Q2 2020 ODP Corp Earnings Call
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On todays ODP Corporation second quarter 2020 earnings conference call all lines will be on a listen only mode for today's call after which instructions will be given in order to asking question.
The request of office depot today's call is being recorded.
We'd like to introduce him broad Vice President Investor Relations Mr. brought you may now begin.
Good morning, Thank you for joining us for the ODP Corporation second quarter 2020 earnings Conference call.
This is Tim Perrott, and I'm here with Jeremy Smith, our CEO.
I'm also happy to announce that we were joined by Anthony Scaglione, our newly appointed Executive Vice President and CFO, who will provide additional details on our financial results.
We're also joined by Davidson Trella, our senior Vice President of financial planning and analysis.
During today's call Jerry will provide an update on the business focusing much of this commentary on our accomplishments in the second quarter and highlighting how the strength of a platform financial position and strategy is helping to address the challenges posed by the pandemic and positioning ODP for future growth.
Additionally, Jerry will outline and discuss the progress we made in the quarter on or B to B pivot and the key drivers of our business.
Anthony will then review the Companys financial results, including highlights of our divisional performance and following Anthony's comments, we will open up the line for your question.
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 of non-GAAP financial measures as we described business performance.
<unk> SEC filings as well as the earnings press release.
Isn't patient 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 Dot The ODP Corp Dot com.
Today's call in 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 ODP CEO, Jerry Smith Jerry.
Thank you, Tim and good morning to everyone joining our call today.
We appreciate you joining us doing what we expect that's been challenging time for most.
All of our listeners and their families are safe and healthy.
I'm happy to be here to David you discuss results for the second quarter and a significant progress we've made our BTB pivot however, before I do.
I'd like to introduce you to a new member of our team Anthony Scaglione, who has joined US as executive Vice President and CFO.
We're thrilled to Anthony has joined our team.
He brings a wealth of experience and expertise in the BTB space previously, leading the finance function of as CFO of Abiam industries, a leading enterprise facility services company.
Among the attributes that was extremely attractive to us with Anthony's leadership role in developing and executing abiam's long term strategic transformation.
We're excited to have Anthony as is senior member for team and we look forward to his leadership in executing our transformation welcome Anthony.
As I begin my discussion on our accomplishments for the quarter I'd like to start off with our continued commitment to safety.
Safety of our associates customers and families in our communities continue to remain our top priority.
We have continued the actions we took in the early stage outbreak to enhance the safety protocols to help protect our employees and create a safer work environment for customer.
Have you made classified as an essential business operation our businesses remain open throughout the pandemic in our retail stores, we've installed counter shield and require employees use masked in clubs to help protect customers and employees three interactions Weve continued our curbside pickup option and nearly all of our locations.
We're also sanitizer facilities and required our employees in our supply chain, a distribution operations, where a personal protective equipment. It continued to promote social distancing by staggering ships increasing space in common areas.
Our tech support teams I caught become transition to a workable home environment very early in the crisis as they continue to provide an interruption support for many of their customers. We transitioned to a distributed workforce, taking these actions and leveraging our various channels how allows us to be our customer needs across the platform.
We're also proud of our support for a local communities during this challenging times.
We don't a $1.5 million, defeating Americas Cobot, 19 response fund supporting local food banks across the country as they distribute food communities. Indeed.
He also kicked off our keep schools going camping connecting students with the tools and resources they need to learn from anywhere and teachers with the supply is they need to continue to engage inspire students.
Turning to two highlights as expected the business environment. During the quarter is very challenging due the impacts of the cobot 19 outbreak, while the effects of the pandemic negative impacted our results the power of our BD platform and diverse routes to market helped us offset some of these impacts enable us to deliver positive.
Adjusted operating results.
Preserve cash and maintain a strong balance sheet and liquidity position.
We continue to expand our value proposition with new product offerings and continue to win new business in the quarter.
Also made significant progress on our BTB transformation plan, improving our foundation and building our capabilities to drive long term profitable growth.
As we all witnessed the cobot 19 pandemic has cuts significant disruption for businesses. It has created unique challenges the daily lives for consumers.
State and local ordinances and stayed home orders have resulted in many businesses the schools pausing for restricting operations during the quarter or switching to a remote environment for activities.
Employees. It consumers have had data here to stay at home and restricted travel orders, making everyday life a challenge. While this has created when the most difficult business and social environments, our nation's history. Our teams have risen to meet the unique challenges the situation has presented.
Our actions insured businesses and consumers, we're able to curate the products and services they need across our platform.
