Q2 2021 ODP Corp Earnings Call
[music].
Good morning, and welcome to the ODP Corporation second 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 second quarter 2021 earnings Conference call.
This is Tim Perrott, and I'm here with Gerry Smith, our CEO and Anthony Scaglione Executive Vice President and CFO.
Also joining us today is David Blish, 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 second quarter, including our improved operational performance and the progress we're making on all of our initiative to drive shareholder value.
David <unk> will then provide commentary regarding the previously disclosed proposal made by U S or an entity controlled by Sycamore partners the owner of Staples to acquire the consumer business of the ODP Corporation.
After David's commentary Anthony will then review the company's financial results, including highlights of our divisional performance.
Following the 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.
During the call we will use some non-GAAP financial measures as we describe business performance.
The SEC filings as well as the earnings press release presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at Investor day, 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 1 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 hope.
All of our listeners and their families continue to remain safe and healthy.
I'm happy to be here with you today to discuss the results and accomplishments for the second quarter.
Our success this quarter reflects the strong commitment from our entire team and delivering improved results, while remaining true to the core tenants that drive our business.
During the quarter, we drove strong overall performance at <unk>.
The good progress on all of our key strategic initiatives at all.
I've mentioned on previous calls our strong performance and strategic actions are supported by the key tenants of our business as outlined on slide 4 in our presentation.
These tenants form our foundation as we address the market dynamics pursue growth and position of our business unlock value for shareholders in the future.
At this foundation of centered on driving a low cost model.
Expanding our value proposition to our customers and moving into the higher value businesses through the addition of new growth engines.
As reflected on our results.
Executing along these priorities.
Proving the flexibility of our business model on the structure and using our unique ecosystem to meet the growing needs of our customers.
At the center of our approach is our winning <unk> culture.
1 of the key components of our culture is commitment our entire team is committed committed to driving value for our stakeholders and not only doing things right.
But also doing the right things for our business shareholders employees and for the communities where we serve.
I am very proud of the culture, we have created the ODP and the foundation. It provides as we support our community.
Track, new talent and continue to execute on strategic priorities.
I think a true testament to our <unk> culture is the strong team we have built over the past several years.
We have attracted some of the best and brightest talent across a broad range of industries, including technology business Commerce supply chain and finance.
In the quarter, we delivered improved operating results at.
The <unk>, our digital platform business and made progress on all of our initiatives to unlock future shareholder value the.
Highlights of these accomplishments for the quarter are shown on slide 5.
First as I have stated on previous calls.
Maintain a safe environment continues to be a top priority.
We're continuing to monitor state and National Health guidelines, and we're continuing to implement safety measures as necessary to help protect our associates and customers.
Turning to the highlights we delivered improved overall performance as the broader economy began to recover from the pandemic and the flexibility of our ecosystem allowed us to continue serving customers in all environments.
Demand grew as more businesses and schools begin to return to work and to the end class learning driving strong results in our retail division at improving performance of our business solutions division or BSD.
Coupled with our low cost model approach, we delivered strong adjusted operating results and they get on preparing for the upcoming back to school season.
Next so part of your key tenant of building new growth engines and higher value markets. We continue to advance our digital platform business, adding key talent to our team and continuing to make progress on building out the capabilities of our new platform.
We remain in excellent position to drive value in the large and growing business commerce market in the future.
Also as we announced last quarter.
We are executing upon our plans as separate ODP into 2 independent publicly traded companies.
We are making meaningful progress on all separation activities, including on the various commercial agreements between the future companies.
Additionally, as we announced on our earnings press release. This morning, recognizing the flexibility afforded by the holding company reorganization, we implemented last year, we modified our plans for separation.
Under the modified plan, we intend to accomplish this transformation by spinning off our consumer business as opposed to our <unk> business as previously announced.
With this change the BTB businesses will continue to be owned by the ODP Corporation and the anticipated timing related the separation that remains the same.
We will highlight more details on this shortly.
Finally, we're happy to report that we've been executing upon our share repurchase program buying back nearly $70 million of our stock through the end of July.
Now turning to more details regarding our operating results as shown on slide 6.
Our performance in the second quarter was highlighted by stronger revenue growth.
<unk> solid operating results.
Steady recovery of the broader economy all.
