Q1 2021 ODP Corp Earnings Call

May 5, 2021

[music].

Good morning, and welcome to the ODP Corporation's first quarter 2021 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 ask a question at the request of the ODP Corporation. Today's call is being recorded I would like to introduce Tim Perrott Vice.

President Investor Relations Mr. Perrott, you may now begin.

Good morning, and thank you for joining us for the ODP corporations first quarter 2021 earnings conference call.

This is Tim per off and I'm here with Gerry Smith, our CEO and Anthony Scaglione, our executive Vice President and CFO.

Also joining us today is David <unk>, our executive Vice President and Chief legal and administrative officer.

During today's call Gerry will provide an update on the business focusing much of his commentary on our accomplishments in the first quarter, including our operational performance and progress on our B to B pivot and digital transformation.

David Blish will then provide commentary regarding the public proposal made by USR, an entity controlled by Sycamore partners the owner of Staples to acquire the ODP Corporation.

After David's commentary Gerry will then provide comments on our decision to pursue a tax free spinoff of our <unk> businesses, creating two independent publicly traded companies anthem.

Anthony will then review the company's financial results, including highlights of our divisional performance.

Following Anthonys comments, we will open up the line for your questions.

Before we begin I need to inform you that certain comments made on this call include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

These forward looking statements reflect the company's current expectations concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially.

A detailed discussion of these risks and uncertainties are contained in the company's filings with the U S Securities and Exchange Commission.

During the call we will use some non-GAAP financial measures as we describe business performance.

The SEC filings as well as the earnings press release presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website investor Dot the ODP Corp Dot com.

Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year.

I will now turn the call over to Odp's, Chief Executive Officer, Gerry Smith Gerry.

Thank you, Tim and good morning to everyone joining our call today.

We appreciate you joining us this morning, and we hope that all of our listeners and their families remain safe and healthy.

I am very happy to be here with you today to discuss our results for the first quarter and our announcement, we made to separate into two independent publicly traded companies.

It's a very exciting day for OTT.

As we Mark the continued evolution of our BTB pivot and digital transformation and take the next step in to unlocking shareholder value.

As separate companies each business will benefit from increased strategic focus and enhanced flexibility to invest in distinct growth opportunities.

With separate capital structures and growth profiles.

We are very excited not only about our progress we are making across our business, but also about the strategic flexibility enhanced prospects for value creation through this exciting step.

Our performance and strategic actions are supported by the key tenants of our business as I outlined last quarter.

As shown on slide four of our presentation. These tenants act as our guidepost as we address the challenges pursue growth and position our business to unlock value for shareholders in the future.

These core tenants are centered on driving a low cost model.

Expanding our value proposition to customers and moving into higher value businesses through new growth engines.

As you have seen.

We have been executing along these priorities are evolving our business model on structure and leveraging our ecosystem to meet our customers' growing needs and higher value markets on.

Also at the center of everything we do is our winning <unk> culture.

I am very proud of the culture, we have created ODP and the foundation. It provides as we attract new talent and execute our strategic priorities.

In the quarter, we delivered solid operating results made progress on our BTB pivot and took actions to build greater value for shareholders by pursuing structural improvements to our business and authorized a new stock buyback plan.

Highlights of music office for the quarter are shown on slide five.

First as Ive stated on previous calls we are remaining vigilant as we maintain a safe environment and continue to employ the enhanced safety measures that we implemented last year for our employees and customers.

We are pleased to announce we are anticipating reopening our corporate facilities. Later this month on a limited basis with further expansion as we progress throughout the year.

Turning to the highlights our performance in the quarter reflects our continued commitment to driving our low cost model, while leveraging our foundation to meet the needs of customers during the ongoing pandemic.

The flexibility of our ecosystem.

All of us to deliver our value proposition to customers at home in the office and through our retail stores coupler.

Coupling this with our low cost model approach, we delivered solid operating results and generated significant free cash flow both that exceeded our internal plans.

Building for our future and evolving into higher value businesses, we made significant progress on our BTB pivot and digital transformation.

We integrated our new procure to pay procurement platform buyer quest advanced our collaboration with Microsoft as we continued to gain strong interest from the supplier community.

All of these actions has advanced our position to pursue profitable growth in the highly value to business commerce market.

And as I stated in my opening in our effort to unlock further value for shareholders and with the unanimous approval of our board of directors.

We have announced plans to separate ODP into two independent publicly traded companies.

We believe this action will enhance our strategic flexibility.

Waiting to highly focused pure play companies unlocking significant opportunities by improving our ability to meet customer needs, while aligning our assets and investment profiles to generate greater value for our shareholders and lastly, supporting our strategy and strong liquidity position our board.

