Q3 2021 ODP Corp Earnings Call

<unk> to the O D. P corporations third quarter 2021 earnings conference call all lines will be in a listen only mode for todays call after which instructions will be given in order to ask a question at the request as the ODP Corporation today's call is being recorded.

I would like to introduce <unk>, Vice President Investor Relations Mister <unk> you may begin.

Good morning, and thank you for joining us for the ODP corporations third quarter of 2021 earnings Conference call.

This is <unk> and I'm here with Jerry Smith R. C E O 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 Jerry will provide an update on the business focusing much of his commentary on our accomplishments in the third quarter, including our operational performance as well as the progress we're making on all of our initiatives to drive shareholder value.

David will then provide commentary on the previously disclosed proposal made by USR, an entity controlled by Sycamore partners the owner Staples to acquire the consumer business of the ODP Corporation.

After David's commentary Anthony will then review the company's financial results, including the highlights of our divisional performance and following Anthonys comments. We will then open up the line for your questions.

Before we begin I would like to inform you that certain comments made on this call include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

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

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

Also during the call we will use some non-GAAP financial measures as we described business performance.

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

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

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

Thank you chairman good morning to everyone joining our call today. We appreciate you joining us this morning hope that 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 third quarter.

Our performance and a quarter reflects our teams continued commitment to our low cost model approach.

And in the core tenants that driver business positioning us to deliver solid operating results, while making progress on.

Two unlocked shareholder value.

I'm extremely proud of our team's efforts in delivering these results against a much more demanding industry backdrop related to supply chain challenges and the resurgence of the COVID-19 Delta variant during the quarter.

As I've mentioned on a previous calls our performance and strategic actions are aligned and supported by the key tenants that form the foundation of our business as outlined on slide four in our presentation.

These tenants form our foundation as we address market dynamics pursue new avenues for growth and continue to position our business to unlock future value for shareholders.

This foundation is rooted in driving a low cost model.

Expanding our value proposition and moving into higher value businesses through the addition of new growth engines.

As reflected in our results we've been executing along its priorities.

Life in the strength of our business model and the flexibility of our infrastructure to dress the market demands at.

At the heart of our approach is there a winning five C culture.

This quarter I will highlight one of the key components of our <unk> and that is creativity.

We have leverage this component of our culture over many years.

Create a highly flexible supply chain operation backed by strong relationships and and well developed infrastructure to allow us to navigate many of the current challenges impacting the macro supply chain and economy.

This approach has helped our team deliver solid operating results, while continuing to advance our digital platform business.

Can progress on our plans for separation.

The highlights abuse accomplishments for the quarter are shown on slide five.

First as I've stated in a previous calls maintaining a safe environment for our associates and our customers continues to be priority number one.

We continue to monitor state and National Health guidelines.

Maintaining safety measures as necessary to help protect our associates and customers.

Now for the highlights we delivered solid operating performance. Despite the industrywide challenges it related to sourcing and supply chain as well as a slower pace of back to office due to the spread of the Delta variant.

We were happy to see a more normal back to school season.

As a greater number of students and teachers return to the classroom this year with core supply categories, helping offset lower sales for products previously and strong demand during the height of the pandemic.

Our continued low cost model focused and flexible supply chain operations hope to drive solid operating results I guess, a more challenging backdrop.

Next supporting one of our key tenants of driving new avenues of growth and higher value markets. We continue to advance our digital platform business varys.

We continue to make great progress on building alpha team and capabilities leveraging new customers on the buyer quest platform, while advancing our collaboration with Microsoft.

Progress, we are making places us excellent position to drive value, the large and growing digital business commerce market in the future.

Also or continue to make progress on our plans to separate ODP and to two independent publicly traded companies.

We announced the top leadership for both companies are making meaningful progress on the various commercial agreements between the future entities.

Finally, we're happy to report that we've been executing upon our share repurchase program buying back over $100 million of stock during the quarter and through the end of October.

Now turning to more details regarding our accomplishments in the quarter beginning on slide six.

Our overall performance reflects both a positive attribute of our team's approach operational excellence.

As well as the value of other investments we made in our infrastructure as we face a more challenging industry backdrop during the quarter.

This backdrop included the spread of the Delta variant delaying the return to office plants or many of our enterprise customers.

As well as the global supply chain constraints and inflation I have created the recent industrywide sourcing and cost challenges.

While our top line did see pressure from a reduction in our store footprint in lower demand for certain pandemic related products are teams continued focus on driving a low cost model, while leveraging the flexibility of our supply chain assets allow us to deliver solid operating results.

Supporting our performance.

Stronger year over year growth in our contract channel as private enterprises slowly began to return to the office.