Along with our value proposition.
Low cost model and flexibility in serving customers in multiple environments contributed to this performance.
As the economy has begun to recover businesses of schools have started to return to the office and 2 in class learning driving increased demand for several product categories, including core supplies.
Continued strong support for work from anywhere customers small businesses and education customers also helped drive growth.
All of these factors contributed to improved performance at our business solutions Division and continued impressive performance in our retail division resulted in a consolidated 6% increase in revenue over last year.
Couple of stronger growth with our continued low cost model approach, we more than tripled our adjusted operating income versus the prior year.
The standout among our operational performance was once again, our retail division as shown on slide 7.
Our retail division again drove impressive overall performance with sales on par with last year, despite significantly fewer stores and service.
We're continuing to fire on all cylinders, capturing the continued elevated demand driven by home office support needs at school re openings, all leveraging our new labor model to drive stronger bottom line results.
We saw increasing demand from education customers and signs of recovery in small businesses driving greater demand for our core supplies and copy and print services.
Store traffic trends per stores in service were up significantly and conversion rates improved. We also continue to see strength of our buy online pickup in store or both of us offering although sales for the service option was lower versus last year's peak at the start of the pandemic.
But to put into perspective sales through both of us are up over 70% when compared to the same period in 2019, highlighting the importance and convenience of this service for our customers with.
We've also added a unique service approach that we expect will help further drive bulk of sales. We recently implemented our 30 minute guarantee for in store and curbside pickup.
1 of the few companies at retail to offer such of guarantee which has been well received by our customers.
We expect this will help drive sales and higher customer satisfaction scores in the quarters to come.
Putting our performance into perspective, our retail team delivered total sales in line with last year. Despite 169 fewer stores. The service. Although we are not specifically reported due to differences in the store hours and other factors. This performance points to a significant increase in same store sales.
From the operating perspective, we drove a 2.5 times increase in our operating income driven by the impact of our labor at store operating model improved mix of of our products and services and improved lease terms.
Overall, our retail division remains in an excellent position to continue serving as the home office headquarters for remote and the hybrid workers, while continuing to be the essential school supply source for education customers, including schools teachers and students.
In fact, we remain very excited about the upcoming back to school season, and the new service commitments, we are making to customers as well as our continued support of communities and schools as shown on slide 8.
It should be no surprise that we're expecting a stronger back to school season than what the industry has experienced in 2020 during the height of the pandemic.
Over a long absence of pent up demand for school supplies and accessories Arts and crafts and technology creates a significant opportunity for ODP as we head into the third quarter.
We have worked through many of the industry challenges regarding the sourcing supply chain and are prepared with a broad assortment of products for the upcoming demand.
We're encouraged by the activity we are already experiencing since quarter end and remains well positioned as we continue to witness the strong emotional connection to the office depot brand among teachers and students.
We're also inspired by the feedback we're receiving from customers regarding the 30 minute service guarantee that I mentioned earlier to date. This has been very well received by our customers.
We're also proud of be giving back to our schools and communities through our start proud program or start proud program now in its fourth year continues to support schools at low income communities nationwide and provide students parents and teachers with the supplies they need to start at the school year confident and prepared.
Also through our 5% give back school program, which gets 5% back the schools on qualifying purchases, we've raised nearly $40 million on funding to support schools and communities.
Additionally, our elevate together program launched this year is already providing strong support in our community for a minority owned businesses throughout the country.
I am proud of all of these efforts and the support they are providing for communities nationwide.
Now turning to our business solutions Division as shown on slide 9 at.
As we anticipated we drove improved performance of our BSD division as the economy continues to recover and overall business activity increased.
Our stronger performance was led by the education sector, mainly K through 12, as well as of the public sector driving demand for a wide spectrum of products, including core product categories, which have begun to enter back into the mix.
In addition to core products, we continued to drive strong volume in our adjacency categories led by furniture and technology, resulting in an adjacency categories driving 44% of overall BSD revenues.
Larger enterprises, which are only beginning to bring employees and staff back to the office had brought on a slower pace of recovery. However, we expect demand from this sector to grow throughout the balance of the year.
That said these positive trends helped drive a strong double digit increase in revenue in our contract channel, which was partially offset by lower sales on our E Commerce channel as post pandemic traffic trends and online traffic have begun to decline.