The combination of strong execution and the power of our ecosystem along with our balanced channel approach and low cost model helped us drive the results in the quarter I'm very proud of our entire team for their efforts and safely servicing customers.
Leveraged our supply chain and service delivered capabilities to meet our customers' needs and giving back to that community. During this time of need.
Aligned with our strategic objectives, we made significant progress across our platform on a number of fronts.
First we completed our holding company reorganization, creating a new publicly traded company named ODP Corporation.
This action simplifies, our corporate structure and begins to better align or assets with respective operating channels, creating more flexibility for the future.
We initiate our maximize BTD restructuring plan, a multiyear plan designed to enhance growth in our BTD platform reduce retail exposure, while continuing to drive a variable low cost model.
We also strengthen our senior management team with appointment of new team members specific experience a mandiant transformation efforts in the BTB space.
In addition to Anthony we also appointed Chief Technology Officer carry Leeper, who has led the technology function to Amazon business and Microsoft.
Terry will help accelerate our digital information both at the core of who we are today [laughter] development of new channels and markets. We're excited about the addition of both these leaders and look forward to their helping executing our strategy.
We also continue to expand our value proposition through expanding our product offerings and leverage our global sourcing and supply chain capabilities result, in expanding our customer base and position us for future growth.
Let me now give some additional insight on our execution in the quarter.
And how our ecosystem imbalance routes to market approach help us addressed the challenges and difficult environment.
Ill start by highlighting this as shown on slide five.
We have built a powerful and agile platform of assets to meet the needs of our customers, which has helped us achieve balance during a challenging business environment in 2020.
This ecosystem is a driving force behind our company and the foundation of the BTD platform that we are enhancing their positioning and to drive profitable growth in the future.
It all starts with our global sourcing and distribution presence and capabilities.
Built upon the relationships that have been developed over decades, we sourced and work with vendors around the globe speaker cost effect.
To meet the needs of our customers.
Our capabilities are extremely agile, having the flexibility to adjust to the most cost effective sourcing scenarios.
Allowing us to capture new opportunities very quickly.
At the heart of our ecosystem is are unique and expansive supply chain of services capabilities.
As one of the larger in North America.
Our supply chain consist of multiple distribution centers cross docks, a private fleet of close to 1000 vehicles and established multitude of the third party in a national freight arrangements.
Our supply chain has a unique capability to reach nearly all of her customers Latin next day and directly to the desktop or enterprise customers.
Can you supply chains in North America had this capability, enabling us to consistently and reliably serve customers no matter what channel they choose for our products and services.
To expand upon that we combined our sourcing supply chain capabilities with balanced routes to market to reach our customers. We create a platform that our customers can access to most appropriately satisfy their needs.
We have direct supply through in our large enterprise customers.
Hey, robust E commerce platform, serving both businesses and consumers.
Many retail location supporting both products and services and about 6500 technology support personnel complete our tech field force sort of the technology and service support needs of our customers. We also continue with our strategy of acquiring small regional distributors with attractive business customer bases in assets, increasing our reach in the marketplace.
Yes.
This broad diverse channel approach is proving to be a very important asset during the unusual business environment, we find ourselves in this year provider customers with options and helping us balance revenue performance.
Our sourcing and supply chain capabilities also provide us with the ability to quickly expand the sets of products and services, we offer to our customers.
Our customers have come to depend on us for category, such as technology products cleaning and Breakroom workspace is it furniture school supplies copy and print and technology services with copy come we continue to evaluate launching new products and service categories leverage their capabilities in customer relationships in fact.
We expanded into a new category during the quarter.
Personal protection equipment or pp quickly launching this category immediate or customer needs.
This all points to our underlining sourcing and supply chain stream and I am proud the team's execution during the quarter.
Lastly, we have a very largest sales marketing presence throughout North America has forced strong relationships with business enterprise customers, creating strong brand recognition with consumers built on a reputation for quality service.
We have an established high quality customer base, including the most well recognized brand names in the World was about 200000 large enterprise customers, including many of the Fortune 500, nearly 10 million business customers and a total customer base of approximately 29 million customer.
The combination of all these components gives us a balancing confidence as we navigate the current challenges in front of us as well as we continue to invest in building upon our BTD platform to pursue higher growth in the future.
Now turning to how this is helping us navigate one of the most challenging business environment Center Nations history.
Please turn to slide six for business highlights.
As I mentioned the outbreak of Kobin 18, as creative on the most challenging business environment in recent memory.
Business operations and many of our customers have been impacted along with school closures and stay at home orders implemented.