The back to school season, while still not back to 2019 industry levels saw more students and teachers returning to the classroom contributing to our performance as well.

In all our team to discipline and utilize their supply chain strength and continued efficiencies across their business offset many of the challenges and help us drive $122 million and adjusted operating income in the third quarter.

Now turning to our divisional performance, starting with our business solutions division or BSD as highlighted on slide seven.

Our BSD segment consistent in both our contract R. E. Commerce channels continues to provide a strong value proposition for customers with a broad product and service assortment backed by a robust sourcing entrusted supply chain operation.

This segment of our business surged nearly half of the fortune 500 companies as well as medium and smaller enterprises and other consumers through our digital presence.

<unk> revenue performance was highlighted by the increase in sales in our contract channel driven by stronger demand and core categories from private enterprises more than offset by lower sales or E Commerce channel.

Overall revenue was down about 2% year over year left.

Let me provide more details.

The business environment in the quarter was stable in general However, as I stated earlier the pace of back to office for many of our customers was slower than we anticipated due to the spread of the Delta variant.

Despite this challenge we drove an increase in sales in our contract channel led by the stronger demand from enterprise customers for our core supply products furniture and managed print services.

While we were happy to see this progress is slower than we anticipated given the delta variant effect.

Much of this progress was offset by lower sales R. E Commerce channel compared to the very strong period last year as the demand for pandemic related products, including PPE in furniture was lower in the quarter.

I would add that a more challenging sourcing environment for technology products contributed to lower sales in this category.

Revenue generated from our adjacency categories, including cleaning and break room furniture Tech and copy and print remained flattened total of last year as a percentage of BSD sales.

As returned to office begins to accelerate we expect our core categories to overperform until the pace normalizes.

From the operating perspective, we continued to maintain our focus on a low cost model approach flexing their assets and utilizing pricing strategies to help offset increased costs related to supply chain operations and other inflationary impacts.

Our sales team has continued do a good job in both retention and winning new business. Our retention rate is at the highest it's ever been earning new business.

Moving forward were also encouraged by the indication of the positive impact store business as customers return to the office.

In general on a per customer basis or recent data shows that we do experience a lifting sales as more employees return the office and is just disgusting, primarily at our core supply categories.

This high correlation with the return to work in the office will drive higher consumption of our breath of products and.

While the returned to office has been slower to materialize than we had hoped for the second half of this year. We are confident that we are well positioned to capture the demand as activity increases in the new year now.

Now turning to our performance or retail division as shown on slide eight.

Or retail division continue to provide strong values support for our consumers, including education home office and small business customers.

Through a network of over 1080 retail stores and the convenience of a buy online pick up in store or focus offering.

I am proud of our associates for maintaining strict safety protocols and providing a positive shopping experience for our customers.

As you continued strong net promoter scores.

Revenue performance in the quarter was lower versus last year, primarily due to 160 fewer stores in service.

However, when adjusting for the store closure impact we estimate revenue was down in the low single digits.

Some of the dynamics in the quarter include the resurgence of the back to school season as more students and teachers came back to the classroom.

While we're happy to see the return to a more normal back to school season, as I mentioned earlier, the total supplies industry has not recovered prepandemic levels in 2019.

That said the back to school season was positive for us as we drove solid year over year growth in our school supplies and related categories. In fact for the categories, which we participate the data shows that we picked up market share and back to school categories versus last year.

And all we are encouraged by the improved year over year trend and looking forward to the industry fully recovering to prepandemic levels in the future.

These pauses helped offset some of the impacts will lower foot traffic lower sales for product categories that were previously and I'm very high demand during last year's third quarter.

During the height of the pandemic last year, we experience very strong demanded are claiming a break from home office and technology categories as customers procured PPE and set up home office is near the beginning of the pandemic.

As COVID-19 cases have begun to recede demand for these items were lower compared to the strong performance in these categories last year.

Additionally, we did faced challenges a quarter related to supply chain and sourcing availability for a number of skills we sell.

The number of out of stocks. We had this quarter continues to run higher than prepandemic levels, most notably for technology products and Pcs driven by the continued chips shortages as well as overall challenges for components, including certain ink and toner.

We are continuing to work with our vendors and partners to efficiently source these products and improve our inventory levels, but we expect these challenges to persist in the near term.

Operationally our teams continued focused on our low cost model helped to offset some of these challenges, including the increase the overall supply chain cost.

Three strong cost controls the benefits of our maximize BTB plan and the new Labour model, we implemented last year, our team drove an increase in the operating margins versus last year.

Overall, we're encouraged by our progress our store footprint continues to become more profitable and our Omnichannel President continues to be a popular choice among our customers.

