Q1 2022 ODP Corp Earnings Call
Good morning.
And welcome to the ODP Corporation first quarter 2022 earnings conference call all lines will be in 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 now like to introduce Tim Perrott, Vice President Investor Relations. Mr. Perrott, you may begin now.
Good morning, and thank you for joining us for the ODP Corporation's first quarter 2022 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 as David Blish, our executive Vice President and Chief legal and administrative officer.
We will begin today's call with David who will provide commentary regarding activities related to the potential disposition of our consumer business.
After David's commentary Gerry will provide an update on the business focusing much of his commentary on our accomplishments in the quarter, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value.
After Jerry's commentary Anthony will then review the company's financial results, including highlights of our divisional performance.
Boeing 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 Companys filings with the U S Security and Exchange Commission.
Also 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 <unk>.
Web site at Investor Dot the ODP Corp Dot com.
Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year.
I'll now turn the call over to David <unk>, who will provide an update on the evaluation of a potential disposition of our consumer business Dave.
David's anticipated date of departure from the company has been extended to May 31.
David.
Thank you Tim.
As a reminder, the ODP Corporation has received both public and private non binding proposal to acquire the company's consumer business, including the office depot, and Officemax retail stores business and the company's direct channel business Office depot Dot com.
On January 14, 2022, the company announced that its board of directors was delaying the previously announced plan to separate the company into two independent publicly traded companies. So that he could carefully review the proposals 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 anticipates that its board of directors will complete its review of alternatives in the near term.
I will now turn the call over to our Chief Executive Officer, Jerry Smith.
Thank you David good morning to everyone joining our call today. We appreciate you joining us this morning, and hope that all of our listeners and their families continue to remain safe and healthy.
I am excited to be here with you today to discuss our results and accomplishments for the first quarter.
We are off to a great start to the year and our performance in the quarter reflects our continued commitment to our low cost model and in the core tenants that drive our business.
We delivered strong results. Despite the numerous market wide challenges, while making significant progress on our strategic initiatives to unlock shareholder value.
I have never been more enthusiastic about the opportunities ahead for our business and I am extremely proud of our team's effort to start the year.
And a follow on to David's comments. We're also excited about the progress, we're making on our strategic initiatives, including maximizing the value of our consumer business and we're aiming to bring this process to conclusion in the near term and will provide more information at that time.
Now turning to slide five of the presentation. Our team continues to rise to the challenge.
<unk> strong performance in a turbulent environment.
As I have discussed in the previous quarter the challenges posed by the macroeconomic environment continues to be significant.
The U S economy has experienced the highest inflation over 40 years, and a sourcing and supply chain conditions continue to be impacted by higher fuel cost.
Labour constraints shipping immaterial shortages. Additionally.
The lingering effects of Covid impacting the supply chain dynamics and the nature of how people work added to this challenge.
All of these conditions have created hurdles are only for our business, but for many companies across many industries.
I'm very proud of our team for once again rising up to meet these challenges.
Delivering strong results, while also advancing our strategic initiatives.
We did so by remaining true to the core tenants that drive our business.
Pursuing new avenues for growth and positioning our business to unlock future value for all of our stakeholders.
These tenants from the foundation of our strategy are 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 these priorities leveraging the strength of our business model and the flexibility of our infrastructure to address the market demands.
We continue to drive our low cost model, enabling us to provide compelling value for our customers and helping us generate strong operating results.
We're also remaining nimble and digitizing our platform to serve customers in new ways, whether at home or in the office, expanding our value proposition and providing a broader set of products and services.
We're also continuing to invest in our digital platform business various <unk>.
In our supply chain and distribution business there.
To support the near term and future state of our business in.
In addition, our BDC business continues to meet our customer needs.
The home and small business office superstore.
And we're making great progress on positioning this business for continued success.
We believe all of these actions are enhancing our foundation to drive increased long term value for shareholders.
At the center of our approach to operational excellence as our winning five C culture as shown on slide six.
I am very proud of the culture, we have created the ODP and the foundation. It provides as we support our community.
New talent and continue to execute upon strategic priorities.
Strongest testament to our <unk> culture.
Is the world class team, we have built over the past several years, attracting the best and brightest talent across a broad range of industries, including technology business Commerce supply chain and finance.
Combined with the support for our communities. We also remain a strong steward of the environment, continuing with initiatives to reduce greenhouse gas emissions and future commitments to reduce the use of plastics in our business.
I am so proud to be a leader of a company with such a strong commitment to our communities.
The environment is.
Culture that truly makes a difference.
Recently leaders across our organization took part in the depot Dam service, a companywide fill Tropic initiative supporting local boys and girls clubs of America, helping kids and teens across the country.
This volunteer initiative is one of the many throughout the year that our associates look forward to participating in to get back to the communities, where they live and do business.
This commitment not only helps the organizations we are supporting but also create long lasting community engagement for our leadership and executive teams.
