Q1 2020 Earnings Call
[music].
Good morning, and welcome to the office Depot's first quarter 2020 earnings Conference call.
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 office depot today's call is being recorded I.
I would like to introduce Tim Perrott, Vice President Investor Relations Mr. brought you may now begin.
Good morning, Thank you for joining us for office Depot's first quarter 2020 earnings conference call.
Super up and I'm here with Jerry Smith, our CEO.
I'm also joined by Davidson trailer or senior Vice President of financial planning and analysis and interim financing leader, who will provide additional details on our financial result.
During today's call Jerry will provide an update on the business focusing much of his commentary on her operations in the first quarter and the impacts to our business from the coded 19 pandemic.
As well as discussed the strength of our financial position and our strategy to address the challenges posed by this health crisis.
Pruning actions, we're taking to ensure business continuity.
David will then review the Companys financial results for the quarter, including our divisional performance and following David's comments, Jerry will have some closing remarks, and then we'll open up the call 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 described business performance.
The SEC filings as well as the earnings press release.
Plantation 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 that office depot Dotcom.
Today's call and slide presentation are being simulcast on our website and will be available there for at least one year.
Ill now turn the call over to office Depot CEO, Jerry Smith Jerry.
Thank you, Tim and good morning to everyone joining our call today.
We appreciate you joining us today Green, what we know is a very challenging time.
And we hope that our listeners and their families are safe and healthy.
I'm happy to be here with you today to discuss our strong results for the first quarter and provide perspectives regarding covert 19 outbreak and its effect on our business as well as highlighted our strong position as we navigate through the challenges caused by this pandemic first.
I'd like to thank all for associates for the tremendous Canadian energy and supporting our customers and our business during this health emergency.
This has been incredibly stressful time for associates.
From those in our retail locations, helping customers on the front line.
So those are supply chain working hard to ensure quote products for our coffee Cup technicians were serving customers.
As well as those were working with our enterprise customers to help them remain operational during this period.
I cannot stress enough gratitude to our team and living up to our designation I think essential business and what they have accomplished in such a short time under challenging conditions to help server and help our customers I.
Im very proud to do the leader in this company with such a capable and committed team.
While the global pandemic has quickly impacted the business environment in general the actions that we've taken over the past few years have reinforced our foundation to serve our customers expanding needs.
Preserve cash and deliver the necessary products and services to help our customers succeed through this uncertain time.
The strong results we've delivered in the first quarter reflect the commitments and tireless work of our team as we supported the essential needs of businesses consumers educators healthcare workers students and first responders during the global health crisis that unfolded in our nation.
Before I provide you with the specific highlights for a strong performance in the quarter.
I would like to discuss what we are doing to remain safe help our customers and how we are leveraging our unique and strong position to driver business for.
These points are shown on slide four.
First and foremost safety is our priority number one and our primary focus is on the health and safety of our associates customers and families in our communities.
In the very early stages of this outbreak we took actions to enhance the safety protocols in order to help protect our employees increased safer environment for our customers.
In advance of a stay at home or is it required by most local jurisdictions.
We issued a work from home mandate for all employees, we don't need physically be in an office where facility.
This included most associates, our corporate headquarters as well as non essential personnel in all facilities, we have the ability to work remotely and maintain social just to see guidelines.
And our retail stores, which is a primary source for customers the acquired the essential product and services. They need we've installed counter shields and required employee Cds mapping clubs to help protect customers employees. During these interactions.
We quickly off pretty curbside pickup optional all oral locations, including at some locations, which are operating on a curbside pickup only fashion per local laws.
We're also clean in sanitizer facilities, our employees that our supply chain and distribution operations are required to where personal protective equipment or pp a term that's become synonymous with this outbreak.
We're also promoting social doesn't seem with our distribution centers by staging starch shifts and break increasing spacing in common areas and account become our tech support teams transition to a work from home environment very early in the crisis, which helped did provide interrupted support for many other customers.
To begin the transition to a distributed workforce.
These early actions taken by pump become and support they have provided have as their credibility among its world class customer base.
We received numerous correspondence praising the comp become team for its high level of service and support during the crisis.
Also during this challenging time, we've been active in the support of our local communities.
Often people is donated well over $300000 two schools school districts Insurable really agencies to help promote virtual learning for those needs through the crisis given the nature of the products and services. We offer we are designated central business in nearly all jurisdictions.
The product and services, we offer through our BBB distribution platform in retail stores, including cleaning and Breakroom supplies technology.
Office furniture, and other products and services that support work from home and virtual learning. These are all essential therefore operations are up and running and our stores were opened helping customers through this pandemic, although a few retail locations required to close for a period of time in certain jurisdictions.
All of our retail stores are open and see if the operating.
Our BBB supply chain and distribution channel continues to be resilient, serving business customers, including hospitals medical facilities and healthcare workers Friday with essential products to help them on the front line.
Our global sourcing capabilities are continuing to work to be cure additional sources of essential products and PPD and our supply chain is operated efficiently. Despite the additional demand placed on the system.
Coffee comps high quality support teams are fully functional working closely with customers provide technology products and services to support main businesses, which have temporarily transition to work from home environment.
We're also working closely with schools in higher education customers to support a remote learning environment for students and teachers as many schools have cancelled in person classes for the balance of the school year.
Next we are uniquely positioned to weather the storm and navigate through the crisis. Our balance sheet is exceptionally strong with significant available liquidity positive net cash position and attractive debt maturity schedule.
This strong cash position and balance sheet also allows us to pursue additional opportunities to expand our customer reach during the crisis to expand our product and service breadth and help customers at this crucial time.