Through our bogus offering all slightly lower on a comparable basis relative to last year is up about 70% versus the same period in 2019.

Feeding off the success of our 30 minute guarantee we recently launched our 20 minute guarantee for in store and curbside pickup.

We are the only company retail that we know of to offer such a guarantee which has been well received by our customers coupled with the growth of independent delivery channels. We expect this will drive sales and continued to generate good customer satisfaction scores in the quarters to come.

Now, let's shown on slide nine I'd like to take a moment to discuss impacts related to the industrywide supply chain disruptions, how odp's a position of strength to navigate this challenging environment.

Much of the recent well publicized global supply chain challenges begin with the onset of the pandemic.

During the COVID-19 outbreak labor resources were constrained both in manufacturing and transportation factory hours are limited and demand shift from services or products added additional stress to the system.

What are the obvious early casualties was the microchip shortage, causing sourcing the supply challenges everything from vehicles to <unk>.

And I know how frustrating this challenge can be as I was the former CMO with global supply chain responsibilities of a major technology and P. C manufacturer.

These factors continue to put strain on global supply chain assets, including manufacturing Ocean carriers.

Port operations long haul last mile and labor.

Many raw materials using everyday manufacturing had become scarce and more expensive this ship, causing suppliers increased costs to their customers, creating inflationary effect.

Transportation costs on the spot market has skyrocketed.

Ocean carrier spot rates of hundreds of percentage points or the historical rates and labour scarcity and costs continue to rise.

All these factors have made it more challenging for all industries to source import distribute and deliver goods and do so at a reasonable cost.

These factors had an impact to our operations, causing sourcing challenges for certain products, increasing costs related to supply chain product and labor that said because of the investments. We had previously made our supply chain infrastructure and long standing relationships odp's better positioned than most companies to navigate through these.

Challenges.

Why is this so.

Well boils down to the investments we made in our infrastructure, including our private fleet flex.

Flexibility of our distribution network and the longterm relationships, we've had with transportation partners and suppliers that place us in a position of strength.

Starting with the source, we leverage our large global sourcing office in Asia, a unique asset that provides us with a significant presence in the region, allowing us to stay on the pulse of the manufacturing market dynamics.

We have a diverse number of manufacturing partners for private label and numerous vendor relationships that supply the products we source.

We're continuing to work closely with our vendors folks an accurate forecast for our inventory adjust can lead times and leveraging safety stockman needed helping to reduce the number of out of stocks and delays.

For the price that we source directly over the ocean and into the U S. We have a long established contracted rates with a number of different ocean carriers.

Protect us from the high spot market rates that you've heard about in the media. These are long standing relationships with contracts that are continuing to be honored and when we do have a need we have a backup plan comprised from relationships with non vessel owning carriers, which also helps us protect some of the costs that we're seeing higher spot market rates.

Regarding port congestion, we utilize a flexible approach with the capability to route to other parts to help alleviate congestion challenges where it is cost effective and available for us to do so additionally.

Additionally, we do a good job of planning well in advance to source to ship goods as necessary.

Also we saw some pressure building earlier in the year, we put actions and placed it helps that inventory levels early.

This helped us during this year's back to school season, which was a good example to Howie managed sourcing challenges.

Next key advantage for ODP is that we have invested in and built are all large private fleet, helping manage some of the increases an over the road trucking and last mile delivery costs.

And because we delivered to retail stores with a strong backhaul program and can use are closed loop transportation to bring in our goods as well as our vendors goods.

We essentially run our own lesson truckload are LDL network, leveraging this network for backhaul and vendor consolidation, hoping to mitigate some of the industry rate increases.

For last mail delivery challenges, we leverage our private fleet and our relationships with over 25 national and regional small parcel carriers with which we have long standing relationships.

The last mile capacity has been severely constrained and capacity limits are in place.

While everyone has been scrambling to establish agreements with carriers, we are already there.

This helps to mitigate costs helps to ensure reliable delivery to our customers.

Lastly, labor costs continue to be pressured given the tight labor market and supply chain retail in general.

Wage inflation has become a real challenge industry, increasing labor costs for us and others, which we expect will continue in the near term.

We're remaining market competitive for labor resources by using creative approaches are more short term oriented including incentive base, which offers is flexibility in the future.

All of these are leading to higher supply chain product costs, and greater challenges and sourcing and managing inventory.

While are impacted by this environment expected challenges to remain for some period of time, we do have pricing flexibility allows us to pass through some price increases help alleviate cost pressures and we can pull other cost levers to help manage margins.

Now turning to the progress, we're making our digital platform business as shown on slide 10.

We're very excited about the progress we're making on a digital platform business various an impressive team that we've assembled to drive future growth and this valuable market.