Has authorized a new $300 million stock repurchase program to enhance return to shareholders now.

Now turning to more details regarding our operating results as shown on slide six.

As I have mentioned conditions related to the pandemic continued throughout the quarter.

Additionally, it is worth noting that adverse weather condition in the southwest which is a large market for us impacted certain operations for a period of time during the quarter.

That being said I'm happy to report that our low cost model and flexible channels helped offset these challenges.

We drove our SG&A lower while generating strong demand and work from home product categories, and our balanced approach helped to deliver sequential growth in our retail channel and an uplift in our buy online pick up in store offering.

Performance in our retail division was again excellent and despite the continued pressure from COVID-19 impacting our contract channel sales. We did achieve one of our highest quarterly rates of net new customer wins in our BSD Division. This bodes well for our future overall solid execution by our team.

Resulted in $91 million and adjusted operating income and nearly $79 million and adjusted free cash flow.

We remain in excellent position to recapture growth as more businesses ramp up operations and more school systems, including K through 12, and higher education returned to N class learning.

We're encouraged by the increase in school activity, we experienced as we progress throughout the months in the quarter and continuing to date, giving us confidence in our thesis of driving better growth in the second half of the year.

The standout among our operational performance was once again, our retail division as shown on slide seven.

Our retail division again drove strong overall performance satisfying the increased customer demand for working on learned from anywhere products, particularly technology and furniture, hoping to offset the year over year on mix shift in core supplies and copy and print.

We continue to leverage our <unk> offering which was up 35% over last year.

<unk> per shopper also increased and when combined with our strength in <unk> helped to offset a decline in retail store traffic.

Fewer stores and service as we optimize our retail footprint drove lower reported revenue results. However, although we are not specifically reporting on it we estimate our comparable store sales were roughly flat to last year.

Our operating performance again improved significantly driven by our efforts to optimize the store operating model manage our inventory and execute upon our maximize <unk> plan.

Moving forward, we believe our retail business is in excellent position to capture some of the pent up demand in the upcoming back to school season as more students return to in class learning and look to restock school supplies.

For many had been depleted since 2019.

We remain bullish for a home and school office supplies as we continue to execute through the coming quarters and in fact, we believe that our retail changes, becoming the home office headquarters for small and medium businesses and for those operating in a hybrid or work from home model and we are well positioned to provide for all of their business needs.

Turning to our business solutions division as shown on slide eight per.

Performance on our BSD Division overall continue to be pressured relative to last year from the continuing effects of COVID-19 as well as the adverse weather in the southwest impacting both our top line and operating results.

Primarily impacted was our enterprise contract channel, which serves businesses from school systems as both of these have been impacted by business and school shutdowns.

This was partially offset by slightly stronger performance year over year, and our E Commerce channel as customers continued strong demand from work from anywhere products.

As we begin to move past the pandemic, we are continuing to drive strength in our adjacency categories, including furniture technology and cleaning products.

And despite these headwinds in the quarter, we did see month to month improvements in demand as the education sector begin to ramp as well as the commercial sector as many businesses begin migrating staff to return to work.

This has continued to date and supports our thesis of delivering a stronger second half in 2021. Additionally.

Additionally, we're continuing to win net new business as our customer retention rate remained strong as we win new business.

This resulted in one of our highest levels of net new customer wins during the quarter, which should improve our position to generate stronger growth in the second half and beyond.

Now turning briefly to comp becomes performance as shown on slide nine.

Overall coffee com's performance is still experienced the effects of COVID-19 with reduced volume levels from some customers like a number of companies. We were affected by a malware incident that occurred in March which resulted in an impact to the top line as we are unable to deliver service to certain customers for a limited period of time.

As we shared previously we engaged a leading cyber security experts, which allowed us to address the incident contain the malware and restore services to substantially all of our customers by the end of March. Additionally, as part of our restoration efforts, we have strengthened our systems with enhanced security measures.

I am very proud of the incident response to their team exhibited despite the incident.

All of our customers remain intact, our pipeline remains strong and we are again focused on scaling the business also our process of exploring a value maximizing sale of our company come Division continues to move forward.

We remain encouraged by the opportunities head per copy come, particularly in relation to their capabilities to address the evolving trends in the future work and cloud based services company.

<unk> continues to be well positioned to capitalize on opportunities in the future now.

Now turning to our progress on our BTB pivot in our digital transformation initiatives as shown on slide 10.

As we announced during our year end call in February we made tremendous progress on our <unk> pivot and digital transformation initiatives.

We formed our new technology business focus on transforming BTB sourcing.

Purchasing and supply chain operations for suppliers and buyers, we built an incredibly powerful team to lead our efforts with some of the most prominent improvement leaders in the business Commerce and technology space today, we significantly accelerated our technology development. So the acquisition of buyer quest, while on a leading procure to pay.