Now turning to the highlights of our major accomplishments for the first quarter as shown on slide seven.
We delivered strong operating performance in the quarter, despite industry wide challenges related to supply chain constraints and inflationary pressures our revenue performance remained healthy.
And the powerful combination of our low cost model approach and flexible supply chain and pricing strategies, along with customers recognizing the breadth of products to serve their business education and home office needs.
To drive strong operating results against a more challenging backdrop in the quarter.
Next we made significant progress in the quarter on our strategic initiatives focused on unlocking shareholder value.
Using the flexibility afforded by our holding company restructuring that we implemented in 2020, we have completed the separation of most of the operational components of the business and are aligning our assets to support our routes to market across our <unk> and <unk> businesses.
We're also continuing to invest in the capabilities of our <unk> digital platform and in our supply chain and sourcing assets.
Supporting one of our key tenants are driving new avenues of growth.
Higher value markets, we continue to make progress in advancing our digital platform business various.
And setting the foundation for <unk>, our logistics and supply chain business.
At various in Q1, we initiated a private preview launch on the Microsoft platform and continue to expand our key supplier network.
Most recently, we were the keynote speaker at our major Microsoft business Central integrators of conference.
<unk> was prominently featured as the key procurement technology, Microsoft dynamics 365 platform.
And then there were enhancing our supply chain capabilities and aligning our assets to support our BDC and our <unk> businesses today and other third party customers in the future.
This year will mark an important milestone for <unk> as the business has formally established and we continue to expand our data driven platform to support our current and future routes to market.
Finally.
As part of our effort to enhance returns for our shareholders.
Our accelerated share buyback plan continues to be executed upon by our partner banks and we expect this to be completed in the second quarter with the delivery of an additional $30 million of.
Sure a conclusion.
I am proud to say that over the past 12 months with the support of our board we have committed to return over $300 million in the form of share buybacks.
Now turning to more specifics of our performance for the quarter as shown on slide eight.
Our overall performance in the first quarter reflects our team's continued commitment to operational excellence and the value of the investments we've made in our infrastructure positioning us to address the challenging market backdrop during the quarter.
This backdrop included a global supply chain constraints.
High inflation that created that recent industry wide sourcing and cost challenges.
As I discussed on previous calls the investments we have made in our supply chain infrastructure and key partner relationships places in a better position than most companies to navigate through these challenges.
The investments we have made in our private fleet the flexibility of our distribution network that includes our long term relationships with our distribution partners and suppliers.
And our global sourcing office remains a key differentiator.
We also remain sharply focused on our revenue management, including additional pricing and funding the growth and other productivity initiatives.
Overall, while the topline results were flat with last year.
This is a significant accomplishment as we had fewer overall retail locations in service versus a year ago due to planned store reductions.
The reduced store footprint resulted in lower sales year over year in our retail division.
Which was offset by stronger sales in our business solutions Division as we begin to see improved back to office trends in the quarter.
Stronger sales of core supplies and cleaning and break room products helped to offset lower technology sales in the quarter, which was impacted by the sourcing and supply chain challenges in the period.
All our compelling customer value proposition combined with our team's strong execution.
This drive over $88 million and adjusted operating income in the quarter and strong EBITDA results now turning to our divisional performance, starting with our business solutions division or BSD as highlighted on slide nine.
Our BSD segment, because both our contract and e-commerce channels.
A strong value proposition for our customers.
Rod product and service assortment backed by a trusted supply chain operation as a reminder, this segment of our business serves nearly half of the fortune 500 companies as.
As well as medium and small enterprises and customers through our digital presence.
<unk> revenue performance improved in the quarter up 9% year over year, driven by stronger traction in our contract channel as more businesses begin to return to the office and two in class learning.
This result was particularly impressive given the ongoing sourcing and supply chain challenges.
We saw improved demand among private enterprises and education customers through our contract channel, partially offset by lower sales through our e-commerce channel related to lower demand for certain product categories.
Slightly higher demand during the pandemic.
Demand for our core supply category has increased significantly.
Partially offset by lower sales of technology and ink categories.
As these continue to be impacted by sourcing and supply chain challenges.
Higher than normal out of stocks in these categories.
In addition to the core supplies adjacency categories, including in select areas of cleaning and break room products.
Furniture and copy and print services showed strong growth for the quarter.
From an operating perspective, we nearly doubled operating income versus last year.
We executed upon our low cost model approach.
Flexed, our distribution assets and.
<unk> utilized both flow path data to analyze pricing cost to serve by SKU location and routes to market.
This approach coupled with in depth enterprise customer reviews.
Pricing Escalations scenarios helped.
Helped to offset inflationary pressures and lead to margin improvement in our contract business.
We also continued to do an excellent job in both retention and winning new business.
Our retention rate remains near its all time highest level above 95% and we're earning new business.