We've fully integrated buyer quest and industry, leading digital a procurement technology platform that are continuing to attract integrate new customers were continuing to advance our collaboration with Microsoft and preparing to bring the capabilities of buyer quest to Microsoft's business central customers in the future.

We are continuing to generate strong interest from the supplier community as I recognize the expansive region capabilities of our new platform.

Our progress as places on the right path with the right team and technology platform to pursue growth and a large and growing digital business commerce market.

While we are still in the early stages were extremely excited at the pace at which we are executing and look forward to sharing more as we positioned the business in 2022 and beyond.

Before I turn the call over to Dana obliged for a brief update on Sycamore I wanted to spend a few moments to highlight our progress on a separation initiatives as shown on slide 11.

Our plans to separate ODP ended two independent publicly traded companies continue to progress in the third quarter we.

We are making advancements in all areas of the separation clean organizational structure operating supply chain mechanics, I T support.

And on the commercial agreements between the companies.

As part of this progress we announced the selection of the Ceos of both companies become effective upon completion of the spinoff as well as the company names for each of the two entities, we announced that Kevin Moffett, who currently leads or retail business will be appointed CEO of office depot upon completion of the spinoff and I will leave the ODP Corporation.

A leading supplier of bvb solutions, serving small medium enterprise level of companies.

The timing for completion of the separation currently remains the same.

As a reminder, a description of the anticipated postbank companies and their related assets is shown on slide 12.

Separating a highly integrated company like the ODP Corporation is not an easy task.

However, we believe that creating too highly focused pure play companies enhances our strategic flexibility and unlocks opportunities to meet customer needs all lining our assets and investment profiles to generate greater value for our shareholders. We remain on track with our plans and expect to provide additional detailed information in the coming quarter.

With that I will 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 Sigmar partners the owner of Staples to acquire the consumer assets the ODP Corporation.

Thank you Gerry.

As a reminder, on June for 2021, USR parents, the owner of Staples, a sick more partners subsidiary, which I referred to as Sycamore made a public proposal to acquire the ODP corporations consumer business, including the office depot, an officemax retail stores business, the company's direct channel business Office depot Dot com.

And the office depot, an officemax intellectual property, including all brand names for $1 billion to.

The company's board of directors will continue to carefully review sick Morris proposal with the assistance of its financial and legal advisers 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 sick more as it further evaluate the potential value and regulatory risk of Sycamores proposed transaction.

The company has previously announced plan to separate the company into two independent publicly traded companies. During the first half of 2022 remains on schedule.

With respect to copy Com previously disclosed steel process continues to progress we were working toward announcing the transaction before the end of the year, but there can be no assurance that we will do so we.

We do not intend to provide any further details on this process until it is completed.

I will now turn the call over to our Chief Financial Officer, Anthony Skeg Leone.

Thank you David and good morning, everyone.

I am happy to be here with you today to discuss their financial results for the third quarter of 2021.

As I begin my review I would like to take a moment to think our entire team for their continued focus on delivering results against a more challenging industry backdrop, while executing on our separation plant.

As Jerry mentioned separating business as integrated as ODP takes remarkable commitment and skill and doing so while we're managing the industry challenges is truly impressive.

Before I speak to the quarter and as a follow up to Jerry's comments I thought I would take a few moments to discuss in more detail. Some of the costs, an inflationary impacts we faced primarily relating to Cogs supply chain and labor.

As well as the strategies, we've been employing to address these headwind.

While these are industry wide challenges and not unique to our business. We have been taking several actions to help mitigate some of the impact to our operations.

Let me start with product inflation.

The overall cost of products from or where suppliers continues to be on the rise over recent quarters.

Materials containing pulp aluminum steel and resin as well as those products sourced overseas where most affected.

This is impacted many of our skews, including paper furniture Tech and other essential office categories.

But still in the early stages in total across our entire Cogs base, we have seen a low to mid single digit percent rise on average and overall product costs.

Next supply chain related costs, including transportation distribution in labor costs were also higher creating challenges is we source and distributed products to a retail stores and two are in customers.

Demand is up and capacity is limited and transportation and labor costs and supply chain has risen.

In total our supply chain cost to serve was up over 100 basis points, driven from higher transportation and distribution rates third party logistics and labor.

[noise] breaking out labor costs wages for logistic workers and in general labor costs across a retail operations when combined were up high single digits across the business.

These costs and sourcing challenges that we face during the quarter will likely continue into 2022.

That said we are in a strong position to mitigate many of these impacts and have been taking early actions to address.

Our strategy has been rooted in a few key areas first from a supply and sourcing standpoint, we are leveraging our private fleet and third party relationships to help mitigate some of the cost increases in transportation and ensure reliable services to our customers.