In total BSD delivered an impressive 12% increase in total revenue relative to last year.
Combined with our low cost model and improved product mix, we drove nearly a 2.5 times increase in operating income.
On the new business front, we are winning and building share our pipeline of new business continues to grow at our close rates are near historical highs when combining the success with our mid 90% retention rate, we're driving net new customer wins and expect that we are gaining share in the large enterprise marketplace.
As we head to the second half of the year.
We are at an excellent position to continue to drive growth.
As we expect stronger traction from our higher education customers and as large corporations to begin the return of the office of.
Our value proposition remains strong at along with our flexible supply chain, we continue to work with our partners and suppliers to the rest of the recent industry wide constraints.
1 of our core Differentiators is the use of our large private fleet and our network of diverse third party logistics partners when coupled with our global sourcing presence.
The assets create a competitive advantage for ODP as we manage through and address the challenges head on for the balance of the year.
Now briefly turning to the performance in our coffee come division as shown on slide 10.
Our coffee Com division drove the increase in revenue driven largely by stronger product revenues and stabilizing service revenues. We believe the malware incident is largely behind the company with business operations functioning back to normal over the past few months, we have strengthen our systems and enhance our security measures cuts.
<unk> continued to rely on copy comp of the services they provide and our retention rate remains strong our pipeline of new business is growing and we are again focused on scaling of the business also our process of exploring a value maximizing sales of our comp become division continues to move forward.
Now turning to the progress we are making our digital platform business as shown on slide 11.
Over the past several months, we've continued to advance our digital platform business and made progress in developing the technology driving our digital transformation.
We integrated buyer questions of our digital platform business and we remain on track with our collaboration with Microsoft.
Through this collaboration we are bringing our capabilities led by buyer quest and industry, leading digital E procurement technology platform to Microsoft dynamics 365 business central customers in the future we're on.
Also continuing to attract industry, leading talent to our team.
Most notably we've added an wrong, who has joined us to lead public sector for our digital platform business. She joined other notable hires over the past year to help drive our growth in the digital <unk> platform business.
We've also made progress on our brand alignment and will continue to generate strong interest from the supplier community as it recognizes the expansive reach and capabilities of our new platform. We believe these developments places on the right path with the right team and the right technology platform to pursue growth in this very large and growing business commerce Mark.
<unk>.
Before I turn the call over to David <unk> for an update on the Sycamore proposal I wanted to spend a few moments to highlight our progress on our separation initiatives as shown on slide 12.
Our plan to separate ODP into 2 independent publicly traded companies continue to move forward through the second quarter. We've established our internal teams to identify the resources necessary to move forward with the work required to execute upon this initiative, we're making solid progress in all areas of the separation.
Including operating mechanics supply chain dynamics at.
Support as well as the market based commercial agreements between the companies. Additionally, as we announced on our press release. This morning, we modified our plan for separation.
We now intend to structure of the separation is the tax free spinoff of our consumer business as opposed to the previously announced spin of our <unk> businesses.
Recognizing the flexibility afforded by the holding company reorganization implemented last year as well as our expected management and support structure. We believe that completing the separation through a distribution of our consumer business will be more efficient the timing for completion by the first half of 2022 remains the same.
And the updated description of the anticipated post spin companies and the related assets as shown on slide 13.
Through our modified approach, we will spin off to ODP shareholders Office depot, a leading provider of retail consumer and small business products and services distribute through more than 1000 office depot Officemax retail locations as well as through our award winning E Commerce site Office depot Dot com.
The remaining company and will continue to be at the existing holding company. The ODP Corporation, which will consist of our business solutions divisions contract business, our Canadian business granted toy as well as our independent regional office supply businesses.
<unk> will also include our newly formed <unk> digital platform business, including buyer quest as well as our sourcing supply chain and logistics assets.
As I stated on our last call. We believe this action will enhance our strategic flexibility, creating true 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.
We remain on track with our plans and expect to provide additional details including management leadership appointments for both post spin companies and more detailed financial information in the third quarter.
With that I'll now turn the call over to David <unk>, Our executive Vice President and Chief legal and administrative officer, who will provide commentary on the previously disclosed proposal made by Sycamore partners the owner of Staples to acquire the consumer assets of the ODP Corporation.