We're continuing to work with our customers to better understand their needs and the new normal environment flexing, our ecosystem to support them in a hybrid setting or in the office a true Testament to this can be seen in our recent results. While many external sources estimate that less than 50% of employees average.
Turning to the office our weekly sales trends indicate that we are continuing to make progress towards the levels. We saw in 2019.
And we remain excited by the positive impact to our business as a greater percentage of those customers return to the office.
Working closely with their customers or the return to office strategy or.
Our data shows that we experienced a lift in sales primarily in core supply categories at all.
Also in Adjacencies as more employees return to the office.
This trend allows us to be well positioned to capture future growth.
Before I move on to our retail business I would like to make a few comments around the press release, we issued this morning regarding the appointment of a new leader for our ODP business solutions.
Today, we announced that Stephen Mohan, our current head of our BSD business will be leaving the company as part of this transition after reviewing several aspects of our business and the current and future opportunities to pursue profitable growth, we announced that David Centrella currently senior Vice President of financial planning and analysis.
We'll lead ODP business solutions moving forward.
David a 20 plus year veteran of ODP brings a wealth of BTB experience and financial discipline.
He was formerly a key member of the executive team bleeding Bst's contract business.
Let our print business and acted as interim CFO prior to leading our SG&A and separation management office efforts over the past year.
David was instrumental in helping to shape, our future state go to market strategy as we executed our holding company restructuring.
We believe the combination David BTB expertise and financial discipline, along with his deep industry knowledge will.
Place ODP and the best possible position to <unk>.
<unk> accelerated profitable growth in Odp's business solution in the future.
In fact, we believe our operational performance is headed in the right direction and we are in position to further improve.
Over the past several months Anthony nine completed several deep dives in BSD analyzing a large number of customer contracts.
Effecting p&l's and reviewing the operational trajectory of this business.
Based on these reviews, we believe the P&L for BSD is positioned to further improve.
And we are optimistic with the progress we're making.
We're excited about the expertise that David will bring to our efforts. We also want to thank Steven for his contributions to the business over the past three years and wish him well in his future endeavors.
Now turning to our performance in our retail division as shown on slide 10.
Our retail division again delivered solid performance in the quarter on a comparable basis, our team drove solid topline and Bottomline results.
We executed upon our low cost model approach and delivered a value proposition that continue to resonate with our customers.
I am extremely proud of our retail team for driving these impressive results.
Providing positive shopping experience for our customers.
Leading to continued strong net promoter scores the best in the company.
Our revenue performance in the quarter was lower versus last year, largely driven by fewer stores and service.
As a result of planned store closures.
Although we are not reporting the specifics with eliminating the impact of planned store closures.
We estimate that sales for open stores were relatively flat.
We witnessed good trends and sales per shopper, along with core supplies and copy and print services exhibiting strong demand and our omnichannel presence continues to resonate with our customers and grow.
These positives helped to offset some of the impact from lower sales and product categories.
We were previously in very high demand last year.
For example, our cleaning and break room category, including PPE.
<unk> is lower sales compared to the very strong demand we experienced last year during the outbreak of the Covid variance. Additionally.
Additionally, we did face increasing challenge as it relates to supply chain and sourcing availability for a number of Skus we sell.
The number of out of stocks in the quarter continued to run significantly higher than pre pandemic levels more than double in most notably for technology products in Pcs driven by the continued chip shortages as well overall challenges for components, including certain ink and toner.
We're continuing to work with our vendors and partners to efficiently source. These products improve our inventory levels, but we expect these challenges to persist in the near term.
Operationally our teams continued focus on our low cost model helped to offset some of these challenges.
We drove lower SG&A expenses, lower operating lease costs and showed improvement in our product margins.
Offsetting these improvements was the flow through impact of lower sales.
Primarily as a result of store closures, which resulted in lower operating income on a dollar basis.
Operating income as a percentage of sales was 9% despite lower volume on the quarter.
Overall, we are encouraged by our strong performance.
Our store footprint continues to become more profitable and our Omnichannel presence remains a popular choice among our customers.
Demand through our focused offerings, while slightly lower on a comparable basis relative to last year.
Is up approximately 30% from pre pandemic levels.
Our recently launched 20 minute guarantee for in store and Curbside pickup also remains popular and saw strong demand.
We are the only company in retail that we know offer such a guarantee which has been well received by our customers.
This innovative service along with the growth of independent delivery channels will.
It will help drive sales and continued to generate good customer satisfaction scores in the quarters to come.
Now as shown on slide 11 in the quarter, we continued to make progress on our strategic initiatives to unlock shareholder value.
By further aligning our assets to support our <unk> and consumer businesses.
Putting into context, our journey over the past few years early.
Early on we recognize the powerful combination of the various assets supporting our business.
Accordingly, we've invested in enhanced our unique supply chain and distribution network.
The strong market and digital presence.
Expanding our offerings in the <unk> market.
We also took deliberate actions to support our strategy and created the flexibility to align these assets to support our business for the future to further unlock shareholder value.