This extends from ocean carrier contract arrangements to domestic small parcel carrier relationships as well as long Hall.

For product invoice increases in both our retail and BSD channels, we have been managing price actions and passing through cost increases to customers where appropriate while remaining competitive with the market.

These price actions are not uncommon and in fact, we had already anticipated some of the cost pressures and have taken early action in several skews.

We're also working to manage through increases in labor costs in.

In a retail segment, our labor model and efficiencies that we have gained through our store footprint have help mitigate some of the increased cost for operations.

And our BSD and supply chain areas were using more short term incentives rather than long term wage locks, helping us address the wage inflation, but dampening longterm effects.

The capability to execute upon all of these actions is a testament to the investments we have made over the years and a core strength and how we operate on a daily basis.

However, the environment has become more challenging and we expect that these conditions will persist into 2022.

That said we are in a good position to continue to mitigate some of these challenges.

And to continue to manage accordingly.

Now turning to the highlights of our financial results as shown on slide 15, consistent with previous quarters. We have provided our results on both a gap and adjusted basis.

Our financial results reflect many of the drivers and dynamics that Jerry identified earlier, including a more normalised back to school season, a slower paced the return to the office activities as well as the aforementioned supply chain dynamic.

As you heard costs have risen relative to last year in the areas of materials labor and supply chain.

Our team has remained focused on driving or low cost model and taking aim at addressing these inflationary cost pressures.

We have seen positive results from these efforts maintaining margins in the business despite the more challenging backdrop.

Also as I mentioned last quarter I would like to highlight that Compucom results are being treated from an accounting perspective, as an asset held for sale.

Therefore, compucom results are not consolidated in our top line revenue or at the operating income level and is reflected on a net basis below the operating line or prior periods have been adjusted for this change as well.

Turning to the specifics of our quarterly results, we generate a total revenue of $2.2 billion in the third quarter down 7% versus Q3 of last year. This was driven primarily by 160 fewer stores in service compared to last year, coupled with lower comparable sales for products previously in high demand during the Earth.

Early stages of the pandemic we.

We saw an increase in core supply categories, which was offset by lower demand for PPE cleaning and furniture categories, primarily our in our retail and digital channels.

Technology and categories were also lower in the quarter, partially driven by sourcing challenges impacting availability.

Despite the slower than anticipated back to work trends in the quarter, we drove an increase in sales in our enterprise contract channel and are back to school performance and generate a positive year over year results.

GAAP operating income in the quarter was $104 million up slightly from $102 million last year include.

Included in operating income was $18 million of charges, including $5 million of non-cash acid impairment charges, primarily related with the rate of use assets associated with our retail locations.

The remaining $13 million in net merger restructuring and other costs with primarily associated with our separation efforts largely related to third party advisory costs. We expect these cost to continue as we continue to make progress on our separation activities.

Excluding these and other items are adjusted operating income for the third quarter was $122 million compared to $136 million last year.

Unallocated corporate expenses were $26 million as we continued to develop our digital platform business.

Adjusted EBITDA was $162 million for the quarter compared to $175 million in last year's third quarter. This includes adjusted depreciation and amortization expense of $36 million and $37 million in the third quarter of 2021 and 2020, respectively.

Excluding the after tax impact from the items mentioned earlier adjusted net income for the third quarter was $96 million or $1.76 cents per diluted share compared to adjusted net income of $102 million or $1.88 per diluted share in the prior period.

Turning the cash flow, we generated operating cash flow of $121 million, which included $3 million of restructuring costs. This.

This compared to operating cash flow of $256 million last year.

The reduction year over year is largely due to timing and higher working capital using the quarter related to an increase in accounts receivable and quicker payment terms, where certain items given the sourcing challenges I mentioned earlier.

Additionally, we had an anti tax refund of $44 million in last year's results that did not repeat this year.

Capital expenditures in the quarter were $19 million compared to $13 million in the prior year period, reflecting targeted growth investments in our digital transformation distribution network and e-commerce capabilities offset by lower Capex in our retail division.

And future quarters, we expect to increase our capital investments in our digital platform as we make progress on various.

Adjusting for cash charges of $3 million associated with the company's restructuring plans adjusted free cash flow in the quarter was $123 million.

Now I'd like to cover a business unit performance, starting with our BSD Division on slide 16.

As a reminder, BSD consists of a contract channel serving large medium and small enterprises as well as R. E Commerce channel, both backed by a flexible and reliable supply chain and distribution network.

As you heard from Jerry the pace of returned to work did not materialize as quickly as we had hoped for the quarter due to the spread of the Delta variant. However, we did generate growth in our contract channel.