Thank you Gerry as a reminder, on January 11th U S store parent the owner of Steeples, the Sycamore partners subsidiary, which I will refer to the Sycamore made of public offer to acquire 100% of the common stock of <unk>.
<unk> Corporation.
In response, we publicly communicated that we were opened to combining our retail and consumer facing e-commerce operations with steeples under the right set of circumstances in on mutually acceptable terms.
On June 4.2021, Sycamore made of public proposal to acquire the ODP Corporation consumer business, including the office depot Officemax retail stores business. The company's direct channel business Office depot Dot Com and the office depot and Officemax intellectual property, including all brand names for 1 billion.
The proposal further stated that the sycamore intends to commence the tender offer for all of the outstanding common shares of the company and less negotiations for consensual alternative transaction as proposed by Sycamore or successful.
The company's board of Directors will continue the carefully review Sycamores proposal with the assistance of its financial and legal advisors to determine the course of action that it believes is in the best interests of the company and its shareholders.
The company remains in conversation with Sycamore as it is further evaluating the potential value and regulatory risk associated with Sycamores current proposed transaction for the consumer business.
In the meantime, the company continues to pursue the previously announced plan to separate the company into 2 independent publicly traded companies during the first half of 2022, which remains on schedule.
With respect to kind of become we are still pursuing the previously disclosed sealed process. We do not intend to provide any further update on this process until such time as definitive agreements are completed.
Now I'll turn the call over to our CFO Anthony Scali on for a review of our financial results.
Thank you David and good morning, everyone I'm.
I'm happy to be here today to discuss our financial results for the second quarter of 2021.
As I begin my review I would like to take a moment to reflect on my first year at ODP.
And the tremendous progress we've made on the goals I laid out for the finance organization when I joined the company.
These goals focus on driving our low cost model leveraging assets in support of our strategic initiatives optimizing our capital structure and living the <unk> culture.
Over the past year, our team has risen to the challenge supporting the business and improving the manner in which we operate.
We fortified the discipline around cost management drove SG&A and other costs lower.
To optimize our store footprint and leveraged our routes to market to drive growth.
Our improving performance, especially during Covid is a true Testament to this progress.
The pandemic has forced us like many companies to think about our business differently flexing, our operations and discovering new ways to serve our customers.
Our team has captured the many lessons we've learned during COVID-19 and I believe those lessons have made at a permanent part of our operational the DNA.
So our finance team support of key initiatives, including the development of our digital platform business and separation efforts are helping us build a more valuable enterprise.
All of these efforts are bringing to life the value drivers that I highlighted when I joined the company, which included our market reach <unk> platform and supply chain and of course, our balance sheet.
In hindsight, perhaps 1 of the assets I did not fully appreciate when I joined the company with the power of our retail footprint and the affinity for the office depot brand.
Our retail presence brand and service capabilities have created a very strong bond with consumers small businesses and through the pandemic the hybrid workforce.
Our team has worked to optimize our retail business unlocking the value and positioning it as a top performer over the past year.
We are also advancing our separation efforts as well as utilizing the strength of our balance sheet to invest in the business and enhanced returns along the way.
Underlying all of these efforts our team is committed and living up to the <unk> culture that Gerry described earlier.
Now turning to the highlights of our financial results as shown on slide 17, consistent with previous quarters. We have provided our results on both the GAAP and adjusted basis.
Our financial results for the second quarter included topline revenue growth and a significant improvement in our adjusted operating results as compared to last year.
We are very encouraged with the strong progress we are making relative to where we were 1 year ago at.
At the height of the pandemic.
The broader economy continues to show signs of recovery and more business and schools are beginning to return to the office and to end class learning leading to increased demand for a variety of our products.
At the same time, our value proposition continues to resonate among hybrid workers and the small business sector is generating additional demand for home office categories.
Turning to the specifics of our quarterly results.
We generated total revenue of $2.3 billion in the second quarter, a 6% increase over Q2 of last year store.
<unk> demand from the business and education sectors, along with continued support for our hybrid and small business customers were the primary drivers of the increase in revenue.
We saw significant increases in demand through our BSD contract channel and continued strong revenue performance in our retail channel.
This accomplishment is even more impressive when you consider that we had 169 fewer stores in service compared to last year.