As expected these dynamics creative revenue headwinds in each of our divisions as business volumes and consumer activity in general were lower.
Traditional enterprise sales volumes dropped on our contract channel related to business and school closures retail traffic trends were lower and service volumes and project related work at Compuchem for negatively impacted.
In total we generated $2.2 billion the revenue down about 70% in the quarter relative to last year almost entirely due to the effects of coven.
Much of this impact we felt early in the quarter, followed by improving trends in May and June.
Basic these tough conditions strong execution by our team helped us mitigate some of the revenue declines and drive positive operating results on an adjusted based.
And I am pleased to say that trend has continued as we sit here today.
In terms of revenue generation.
Our increasingly diverse product portfolio and multiple routes to market helped us offset some of the conditions caused by the cobot pandemic.
For example, in our BSD Division the Cobot 19 outbreak resulted in many temporary business a school closures, resulting in a significantly lower sales and our contract channel. However, our diverse channel approach helped us offset some of this impact as sales or ecommerce channels was up double digits versus last year as business.
Customers that consumers are recognized the convenience of our online presence in supply chain capabilities to safely procure the products to help maintain their business operations.
Our product breadth and diversity channel presence also helped generate demand to help offset some of the impacts on the pandemic.
Our retail division continued to drive is reasonably strong demand for the quarter for essential products for businesses and homes.
Our retail division during open in operational during the pandemic.
Great continued demand for essential products, including cleaning and breakroom as well as prices set of home offices or and remote learning, including technology in furniture buy online pickup in store or BOPUS sales were up about 150% year over year, showing the value of this channel option in the quarter.
While our BSD division saw the largest impact from coven, we're able to grow certain adjacent categories in the quarter relative to last year.
Cleaning and Breakroom and technology products, all sprint double digit increases in sales relative to last year, helping to offset lower demand other categories.
In total our adjacent categories comprise 48% of our total revenue, though BSD division.
Highlighting again the success of our strategy to increase our value proposition to customers and the benefit of a diverse channel mix.
And as I highlighted earlier, our sourcing supply chain shrinks allowed us to quickly identify initiate and launching new product category for our business. The P. category, which includes face masks based shield gloves and other personal protective gear.
Remarkably we initiated launched its new category within one quarter and a quickly gross sales to about $100 billion to date I'm very proud of our team in accomplishing this in such a short period of time and the takeaway here is the strength of our platform and the sourcing to execute extremely capabilities we have.
And our team has continue to win new business. Despite the challenges our value proposition continues to resonate with new customers.
In our BSD Division, we continue to win customers in both traditional and new areas of business.
We have net new customer wins in the quarter and a significant amount of renewals. We also added new customers for our pp category as well as could become new business wins continue for both service contracts and products at about $250 million, an expected lifetime contract value during the quarter.
While it takes time to realize this revenue is a strong indication accomplished comes value proposition and we look forward to returning to growth over the next several quarters.
Additionally, our continued focus on driving the low cost business model helped us deliver positive adjusted operating results. While we continue to prudently manage cash maintain our very strong balance sheet liquidity position.
Before I turn it over to Anthony I want to make a few comments about our focus and position going into second half a year.
As discussed the team is an amazing job to navigate the challenges created by the pandemic.
We have our fingers on the pull so the business activity and our modern year Crawford channel. So we stay agile continue to leverage our supply chain, our product breadth and our routes to market, particularly E. Commerce help us continued to drive the business and revenue growth.
While we're encouraged by the improvement month to month performance that we drove throughout the second quarter in quarter to date. There continues to be a lot of uncertainty on the overall systemic pace a back to work and back to school scenarios.
For example.
Back to school season is upon us in Q3, which typically generates an additional 5% or more demand on the topline.
As we have witnessed we're seeing a variety of scenarios playing out regarding school reopenings.
With some systems are electing to lay opening while others are opening are deploying hybrid model.
This is uncharted territory for the market and we may have an impact on buying patterns with scenarios ranging from an increase in demand for certain school products supplies and technologies to salvage remote learning to some scenarios showing less demand in certain categories. Backpack. For example, if they are prevalent delays in opening is.
Outside of back to school, we continue to work with our business customers help them in any scenario, where they returned to work in a more normal fashion or if there remain remote.
As with our successful launch of ERP, we are evaluating new product and service offerings to help support work from home and learn from home business environments. We believe this bodes well for our BSD business in the long run as we work to expand our value proposition and use our supply chain and distribution capabilities.