We are keenly focused on maintaining a low cost model driving efficiencies in our business and you can leveraging our variable cost structure to provide us the ability to better match, our cost structure with our topline revenue.
Our global sourcing and supply chain capabilities are critical assets and key differentiators that position us to continue to deliver an expanded set of essential product and service.
Including PPD.
Lastly, the combination of our business and technology products combined with a technology support and expertise that comp become position us well to support the needs of a distributed workforce and virtual learning environments.
This has been a powerful combination helping many enterprise individuals adapt during the rapid change and that work environment.
Overall, despite the near term headwinds caused by this pandemic, we're experiencing an acceleration of the strategic pivot we embarked on three years ago to become a leading integrated BBB provider of business products and services I believe that this is happening for a number of reasons, most notably the advantage as it relates to our global sourcing.
And supply chain capabilities and wish we are providing a much broader set of in demand products and services to our customers and delivering them and consistent manner.
During this pandemic. This conversation we're happy for customers are changing and customers are taking notice in discovery more of what we have to offer beyond traditional office supplies.
The consistency of our supply chain is building significant credibility as a reliable source of essential products, such as cleaning and breakroom and PPV with a high level of service and support.
And is not just an expanded product set but also service and technology support sourcing and make it available technology products and have a copy comment the mix for critical tech support for enterprises. During this pandemic is leading to more visibility and credibility with our customers.
I'd like to now peer into the performance in the first quarter and discuss the directional impact to the cobot 19 operate on that various parts were business. This is shown on slide five.
We entered the year with good momentum in our PDP businesses, which helped us generate the overall strong results we drove in the quarter.
We saw steady pace of net new BSD customer wins, and new business at KMP become and demand for our adjacent categories in a supply for relatively strong.
The effects of the Koeppen 19 outbreak beginning in March had a mixed impact to various channels and product segments, but the overall net affecting the quarter was positive the sales.
During the initial phase we operate demand for essential products like in embracing supplies technology and home office products, We're a very high in our retail stores and through our ecommerce channel.
The heightened demand police products with a key driver of the increase in our same store sales comparison, and our retail division, which was up 2% year over year. However, in our BSD division. Despite our strong start for the year. The cobot 19 operate disrupted the business operations of several of our customers causes.
Tom to temporary pause operations are temporally transition to a worked for home environment.
These impacts combined with a number of school systems am shut down for the school year have had a negative impact in our contract channel within our BSD Division.
We are working with our customers to support them. During this transition supporting their needs with our distribution capabilities and tech support and ready to support them as more of the country opens up and resumed normal operations.
At comp become the covenant teen outbreak resulted in a number of customer delays. The previously scheduled project work, which negatively impacting revenue and operating results in the quarter that said company calm provides critical technology support for many enterprises and their core competencies to built around supporting large distributor workforce.
Yes, we can for unique capabilities positions them very well to capture future growth in this environment.
The strong started the year to our BD businesses combined with increasing demand for essential products and our retail ecommerce channels drove exceptional results from the first quarter.
We drove increases our operating performance and free cash flow generation further strengthening our balance sheet.
Highlights in the quarter or $2.7 billion in revenue down slightly over last year largely related to fewer stores in service in lower revenue in or BSD Division.
Adjusted EBITDA of $157 million.
33% over last year.
Adjusted operating income of $108 million up 61% over last year.
And adjusted earnings per share of 12 cents of five cents over last year.
Free cash flow generation in the quarter was stellar generating $173 million, an adjusted free cash flow of 12 pull from the prior year.
This increase cash generation has further strengthened our balance sheet and enhanced our position as we head in the challenges of the balance of the year I'm very proud of our team and all the hard work to generate these terrific results.
Notwithstanding the strong performance because of the global business disruption and uncertainty caused by the cobot 19 endemic.
We are withdrawing our previously issued guidance for 2020, which did not include possible impacts from the Pandemics.
While we're not providing specific guidance in the current environment, we will discuss some of the trends that were seen in the near term and provide some color on our expectations for the second quarter due to increased demand supply for essential products, particularly in the cleaning and breakroom categories have been constrained beginning late in the first quarter and continuing to date.
While we've been able to mitigate some of the lack of supply of all while using alternative lenders. We expect to continue experienced temporary disruption supply output levels normal lives. In addition, we expect demand the second quarter to decrease as several of our enterprise customer operations continue to be disrupted including K through 12 schools.
In higher education.
At this time, we're assuming that these effects are temporary however, they have cost pressure on near term revenue beginning in late March and best. This effort has continued to date in the second quarter.
Revenue trends are currently lower in our contract channel and BSD as well as lowered our retail division given decreased traffic trends in accordance with continued stay at home orders imposed by local jurisdictions.
These trends, thus far been partially offset with increase in demand our ecommerce business.
Slide six highlights our strong financial position and our priorities to help mitigate the business challenges caused by the cobot 19 outbreak.
As I've said earlier first and foremost our primary focus is on helping maintain a safe and healthy workplace for our employees and helping our customers continue to manage their businesses through this crisis.
Significant challenges remain we're implementing several strategies to help mitigate the challenges and believe we're an excellent position to navigate through this crisis and strengthen our business in the long run.
Our priorities are focused on one maintain utilizing our strong balance sheet and cash position to maintaining a low cost business model and conserving cash three supporting customers as well as pursuing growth opportunities and for supporting customers in work from home and virtual learning environments.
Let me start with our strong balance sheet.
Our conservative approach to our capital structure, along with our strong cash flow generation has placed our balance sheet and I'm very strong position.