We were encouraged to see that some of our core categories like paper ink and toner and supplies are sequentially growing and entering back into the mix, while home office categories and adjacency products remained strong.
These positive trends were partially offset by lower sales on our E Commerce channel, which were down compared to Q2 of last year at the beginning of the pandemic as well as lower sales of PPE.
During the quarter, we recorded charges totaling $122 million, consisting of $115 million of noncash asset impairment charges and $7 million and net restructuring and other costs.
Nearly all of the noncash impairment charges were associated with an impairment of goodwill and intangibles at comp income mostly related to the continued macroeconomic effects of COVID-19 on their overall business condition.
With the assistance of third party valuation experts and factoring in the impact of COVID-19 has had on end markets. We recorded a noncash impairment of $114 million related to goodwill and other intangibles in our comp income business.
Our net restructuring and other costs included about $11 million associated with our separation efforts in the quarter largely related to third party advisory costs.
As we progress on our separation activities in the coming quarters, we expect these and other costs related to our spinoff to grow commensurate with our progress.
That said we of initiatives in place to offset some of the costs as we move forward with our plans there.
Therefore, including the impact of these items on a GAAP basis, we reported a loss from operations of $78 million.
Excluding these and other items, our adjusted operating income for the second quarter with $44 million up.
Up significantly from the $10 million in the prior year period.
Unallocated corporate expenses were $32 million up from last year.
Adjusted EBITDA was $93 million per the quarter compared to $59 million in last year's second quarter.
This includes adjusted depreciation and amortization expense of $43 million of $47 million in the second quarter of 2021 and 2020, respectively.
Excluding the after tax impact from the items mentioned earlier adjusted net income for the second quarter was $28 million or <unk> 51 per diluted share compared to an adjusted net loss of $4 million or <unk> <unk> per diluted share in the prior year period.
Turning to cash flow seasonally our second quarter cash flow results typically reflect increased investments in the inventory as we prepare for the back to school season that occurs in Q3 of every year.
Cash used in operating activities during the second quarter was $11 million, which included $14 million of restructuring costs. This compared to cash used by operating activities of $8 million in the second quarter of the prior year.
The slight reduction in year over year was largely driven by higher working capital use due to increased receivables at comp become during the quarter as well as inventory purchases as we head into the back to school season.
Capital expenditures in the quarter was $16 million compared.
Compared to $15 million in the prior year period, reflecting continuing growth investments in our digital transformation distribution network and e-commerce capabilities.
Offset by lower Capex requirements, and our retail division.
We expect to increase our capital investments in the future quarters as we continue to move past Covid and continue to make progress on our <unk> and digital transformation initiatives.
Adjusting for cash charges of $14 million associated with the company's restructuring plans adjusted free cash flow in the quarter was the use of $13 million.
I would now like to cover our business unit performance, starting with our retail division on slide 18.
Our retail division continued to deliver very strong performance in the second quarter, playing an important role in supporting customers for a variety of essential needs from hybrid work to support for teachers and students.
Reported sales in the quarter were $914 million, which was essentially flat versus last year. This result was a very impressive considering we had 169 fewer stores in service this year versus last including 55 stores that we closed during the quarter.
Strong traffic trends and increased conversion rates helped drive revenue.
Same store traffic was up 17% relative to last year and conversion rates were up in the single digits Kantar.
Continued support for hybrid and remote workers as well as for teachers and students increased demand for core product categories as well as copy and print services on.
Both of us offering while down relative to last year was up 71% since 2019, and we expect at our recently launched 30 minute guarantee we will continue to boost sales through this service.
Operating performance on our retail division again with terrific, we generated operating income of $44 million in the quarter up over 140% compared to the same period last year, representing approximately at 290 basis point improvement in margin.
This strong performance was driven by improvements in operating lease costs and improved product mix.
Turning to slide 19, we drove improved performance in our business solution Division.
As a reminder, BSD consists of our contract channel, serving large medium and small enterprises, and our direct or E Commerce channel.
As you heard from Gerry businesses and schools are beginning to return to work end to end class learning and business activity is heating up as is demand for our core products.
Reported sales in the quarter for BSD were $1.1 billion up 12% relative to last year's second quarter.