To drive long term profitable growth and in our comp become division. Despite the near term impacts from Copel, which continued in the second half a year, we believe that could become isn't the right place at the right time to leverage their ability to support remote workforces to help maintain business continuity for our customers.
Because of this uncertainty across many of our channels.
We remain cautious as we head into the second half a year and our guidance for 2020 remains withdrawn.
That said, we remain in a position of strength to not only continue to address these challenges, but also to position us for future growth.
On the foundation of a very strong balance sheet.
We will continue to drive our low cost business model and managed cash while investing in and leveraging our BTD platform to drive long term growth and stakeholder value.
With that I will turn the call over to Anthony for overview of our financial results.
Thank you Jerry and good morning, everyone. I appreciate the warm welcome and happen to be part of the ODP family.
I think ODP has tremendous opportunity to create value for shareholders and I'm excited about being part of a team that will make the tab.
Before getting into financial results I'd like to take a few moments to share with you why I joined ODP.
Perhaps the most significant aspect that attracted me when the company very large market presence BTD platform and expansive reach.
Very few companies have the scale and portfolio of assets to drive their business.
From the supply chain and unique distribution asset to the multitude of customers across BNP and D to C. Our platform creates a significant opportunity to expand our value proposition and deliver a broader set of products and services growing our customer base and driving long term value.
Of course, being a CFO I quickly recognized the strength of our balance sheet and the flexibility that affords us in terms of capital allocation as we transformed the business pursue growth and create value for shareholders.
The strength of these assets along with strong free cash flow growth and the ability to generate substantially higher EBITDA growth overtime was very compelling and I believe there is a tremendous opportunity to create significant value that ODP expand our multiple and deliver substantial long term growth.
Now turning to the highlights of our financial results as shown on slide nine consistent with previous quarter. We have provided our results on both a GAAP basis and on adjusted basis.
Total revenue of $2.2 billion during the second quarter was down 17% largely driven by the effects of the cobot 19, operator, resulting in lower sell throughout our division as well 60 fewer stores than server relative to last year.
Partially offsetting the negative impact due to covert with an increase in online sale and strong demand for essential items, such as cleaning and breakroom and products that supported the work from home and learning from home environment.
During the quarter, we recorded charges totaling $466 million.
Consisting of $401 million of noncash asset impairment charges and $65 million and restructuring costs, primarily associated with our business acceleration plan and recently announced maximize b to B program, which I will go into more detail shortly.
Included in the noncash asset impairment charges with an impairment related to goodwill and intangible at Compton calm and in our contract business, mostly related to the cobot 19 impact the overall business conditions.
For context, we assess whether there are indicators of impairment every quarter, but traditionally perform an annual assessment of goodwill during the fourth quarter.
However, as a result of the impact that Coven 19 has had on our business conditions within our segment, we performed an assessment of goodwill and intangible values in the second quarter.
With the assistance of third party valuation expert and factoring in the impact that Cobot 19 has had on our end markets as well as higher overall discount rate, we recorded a noncash impairment charge of $363 million related to goodwill and our comp ecomm and contract businesses and other intangible.
Therefore, along with a restructuring charges on a GAAP basis, we reported a loss from operations a $456 million.
Excluding these items and other items, our adjusted operating income for the second quarter was $10 million compared to $71 million in the prior year period.
Unallocated corporate expenses were $25 million in the quarter basically flat with last year.
Adjusted EBITDA was $59 million for the quarter compared to $125 million in last year's second quarter. This includes adjusted depreciation and amortization expense of 47, nine and $51 million in the second quarter of 2020 and 2019, respectively.
Excluding the after tax impact from the items mentioned earlier adjusted net loss for the second quarter was $4 million or seven cents per diluted share compared to adjusted net income of $37 million or 16 cents per diluted share in the prior year.
Despite the very challenging conditions and significant contraction in top line our team maintain the focus on cash in the quarter.
Operating cash used in the quarter was 8 million, which included $4 million and integration costs and $16 million of restructuring costs.
Capital expenditures in the quarter were $15 million compared to $45 million in the prior year cared, reflecting lower investment in our retail operations, while continuing our investments in our beating me platform distribution network and ecommerce capabilities.
Adjusting for cash charge as a $16 million associated with the company's restructuring plan adjusted free cash flow used in the quarter was $7 million.
Let's now turn to slide path, which highlights the performance of our BSD Division as a reminder, DSD is the largest component of our de integrated distribution platform serving customers from the fortune 500 to small and medium sized businesses.
The business consists primarily of serving customers for both our contract and E Commerce channel.