Procurement software platforms in the World and we announced our collaboration with Microsoft to bring the power of our new digital procurement technology platform to Microsoft dynamics 365 business central customers in the future.

Over the past two months.

We've moved with rapid precision, making progress on both our business initiatives and technology development driving our digital transformation.

Let me highlight a few areas.

We've integrated buyer quest launching new customers on the platform and building a pipeline of new business opportunities.

We advanced our collaboration with Microsoft.

<unk> X gene and life technical demonstration of bioequivalence capabilities on the dynamics 365 platform to integrators at an industry conference.

This represents an important step as we prepare for a full launch from Microsoft business Central customers scheduled for later in the year and lastly, we have continued to generate strong interest from the supplier community as they begin to recognize the expansive reach and innovative capabilities of our new digital platform.

We're on the right place with the right team and the right technology platform to pursue growth in this very large and growing business commerce market.

Before I discuss the spinoff transaction that were announced this morning, I want to turn the call over to David <unk>, Our executive Vice President and Chief legal and administrative officer, who will provide an update on the status on the public proposal previously made by Sycamore partners the owner Staples to acquire the ODP Corporation.

Thank you Gerry.

Before Gerry discussed its the spinoff transaction that we announced this morning I will provide an update on the status of the public proposal previously made by Sycamore partners the owner of Staples to acquire the ODP Corporation.

As a reminder, on January 11th USR apparent the owner of Staples, Sycamore partners subsidiary, which I will refer to as Sycamore made a public offer to acquire 100% of the common stock of the ODP Corporation.

They are public letter stated that sick more intended to commence a tender offer for the stock of ODP in March 2021, if they did not reach negotiated agreement with us.

In response, we publicly communicated that we were open to combining our retail and consumer facing e-commerce operations with staples under the right set of circumstances and on mutually acceptable terms.

As we previously disclosed we received no substantive response from Sycamore, but instead, we're informed that sycamore does not want to engage in substantive discussions until the regulatory process initiated by Sycamore is completed.

As part of that regulatory process. We previously received a civil investigative demand from the U S. Federal Trade Commission, which is conducting an investigation of Sycamores proposal as a result of the <unk> filing of a Hart Scott Rodino notification.

Net filing was based upon Sycamore as previously stated intention to commence a tender offer by the end of March instead.

Instead of commencing such an offer on March 31, Sycamore publicly announced that it decided to defer the March 2021 launch of a tender offer for the company's common stock while reserving the right to commence when in the future.

We received no additional communications from Sycamore since March.

March 31 public communication.

Accordingly in order to relieve the company from the continuation of a costly and burdensome process. After limited response by the company to the civil investigative demand. The FTC has agreed to defer requiring further responses from the company and lessen until Sycamore formally launches a tender offer for the parties to execute a negotiated agreement.

Additionally on May four 2021, the Canadian competition Bureau advised the company that it is determined that <unk> proposed acquisition of the company would likely result in a substantial lessening or prevention of competition in the sale of business essentials to enterprise customers in Canada.

While we do not know for certain what the Bureau would do a sycamore actually launches a tender offer in the future. The bureau's determination signals that the Bureau would likely challenge the acquisition.

With respect to comp become we are in the midst of the previously disclosed sales process we.

We do not intend to provide any update on this process until such time as it is completed.

Now I'll turn the call back over to our CEO Gerry Smith.

Thank you David.

Now, let me turn to comments regarding our plans to split ODP into two companies. This begins on slide 12.

As we announced this morning, our board has approved a plan to separate the ODP Corporation into two independent publicly traded companies through a tax free spinoff of our <unk> business and related assets.

We believe this initiative will unlock significant value for shareholders by positioning both companies to enhance our focus on customer needs.

With a unique and highly focused strategy and investment profile.

Before I get to the specifics I thought it would be helpful to reflect on the journey that has led us to making this decision.

As most of you know over the past several years, we've been executing a plan to pivot our business to be to be leveraging our assets and customer relationships to drive a distribution business and digital platform.

Supporting this effort we have created a strong foundation consistent with valuable assets that we have leverage in order to drive our business.

This includes our supply chain one of the largest in North America capable of covering nearly 99% of the U S. Population next day, our vast global sourcing operation a growing distribution presence, serving a large business customer base and a robust digital platform.

Our <unk> business today serves nearly 10 million business customers over 200000, large enterprise and nearly half of the fortune 500 companies.

With the exception of the COVID-19 environment over the past year, we have been successful in utilizing these assets to create a much more viable BSD business from where it was five years ago.

We have stabilized and grown our presence.

We rebuilt our pipeline of new business added distribution in underserved markets and improved our go to market strategy, all resulting in net new customers.