For example, two years ago.
We reorganized into a holding company structure in order to provide more flexibility to our business model and to align our assets with our operating channels.
Since that time, we also executed upon our maximize vdb plan.
Aimed at optimizing our retail footprint and generate additional resources to invest in our future growth.
And last year.
We embarked on a plan to separate our business and we shifted our digital transformation into higher gear with the development of various.
Through the process of analyzing the assets that control our business and how to leverage these capabilities we have.
Continued to make progress on aligning these assets to support our go to market strategies, and our B to C. B to B digital platform and distribution businesses.
These efforts have helped us develop a clear line of sight for each of these businesses and the strategy behind driving future profitable growth.
And during the quarter, we continue to separate the operational components of our business that are necessary to support a split or sale of our consumer business.
This was no easy task.
Hundreds of process reviews and assessments uncut.
Uncomfortably in processes and flows.
Some which have existed for decades.
This work continues.
Today, we have mostly completed our realignment, which has resulted in highly focused operating businesses under a holding company structure.
We're continuing to look at ways to further drive efficiencies and our low cost model approach.
Highlighting these I will turn first to ODP business solutions.
Leading BTB solutions provider, serving small medium and enterprise level companies, including the contract sales channel of Odp's. Prior office Depot's business Solutions Division. This includes our federation entities comprised of more than a dozen regional office supply distribution businesses. We.
Wired to expand our distribution network into geographic areas previously underserved.
But as you correctly produces a significant amount of revenue and our grand and toy operation, which serves commercial contract customers in Canada.
Next up is there been stood up through our separation process and as our world class supply chain distribution procurement and global sourcing operations supporting both our <unk> and <unk> businesses as well as logistics needs for other third parties.
There provides a strong value proposition.
We plan to grow over the next few years as we continue to evolve the platform.
Next is various.
Which as many of you know is our BTB digital platform technology business focused on transforming digital commerce between buying organization and suppliers and.
And finally office depot, a leading provider of retail consumer and small business.
Alex and services and what our brand is most recognized for our.
Our progress in the quarter has been terrific and preparing our foundation to support the go to market strategies for each of these highly focused businesses.
And moving forward, we're focused on leveraging these assets to drive future profitable growth.
And as you heard from David.
We've continued to make progress in the strategic evaluation of our consumer business.
To bring this process to conclusion in the near term and will provide a future update accordingly.
Now I'd like to provide insight into our progress on our digital platform business various as shown on slide 12.
As a reminder, various as a technology company, that's focused on reducing the complexity and friction in the BBB to procurement and distribution.
Those who is experienced in the <unk> distribution business procurement space.
Buyers and suppliers have been using inefficient legacy systems and processes for decades.
And those systems create inefficiencies and drive up cost for both.
At the same time expectations from my workforce that continues to be digitally enabled as compounds the need to engage suppliers a more seamless and.
Frictionless way, while driving economics towards contract compliance and purchasing leverage.
As consumers, we benefited from new and innovative solutions. However, there is a very wide gap when it comes to solutions tailored to the unique needs of businesses.
And this is a gap that various is positioned to address.
The reality is that neither procurement organizations, nor suppliers are in a position to invest in technology and user experiences that are holistic for their employees or customers.
<unk>, our digital platform is being developed with the flexibility. So organizations can focus on what makes them great helping them grow their strategic partnerships and their business.
Our focus is on enabling both buyers and suppliers.
Wind through a seamless end to end solution.
In the quarter, we continued to make strong progress in various development and platform launch in 2022.
We initiated a private preview launch on the Microsoft dynamics 365 business Central platform.
And we're receiving very positive feedback from customers and build partners alike.
As I previously mentioned, we had a successful showing at a major Microsoft business Central Integrators conference in March generating significant excitement around the various platform and the value for their customers.
We're making progress and continue to attract new customers to the platform.
Buyers and suppliers innovating on their behalf.
And expanding capabilities over the next several quarters.
To wrap up my comments before I turn it over to Anthony we're excited about our continued strong performance.
Encouraged by the progress we are making as we continue to strengthen our <unk> platform business.
The progress we are making across all of our strategic pillars.
Place us in a position of strength as we pursue the large and growing market opportunity ahead of us.
Operationally, we will keep our heads down and focused on continuing to drive strong execution, while making progress on the strategic evaluation of our consumer business.
Working to bring that process to a close in the near term.
With that I'll turn the call over to Anthony for a review of our financial results.
Thank you Jerry and good morning, everyone.
I'm happy to be here today to discuss our financial results for the first quarter of 2022, and the progress we are making on our strategic initiatives.
As I begin I would like to say how proud I am of our entire team for remaining focused and driving strong results against a challenging industry backdrop.
We maintained our focus on our low cost model and on our infrastructure to help offset some of the supply chain and cost pressures that the market has been experiencing.
We also continue to make progress on our digital transformation and building out our data driven platform for the future.