The outbreak of covert 19 caused significant business disruption for our BTB customers and many schools.
Many businesses had the pause operations transition into remote works settings, and many schools were forced to cease in class operations and shutdown early.
Clearly this is not a business as usual situation.
And the effect of the output most notably impact the topline results in our BSD Division.
Because of this reported sales in the quarter for BSD were $1.02 billion, a decrease of 23% compared to the prior year period, our channel mix and products that helped to offset some of the negative impact.
Sales increased over 20% in our ecommerce channel and demand increase for products supporting work and learn from home and essential products with technology sales up 17% and cleaning and breakroom sales up 20% versus last year.
Our total adjacent categories grew relative to last year and comprised approximately 48% of total revenue in our BSD Division.
The launch of Pp added to this performance.
The balance helped to partially offset the negative impact related to the Covance 19 pandemic.
As Jerry mentioned sales improved each month throughout the second quarter and has thus far continued current quarter to date as business activity increased and companies began to adjust their needs for the work from home environment.
We're continuing to monitor the pace of business in school Reopenings as this will have impact to the speed of our topline recovery.
Operating income was 13 million and the second quarter compared to 86 million in the prior year period. The decrease in operating income versus last year was related to the impact of cobot impacting sales product mix and higher overall distribution costs.
We experienced higher distribution costs early in the quarter as we were making more deliveries directly to residents instead of corporate offices.
We have implemented strategies to address including working with our distribution partners and evaluating delivery schedules and sees all of which are helping controlled delivery cost going forward.
Looking at Slide 11, we highlight the performance of the compound Division you.
The immediate effects related to the cold. It operates also impacted sales performance at Comping calm in the core sales or $214 million down 17% versus the prior year period.
The decrease was largely due to customer imposed project delays and lower service volumes at the corporate banking pandemic impacted our customers business operation.
Adding to this was our deliberate effort to reduce certain unprofitable accounts to improve future profitability.
The comp Dcom Division reported operating income of $4 million in the second quarter of 2020 compared to operating income of $1 million in the prior year period.
Back cost efficiency measures and other cost reduction efforts helped to drive the year over year increase.
He's cost reduction efforts helped offset the expense incurred in anticipation of supporting the implementation of new future service contract as comp income continues to win new service contracts and project work during the quarter.
As Jerry interest earlier copy come support for its customers during the pandemic had been stellar.
Combined with our core competency in supporting enterprises in a distributed environment. We believe that copy calm remained and an excellent position going forward.
Turning to slide 12 reported sales in the quarter for our retail division declined 9% to $912 million.
A decline in sales was related to the impact of store closures over the past 12 month as we had 60 fewer stores compared to a year ago as well as lower store traffic through the coated.
Higher average order volume and sales per shopper, along with our diverse product mix and channel availability helped offset some of the negative impact to store traffic.
We drove an increase in demand for essential products to support work and learn from home environment as well as essential cleaning products, including TP to address customers needs posed by the pandemic.
Our buy online pickup in star offerings, or BOPUS experienced a 162% increase in demand as customers chose the convenience of this option to limit the time spent in the store.
And my quick analysis I was truly impressed at the agility of the team and scaling BOPUS during the quarter, helping to meet our customer needs and ways that work for them.
Moving to mix, while product revenue held its own and was down 4% compared to last year service revenue was down 38% as copy and print services and subscription offerings were negatively impacted by the covert 19 pandemic.
Operating income was $18 million in the second quarter up 100% over the same period last year or as a percentage of sales 110 basis points improvement in margins.
This increase was largely related to lower SG nine from cost efficiency initiatives and an improvement in distribution and inventory management costs as well as lower operating lease costs recognized as a result at the new lease accounting standards.
Turning to the balance sheet and cash flow highlights on slide 13, we ended the quarter with total liquidity of over $1.5 billion.
Total debt at the ended the quarter with approximately $672 million considering our recent refinancing of our credit facility, our maturity profile as attractive with our ABL not maturing until 2025.
Our balance sheet remains a source of strength and provides us flexibility as we execute our strategy and pursue growth.
I cover cash flow in my earlier remarks, however, given the challenges caused by the pandemic and generally tough overall operating condition, we still prudently manage cash in the quarter.
Resulting in adjusted free cash flow use a $7 million versus a use of $48 million in the prior year period.
Regarding capital allocation, considering the uncertainty of the Covance outbreak on the current environment, we remain focused on preserving liquidity and maintaining our financial flexibility.