Now on leveraging all of these valuable physical assets combining them with our new digital presence to develop a next generation business commerce platform in order to pursue growth in a very large and growing buyer and supplier commerce markets.

As a component of our BTB pivot, we've worked to optimize our legacy retail business a business that continues to thrive during COVID-19 with a focus on serving consumers and small businesses through a network of about 1100 retail stores.

We've been optimizing our store footprint and driving cost efficiencies in order to position, our retail division to most effectively serve consumers and small businesses.

The performance of our retail division has been stellar serving customers and small businesses through a variety of means including in demand. Both this offering.

From a corporate structure perspective, our holding company reorganization last year has provided greater flexibility and better alignment for operating assets to improve our ability to serve an increasingly different needs of our customer base.

Considering this progress and realize an increasingly unique needs of business customers and consumers.

On with a recognition that the value. We have created has yet to be fully recognized led to our decision to split ODP into two companies each with unique strategy and asset base to serve their respective customers.

A description of each company and related assets are shown on slide 13.

Through the spin of our BTB related businesses to ODP shareholders, we will create newco, a leading BTB solutions provider, serving enterprise level companies, including small and medium sized businesses as well.

<unk> will consist of a business solutions division contract business.

Our Canadian business granted toy as well as our independent regional office supply businesses Newco.

Newco will also include our newly formed <unk> digital platform business, including buyer quest as well as our sourcing global sourcing supply chain on logistics assets. The remaining company will be ODP, a leading provider of retail consumer and small business products and services distributed through more than 1100 office depot.

Office, Max retail locations as well as through our award winning E Commerce site Office depot Dot com.

While ODP of Newco will be separate independent companies.

We'll share commercial agreements that will allow them to continue to leverage the scale benefits in such areas as product sourcing supply chain and related services.

Any of these areas and we further refined and adjusted as we proceed with the separation and we will provide updates along the way.

We believe creating two focused pure play companies will unlock significant opportunities for all of our stakeholders by improving our ability to meet the needs of our customers, while better matching our assets and investment profiles to generate greater value for our shareholders. The.

The value, we intend to unlock for our stakeholders.

<unk>, our customers and investors and employees are shown on slide 14.

First for our customers the split rollout each company to increase its focus on the unique needs of their respective customer base.

Through aligned go to market strategies and customer specific innovation.

This customer specific innovation will lead to building new capabilities to improve the customer experience for each customer set.

For investors the separation will allow for a better matching of assets investments growth and return profiles, leading to greater value for shareholders, along with the investor and analyst space more aligned with these attributes.

We believe that much of what we have created today and the valuable collection of assets. We have built has not been fully recognized by the investment community largely because of the deferred investment requirements risk profiles and return characteristics of the combined entity.

This separation will create a much cleaner and understandable investment thesis and will allow us to pursue a more targeted investment opportunities and capital structure to create value at each company.

And finally, creating two focused company is will allow us to attract and retain talent is motivated by the specific mission of each entity that will provide our employees expanded opportunities.

Having a more aligned strategy and goals will help to empower their respective teams of each company and prove the mix of talent and capabilities.

Therefore from <unk>.

All perspectives, we believe this initiative create significant value for all stakeholders, we will be better positioned to maximize our strategic focus and financial flexibility of each entity.

Aligning go to market strategies and capital investments to meet customer demand, while positioning the respective growth trajectories and return profiles to be recognized by shareholders to drive value.

Now turning to slide 15 for additional process information and comments about timing.

As I mentioned, we fully expect this spin off to be tax free to ODP investors.

Shareholders on 100 percentage of the equity of both companies post spin.

<unk> name and brand of Newco, along with the appointment of respective directors and management teams of both companies will be determined at a later date.

As a component of the process ODP and newco will enter into commercial agreements in areas that will benefit both companies and continue to deliver scale benefits and the sourcing supply chain and arenas. Additionally, ODP today has continued to work on driving further cost efficiencies.

And its business to help offset certain duplicate and onetime costs associated with the separation.

We have a lot of work ahead as we pursue this important step to unlock shareholder value and we commit to providing you more information as we make progress we expect to complete our separation during the first half of 2022.

As I mentioned at the onset. This is an exciting day for ODP, we're fortunate to be undertaking this process from a position of strength with financial operational and organizational readiness and with significant liquidity, providing us flexibility in determining how to allocate capital between the separate entities.

With respect to the continued success.

With the flexibility created by our holding company reorganization last year, we are now ready to take this step in our evolution.

In support of our strategy on our positive view of the future.

Also happy to announce a day that our board of directors has authorized a new $300 million share repurchase plan with that I will hand, the call over to Anthony for a review of our financial results.