Collectively our teams rose to meet the challenges of the quarter.
As Jerry mentioned, the sourcing and supply environment remains challenging and inflation is the highest it has been in over 40 years, creating additional cost pressure not only for us, but for nearly every company and consumer.
Distribution and supply chain costs are up significantly as well.
The raw materials used in everyday manufacturing have become scarce and more expensive spot.
Spot market transportation costs have skyrocketed, and labor scarcity and costs have continued to rise.
All of these factors have made it more challenging for all industries to source.
And distribute and to do so at a reasonable cost.
These costs and sourcing challenges have continued into 2022 impacting cogs supply chain and labor.
That said, we continue to be in a strong position to mitigate many of these impacts.
And we've been taking actions to address these factors early on as reflected in our most recent results.
Record high inflation in energy prices has increased the overall cost of product from our suppliers impacting the cost of many of our skus, including paper furniture Tech and other essential office categories.
In total for the quarter, we have seen a high single digit percent rise on average than our overall cost of goods sold via our product baskets.
Given the breadth and depth of our product offerings customer buying patterns and baskets can heavily influence the cost to serve.
Next supply chain costs related to transportation distribution and labor continue to be inflated.
Market demand is up fuel prices are higher about 50% higher for diesel fuel and capacity remains constrained.
Accordingly, our supply chain cost of serve was up nearly a 100 basis points in the quarter compared to last year due to higher transportation and third party logistic rates and labor.
And specifically for labor costs wages for logistics workers and general wage labor across our retail operations combined were up about 7% year over year across the business.
And as has been the case for some time, we continue to experience sourcing challenges in certain technology product categories, including Pcs printers and ink.
Causing our overall out of stock to be relatively higher than normal.
While these costs and sourcing challenges have persisted in the quarter, we have been taking actions for some time to address. These actions include leveraging our private fleet and third party relationships to help mitigate some of the cost increase in transportation and ensure reliable service to our customers.
This extensive promotion carrier contract arrangements to domestic small parcel carrier relationship as well as long haul providers.
We have also annualize our proprietary developed low patent data tool, which has helped us optimize our supply chain operations to help reduce the cost to serve by route to market and product.
For product and with increases in both our retail and BSD channels, we've been managing price actions and passing through cost increases to customers where possible while remaining competitive with the market.
Additionally, our vast assortment of skus and our ability to pivot to our assortment breadth to help meet our customers' needs at varying price points is a competitive advantage, helping us to manage some of the price elasticity of demand.
For Labour costs, we continue to look at ways to optimize incurred hours, while driving productivity enhancements through process reengineering as well as looking at incentive compensation structures to drive performance.
Our team's ability to execute upon these actions is a reflection of the investments we have made over the years and is a core strength and our operational excellence.
However, I will point out that the environment continues to remain challenging and while we see some signs of certain constraints are abating. We expect that these conditions will persist in the near term.
That said we are in a strong position to continue to mitigate some of the challenges and manage accordingly.
Now turning to the highlights of our financial results as shown on slide 14.
Consistent with the previous quarters, we have provided our results on both a GAAP and adjusted basis.
We generated total revenue of $2 2 billion in the first quarter flat when compared to last year's Q1.
This was particularly impressive given that we had 114 fewer stores in service compared to the same period last year.
We saw improving back to office trends in the quarter, helping us drive stronger performance in our enterprise contract channel both year over year and sequentially.
We generated strong sales and core supplies cleaning and break room and copy and print categories.
Partially offset by lower sales of technology products and ink categories related to the supply chain challenges I mentioned earlier.
Our retail channel again drove solid performance, providing strong support for hybrid workers education and small business customers.
GAAP operating income in the quarter was $76 million up from $69 million last year.
Included in operating income was $12 million of charges, consisting primarily of $10 million of merger restructuring and other operating costs largely associated with the separation activities.
The remaining $2 million is associated with noncash asset impairment charges, primarily related to the company's retail store locations.
Excluding these and other items, our adjusted operating income for the quarter was $88 million compared to $93 million in Q1 last year.
This included $34 million of unallocated and other expenses for the first quarter of 2022.
Adjusted EBITDA of $125 million for the quarter compared to $133 million in last year's first quarter. This included adjusted depreciation and amortization expense of $34 million and $36 million in the first quarters of 2022 and 2021, respectively.
Excluding the after tax impact from the items mentioned earlier adjusted net income for the first quarter was $64 million or $1 27 per diluted share compared to adjusted net income of $68 million or $1 22 per diluted share in the prior year period.
Turning to cash flow, we generated operating cash flow of $30 million, which included $7 million of restructuring costs.
This compared to operating cash flow of $103 million last year.
Operating cash flow in the quarter was related to timing of working capital items and was in line with our internal expectations.
Capital expenditures in the quarter were $21 million compared to $12 million in the prior year period reflected targeted growth investments in our digital transformation supply chain and e-commerce capabilities.