This growth was offset by lower sales in e-commerce ripped.

Reported sales in the quarter for BSD were $1.2 billion down 2% relative to the last year's third quarter.

On a positive note as more businesses slowly began to return to the office. We saw an increase in demand for core supplies driving stronger sales in our contract channel.

Demand for core supply categories were up in the high single digits, highlighting the correlation between returned to the office activity and core supplies growing in the mix.

Also furniture and print services showed better traction during the quarter in this channel.

Overall adjacency categories remained at 44% of total BSD sales.

Offsetting this progress was lower sales in our digital channel compared to the strong demand during the height of the pandemic.

Sales of PPE technology in furniture, all products and very strong demand at the height of the pandemic, we're all lower than this channel during the quarter.

That said R. E Commerce channel is a key component of our Omnichannel presence, providing our customers with the convenience and ease of shopping online and fuels are strong and growing both this offering with those sales reflected in our retail business.

<unk> operating performance remained relatively steady despite the challenges related to an increase in supply chain and distribution costs operating income with $41 million in the quarter versus $45 million in the prior year period. This represented only a slight decrease as a percentage of sales a mix shift into core supplies and continued cost efficiencies helped him.

Mitigate the increase in distribution costs.

Now turning to a retail division results as shown on slide 17.

Reported sales and a quarter or roughly $1 billion down 13%, primarily driven by 160 fewer retail stores and service this year versus last year, including seven of which we closed during the quarter.

When eliminating the impact of store closures, our estimate of open store comparable sales were just down a few points continuing to strength, we have seen over the last year.

This is our estimate of the impact given a variety of factors, making the comparisons difficult on a standalone basis, but we are pleased with the retail store performance and their results.

Same sort of traffic was slightly lower year over year with the increased back to school traffic being offset by lower in store traffic relative to the third quarter of last year. During the pandemic. Our sales conversion rates are up balanced by lower average order volume leading to essentially a flat sales per shopper.

While the demand for back to school supplies still has not recovered prepandemic levels, we did drive stronger growth in school supply categories contributing to our performance.

Additionally, we saw strong performance in our copy and print services up about 25% compared to last year.

Balancing this progress we saw lower demand compared to they're very strong performance last year for categories relating to the pandemic.

These included Peepee and cleaning products furniture, and technology I would add that out of stocks also added to lower sales of technology products like pieces as well as ink during the quarter.

Our omnipresence continue to be recognized by the market. Both this sales on the same store basis were essentially flat with last year. However are up over 70% from Prepandemic levels showing continued strong demand for this service.

And as mentioned earlier or 20 minute guarantee we just launched is the first in the nation to offer this convenient service for our customers.

All of these actions allowed us to deliver strong operating margin performance in the quarter, despite the higher cost challenges.

We generated operating income of $107 million in the quarter down compared to the $119 million in the same period last year.

However, as a percentage of sales operating margins or 10.7%, a 30 basis point improvement from last year strong core supplies improvements in operating and lease cost and continued cost efficiencies drove this result.

Now briefly turning to our balance sheet highlights as shown on slide 18, we ended the quarter with total liquidity of approximately $1.7 billion, consisting of $753 million in cash and cash equivalents and $953 million, an availability under our asset base lending facility.

Total debt at the end of the quarter was approximately $353 million, primarily comprised of our long term IRB bonds.

Our balance sheet continues to remain a source of strength and provides us flexibility as we pursue growth and execute our strategy.

I've already covered the cash flow items and 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 October.

We repurchase about 1.7 million shares of our stock $476 million during the quarter subsequent to the quarter, we repurchased an additional 600000 shares for approximately $24 million. This.

This leaves roughly $150 million remaining under our $300 million authorization.

As a final comment I would again like to thank our entire organization for their strong commitment and executing upon our strategic initiatives and meeting the challenges of the quarter.

I would emphasize that our entire team as enthusiastic about our future excited about our path for growth and energize to continue to create value for shareholders.

We are making progress and excited about our new digital platform business very we're very encouraged by our progress to date and the team. We have built 2022 will be a critical year of development as we enhance the capabilities of this platform add new customers and continue to work with the supplier community moving forward in the coming year, we expect to.

Need to invest in focus even more resources targeted at capturing this large and high growth opportunity and the digital business commerce market.

We look forward to sharing more details at year end as we continue to position this business.

One last comment before we turn it over to your questions given the continued unpredictability and the pace of back to office activity as well as the uncertainty related to the global supply chain, we are continuing to suspend guidance at this time.

We do expect that the global challenges related to supply chain costs and inflation would likely intensify as we head into year end, but expect to continue to manage with the actions I mentioned earlier.