The stronger demand from the public and education sectors drove a double digit sales increase in our contract channel. This was partially offset by lower sales on our E Commerce channel compared to the strong demand last year at the beginning of the pandemic.
Our expanded value proposition continued to resonate with customers driving increased demand for core products as well as the strong demand for our adjacency categories, which remained at 44% of total BSD revenue.
Furniture and technology categories were up both sequentially and on a year over year basis.
BSD stronger revenue traction, resulting in improved operating results in the quarter opera.
Operating income was $31 million in the quarter up significantly from the $13 million of the prior year period.
As a percentage of sales. This represents a 140 basis point improvement in margins.
The increase in operating income was driven by stronger sales volume higher gross margins cost efficiencies and more efficient distribution costs.
We continue to see Bsd's performance, improving our schools reopen and companies begin to return the the office in the second half.
Looking at Slide 20, we highlight the performance of the comp become division revenue.
The revenue in the second quarter with $222 million up 4% over last year, driven by stronger product sales.
Sales of services have stabilized and as Gerry mentioned, we believe the malware incident is largely behind the company with business operations functioning back to normal.
<unk> reported operating income of $3 million.
Versus $4 million in the prior year, driven largely by lower sales of service in the quarter, partially offset by cost efficiency measures.
<unk> pipeline of new business remains healthy and the company is focused on driving future growth.
Our external sales process is continuing to move forward with the commitment from our board moving forward the accounting treatment for comp become will change beginning in the third quarter as the criteria for an asset held for sale has been satisfied we will provide additional insights into the process as they develop.
Now briefly turning to our balance sheet highlights as shown on slide 21.
We ended the quarter with total liquidity of approximately $1.7 billion consisting.
Consisting of $691 million on cash and cash equivalents and $997 million of availability under our asset based lending facility.
Total debt at the end of the quarter was approximately $359 million.
Primarily comprised 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.
I've already covered the cash flow items in my comments earlier, however, I would like to highlight that we have been executing upon our previously announced share repurchase plan during the quarter and subsequently in July.
We repurchased about 1 million shares of stock for $46 million during the quarter.
Subsequent to the quarter, we repurchased 490000 additional share for approximately $23 million.
This leaves approximately $230 million left under our $300 million authorization.
As the final comment before I turn it over for questions I would like to thank again, our entire organization for their strong commitment in executing upon our strategic initiatives and to emphasize that we are very enthusiastic about our future. We're gaining traction driving stronger operating results and remain encouraged regarding the improving business environment and significant.
Fortuna during this year's back to school season.
While we are experiencing better trends and believe that this will result in a stronger second half of 2021, we're continuing to keep guidance suspended at this time largely related to the strategic initiatives as discussed including the timing of costs related to the spin as well as continuing market uncertainty for the balance of the year.
That being said the trends and market conditions continue to improve placing us in an exciting position as we enter the second half of 2021, we.
We are excited about the progress, we're making on all of our initiatives, including our separation efforts and I look forward to providing more detailed information regarding the spin in Q3 with that I will turn it over to your questions. Thank you.
At this time, if you would like to ask a question Press Star then the number 1 on your telephone keypad well pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Chris Mcginnis. Please state. Your company name then proceed with your question.
Yes, Chris Mcginnis from Sidoti <unk> company. Thanks.
Thanks for taking my questions and on a nice quarter.
Just on the the modification around this.
Of the spin can you just clarify maybe.
Maybe just none of the assets change and really maybe it's just the technical modification.
Yes, Chris Good morning, and thanks for the kind of your comments as well of hope Youre doing well.
Yes basically.
The spin just reverse basically at was it originally at the <unk> the spending that we're just we're.
Taking the spin.
Now at the BDC and we just think through a lot of work that it's more of it's a more efficient structure.
And the majority of the management as well as the board will stay with the ODP Corporation.
Okay great.
And then just the.
In the same line I guess, just I know, it's early you gave a little bit more structure around the assets is there any thoughts around maybe the capital structure or any more details around maybe.
The structure of the profit trends or how long, it's going to be set up going forward.
Great. Thanks, Thanks for the question, Chris as Gerry mentioned, we're making progress of accordingly, and providing updates along the way.
As it relates to the capital structure.