In future quarters, we expect to increase our capital investments allocated to these investments and capabilities as we continue to make progress on there and there.
Adjusted for cash charges of approximately $7 million associated with the company's separation and restructuring plans adjusted free cash flow in the quarter was $16 million.
Now I would like to cover our business unit performance, starting with our BSD Division on slide 15.
As a reminder, BSD consists of our contract channel, serving large medium and small enterprises as well as our E Commerce channel, both backed by a flexible and reliable supply chain and distribution network.
As you heard from Jerry returned to the office in classroom trends improved in the quarter, helping to drive strong demand in our BSD Division.
Total revenue in BSD was $1 2 billion in Q1 up 9% in the quarter relative to the same period last year driven by an increase in sales in our contract channel as businesses began to return to the office.
This was partially offset by lower sales velocity in our E Commerce channel, which we expected relative to the strong demand experienced last year during the heightened conditions related to the pandemic.
In total we saw an increased demand for core supplies cleaning and break room products furniture and managed print services.
More specifically in our contract channel demand for core supply categories were up in the high single digits.
Highlighting the correlation between return to office activity in core supplies growing in the mix.
I would also point out that our cleaning and break room category included sales of Covid kits, helping to propel sales in this category.
Overall total adjacency category sales were 46% of total BSD revenue up about 200 basis points compared to last year.
Offsetting some of these positives were lower sales of technology related products, including Pcs and ink, both of which were impacted by the sourcing and supply chain challenges I mentioned earlier.
Additionally, sales of PPE and certain supply product categories previously and strong demand during the height of the pandemic were lower in our E Commerce channel.
That said our E Commerce channel continues to be a key component of our omnichannel presence, providing our customers with the convenience and ease of shopping online and fuels, our strong and growing both this offering with those sales reflected in our retail business.
<unk> operating performance improved significantly over last year, driven by stronger sales volume and lower SG&A.
Operating income nearly doubled year over year to $33 million in the quarter versus $17 million in the prior year period.
This represented a 120 basis point increase as a percentage of sales.
A mix shift into core supplies, lower SG&A and pricing strategies helped to mitigate the increase in supply chain cost and other inflationary pressures we see.
During the quarter, we continued to move aggressively on pricing.
With Gerry David Centrella Ni performing line level customer reviews, with the business to execute strategies to pursue profitable growth.
This was enabled with our data driven approach utilizing the full cost of serve helping to meet our customers' demands and the most efficient way.
Now turning to our retail division results as shown on slide 16.
Our retail division again drove strong results in the first quarter, while reported revenue in the quarter was down 9% to $943 million. This was primarily driven by a 114 fewer retail stores in service this year versus last year related to our planned store closures.
We closed six stores in the quarter ending the quarter with 1032 stores in service when.
Eliminating the impact of store closures. We estimate sales were open stores were approximately flat with last year as our value proposition continued to resonate as we provided strong support for home office education and small business customers.
Same store traffic was lower in the quarter. However, this was largely offset with higher conversion rates and average order volumes, leading to a strong increase in sales per shopper.
We saw continued strong demand for our copy and print services up nearly 20% and increased demand in our core supply categories on a comparable store basis.
Additionally, our omnichannel presence continues to grow with strong <unk> sales in the quarter, leading to an increase in <unk> sales as a percentage of total retail sales.
On a comparable store basis, <unk> sales were up 10% over Q1 of last year and up approximately 60% from pre pandemic levels highlighting the continued strong value proposition, we are providing to our customers.
Supporting the successes, our 20 minute pickup guarantee which continues to drive strong customer demand and satisfaction.
Balancing this progress we saw lower demand for product categories related to the pandemic, including PPE and cleaning products furniture and certain technology.
Mentioned that out of stocks also added to lower sales of technology products like Pcs as well as ink during the quarter.
From an operating perspective, we delivered strong operating margin performance in the quarter. Despite the higher cost challenges, we generated approximately $89 million in the quarter down from $100 million in Q1 of last year largely related to fewer stores and service.
Operating margins were slightly over 9% of revenue nearly flat with last year as improvements in SG&A lease cost and continued cost efficiencies helped to mitigate higher product and supply chain costs.
Now briefly turning to our balance sheet highlights as shown on slide 17.
We ended the quarter with total liquidity of approximately $1 4 billion.
Consisting of $557 million in cash and cash equivalents and $874 million in availability under our asset based lending facility.
Total debt at the end of the quarter was approximately $199 million.
I would like to highlight some of the actions we took during the quarter as part of our overall capital structure and to support our efforts to enhance shareholder returns.
In the quarter, we retired approximately $43 million of the final term loan facility under the existing credit agreement.
This facility was drawn at the time, we amended our ABL a few years ago and is relatively more expensive and had strict borrowing base requirements.
As our borrowing base has changed after the sale of <unk> and as we optimized our retail store footprint.