To conclude we remain very encouraged about our future and the progress we're making across all of our strategic initiatives and are keenly focused on leveraging our strong position to navigate the global challenges and drive future growth.

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

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one.

First question comes from the line of Chris Mcguinness. Please state your company name Damn proceed with your question.

Good morning, Sidoti and company. Thanks for taking my question nice quarter.

If we could just start off maybe around sick more.

Maybe just explain a little bit more you an active conversations with sick more at this point.

Thanks.

Chris Good mornings, Jerry I will say that we're an ongoing conversations as David said and will continue to evaluate the value as well as the regulatory risk I think it's really important to highlight that we're going to evaluate all options, whether it's sale, whether it's been that great what what's the best option for creating shareholder value.

Anthony to the board and myself take that very seriously that our job is to pick the right path with the highest value for shareholders.

Again, we're an ongoing conversations with them to evaluate that.

Okay great.

Just around the supply chain, obviously, what I'm talking about on the call. You can just talk about your inventories had in the queue for how you feel about that and I guess just pricing.

Are you at price at this point or are you still a little bit behind.

And I guess, how does that progressive you think over Q4, and then had in the 2022.

Hey, Chris is Anthony I would say on the inventory side overall.

Right, where we expected to be from an inventory level of given sales penetration as well as movement and some of our category that we started the year heavy so if you think about some of the P. P categories and either we were able to move a lot of that throughout the year from an inventory standpoint, so as we look at our inventory level heading into Q4 and into Q1.

Clearly still challenge in certain areas like ink and toner.

Certain technology has been a challenge we don't see that necessarily correcting in the near term.

Needed to be a challenge from an inventory standpoint, but overall, we feel like we're in good shape as we look into the balance of this year and into Q1.

Still some uncertainty and you'll probably see trends consistent to what we saw in Q3.

Continuing performance overall in our retail chain in our contract business in within BSD, It's really gonna be contingent on that returned to office, which we now expect to more meaningfully.

Be part of our queue, one story versus a Q4, but hopefully trends continue to improve Jerry Chris two things I'll add as I think it's real important.

Proud of this team for the performance we had this quarter.

That we experienced.

Highlights do things with the number ones are low cost bodily continue to.

Able to respond to pricing and inflationary pressures and make sure we pass that through and drive that through to the bottom line.

I really want to highlight and what time of the script will pantheonize, we really have.

Supply chain strength with crushed or I may want to thank our supply chain or procurement or merchandising as well as our global sourcing office Simcoe believes.

And as well as Hong Kong.

And then perspective, we made a lot of investments pretty quietly over the last three or four years, but we have a private fleet, we've longterm relationships partners.

Ocean rates that are on the contracted basis, so we've been able to weather.

Many relationships across three pills as well so I think relative to a lot of other people in a lot of other industries or even though our industry because of this focus on supply chain and the strength, we have in our teens were able to wreck quicker and.

Bluntly work through some of the challenges that many people are facing so we're very proud of the team and you can see from our results of our ability to to go out and execute to that.

I appreciate that and then I guess just throw one last question around.

Demand trends.

Are they I guess specifically to BSD.

Are you seeing an increase in.

October and acceleration from the demand.

<unk> Q3.

And then just maybe conversations you're having with the customers on kind of timing those coming back into the office. Thanks, Yeah.

Yeah, I think the good thing their Christmas, where we see in companies come back more meaningfully in Q3, the correlation to pick up in our core.

Pretty high so what we're seeing that positivity at companies return, but given some of the delays that we saw at the Delta very began to spread in Q Q3 became queue for now many companies are shifting Q1, clearly we're monitoring that pace of recovery from a return to office, but we have been enacted.

Conversations with our customers, we see positivity in terms of our ability to serve service those customers in any environment, but clearly the tailwind can occur.

Realization to return to office workers.

Okay and just one quick question on that hybrid model can you just talk about your offering their how your positioning and as an opportunity to take Sharon this environment given the hybrid model. Thanks again.

I think because I think a couple of things number one Steve and his team have done a good job of pertinent closely with our large enterprise customers as a source to a hybrid approach and so we'll continue to make investments in that area and there's a number of different facts.

Go to market strategy to be used and I think the fact of having multiple channels, we have to reach it from a hybrid models important verse as well.

Online business, we're going to continue to make investments that are are are actually used as well as our web sites as well as having the ability again, the private fleets a huge advantage worse and so we were able to.

To deliver to customers, both remotely as well as they come back in the office.

Okay and just around Barest you just maybe is there any data points you could provide us I know, it's very early still but can you just talk about maybe ikea, how it's tracking versus your expectations and any more color you could provide around that opportunity I think it's I mean, I am Super pleased and where it's tracking of the apprentices built that incredibly strong team from a town.