We're using some of the current term loans in advance of the spin and the remaining day, 1 capital structure really be considered as we get closer to the spin as other parts of the overall strategy cash day profiles become defined.
For the <unk> and the BDC business, So thats, where we are and will provide updates accordingly, along the way.
Okay.
And then just.
The question around trends can you just talk about maybe the progress in the quarter and maybe the exit rate on both of the DSD accounts. Thanks.
Yeah. So we saw a great deal of trends in retail continuing to see strength there.
Great performance good margins consumers are really resonating with the home office superstore.
Our pace of business is very encouraging we expect those trends to continue.
Too early to say that the permanent shift, but very encouraging to see the performance out of retail over the last couple of quarters.
From our BSD perspective, we've always said <unk> of the second half story, it's really going to be predicated on the return to work and returned to school. The early stage comeback for BSD. We've seen some good at indicators on the education sector, our pipeline of win rate in commercial.
On the highest we've seen darts of and a little bit slower the there, but really tied to the reopening and ensuring we continue to work with our customers in any environment.
We've seen the the hybrid work environment resonating and our ability to serve those customers in any environment.
Okay, great I'll jump back in queue. Thanks for taking my questions.
Thanks, Chris.
Your next question comes from the line of Michael Lasser. Please state. Your company name then proceed with your question.
Good morning, Thanks, a lot for taking my question at UBS.
You disaggregate the.
For many of the retail business between market growth.
Recapturing share from the stores that you had closed at drove the 17% increase in traffic how would you do it but.
We're trying to get a sense of what sustainable moving forward and that'll be a key point on determining what's sustainable.
Yes.
At the heart question to dissect in terms of the recapture.
As Gerry mentioned, we had 169 stores lower this year than last year, So clearly the.
The performance is truly outstanding from a retail perspective, some of that is recapture.
We as you know as we close stores through our Mac might be to the plan. There is a recapture rate associated with that but even when you take a look at the performance of the existing stores and the ability for those stores to deliver what they delivered some of that is market growth.
While we don't disclose it at the Jeremy mentioned, we feel really confident that at the same store trend performance.
Better than what we would've expected the entering 2021 eggs.
Exiting 2020 with the strong momentum. So there is some level of recapture and the the home office Superstore is resonating.
I'll just add in that the continued hybrid model I think is definitely our retail business, Kevin and his team have done a great job. We've done a lot of work on our our labor model, our low cost model, our 30 minute guarantee so we brought more value proposition to it.
The first half of our retail business has been exceptional at.
So I want to emphasize it's about the culture of they've created at the meet and greet the 30 minute guarantee the low cost model plus honestly.
Return to school and hybrid model all of the benefactor.
And clearly yes, there is some from a store closure perspective, but I think it's much more than just a store transfer rate.
Okay.
My follow up question is on the DSD segment.
You're still a couple of hundred million dollars below where you were in 2019, presumably.
The core because workers have yet to return to the office.
If you were to get back to the same level of sales in 2019, how would the margin look based on all of the actions that you've taken including the cost cuts.
Yeah, I'll take the first piece of the topline there Anthony talk margin. So what's the what we're very pleased with the Steve and his team have done at really good job of ability of momentum, we're seeing a lot of improvement on K through 12, as well as the public and education sector. So sequentially, we're growing we've been growing since the pandemic.
Our pipeline is at an all time high with our win rate is at an all time high our retention rate is extremely high and solid so a lot of momentum.
Obviously, the hybrid model is it still being adjusted in the evaluated.
So I think that's the piece that we're evaluating that.
I am very pleased of the first half of the sequential growth in trend of the business, especially I'm eager with the the K through 12 as well as the University systems reopening I think that's always been a big chunk of our business and we're going to evaluate what's happening from a hybrid model perspective, and again, having the channels, we have at or above.
And I think that Steve and team have done a great job of executing.
Spent a lot of time focused on low cost model across our whole business, we have adjusted our cost structure in this business both the Anthony.
Comment more details about margin.
So Mike when you think about the margin profile clearly there is a revenue pull through effect of that at BSD comes back to levels pre pandemic, there should be that of corresponding benefit to the bottom line is we've taken corrective actions on the overhead corrective actions and cost.
If you look at gross profit, that's mostly a function of the product net.