We were able to retire $43 million of the file which will save us approximately $2 million a year in interest cost while the retirement had no impact to overall liquidity.
Additionally, as part of our efforts to enhance shareholder returns. The ASR plan, we put in place during Q4 of last year continues to be executed upon by our partner banks.
We're expecting this plan to be completed in the second quarter, which will include the delivery of additional $30 million of shares at the conclusion of the plan.
Putting this into perspective in conjunction with other share repurchases over the past 12 months, we have committed to return over $300 million in capital to investors, reflecting the confidence our board has in our business solutions and digital <unk> platform strategy, and our ability to deliver shareholder value through disciplined capital.
Yeah.
And as we move forward, while we have been excluded from buying back additional shares in the market as the ASR is being executed I would point out that we have $342 million remaining available for additional repurchases under the current stock repurchase authorization as of quarter end and we plan to work closely with our board on future capital.
<unk> strategy.
Our balance sheet continues to remain a source of strength and provides us flexibility as we pursue growth and execute our strategy.
In summary, we executed well across our strategic initiatives and drove strong results in the quarter.
Our entire team remains committed to unlocking future value by driving our digital transformation evolving our data driven <unk> platform and continuing to execute our strategic initiatives for the benefit of all our stakeholders.
As we move forward, we are focused on bringing the strategic evaluation of our consumer business to a conclusion in the near term.
Operationally our team will remain highly focused on executing across our business utilizing our data driven approach in our contract channel while delivering upon our retail plan.
We are working to complete the build out and gaining momentum in our <unk> digital platform business there.
<unk> continues to make significant progress, adding new supplier relationships and customers and expect to add to its capabilities and launched the components of the revenue flywheel as we exit this year.
And there remains focused on enhancing its supply chain and digital capabilities supporting our <unk> and <unk> businesses as well as positioning its value proposition for other third parties in the future.
From a capital deployment perspective, we will continue to take a balanced approach continuing to work with our board on the returning capital to shareholders and making strategic investments to pursue higher growth opportunities for the firm.
And regarding our outlook, while we are not providing specific guidance for 2022 at this time, we continue to anticipate annual revenue operating cash flow results to be in a range consistent with the results of the prior year on a comparable basis we.
We hope to refine our review the specific guidance elements as we conclude the BDC process and as the year progresses.
With that operator, we will turn it over for questions.
Thank you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again, if you'd like to add.
Question Press Star one please.
Please standby, while we compile the Q&A roster.
Our first question comes from Chris Mcginnis with Sidoti <unk> Company your.
Your line is open.
Good morning, Thanks for taking my questions and nice quarter.
I think if we could just start just around the kind of the terminology around near term related to the consumer business.
I know you can't put a timeline on it but can you just maybe dive into the expectations for the separation for this year.
What you mean by the change in the terminology.
I'll take separations.
Good morning, Chris.
And your family are well.
So.
From a separation perspective, we spend a ton of time and effort data controllers team does a fantastic job, we've made substantial progress making sure the company is.
Separate and able to operate.
And the units that we described the B b to C. The b to B, there nurse and so we've made incredible progress to get ready for that and so I would say that we're very very close to having that ready in regards to the transaction as I will just say that as David said and I said, we made substantial progress.
We obviously think that we're going to be completing that in the near term.
It can be.
Exactly.
Terrific.
<unk>.
That says it all.
Anthony want to give any color.
I think you're exactly right all the work that we've done obviously has prepared us where separation and given the process.
Chris Thanks for the comments.
We expect some time to for this quarter and to provide an update.
So in the very near term.
Great.
Maybe just the next question around the back office trends Omicron was present in the beginning of the quarter can you just talk about maybe the progression of the return to office and how you see exiting the quarter.
Yes, I'll start.
Let Anthony Thanks, So we've continued to see as you saw from our or our <unk> results.
Building momentum across the category as well as segments and so no it's not at the pre pandemic level.
That gap pretty rapidly.
Thank you.
In some area in some segments in fact will back up to.
Pre pandemic levels so.
We're very very pleased with the progress from the growth on that.
I think theres, a lot of upside potential as well, but we've seen huge growth in.
Turning to our adjacency categories, we're finding other ways to obviously grow the revenue of the business and I think we've made a lot of progress we mentioned it.
Very very proud Chris of what our team how we manage the costs the impact of inflation across the entire business not just <unk>.
The low cost model isn't just isn't just made.
Daily operating focus it's our flow path tool, we've developed which gives us pricing costing which we think is unique across many many.
Many industry, we have the ability to price at the SKU level. So we really have a better visibility of the P&L, we really dug in on that.
Daily basis into driving costs and driving revenue opportunities across the <unk> business. So it is not back completely.
Substantial progress substantial momentum building.
Yes, I would just add Chris we look at a few key statistics, namely weekly sales trends across end.