Our stock buyback program and quarterly dividends remain suspended and we will reevaluate these programs when appropriate aside from preserving liquidity our capital priorities will continue to focus on investing in our business to further enhance our VTB platform to pursue profitable growth and expand our distribution network and capabilities.
Moving to maximize B to B.
Our recent announcement regarding maximize BT continues our strategic pivot to becoming a platform to our customers can rely on for their business needs.
We plan to accomplish this across all channels, including maximizing the value of our retail presence by continuing to rationalize the footprint, reducing our longer term lease exposure and improving the overall cash flow and earnings profile of the business going forward.
We will also continue to make strategic investments in our supply chain and b to b capabilities.
The pace of the programs restructuring investments and other costs will be dependent on overall business conditions and shifting customer dynamics as the effects of cobot 19 continue to be match and understood.
Finally, let me wrap up with some of my priorities over.
Over the next few quarters I plan to focus my time on a few key area.
Number one is to continue supporting the key initiatives across our platform that will drive long term growth accelerating our BTB pivot.
Number two continue to drive a low cost business model, while I believe that accompany can't cut its way to greatness I will work with the businesses and corporate teams to ensure that GE and $8 are invested in the right places and are aligned to best support our field associates and client.
Number three continue to leverage our assets across supply chain and procurement expanding the product and services that we offer a customer driving value and building upon our sourcing capabilities our network touches many customers and we'll be focusing on delivering even more value for our customer base across all of our channels.
Number four reviewing our overall capital allocation program to ensure the right long term balance for growing shareholder value.
And finally, continuing to promote our five see culture across associates and the finance team and my few short weeks at the company I've been very impressed with the company's prong and innovative culture, creating the foundation to drive our mission and reach our goal was all of our stakeholders at the core.
With that operator, we'll now open up the line for question. Thank you.
At this time, if you would like to ask a question Press Star then the number one on your telephone keypad, well pause for a moment to comparable to Q1 day roster.
Our first question will come from the line of Chris Mcginnis. Please state. Your company name then proceed with your question.
Thank you truly Chris Mcginnis from Sidoti and company. Thanks for taking my questions.
Maybe just I know you talked a little bit about improving trends throughout the quarter you, maybe just provide a little bit more granularity of maybe where you exited the quarter, whether it's on a consolidated or across the three segments. And then you know just any kind of indication in terms of what you're thinking for the back half of yours is obviously your nose lot of uncertainties.
But anything that can help a little but around demand trends. Thanks.
Thanks, Chris This is Jerry so I appreciate the question. So as we said in his script. We obviously the early part of Q2 was it was very very tough.
We saw and we saw or like April was very difficult may was improves in June was what was even better and that as we said in his script, we continue to see.
Improvement across.
All our routes to market and so but as I said in my part there's so much uncertainty in the back half, which is why we pulled guidance going forward, but we do think we already a very good position. If you look at how how we actually the quarter versus where we started our cost our cost models and right place really proud of the team from ability to.
The drive cash we're going to continue to look for new categories like we Didnt P. E work from home learn from home, there's all kinds of different innovations going on there, but we're obviously we have a lot more confidence today than we did early in Q2 it.
But due to reduced results. We did in this you know the worst economic times, you kind of countries history.
Radar proudly peep team for adjusted operating.
Profitability as well as.
Pretty much net cash neutral from it.
That perspective, so lot of confidence with the model we have the team in place the direction, we're going to and really using the routes to market and most importantly, we think we have this ecosystem platform in place to bring products and services the BTB customers, whether that SMB through retail and online whether it's mid mid mid size customers for coffee carbon.
Our contract business or through our large enterprise customers. We think we can serve all routes to market or just.
Insisted that <unk>, plus a little bit on on the remote status and some of the work from home and the cost to serve there and just how is driving that down and I see that has that transition a little bit since we've seen some autonomy circles reopened itself.
Yeah, I think it's again this very emphasizes the value of the routes to market.
We did see early in the quarter, we just a real quickly our finance and supply chain and our merchandising teams of how we serve those customers. So we did do some we worked with some of our distribution partners that are in our own fleet to address that from a a operational execution perspective.
Adjusted some from a cost structure perspective, as well so we feel good about that I think that you saw us from a merchandising perspective, we've seen tremendous growth in furniture in tech and number of its sort of printers.
Cedrik setter and so I think we're very very well positioned to continue that we're seeing that strength continue and I think that whether it's a hybrid model whether it's.
Good Okay, I'll say continuous work from home I think that we're well positioned with our broader product offerings to go off it'd be successful what I'm most proud of it.