About $1.7 billion available liquidity, including $842 million in cash.
Concerning the relatively low level of debt, we have nearly $200 million of net positive cash our highest net cash position in recent years.
In April we further enhanced our balance sheet by refinancing our existing credit facility, which increased the borrowing amount and extend the term to 2025 and the same time, we retired or relatively expensive term loan.
Which is expect to result in annual cash payments are approximately $90 million. Therefore, the net effect on our recent actions, resulting an increase in the mountain. It can borrow significant annual cash payment reductions and an extension of our credit facility did 2025.
We started this refinancing process late last year and this activity was not in response to the pandemic, but it's certainly in places us into a stronger position as we head into this challenging environment.
We're happy to state that the credit, but new credit facility with Sniffily oversubscribed with strong lending support and provide substantial financial flexibility to continue the company's transformation efforts, including the dynamics of the planned holding company reorganization.
Next we remain committed to maintaining a low cost business model and our implementing additional cash conservation measures in response to the Koby 19 pandemic.
These measures include among others restrict can travel limiting store hours.
Eliminating non essential third party support and implement is illumina number of temporary furloughs in areas that were business have simply impacted by the operate we also have a high degree of variable cost in certain areas of the business, which can be a lever to help us better match cost with expected revenue performance.
With continued to pay rent due for one store locations. However, we are working with landlords equipment vendors on rent and lease abatement opportunities.
To attain better terms and limit exposure. Additionally, as we continue collecting close unprofitable stores. Our exposure continues to be reduced moving forward. We will continue to focus on actions to improve our cost structure and maintain a low comp business model.
As another component to preserving liquidity and financial flexibility in the current environment.
We are temporarily suspending share repurchases and the quarterly dividend.
We do not affect repurchase shares in the near term under the current repurchase authorization, which has a balance sheet of about $130 million remaining and we are timberland suspending our cash dividend beginning with the second quarter 2020.
As business conditions related the koeppen 19 evolve.
And as appropriate time, we will reevaluate our capital return program.
Next.
We remain in a position to pursue numerous growth opportunities utilizing our global sourcing capability expanse and supply chain and distribution network.
Leveraging these key assets is that the core of our transformation to become a leading BTB distribution company.
These assets and capabilities are more important ever during this crisis and create a unique opportunity for our company.
We have the ability to continue this source the essential product categories like cleaning and breakroom as well supplied such as pilot paper. It paper towels. Additionally, we are working to expand our product capabilities into areas, a PE like protected math gloves and other gear critically needed there is pandemic as well.
After the health crisis with businesses start can we open.
We expect that PE for employees will be essential for many businesses to operate going forward.
Having a strong balance sheet and cash position helps us tremendously as we work to procure some of these products for our customers.
Next as many of our enterprise customers have terribly shifted to work from home environment.
We will continue to focus efforts and helping customers remain operational in a distributed work environment.
This concludes continue to serve their work from home needs, including Technology home office supply office furniture and services to enable our customers who are working in an office facility to be effective at home.
This temporary transition is causing a significant amount of disruption in the business environment. However, our enterprise customers had the continued ability of purchase their business support need to the respective current agreements incentive serving them Central App office, we are working serve customers at their homes.
And is not just product related support is also technology services support for enterprises as it will work to remain operational in this environment.
Copy comps technology support infrastructure and large field force, it's particularly suited support distributed workforces.
Comp becomes performance in early stages of this pandemic has proven their capability to quickly and efficiently support our customer needs.
Our efforts have garnered significant credibility from CIO is a number of companies.
Comp becomes focused by connecting people technology and the edge with a seamless experience combined with a large field support team.
Equally positions them to support the growing needs of customers and this distributed work environment, creating more long term growth opportunities.
And lastly, we will remain focused on our accelerating BBB pivot and strategic plan.
Executing upon our board approved holding company reorganization directive.
I believe our opportunities are evolving as they expand our value proposition to customers sourcing and distributing a broader set of end demand products and business support services.
We are uniquely positions us for customers in this challenging environment and are focused on evolving our BV platform in executing our pivot remained resolute.
Summing all this up we believe we're a strong position to weather the storm and improve our business in the long run and we are ready to serve more customers as business operations resumed normal level.
As you might expect.
We have run a multitude of scenarios of varying degrees of possible impacts the revenue during this downturn.
Well I don't plan to share in a different scenarios because this is a dynamic situation.
We believe that our strong financial position in cash conservation focus.
We'll be able to withstand even the most challenging economic and market conditions.
Moving to slide seven let me turn our attention to a few additional highlights with our business segments, beginning with our BSD Division.
Our BSD division the largest component of our BTD platform.
Began the year with significant momentum.
When you net new business and experienced relatively strong demand and traditional product and adjacent categories.
However, as I stated previously the Covance 18 pandemic impacted revenues late in the quarter and this trend has continued to date in the second quarter.
Demand for cleaning home office and technology category increased significantly during the quarter.
Cleaning and Breakroom supplies were up over 20% and technology products were up over 10%, resulting adjacent category sales growing to 39% of total revenue.
However, traditional supply categories were lower in our contract channel related to that business disruption caused by the Copa 19 outbreak.
Our E Commerce channel continues and see increasing demand and we're working closely with our enterprise customers to support their work from home need delivering directly to residents of as required.
Consequently, we are working to address increasing costs related to the additional amount of residential deliveries that we the required to make to serve our customers in this environment.
Our supply chain has remained resilient.
Despite the challenges to source additional essential pandemic related products that continued to be a crucial source for our customers, including hospitals medical facilities and healthcare workers.