And market, so think of it from an industry perspective education to gerry's point closer to the pre pandemic levels and Thats really K 12, higher Ed a little bit behind that at the higher end core office supplies to think about tenant and multi tenant.
<unk> real estate still at the low end of the recovery, but the good thing is those weekly sell trends are improving across all our sectors.
So we feel really encouraged that we're starting to see some true tailwind as it relates to the back office trend.
Thanks.
Just on the inflation side of the business, obviously a host.
Or is the pressure this year than supply chain constraints I don't know is there a way to.
Thank you.
Or maybe talk about how the consumer is taking that approach.
And both maybe on the retail side and then on the commercial side of the business if you wouldn't mind.
How they're doing with the pricing.
Your position on the inventory as well would be helpful.
Yes go ahead Anthony.
Yes, I'll start and then.
Pass it back to Jerry So if you think about the installation clearly this has been a pressure point not only for ODP, but in the broader economy I think to Jerry's earlier comment we're very proud of what we've been able to accomplish starting in Q2 Q3, we started to see some supply chain disruptions as it related to Ocean freight Cup.
Coupled with our data driven approach we've been taking pricing actions early we've been working in each of our channels to see how much of the pricing actions, we can offset from the cost increases while staying competitive and that's the key element of our process.
And as I mentioned in our prepared remarks.
We have such a breadth and depth of products really allows us to price accordingly across multiple skus to really drive value to our customers and helping our customers also navigate some of these cost pressures.
We will continue to take action and pricing as well as continuing to drive the low cost model from an efficiency standpoint, and I think Q1 is a testament that we were able to navigate that pretty adept Lee in the quarter.
Great. Thank you.
And then thinking about the guidance.
Q1 was a little stronger than expected thinking.
Just thinking about the cadence for kind of the <unk>.
First of the year and your expectations for the business overall in relation to guidance.
Yes.
As it relates to guidance, obviously, the BDC transaction plays a big part in how we're looking at the full year and the timing related to that to the prepared remarks, we expect trends to continue to improve across each of our channels as we're investing in our <unk>.
Digital platform business and our supply chain business. So theres a lot of puts and takes but the biggest variable is clearly second half continuing momentum on the return to office as well as.
The b the C transaction process really coming to conclusion, there will give us some better insight into the full year that will provide the market.
Great.
And any.
Any more you can provide data or detail around various.
Just in terms of.
Their expectation to put out maybe some numbers around the offering at some point throughout this year.
Yes, I think.
Two things we had a very successful I think this is super important and I hope everyone recognizes that we had our beta which is called private premium which is really a data from a product launch perspective.
Okay.
Excuse me at the Microsoft Conference here, a couple of weeks ago and it was huge.
Success, Tom and people are superior to other partners.
And the platform, we're making progress on buyers and sellers by 'twenty. Two is really a year of launching the tech in 'twenty, one as a year of building the 'twenty twos launching an attack.
Beta was super important we appreciate the support from Microsoft.
And bluntly the success at the conference.
It seems more optimistic I would say Chris.
As we move towards the near term from a sales on the BDC perspective, or a direction one way or the other.
Once we make that conclusion and what we're going to do we're going to obviously come back with a full investor day type of approach.
Yes.
Either.
Here's the sale or spin.
Or whatever we do plus.
The remaining pieces, we've talked about the <unk>.
Apply chain business to various business and then obviously that the.
The <unk> business as well and so I would say once we get through a determination one way or the other what happens from a BDC perspective will come out more details from a <unk> perspective.
Super pleased and happy with what we did from a.
Our soft launch perspective.
Sorry, Chris and team did a great job Daniel did a great job.
Hum.
Getting the product ready in launching.
Pilot customers on so we're very pleased with that.
Yes. It was just that we are reviewing our segment reporting in light of Jerry's comments around the whole process. So thats something that this process, we undertook because afforded the opportunity to take a look at our routes to market.
And we're considering our segment reporting as a result of that process.
Great really appreciate it.
Thanks for taking the time today.
And good luck in Q2.
Thanks, Craig.
Thank you Chris.
Thank you and I am showing no further questions in the queue I would like to turn the call back to Gerry Smith for any closing remarks.
Thank you for everyone for joining us on the call today I want to thank personally thank my team.
The whole organization for an outstanding quarter.
Be more pleased with the economic conditions in the marketplace and some of the challenge that other companies have had how we rose up and beat expectations across earnings per share as well as revenue.
Did a great job of driving our low cost model really going into detail in growing our <unk> business again.
Super pleased with that progress as well as <unk>.
<unk> culture of our business as well.
That's a testament of the team and the leadership across the country company in the support of our board. So we will continue to focus on the near term.
BDC perspective, as well as continuing to build out the future.
High growth high value areas of the business, whether it's bare various and continue to expand our <unk>.
<unk> systems as well.
And thank you team and thank you everyone for joining the call today.
Okay.
Thank you for your participation. This concludes today's call you may now disconnect everyone have a great day.
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