As you look at this was our ability to really emphasizing confirm our strategy, we can be more than an office supply company and we would look what we did with P. E mail from zero to 100 million a 90 day.
Pretty impressive [laughter] and and I think we can do that in other categories continue to look at what else do.
Kids need from a learn from over an education perspective, what do you know remote workers need all of us or in that environment now, so I think world or any of the hey, what do I need to be successful in this environment. So well continue to be that platform out there, but again, it's always about getting the right cost structure in place, making sure we deliver.
The right central products and services for for people and Chris is advancing just to add some color on on the cost side clearly as Jerry mentioned, we saw some shift a cost mix I'm on the DSD, which has a higher relative cost to serve that was offset on our retail side. So on a consolidated basis, we were able to.
That some of the cost that we saw as the shift in mix occurred and more of the channel is to the retail side or to the a stay at home side, but you know the dependent on the overall reopenings and our commercial and education clients, they're gonna look to us for different products and services and I think you saw how.
Agile the company wasn't it floater in terms of servicing those clients throughout that child.
Great Thanks to that and again congrats on the TV. This Uh huh.
So far on Silicon two three and things that doesn't question.
Thank you.
Your next question comes from the line, it's Chris Horvers. Please state your company named on proceed with your question.
Thanks, Good morning, guys. So I wanted to follow up on that a little bit just you know maybe.
What do you have seen so far and back to school I mean, you cover a wide geographies and do you see any indication that you know maybe there there's buying early are able to look at <unk> in terms of.
[music].
Areas, where the you know students are going back to school, where or versus the work from home and Oh, sorry learn from them environment will.
Stay in place and then just more broadly as you think about back school.
How are you trying to position to it obviously technology and desks and so forth seem to remain strong at this point, but you're not same time technology is not the brightest margin categories. So how are you broadly trying to position ourselves from a a an assortment perspective in a promotion perspective, you know around that.
Technology category.
Well the a the back to school, obviously, a lot of uncertainty there and can be a dynamic across the country I think in terms of when school reopens and when they do reopened what does the model looked like a whether it can be a hybrid model or wherever you know school from.
From whole model, so what we're monitoring that we're obviously keeping a pace.
On the reopenings across the country I'm here.
Your question regarding the product mix, if you think about the way we've approached this year or not you know really commend the merger that merchandising groups.
Because our stocking strategy on a year over basis was really to leverage more of a replacement replenishment model versus yes storage models that we were able to reduce our overall inventory in the category its really going to be dependent on where we see the products and suite of services across the platform to drive the value that ultimate.
They are our education clients are going to need for their students if they're going to be at home or hybrid. So we think there's an opportunity for both channels to actually pull through dependent on the pace of the reopenings of those channels may have a different mix, but ultimately a there's great opportunity for us its service not only the traditional back to school, but also the school from home environment.
And then I guess it.
On the M&A side very strong expense control despite.
Another coven topline headwinds 406 million, that's Jane I can you maybe.
Trying to get at what that baseline X gene a run rate is going forward do you have the bat program and cost efficiency has always been a focus but then there's a variable variable cost components. So.
As as you think about that 406 million is there any way to give us a sense of like you know what was you know was significant belt tightening that you might have to get back next year.
Any any thoughts on you know sort of the variable costs, a component of bashing $8 versus yeah. Arses sales go talk to that at a high level, obviously, let Tim good good for you with offline with some of the more specifics, but obviously with bath as well as our maximum.
Project that we announced meaning that the entire focus as we I always say the local you need a low cost model to win in this space I think we've demonstrated that very very successfully over the last couple of years, we've substantially improved our our cost management, obviously, we focus a lot in cash cash generation as well, but we're going to continue to look at.
Ways to manage the business.
From a I'll say fixed cost bases to a variable cost basis in the future and so were always <unk> over <unk> Maxx. Mrs are the primary goals of Maximus is to drive.
From a fixed cost model to a low cost to a variable cost model that allows us flexibility.
Oh for this is ever repeated the covert experience, but we believe this demonstrated the ability for us to pivoting and successfully manage cash it and cost it in a very very difficult environment. So we're we've built a DNA here at our culture about about driving cost would be inefficient and I'm very pleased with at the progress we made across not just.
Our finance teams, we've done a tremendous job all are integrations done tremendous job of of driving to efficiencies and productivity and even this acceleration of work from home is we've found all kinds of opportunity to of efficiency and productivity that.
Hi, beta in a work environment, you Didnt realize things, we didnt need anymore, and so we're going to continue to drive that the future as as we do come back into a.