Thank you Gerry and good morning, everyone.

I'm happy to be here today to discuss our financial results for the first quarter of 2021.

As I begin I'd like to say, how proud I am of our entire team for remaining focused on driving our low cost model one of our key tenants, helping us offset some of the challenges related to the COVID-19 environment over the past year.

Our low cost model and it's not just a one or two quarter exercise.

It's a discipline that has been instilled in the fabric of our operational approach improving our competitive position and supporting our strategic initiatives.

Including our announcement today to further unlock shareholder value.

Now turning to the highlights of our financial results as shown on slide 17.

Consistent with previous quarters, we have provided on our results on both a GAAP and adjusted basis.

Our financial results in the first quarter continued to be affected by the COVID-19 pandemic as many businesses and schools have remained closed or continued to operate in a hybrid environment.

Additionally, severe weather conditions in the southwest impacted certain areas of our operations with.

We typically do not mention weather impact, but since this was an exceptional occurrence that impacted a region of the country, where we have a significant presence. We believe it was notable.

Despite these challenges our teams continued focus on driving our low cost model and leveraging our broad portfolio of offerings positioned us to deliver strong operating results and free cash flow, even slightly ahead of our internal plan.

Turning to our quarterly results total revenue of $2 4 billion in the first quarter was down 13% over the very strong results. We delivered in Q1 of last year, the last quarter prior to the pandemic.

The aforementioned effects of COVID-19, and adverse weather conditions, along with 149 fewer retail stores and service relative to last year resulted in lower sales versus last year.

Partially offsetting these impacts was our balanced channel approach and broad product assortment, both helping us address the evolving needs of our customers. During this period.

This flexibility resulted in continued strong demand for work and learn from home products and increases in our E Commerce and Omnichannel sales versus last year.

GAAP operating income in the quarter with $55 million down from $80 million last year.

Included in operating income was $14 million in merger restructuring and other operating charges, primarily associated with our maximize <unk> restructuring plan.

$12 million of noncash impairment charges, mostly related to our operating lease right of use assets associated with retail store locations and $10 million of expenses related to the malware incident that impacted copy gum.

I would like to highlight that the additional SG&A expenses related to the malware incident were included at the ODP corporate level expense line and excluded from the comp become divisional results.

Excluding these and other items, our adjusted operating income for the first quarter was $91 million.

Compared to a $108 million, we generated last year.

Unallocated corporate expenses were $35 million in the quarter up from the prior year, primarily related to the aforementioned expenses incurred from the malware incident at <unk>.

As we reflected in our 8-K on this topic, we expect to incur approximately $20 million in total expenses in the year related to the malware incident of which we accrued $10 million in the first quarter.

We carry insurance, including cyber insurance, which we believe to be commensurate with our size and the nature of our operations and we are seeking coverage for certain costs incurred due to the incident.

Adjusted EBITDA was $138 million for the quarter compared to $157 million in last year's largely pre COVID-19 first quarter. This.

This includes adjusted depreciation and amortization expense of $44 million and $49 million in the first quarter of 2021 and 2020, respectively.

Excluding the after tax impact for the items mentioned earlier adjusted net income for the first quarter was $68 million or $1 21 per diluted share.

Despite the continued challenging conditions, we generated solid free cash flow in Q1.

Cash generated from operating activities was $86 million, which included less than $1 million of integration costs and about $6 million on restructuring costs.

This compared to cash provided by operating activities of $188 million in the first quarter of the prior year.

The reduction was largely driven by the prior year's strong operating cash flow related to the significant consumption of goods at the beginning of the pandemic, which was not replicated again in Q1 of 2021.

Capital expenditures in the quarter were $30 million compared to $25 million in the prior year period, reflecting the COVID-19 environment and lower investment in consumer operations, while continuing our early investments in our digital transformation and e-commerce capability.

We expect to increase our capital investments in future quarters, as we move past COVID-19 and continue to make progress on our <unk> and digital transformation initiatives.

Adjusting for cash charges of $6 million associated with the company's restructuring plans adjusted free cash flow in the quarter was $79 million.

Now I'd like to cover our business unit performance, starting with retail on slide 18.

Our retail division continued to deliver very strong performance in the first quarter. Our retail presence continues to play an important role in supporting customers for their essential needs be at work and learn from home setup technology or personal protection equipment and through convenient channels, such as our <unk> offering. Additionally.

Additionally, cost efficiency improvements in our efforts to optimize our retail footprint are continuing to deliver strong cash flow and bottom line results.

Reported sales in the quarter for our retail division was approximately $1 billion.

Which was down 10% from the same period last year.

This decrease was primarily driven by a 149 fewer stores and service as compared to last year, which included eight store closures during the first quarter of 2021.