Our targeted growth remains intact utilizing intelligence tools to improve our sales processes drives sales efficiency and enhance our value proposition.
We are working to source additional products and cleaning and Breakroom category, which continues to be in very high demand and importantly.
We're working source additional critical piece.
And gloves, which we believe represent a very large opportunity for us now and in the future.
Despite the challenges caused by the pandemic, we're building a significant amount of credibility with customers as we have been a consistent and dependable source of essential products and work from home support during this health crisis.
We are delivery to and supporting customers when others can't and our supply chain in sourcing capabilities has been consistent and many customers are taking those.
As I've stated earlier and mid the crisis, our strategy is an effect being fast forwarded.
Shining and bright light on the core of what we are all about a BBB focused company with expanded similar products and services backed by reliable supply chain and distribution network.
We're looking forward to continue to support customers through this process and expanding our value proposition for the future.
Our value proposition is expanding and our customers are beginning to realize the breadth of products and services we have to offer.
Now, let's return to coffee calm on slide eight.
Comp become has continued to execute upon can refocused strategy of connecting people technology and edge in a seamless experience.
Seeing greater emphasis on its core offerings expanding its value proposition.
We're excited about the progress that mix flattery as team are making.
Both in terms of improving operational performance and we'll continue progress in winning new business with coffee comps expanding influence and visibility.
They delivered another quarter of business wins in excess of $300 million and lifetime contract value, including eight new logo customers.
Well as I mentioned comp becomes operational performance in the quarter was negatively impacted related the covenant can operate as some customers delayed near term project work. This impact was partially offset by increases in demand for new technology products like laptops and related equipment.
That said during the Coca 19 operate comp become support an extra efforts enabled customers remain operational as many companies pivoted to a work from home environment or experienced other challenges related to pandemic.
We have received numerous accolades from the CIO for many companies, who appraised comp become pretty significant efforts during the crisis.
I'd like to share a few examples of the type of support comp become as providing to put this into context for you.
Comp becomes part of the migration of over 6000 users to work from home environment for our major power company in a matter weeks.
We partnered with the customers develop innovative solutions to wrap up our service dust control desktop patching insecurity and a servicer control room store dispatched team.
A storm interrupted power in the customer service area and the customers able to restore power using a remote workforce something had never done before.
Second copy calm supported the movement thousands of essential workers at what the world's largest pharmaceutical distribution firms to working home environment over a three to four week period third. We are also supported by the technology to quickly standup covert 19 testing center in Canada.
And finally, we were crucial and supported a large grocery chain added capabilities to maintain high reliability and availability of point of sale systems and onsite support.
These are only a few examples but it helps illustrate the many ways at KMP become at helping in supporting customers through this crisis in fact, what the changing nature work comp becomes unique capabilities. The sport distributed workforces with the state of art technology, and a rarity unique field force of over 6500.
Fuel techs and support personnel have a well position to capitalize on opportunities in this growing area.
Now, let us move briefly to our retail business on slide nine.
Our retail division has been a hero job during the pandemic.
Working to safely serve increasing demand from our customers.
And keeping our stores open.
At the onset of the health crisis.
Our retail team quickly implemented safety measures.
Work to keep our stores opened in operational in order to continue to serve our customers.
The retail division was off to a good start in 2020, having recently made changes to its store operating model moving from a specialist to a generalist model to reduce cost increased the level of service.
This change happen at the right time to help our service levels and drove improved cost efficiencies during the crisis.
Our total revenues were down versus last year related to fewer stores and service demand in the quarter increased significantly for products, such as cleaning and breakroom supplies technology and home office products.
This had a significantly positive impact to revenue and help to drive 2% positive same store comp relative to last year.
The curbside pickup auction put in place all of our locations was a popular choice as our buy online pickup in store sales increase over 20% in the quarter.
These positives taken together the strong execution of our business acceleration program and other cost measures helped us drive higher margins lead to a 30% increase in operating income in the first quarter.
The tremendous effort by our retail team inserting customers under challenging circumstances have resulted in significant improvements in our net promoter score as customer experience improved significantly. This is a true customer testament to the quality of services. They have received during the pending.
While traffic trends were strong earlier in the quarter not surprisingly this trend reverse the stay at home orders will put in place and replenishment of essential supplies became more difficult likewise.
Revenue was negatively impacted late in the quarter and this trend has continued into the second quarter to date.
Moving forward, we will work to replenish essential supplies support home office and continue to service customers in a safe manner possible and continue the safety measures we put in place.
We will also continue focused efforts drive efficiencies and a low cost model in our retail business.
Our operating model change. This one aspect of this approach as I've mentioned in the past and we'll continually evaluating the profitability and strategic valley of each of our retail locations in order to optimize our footprint.
We are expecting a higher number of store closures this year versus last year.
While this has a negative impact or a sales these actions to improve the vitality of our network and rent increases and profitability.
With that ill turn the call over to David for more details on our financial results.
Thank you Gerry and good morning, everyone I'm happy to be here today to discuss with you our financial results for the first quarter of 2020.
Consistent with previous quarters, we have provided our results on both the GAAP basis and on an adjusted basis. My comments will primarily address our performance on an adjusted basis.
Total revenue of $2.7 billion in the first quarter was down 2% largely driven by lower sales in our retail division related to fewer stores and service and lower sales in our copy Com BSD division, which were negatively impacted by the business conditions late in the first quarter related to the cobot 19 outbreak GAAP operating in.
Income in the first quarter was $80 million up from $24 million last year.