Currently there is some impact at PB categories that were heavily promoted in the channel in the quarter because of those I would say those are isolated other than that pressure. We saw good mix shift in BSD in the core supplies, which at.
The higher margin profile and at the economy reopens and we start to see the pull through our expectation is of course applies to become a bigger portion of that overall recovery, which will have a corresponding impact on the bottom line, but clearly as we look at the.
Balance of this year in 2022, the reopening and the timing of the reopening and the.
The return to normalization will have a significant impact.
With BSD and we expect that of the margins as we look at 19% and 18 to get back to the margin in 'twenty, 2 and beyond as the topline of normalizes.
Good day, let me just clarify Jerry's comments youre evaluating the impact of of hybrid worker instead of on the BSD business does that mean, if we're in the situation where there's there's propel.
Perpetually higher working from home the beer.
He might have a more difficult time getting back to it.
<unk> welcome.
No not at all I think that the.
What we've done relative to our sales model the momentum we have from a win rate perspective in the most.
And we've had against from bluntly against competition I am very optimistic over a period of time, we're going to get back to pre pandemic levels. Our federation of businesses are doing the right in your name on they are doing a fantastic job of growing and driving operating income as well so and I'll just say, we're continuing to look at models of how to assure recapture some of that spend at.
As people are both working from home at working at the office as well.
Okay.
Your next question will come from the line of Chris Whoever's. Please state. Your company name then proceed with your question.
Good morning, It's Christian Carlino on for Chris J P. Morgan.
Good morning, Greg.
What if any impact of the business due to the Delta variant, particularly some governments have begun restrictions again. So what are you hearing from your larger contract customers around the return to office.
We're still evaluating but we haven't seen an impact really I mean, it's the momentum has continued from where we were early Q1, if you look at it sequentially.
Previously, we did see an impact for some of the other surges, but at this 1 it seems like from especially from the school perspective education perspective.
Schools are opening flights are happening at University of the growing back under the people have to wear a mask they have to go up.
And obviously from the vaccination perspective, but we haven't seen a huge impact relative to.
At least now we will continue to evaluate.
Got it at its very helpful. And then the press release said that the Newco will will have at around 1100 stores. Once the spin is done.
The next year.
Does that mean youre done closing retail stores or is that just using the current store count yes.
Yes, I would just using the current store count that we have an updated on existing store count. So there continues at the evaluation on the or maximize the PDP plan as we continue the progress through the year, we'll be providing that update but that was just referenced.
Store count.
Got it and then.
Last 1.
Are there some of the early reads Youre seeing from buyer question now that you've mostly integrated into the the digital platform.
We're very optimistic with what's happening.
Great.
The progress from <unk> perspective of integrating the team a number of new customer opportunities. We've added a very highly.
Talented additional executive hires of across the business and in Rocky and team.
We're very optimistic.
It was the right.
Asset to acquire and it's given us an ability to accelerate the platform and so we're very bullish on the digital platform moving forward.
Thank you best of luck.
Our final question will come from the line of William Caffari. Please state. Your company name then proceed with your question.
Hi. This is will look forward from elevation. Thanks for taking my question and congrats on the great quarter.
My question was partially answered just not of previously, but just thoughts around retail margins more on the cost side.
I know you mentioned, a few moving pieces leases labor model store.
The closures.
I know youre, not giving guidance, but what inning would you say that we're in in terms of the optimizing the cost structure in retail.
And then as a follow up has that strategy changed at all given the spin out of retail.
I'll take the <unk>.
First part of the Lindsay jump in as well.
The work that Kevin and his team have done has been exceptional.
Besides the the labor model, we put in place we're at.
I think industry, leading and we talk about low cost model here all the time, we're always looking for ways to transform and drive the business. We're also talking about the delivery value, but I mean, the 30 minute guarantee we have for both of us.
And curbside pickup is huge.
On a 2 retailers across the country actually do that guarantee and we're operating at really really high level of our performance relative.
<unk> to that so we think that's a huge value add but our ability to go off of the meet and greet our net promoter score is up dramatically in our retail business over the last couple of years. So all of that that team is firing on all cylinders are doing not just the cost piece, but it's the.
It's the customer satisfaction piece at <unk>.
We have with our merchant teams at our stores and so I'm extremely pleased with the progress I think that continues as we go through spin and I think that that business.