Offsetting lower store traffic was higher sales per shopper and stronger demand through our omnichannel offerings. The.

The lift in sales per shopper was primarily driven by increased demand for work and learn from home products supporting consumers and small businesses and personal protective equipment.

The combination of our curbside pickup option and <unk> offerings remain popular with focused demand up 35% in the quarter as consumers continue to choose the convenience of this option.

Ship from store and same day deliveries were also up highlighting the flexibility of our delivery offerings.

Operating performance on our retail division with terrific, we generated operating income of $100 million in the quarter up 15% compared to the same period last year, representing a 210 basis point improvement in margins. This strong performance was driven by improvements we've made to our labor operating model driving cost efficiencies while enhancing.

Customer service as evidenced by higher net promoter scores as well as from our maximize b to B plan, driving lower operating and lease costs.

And we are looking forward to the upcoming back to school season, as we expect more school systems will be open for in class learning and expect consumers and school districts to replenish supplies for the upcoming school year.

Now turning to slide 19 performance in our business solutions division or BSD continued to be impacted from conditions related to the pandemic.

As a reminder, BSD consist of our contract channel, serving large medium and small enterprises, and our direct or E Commerce channel.

As we anticipated the impact of the pandemic has largely continued into Q1 and many of our business and education customers have yet to return to a more regular cadence to their operations. This impacted our performance in the quarter.

Reported sales in the quarter for BSD were $1 1 billion down about 16% relative to last year's first quarter sales.

Sales in our contract channel were lower related to the conditions due to COVID-19, which was partially offset by channel mix and product breadth.

Sales were higher in our E Commerce channel and demand increase for products supporting work and learn from home with solid increases in technology and furniture.

In the quarter adjacency categories remain in strong demand and comprised approximately 44% of total revenue in our BSD Division.

This balance helped to partially offset the impacts related to the pandemic, which negatively impacted core supply categories. While we expect these effects to continue through the first half of the year. We were encouraged with the increasing pace of business and school re openings, which resulted in a month to month increases in our sales pipeline, which has continued into the second quarter.

This gives us confidence in our thesis of our BSD segment, returning to growth in the second half of 2021.

Operating income was $17 million in the quarter compared to $40 million in the prior year period.

The decrease in operating income versus last year was related to the impact of COVID-19 on sales and product mix, partially offset by SG&A cost improvements related to efficiency programs and the contribution of our E Commerce channel, which continues to perform well.

Looking at Slide 20, we highlight the performance of the company come Division sales.

Sales in the first quarter were $196 million down 17% over last year, primarily driven by conditions related to the COVID-19 pandemic and other factors, which impacted service volume.

Additionally, while comp become quickly responded to the malware incident certain customer services were temporarily unavailable and as a result, we had a $3 million impact to revenue in the quarter.

<unk> reported an operating loss of $1 million driven by the flow through effect of lower revenues in the quarter.

As Gerry mentioned <unk> has made significant progress in restoring service to its customers as part of the restoration efforts cant become has taken actions to strengthen the systems and enhanced security measures.

And as we stated in our 8-K, we expect to incur total expenses of approximately $20 million in relation to the restoration efforts cost to address the incidents and remediate systems and for enhanced cyber protection.

As I stated earlier, we havent crude $10 million of these costs in the first quarter reflected in SG&A at the ODP corporate level and unallocated corporate expenses.

And as I also mentioned, we do carry insurance, including cyber insurance and are seeking coverage for certain costs associated with addressing the incident.

<unk> customer base and pipeline of new business remains strong and the company is focused on driving future growth. Additionally.

Additionally, the value maximizing sales process for <unk> continues and we expect to provide an update on this process during Q2.

Now briefly turning to our balance sheet highlights as shown on slide 21.

We ended the quarter with total liquidity of over $1 7 billion consisting.

Consisting of $753 million in cash and cash equivalents and $946 million of availability under our asset based lending facility total debt at the end of the quarter was approximately $367 million.

Apprised of our long term IRB bonds.

Our balance sheet remains a source of strength and provides us flexibility as we pursue growth and execute our strategy, including our decision to pursue a separation of our BTC and <unk> businesses.

As a final comment before I turn it over for questions I would emphasize that we are enthusiastic about our future. We're excited about the progress we're making along the key tenants that Gerry outlined earlier, our low cost model has positioned us to invest in growth opportunities and we're expanding our value proposition to the progress, we're making on our b to b pivot and digital transformation.

<unk> per.

Positioning us to pursue growth in high value markets.

While we are experiencing better overall trends and reported strong results in Q1, we continued to suspend guidance at this time until we have more clarity around market conditions for the balance of the year.

That being said trends have improved since our year end update in February which is extremely exciting bye.