Included in operating income was $16 million in merger and restructuring charges.
$8 million of which is associated with our business acceleration program. We also recognize $12 million an asset impairments, mostly related to operating lease right of use assets associated with our retail store locations.
Excluding these and other items, our adjusted operating income for the first quarter with $108 million up 61% from $67 million in the prior year.
Unallocated corporate expenses were $22 million in the quarter compared to $31 million in the prior year, reflecting lower professional fees and lower deferred compensation expenses.
Adjusted EBITDA was $157 million for the quarter up 33% compared to $118 million and the prior year.
This includes depreciation and amortization expense of $49 million and $48 million and the first quarter of 2020 and 2019, respectively.
Excluding the after tax impact from the items mentioned earlier adjusted net income from continuing operations for the first quarter of 2020 was $66 million or 12 cents per share compared to $39 million or seven cents per share in the prior year, an increase of five cents per share.
Cash generation in the quarter was very strong we generated operating cash flow of $188 million, which included $10 million of cash expenditures related to the business acceleration program.
Capital expenditures in the quarter were $25 million compared to $46 million in the prior year period, reflecting lower investment and our retail operations, while continuing investments and our service platform distribution network and E commerce capabilities.
Reported free cash flow was $163 million.
Adjusting for $10 million and cash expenditures related to the business acceleration program adjusted free cash flow in the quarter was $173 million.
Let's now turn to slide 12, which highlights our performance of our BSD Division as a reminder, BSD is the largest component of our b to B integrated distribution business servicing customers from the fortune 500 to small and medium sized businesses.
Reported sales in the first quarter for BSD for $1.33 billion, a decrease of 1% compared to the prior year period.
The year over year comparison reflects the impacts of the cobot 19 pandemic as well as the actions over the past year to reduce unprofitable sales and our contract and ecommerce channel.
The cobot 19 outbreak cut the portion of our B to b customers to either pause operations or temporarily transition into a remote work environment. As a result of restrictions imposed in March 2020 aim to reduce the spread of cobot 19.
This effect resulted in lower sales in our contract channel, partially offset by higher sales in our E Commerce channel as demand increased for certain essential products.
These effects are continuing into the second quarter negatively impacting revenue.
Product sales in the first quarter of 2020 decreased 2% while service revenues increased 14% driven by increases in sales of our managed print and fulfillment services copy and print services and shipping services compared to the prior year period.
These actions were partially mitigated by the positive impact of customer acquisition and growth in certain adjacent categories. For example, cleaning and Breakroom and technology products were in high demand during the pandemic, helping to drive total adjacent category sales to 39% of total BSD sales.
Operating income was $40 million in the first quarter of 2020 compared to $46 million in the prior year period with flat comparable operating margins.
The decrease in operating income versus last year was related to the flow through effects of lower sales product mix and higher distribution costs related to the cobot 19 impacts.
Higher distribution costs continue to be a challenge in the second quarter as we're making many more deliveries directly to residences instead of corporate offices, we are implementing strategies to address including working with our distribution partners and evaluating delivery schedules and fees.
Looking to slide 13, we highlight the performance of the comp become division.
Sales in the first quarter for comp become were $235 million down 5% versus the prior year period. The decrease was largely due to lower project related sales as a number of customers delayed projects in response to the coven 19 outbreak as well as deliberate efforts to reduce or eliminate certain unprofitable sales and support.
Activities to improve future profitability.
The copy come Division reported operating income of $3 million in the first quarter of 2020 compared to an operating loss of $15 million in the prior year period.
Cost efficiency measures and other cost reduction efforts helped to drive the year over year increase.
On a sequential basis operating income was down as we incurred costs in anticipation of supporting new service contracts as well supporting new project related work in the quarter that did not materialize due to the business disruption caused by the cobot 19 outbreak.
As Jerry addressed earlier coffee come support for its customers. During this pandemic has been stellar combined with their core competency and supporting enterprises in the distributed environment. We believe the coffee com isn't an excellent position to capture future profitable growth.
Turning to slide 14 reported sales in the quarter for our retail division declined 2% to $1.16 billion. The decline in sales was related to the impact of store closures over the past 12 months as we had 64 fewer stores compared to a year ago, while product sales were flat sales of services were down a battle.
1% has copy and print services and subscription offerings were negatively impacted by the effects related to the Covance 19 pandemic.
These impacts were offset by increases in demand for essential products. During the early phases of the cobot 19 outbreak, helping drive a 2% increase in same store sales relative to the same period last year.
Higher average order volumes and a 26% increase in both the sales added to this performance.
The retail division reported operating income of $87 million in the first quarter up 30% over the same period last year.
As a percentage of sales. This represents a 180 basis point improvement in margins.
The increase in operating income versus the prior year reflects higher gross margins lower asked DNA from cost efficiency initiative, and an improvement in distribution and inventory management costs.
Turning to the balance sheet and cash flow highlights on slide 15, we ended the quarter with total liquidity of over $1.7 billion, consisting of $842 million in cash and cash equivalents and $851 million of availability under our asset based lending facility.
Total debt at the ended the quarter was approximately $652 million, resulting in a positive net cash position of $190 million, our highest net cash position in two years.
As we previously announced subsequent to the quarter end, we successfully refinanced our asset base credit facility with a new five year agreement and retired our term loan credit agreement due to 2022.
Our new 1.3 billion dollar asset based credit facility matures in April 2025, and replaces our previous credit facility that was due to expire in May 2021.
Upon closing of this transaction.
We borrowed a total of $400 million under the new credit facility.