But the future, but you know it huge focus a low cost model and we'll continue to drive that get in the future. If anything I think there you know my short time here I'm just the agility of the team to respond to the top line pressures that we saw taking out costs and I think the way to look at it is you know we will invest in areas that.
Produce the growth, we're not going to add DNA for the sake of adding DNA. So as the business modulator and there's areas for us to improve the topline recapture those are the areas that will look at reinvesting, but overall, we're going to keep our ESG and I continue to be focused on where the businesses heading and really keep that low cost as its model front center.
I guess, it's just one quick follow up to that is there any sort of like just specific items you could point out like well incentive comp was down 30 million or are you know teeny was down acts like anything that is not you know variable and is really just you know something you're gonna have to lap as you look forward.
We as we went through our cost structure Weve actually look at multiple workstreams across.
Every cost element of the business.
As it as a work stream owner as well as the benchmarks in place so where we had a very comprehensive cost model and so really proud of the work that our team has done. So every element of cost is it looked at benchmark and driven.
Got it best of luck.
Thank you.
Your next question will come from the line as Michael Lasser. Please state. Your company. Then proceed with your question.
Good morning, it yes.
I think the market's heavily focused on trying to understand what a realistic run rate for the topline other businesses. So with that being said you didnt referenced the improvement throughout the quarter in into July can you give us what the run rate growth or decline the business is in July so far.
Well, let me, let me maybe put it into the contact for the second half. So obviously Q2 as the prepared remarks referenced we saw improvement along the quarter.
When the pandemic hit I think everyone with flat footed and panicked that obviously created a lot of disruption in a lot of our channels, but we were able to pivot and categories as well as execution across both the services and products side and we saw improvement I think as we look into the second half and given the unknown and one of the reasons why we continue to.
So with drug guidance, we're seeing improvement so we're not going to see the same level of degradation at the top line that we saw in Q2, continuing but there is going to be continued headwinds if I would bench market based on what we've seen it's probably low single digits versus double digit that we saw in some of the and some of the services.
We provide and product that we so we see improvements continuing on but the headwind continues exists.
For the for the second half.
So it's going to throw went down 24 down 24% to down low single digits.
For the second half that should be low to mid single digits on an annual basis.
Okay, and <unk> and with the restructuring program, how many retail stores do you expect to close.
The pace of the restructuring and ill be referring to maximize its really going to be dependent on a lot factors not going to be dependent on our negotiations with our lease holders.
Making sure that we have the right view, though.
It's really going to be looking at the profitability in the cash flow generation by store a ensuring that we have the right line of sight and it really is going to be dependent on how effective our renegotiations, where it makes sense to renegotiate those leases.
And the terms of those leases will will drive how fast we closed doors.
Okay. Thank you very much in good luck.
I can't give.
Our next question will come from the lineup William Consulting. Please state. Your company name then proceed with your question.
Hi, Good morning company name is elevation.
Just wanted to say congratulations on the progress that's been made in terms of corporate actions around the BW transformation.
I guess my question is you know I know, we're only a couple of quarters and to this new operating environment and you know you're managing the cost structure dynamically I'm very well, but just kind of curious given the shift in category and channels.
Do you have any early learnings around what the long term margin profile in BSD might be.
Once we kind of reach a steady state topline in that business as or as a comparison historical margins. Thank you.
Yeah, well. Thanks for the question I think we probably need some more wrote underneath underneath this from a a trend perspective, we're watching it carefully.
I think as we go through the second half of your and get a better line of sight I think we'll be more comfortable and and 2021 sort of no no. It knowing that margin profile. Obviously there are some categories are lower than some of our core supplies, but there are categories were looking at adding that are also pretty margin accretive as well.
So.
Again this at a high level, we're always we're trying to always get to a cost structure that is variable based so depending on the composition or products, we can shift up and down relative to whatever our customers' needs.
How that capability, which is why.
Well I keep saying to play a platform is important because we can offer more than just occurred offerings. We want to continue to bring more and more Jason sees on this to.
Your skus distribution into deliver in five different things that five different categories versus one category, you're going to get scaling into that business as well.
Great. Thank you.
That concludes the Kieran day session for today I will now turn the call back over to office Depot's CEO, Jerry Smith for any closing remarks.
I just want to thank everyone for joining the call today and I just wish everyone. A kick stay safe in this difficult environment, and we look forward to or or conversations or when we close Q3 have a great morning, and again, thank you for joining the call.
Thank you for your participation. This concludes today's call you may now disconnect.
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