By further focusing our strategies to leverage the BDC and the BTB end markets I'm confident that our separation will create significant additional value for all of our stakeholders.

We are fortunate to be pursuing this initiative from a position of financial and operational strength with significant liquidity that provides us flexibility in determining how to allocate capital between the separated entities also in support of our strategy. We're happy to announce that our board authorized a new $300 million share buyback plan.

With that I will turn it over to your questions. Thank you.

At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad again that is star one.

First question comes from the line of Chris Mcginnis. Please state. Your company name then proceed with your question.

Yes, good morning, Sidoti <unk> company. Good morning, Thanks for taking my questions and nice results and congrats on the announcement this morning.

Thank you Chris.

I guess just to start off around the separation announcement.

I think one of the key strength you've highlighted is just the.

The supply chain and the company you just talked about on the changing kind of environment.

How do you keep that the strength of the supply chain and the economies of scale going forward and when you think about that hybrid business model, how does that impact kind of.

The two divisions.

Yeah. Thank you, Chris and thanks for joining the call today. So I think what we've said in the script is very important for everyone to understand we're going to keep the leverage of having the newco have the supply chain there'll be commercial agreements between both companies but.

We will not lose our scale advantages for both companies.

We have a supply chain that delivers 99% of ZIP codes. The next day, even to the desktop and so we want to make sure we leverage that capability across so it'll be commercial agreements in place we will give more details about the obviously the cost structures and things around that as we proceed throughout the year as we go through the split.

I think it's a very important moving also mentioned sourcing as well. So I think it's important to mention that we're going to not lose our scale advantages from sourcing also so I'm real happy with our management teams.

The model, we built as well as our board's support to move forward on this.

Great.

Thank you.

And then I guess, just thinking about BSD economies are starting to open up can you just comment maybe a little bit more on the trends you saw throughout the quarter.

And then maybe if you could shed any light on the April trends.

And just as that vaccine rolled out.

I'll take that and how are you preparing for the rebound.

I'll take the first part and let Anthony you get specifics. So obviously as we said in the script, we definitely seen momentum on it on a on a monthly basis.

So we definitely saw.

March was much stronger than February.

Our January.

Honestly.

We gate, where we had the snow issues in Texas and the surrounding states.

Did have an impact that we saw a lot of recovery, we do see a lot of net new wins and we're seeing it.

<unk> had a ton of momentum in BSD for the first time since pre COVID-19 I'll, let Anthony can give any more specifics around that thanks, Gerry yet so as we said from last year DSD, we expected it to be a back half story, Chris tied to both the reopening and those generally in higher Ed and K 12, as well as business reopening.

As Gerry mentioned, we're excited to say that we are starting to see that progress and the real positive.

Both from a pipeline perspective, as well as an outlook for the second half. So as we continue to proceed through the year.

Starting to see the momentum build in the BSD contract, which is a real benefit.

Okay. Thanks.

And then I guess just last question just on the progress on the digital transformation.

Can you just maybe share how far along you are.

Procurement market, and then maybe any possible mitosis and share around that business.

Well too early from a metrics perspective, but we are.

Hey, Mike.

Great integration progress with by request numerous.

Numerous opportunities, but only with the size of our sales force.

The relationships, we already have and so the <unk> business is extremely.

Well received and Prentiss.

Gerry Daniels and team are all building this building the platform and we're Super excited we did have Daniel Smith was on stage at the Microsoft dynamics 365 worldwide conferences, one on one of the few keynotes speakers and so we're super excited by that Biocryst procure to pay piece being part of the.

On the best Tech companies in the World.

ERP ERP package, and so I think thats a great validation that this.

Vaporware this is real.

More progress.

On a on a weekly quarterly basis as we as.

As we have more wins, but.

Super excited again into 2022 2023 type of product.

Product.

MVP in this.

In the last half of the year.

I think I would add Chris is as we proceed and execute in 2021 to Gerry point. This is an investment year, we will be building out the metrics, we'll be building out the right cadence on those metrics as we exit 'twenty one so.

So that we can start to provide both our investor and analyst community with the right set of ways to gauge the progress we're making on this initiative.

Great. Thanks for taking my questions. Good luck on Q2, and I'll jump back on the queue.

Thank you Chris.

Your next question comes from the line of Michael Lasser. Please state your company name and ask your question.

Good morning, it's Michael Lasser from UBS.

Two questions. Please.

EBIT.

Number one.

Like what youre, suggesting.

Okay.

Our positive sales.

And in the BSD segment.

Into the.

On a year. Despite the fact that this is a really easy comparison this quarter, there's going to be many more children who are on.

In school.

During the second quarter of this year versus last year. So does that give you any pause about the longer term trajectory of the pit.