We use these proceeds along with available cash on hand to repay the remaining $388 million balance on the term loan and approximately $66 million and other debt by eliminating the term loan we expect to eliminate approximately $14 million in annual interest expense and $75 million in required annual amortization.
Payment.
We are happy to report that the new credit facility with significantly oversubscribed with strong lender support and provides us with substantial financial flexibility to continue the company's transformation efforts.
Moving to cash flow for the first quarter cash provided by operating activities was $188 million, which included $10 million in restructuring costs and $4 million in acquisition and integration related costs.
This compares to the cash provided by operating activities at $67 million in the first quarter of the prior year.
Capital expenditures in the quarter were $25 million versus $46 million in the prior year, reflecting lower investments and retail operations, while continuing investments in our service platform distribution network and ecommerce capabilities.
The cash charges associated with our business acceleration program in the quarter over $10 million Accordingly, adjusted free cash flow was $173 million in the first quarter of 2020.
On slide 16, we highlighted our balanced approach to capital allocation.
Our priorities in the quarter, we're focused on investing in our business, including our business acceleration program servicing dividend expanding our distribution network paying down debt and selectively executing share buybacks during the quarter, we generated $188 million in operating cash flow.
After considering the $25 million in capital investments to further strengthen our b to B platform.
As well as significant cash investments in our business acceleration program, we bought back $30 million of our shares paid $13 million and dividends paid down $19 million in debt and invested $18 million and high quality acquisitions.
Moving forward in the current environment, we will remain focused on preserving liquidity and maintaining financial flexibility.
In support of this focus we have temporarily suspended our stock buyback program and our quarterly dividend beginning in the second quarter and we'll reevaluate these programs when appropriate.
Overall, we delivered strong operating results in the quarter and our team remains committed to creating value for our shareholders and building upon our b to B platform.
With that I'll now turn the call back over to Jerry.
Thanks, David.
As you heard today, our team delivered very strong results through the onset of a global pandemic that is grip the nation in the world I can't think our team enough for their dedication and efforts. During this health crisis to ensure we may operational and serving our customers.
It is evident that we're heading into a more challenging period related the effects of this operation, which we expect will negatively impact revenue operating results in the near term that said, we believe were excellent position to weather the storm and even become a stronger company when the crisis is over.
We have a strong balance sheet and liquidity position, our global sourcing and BTB supply chain remains resilient and a reliable source of essential products and our tech support capabilities help enable customers to work and learn remotely.
As I mentioned earlier, despite the near term headwinds caused by this pandemic, we're experiencing an acceleration of the strategic pivot. We are marked upon three years ago to become a leading BTD provider a business products and services.
Customers are beginning to recognize the power and consistency of our global supply chain and distribution capabilities as well as the expanded set of products and services we have to offer.
Given the current environment.
We've adopted a more conservative approach to our capital return program.
Reserve Maxim liquidity and financial flexibility.
As you heard we have temporarily suspended our share repurchases and our quarterly dividend beginning the second quarter 2020.
We will reevaluate our capital return program when appropriate.
We will also continue to take action to support our low cost business model with a focus to drive additional efficiencies and cost structure improvements throughout our entire business. This supports our belief that the low cost model wins finally.
We remain committed in our strategy and working to implement the board approved holding company reorganization plan, which we expected to complete by the middle This year and again, thanks to all who joined us on the call today.
Operator, we'll now turn the call over for questions.
I'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one if you would like to ask a question.
Our first question comes from the line of Chris Mcginnis. Please state. Your company named then proceed with your question.
Hi, good morning Christina.
Great. Thanks for taking my question.
Well.
Maybe can you start out with some of the commentary around.
The current environment salary.
I guess, how sustainable do you think it is and how do you think you environment changes on the PC side going forward.
Alright, Thanks, Chris.
Chris Thanks for all your work did our coverage we really appreciate that.
Chris I think Oh look at it from a overall overall environment, obviously as we've had a guidance is very hard to predict.
Oh, Yeah, we're encouraged by.
Say three or four key thats number one we have the opportunity these new categories, where we're excited with the opportunities that pp in some of the cleaning and Breakroom grosses technology growth we've seen.
Weve focused on those but adding these new categories and as had been a very important really pleased with our our cash position, because it's allowing us to source somebody's products right now and obviously cashes important during that especially in the pp category I think I want to call, especially our supply chain and how reliable and dependable is I think that help.
Just on or B to B piece of it I think our sales team is done an incredible job, Steve and his team of of selling into categories. I really think our sales is get stronger.
Because this as we pushed a little cost model have more variable model across our business the ability to support the beauty businesses as has been accelerated but you know I've always said for the beginning we want to be a platform that sells b to b products and services and I think this is help highlight how we can do that and when we John again for us as supply chains.
On the Stephen Mohandas organization has done a great job books of showing that our PDP business and obviously, we're going to lean in hard to ensure that we can see to do that going forward and I can't say off we also have a retail team sport in terms of small medium business out there as welcome seems done it it's incredible job in our online business has been extremely strong I think a lot of that small and medium.
Yes that needs product in our supply chain can deliver Jamie the team have done great. So we're very well positioned for the beauty piece of it I think it's that's it that's what we've been trying to strike for it and.
This is a very challenging times, where we're taking.
Our strategy is lined up and we're executing well process.
Great.
Just I guess to touch on where I wonder what you're talking or was that the strength of the balance sheet the ability to source product given I would imagine Cincinnati financial constraints around some of your competitors within that market. How are you may be changing your go to market strategy to capitalize on.
And then office and.