With perspective.

Microsoft relationship continues to grow and develop.

Have a lot of very positive.

Turns on that piece I think our our our I think our platform development is going really well I'll use an analogy for Ya I was thinking about this earlier this morning is.

We're really building a foundation, it's almost like building a house. It takes a long time to see the progress of the house that were lane, we're laying the pipes were laying all of that infrastructure related that concrete foundation down any materials presented standing technology later at him and his team are doing a great job of really building that foundation.

As we are.

Further in 2022 and 23 at People's are seeing some of the results of that foundation think it's gonna be a great value for us I think we have a.

An outstanding opportunity I think we're we're in a space and opportunity that we think there is a wide open market for us to go out and capture.

Great. Thanks for taking my question is will jump back in queue. Thank.

Thank you, Chris Christie Hi.

If you would like to ask a question. Please press Star then everyone. Your next question comes from Michael Lassner. Please state your company before asking a question.

Good morning, Thanks, a lot for taking my question from you be at.

Given the correlation between those areas, where you have been an back office and your sales performing.

Assuming the 2022 is the more normal life back office environment would you expect your business solution failed to get back to where they were in 2019, because the hybrid another factor is going to be below 2019.

Yeah, I think I'm not Michael too early to tell you clearly the cadence of returned to office.

Earlier comments around.

The correlation we're seeing and pick up in our core as people return to the office is a positive offsetting that is obviously, where ultimately corporations land in that hybrid model.

Early indications clearly, we're able to serve customers in a variety of ways and we're building towards the area that Jerry mentioned from a technology standpoint ensure that we're capturing that bend for corporations, no matter, where they individuals sit in the office or at home, but.

But it's too early to tell whether the trend back to 2019 occur in 2022 are we start to see that pain begin in 2022 and continue on in years.

There I don't want a little color.

Every CFO every CPR on a company wants to make sure they manager costs and so I think I think.

In early stages. The pandemic people, just we're able to expense out, but I think there'll be more and more governance in the future, which will bode well for our office depot as well as our multiple channels of opportunity.

Thank you my follow up question.

Supply chain caught weighing on your gross margin in the third quarter and it being down 18 basis point is that the number.

You should think about using.

Third.

Fourth quarter.

That's the key or their offset within USGA line that.

Help drive overall margin expansion in the fourth quarter.

Overall, what you saw from pressure point on supply chain Labor increase everything we mentioned in our prepared remarks, I think that that that trend will continue through Q4.

Some of these costs as we mentioned our pass through through our customers through pricing action. Other there are other initiatives from a productivity standpoint, I think the company has exhibited that low cost model to address where those cost pressures are and and being ahead of those cost pressures as it relates to some of the pricing.

Pricing of areas and one thing to note that I didn't mentioned in the earlier question.

We also took a very.

Deliberate and strong stance as it relates to some of our discounting so as we looked at the quarter as we looked at inventory loads. We are not probably as heavily discounted that in years past, which obviously improved our margin profile and we expect given all the challenges on supply chain. The challenges on products that we will continue that trend throughout this year.

<unk>.

Thanks, a lot.

Your next question comes from the line William Castle. Please state your company before asking your question.

Hi companies elevation.

I'm just wondering if you can provide a little more color on the performance of higher education.

Relative to K 12. Thanks.

We saw from a back to school perspective, K through 12.

If you look at from a market perspective overachieve last year.

We felt from a forecast perspective, many people thought we'd get back to the industry to get back to 2019 levels from Ah MPD perspective, it did not but the good news is we did take share relative within within within our sector. So it's above 2020 levels, but still slightly below 2019 levels I do think as.

Hopefully that.

At M. A continues to Wayne and there is not a very after Delta then I think that as people get more and more of a back to normal piece. We're hoping in 2022, we will see some of that 2019 type of level of of strength, but very I was pleased with the performance of our teams, especially obviously would elect to have the 2019 levels, but I think I am opening 2020.

Do we see more of that.

Great. Thanks.

Thanks, so much appreciate it.

At this time I would like to turn it back over to Gary Smith CEO for closing remarks.

Well, thanks, everyone for joining our call today I want to highlight a couple of things obviously, we're going to continue to focus on driving our top line business. We're going to continue we're focused on our great execution across our low cost model will continue to emphasize the power of our supply chain procurement sourcing teams across the globe in those relationships, we have and we're going to continue.

Renew to ensure that we deliver shareholder value by evaluated all different avenues for value for the corporation. Appreciate the times today, everyone have a great day. Thank you.

Thank you. This concludes today's conference you may now disconnect speakers. Please hold the line.

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