Yeah, Michael I don't know how you concluded that because that's not what we said.

We believe there is momentum in the second half of the year with a good building strongly.

And obviously, Tim we can work with you offline on more specifics but.

I'm very optimistic and very excited with what Stephen seeing from a pipeline perspective, we're seeing more and more companies go back to work, we're seeing hybrid model, but theres no question on our mind that we're gonna do have a strong second half.

On the business and is building and I hope, we didn't I'm, sorry that wasn't clear to everyone, but we want to be clear everyone that we.

We're seeing a momentum building on a monthly basis on DSD and we're Super excited with what Anthony said, the second half recovery across that business.

Okay.

And Mike, we're seeing sequential and year and year on year improvement. So just to be clear the improvements. We're seeing from this point or are there going to be sequential and year on year, but obviously the second half with the reopening from a school perspective and does it gives us a lot of confidence that businesses.

Starting to show signs of strength.

And just to parse this demand sequentially and year on year, meaning youre expecting the dollars the sales dollars for BSD to be higher in the second quarter of this year than they were in line.

Second quarter last year.

That's correct that's correct okay.

Okay. Thank you.

Second question I had.

Was on.

Got that.

These synergies and incremental cost.

Separating the businesses.

How much will that be in total.

Where should we allocate those between the segments. So we can have a better understanding of what the independent pieces are going to be.

We're going to look like on a standalone basis.

Yes, so Mike.

It's early days, obviously further information regarding the expected cost of the separation will provide it will be provided in due course, but thinking about it from a path to separation there will be one time implementation cost dis synergies as we set up redundant systems and processes and most importantly synergies as we pursue the independent path for growth and expected the rationale.

<unk> that we expect from the two entities as we become a more pure play independent <unk> company. So it's a little too early to go through those details at this stage, but we plan to provide that in due course I will add in the one of the reasons why we have the <unk>.

Commercial agreements and we have the supply chain and procurement global sourcing type of arrangements as to minimize some of those synergies.

Across across the two companies as well.

Okay. Gerry this is being talked about many of your predecessors.

Youre sitting and have thought about it.

Why is now the right time to do it and how much of that.

The decision to do it now is being influenced by some of the actions that.

<unk> has taken on sticking more with.

I'm going to answer in reverse fashion it had nothing to do with the Staples transaction at all it has to do with we think we're in a great position of strength.

We're in a very strong liquidity position, we pivoted our.

Our model from a cost perspective.

Ben.

And history from a bike share on that.

Radically improved from an SG&A perspective, we have obviously strong liquidity. So we can provide proper liquidity for both companies.

Super excited by Prentice.

Turning to the team and the whole team we are building around become so it's the perfect time to really look at it both businesses from a BBB and BDC perspective allow the shareholders to have a steak at volt. They can vote. They can stable they want or they can choose the direction. They want to go in the future, but we think we're very well positioned now it's the perfect time and again unanimous approval from.

On the board and we want to thank the board for their support Anthony once you add any color.

To add to that is the separation also on attracting the right investor in sell side analyst day more in line with the B to B and B to C and market and that we're pursuing and then the investment thesis that each company will have so really wanted to make.

The focus this year, both end markets, we see as opportunities for investors and as we further align theres opportunities for shareholder creation.

Thank you very much good luck.

Thank you.

Your next question comes from the line of Chris <unk>. Please state. Your company then ask your question.

Thanks, Good morning, Chris <unk> Jpmorgan, a few questions. So as you think about the retail business I. Appreciate I think about 14% of your stores are in Texas and that probably had the start surely on a big impact.

At the same time, you had the double benefit of stimulus in both January.

In the back half of March when we when shelter in place.

And you saw a big ticket strength technology and furniture strength so.

How much do you think that that was sort of a contributory factor and do you think that more than offset the headwinds from the weather in the southwest.

I think.

A couple of things that happened and thanks, Chris for joining US. This morning, I think number one we've had the retail business through this hole.

Pandemic as well as it continues as it really sort of become the home office headquarters for small and medium businesses and people working from a hybrid perspective, we are starting to see some sequential obviously in personal learning, which is helping as well.

I'm, Kevin and his team have done a tremendous job of putting the right costs. Both on place huge focus on our net promoter score on our customer experience.

That conversion.

Share of wallet and higher sales per shopper as well so a lot of the initiatives, we're driving to operate the business effectively.

On the him and his team have done a brilliant job doing that so.

I am continue optimistic again, we see tailwind in the business we see.

They continue to this day and we're excited that all of the structural initiatives. We put in place continue and I think yes, there's been some initiatives, but I really do believe structurally there has been a.

A recognition that.

Home office headquarters, we can provide tech we can provide furniture, we can provide core supplies.

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