Well, we're using our cash obviously were conserving cash wisely, but we're also using our cash to go sources products as our customers have a big demand for that and we're listening to our customers and giving them the essential products and services that they need I think again being conservative with our balance sheet and our cash position for the last couple of years, it's helped.
This be in this position obviously you saw some of the axis. We're doing today to further accelerate that I think we're in a very good position as you go off and provide those products for customers and I won't comment our competitors, but it's good to be a disposition.
Fair enough. Thanks for taking my question is good luck.
Thank you Chris appreciate look forward I mean, one of these days.
Your next question comes from the line up with <unk>. Please state. Your company name then proceed with your question.
Great I got that liquidity from bank of America I can you just talk about the impact to operating margin from coal bed burst. It back in other words, how much of the savings from SAP are offset by cost and or de leverage associated with kind of it.
Yes, hi loses David Yes, So we think about the bat program, we saw significant improvement in August.
Why not and from that consistent with what we see previous quarters.
And what we what we experienced from Cobot 19 on gross margin with a little bit of pressure as a result product mix shift out of some of our core supply categories in June.
Slightly lower margin cleaning and breakroom in TV.
Okay, great and so no more of that gross margin impact than necessarily seen AG.
That's correct.
Okay, and we start as we model at our second quarter. You know you mentioned that B to B is experiencing lower revenue trends in Houston, 20, and 20000 experiencing reduced traffic and lower revenue effect and then second quarter is that when you say lower quarter over quarter or year over year and how much slower.
Are we thinking about just directionally.
Obviously were like we can't give specifics.
On the on that but we clearly have talked about the fact that eras challenges last epidemic of March and early early in April and I think it all depends lives on what happens from a reopening perspective.
And why why it's so hard to predict and I wish I could is we don't know how quickly.
All the states are different ever and we're looking to actually it literally every state every jurisdiction. So yeah, we're going to monitor closely I think the most important thing is you know is to make sure. We have the right business model in place, which we think we do well drive low cost model keep our cash position well and we're going to lean into these categories like we talked about even though some of the margin levels arches.
As high as some of our core categories driving growth and those are important because obviously, bringing gross margin dollars and growth in the business.
As what we stripe wars, and having a whole basket of products, we sell to our BTB customers, whether whether they're small whether medium where they're large enterprise customers and to be honest with you also driving comp become in those businesses. While we're pleased with the fact of call. It becomes very well positioned for this new work from home learn from home environment.
Okay, Great and if you don't mind, if they can squeeze one more and I mean are you finding that any of your small and medium business customers are pulling back significantly on spending or you know on there have lagged on any contracts that were already in place or have any of your customers then address adaptation.
Well we have.
Over 10 million customers that from it across from a b to B perspective, so clearly there's been some customers who have been impacted.
But we're here to support our customers. We obviously, we're listening to the their needs and there's a loud need to have a dependable reliable supply chain, which we have there's a lot of need to Hey office depot give us more give us a broader range of products and services, which are outsourcing and greedy, which I think which was listen my whole shaving nice will message of it.
It is it actually accelerated our strategy of seeing a broader provider of products and services and as they come up in.
And the county, reopens and they get opportunities, we're going to be therefore them with whether it's our traditional products, whether it's our there's extra furniture or cleaning and breakroom, whether its BP or whatever other categories in the we're here to support them because we have that backbone of the stores the online business, it's not become as well as our supply chain and Salesforce.
Okay, great. Thank you.
Thank you Liz.
Your next question comes from the line up for please state. Your company name then proceed with your question.
Hi, this is well before your from elevation.
Appreciate the commentary on a on the variable cost model I Wonder if you give a bit more color on how we should think about kind of fixed versus variable cost structure and BSD.
Oh. This again this is really highlighted the importance of.
It is having a variable costs business and then from the day one I've joined here up have decision to driving us to be a b to B company and the more we can pivot towards that you've heard me lease low cost model. Many many many times all continue to do that we're going to continue to try to grow the beauty business, but always look for ways to get to a variable cost model because that's how you survive.
Five ups and downs over periods of times.
So that's how you get competitive more competitive from a operators.
Operating entity perspective, as well as giving customers a better values. So you know throughout the year, we're going to constantly look at ways to optimize cost to look for ways to always be most efficient whether it's you know.
Remotely helping companies work remotely whether its work from home we're going to go after all those and look for ways to do that they once you jump in as well and I would just add to that that if you recall last year, we implemented Celleration program, which was directly to address some of our fixed costs.
So you know what you see an R.S. DNA line.
Yes, it having gotten ahead of that a little bit.
We'll continue to monitor our variable expenses as we transition through this through this period.
And look to long term challenges with fixed costs will address though that we go but.
To gerry's point on that transition to a b to b business.
Continue to transition.
Got it thank you.
Your next question comes from the line of Chris Horvers. Please state your company name to proceed with your question.
Thanks, Good morning, JP Morgan So I just want to ask up questions on Oh, you know trying to fill back on what the organic trend was prior to Cove and because.
As a lot of puts and takes in terms of.
It's hitting some businesses and hurt and some other product categories. So.
First on BSD can you talk about what the organic trend was prior to mid March a and and to what degree acquisitions benefited sales overall on the quarter and then second Similarly can you talk about what the retail comp was prior to mid March obviously, the tech sales and cleaning and.
Breakroom benefited died in the last two weeks just trying to get a sense of you know.
What it looked like prior to that.
Yeah, Chris what I'll tell you is that on the on the B to B side. If you recall, we came out of Q4 with.
A little bit, but down 2% and coming into Q1, we saw improving trends are viewed to be business was starting to see some.
Some signs of improvement.
Certainly as.
We progressed through the quarter.
Yeah.
We're fortunate enough to kind of get into some of the cleaning and breakroom products, a little heavier as we're preparing for back to business and so we were able to kind of leverage some of the initial volumes that came in for for a.
Pandemic, but certainly saw improving trend throughout the business and I would say that from an acquisition standpoint.
Probably say 100 250 basis point of power performance was driven by acquisition.
And on the retail side Oh.
Well, we actually saw strength throughout February in early March as we said in the and the script.
Obviously, the last couple of weeks as more and more and more counties and cities in states, where on the stricter Oh ill stay at home orders, we saw an impact, but because the fact people needed some of the.
Recency products, like cleaning and Breakroom and tech and furniture.
That's what drove the robustness and what wasn't the last two weeks margin was actually ever area and early March that we saw this demand and its people started to shift to work from home and again when the highlight of really really strong success with our online business and I think we're fulfilling a lot of people's demands of products that needs to get through that.
I can't give specific on the obviously for competitive reasons on the retail comp but.
As we believe as the as the economy Reopens and again, we don't know and that is we're going to be ready well position to ensure we continue that to give them as those essential products and services.
Got it and then I I've two questions on just on the corporate structure side can you talk about you know what that benefit is operating as a holding company.
And then secondly, also announced the poison pill. This morning, so I understand it's your productively given you know what the stock market gyrations, but is that it is only one year and denim, but on the other hand your stock price has been around this level over the past year, maybe not as low as the depth of.
Of March so to comment on that as well. Please thank you.
On the holding company, obviously, we wanted to simplify the legal and tax structure of the company.
I think it was important that happened.
Yeah, David Blushes team have done an amazing job doing that and we also want to do improve the alignment of the operating assets with the respective operating channels and I think it it.
Third piece I think it's super important gives us a lot more operational flexibility to future and I think that that's important for that's from the holding company reorganization and again as we said we as we were pushing to have this completed by middle of middle of this year.
From Oh.
The pill perspective, obviously, that's something to ensure that when it is sure our shareholder values maintain and we think over a period of time that the Marco will recognize that value.
Yeah, we thought that was an important thing to do in that with strategic for the company.
Thanks very much.
And our final question comes from Michael Lasser. Please state. Your company name then proceed with your question.
Good morning been quiet for taking my question is yeah, Jerry if one of the enduring lag is coming out of this situation.
Is that white collar workers work from home more often isn't that a net negative for the office supply industry.
I I don't think it is all personally I mean I. That's if you define yourself narrowly I think the way we're defining ourself isn't a traditional just a pure you know paper and ink type of company.
We're extremely excited with the the tech the furniture the.
The other categories that were seeing it very strong year over year growth rates in it'd be honest with a copy com business is perfectly positioned to provide services for people to connect technology people technology, the edge and it was as we say in a seamless experience, we're going to a more and more of that Oh, so proud of our topic I'm team or India and Mexico sit.
These sites went to work from home almost immediately and they did it flawlessly and they were able to provide tons of enterprise customers.
Excuse me the technical services, they need to make that transition I think over a period of time, we can be that companies can be out there continue to support those companies.
I.
They're working from home as well as well as our leadership team and I'm printing surprisingly more than I thought it would.
And obviously.
As as you work on things that I think the efficiency productivity. We're seeing from work for home is somewhat we're gonna lean into and we think is going to actually be helpful for us longer term is companies.
Companies will need their employees have access to the right products and services to make them effect that we can provide those products for them across many categories and have a supply chain that can deliver it to them through their homes, whether it's to a small business and we have the ability to deliver next day to 99% of that ZIP codes, the United States very few people have that capability.
If you more quick one when should we expect to see positive sales grew from a top E Com Division.
Well I think that Nick and his team have done a tremendous job the of getting the right cost structure in place getting the right strategy in place that they're getting the right offerings in place I think obviously as we get through some of the this covert type of responses and as we've said in his script. We are they had a lot of they add or 300 million it and new lifetime value bookings.
In new logo wins, I think as we see get some of the project business back up on track I'm confident sometime in the future, making his team will be able to drive to be able to drive growth and obviously our profitability. This quarter. This year versus last year is significantly different I think that shows and we had a a couple of who really good quarters of position here are good.
In our cost structure right. We've got the right in a place we've got the right strategy and how it's a matter of executed and obviously getting the economic conditions more positive over a period of time.
Q2 last ones can you quantify what sales have done in April so we can calibrate our models accordingly and in the okay. Okay. And then guys. We I mean, if I could predict economic activity I would do that I mean, it's extremely challenging.
We want to make sure we're credible.
Well what were little bit are watching it every single day.
And now and we're seeing and were well across all of our routes to market and we're we're making investments to make sure. We have the right sort, we're sourcing products to our customers and we're doing our best to make sure we will bring to the strengths of our business to our customer base.
And it out.
Obviously, we are person and for all our and our thoughts with all our customers in the country and we want everyone to be safe and healthy and we're doing our best to make sure we deliver that from a we can break the right products customers LP. We're gonna go off and go do that.
Last quick question, a lower operating costs due to the new lease accounting standard was the driver or the profit improvement a retail business how much did that can review during the quarter.
Yeah that was less than $5 million, so very immaterial.
Understood. Thank you very much and good luck.
Thank you.
All right one today.
I want to thank everyone for joining the call. Most importantly, please stay safe and healthy and we look forward to talk in the next quarter and thank you very much.
Thank you for your participation. This concludes today's call you may now disconnect.
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