Q2 2024 The ODP Corp Earnings Call
Good morning and welcome to the ODP Corporation's second quarter 2024 earnings conference call.
Operator: All lines will be in a listen-only mode for today's call, after which instructions will be given to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations, and Treasurer. Mr. Perrott, you may now begin.
Speaker Change: All lines will be on a listen-only mode for today's call, after which instructions will be given to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations and Treasurer. Mr. Perrott, you may now begin.
Timothy Perrott: Good morning, and thank you for joining us for the ODP Corporation's second quarter 2024 earnings conference. This is Tim Perrott, and I'm here with Gerry Smith, our CEO, and Anthony Scaglione, our Executive Vice President and CFO.
Speaker Change: This is Tim Perrott, and I'm here with Gerry Smith, our CEO , and Anthony Scaglione, our Executive Vice President and CFO .
Timothy Perrott: During today's call, Gerry will provide an update on the business, focusing much of his commentary on our results and accomplishments for the second quarter of 2024, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Gerry's commentary, Anthony will then review the company's second quarter financial results, including highlights of our divisional performance. Following Anthony's comments, we will open up the line for questions.
Timothy Perrott: Before I begin, I'd 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 is contained in the company's filings with the U.S. Securities and Exchange Commission.
Speaker Change: 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.
Timothy Perrott: 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-Gap Financial Measures to the Most Directly Comparable Gap Financial Measures are all available on our website at investor.theodpcorp.com. Today's call and slide presentation is being simulcast on I'll now turn the call over to Gerry. Gerry?
Speaker Change: During the call, we will use some non-GAAP financial measures as we describe business performance.
Speaker Change: the SEC filings, as well as the earnings press release, presentation slides that accompany today's comments, and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor.theodpcorp.com
Gerry Smith: Thank you, Tim, and good morning to everyone joining our call today. We appreciate you being here with us to discuss our results for the second quarter of 2020, as well as to provide insight into our progress on the initiatives we are taking to improve business performance going forward. As you can see in the press release that we issued this morning, our performance in the quarter was below our expectations. We are disappointed in this performance and view this as unacceptable.
Speaker Change: Thank you, Tim, and good morning to everyone joining our call today. We appreciate you being here with us to discuss our results for the second quarter of 2024, as well as to provide insight into our progress on the initiatives we are taking to improve business performance going forward.
Speaker Change: As you can see in the press release that we issued this morning, our performance in the quarter was below our expectations.
Gerry Smith: We have faced ongoing macroeconomic headwinds in a challenging business environment, which have reduced the level of corporate and personal spending, impacting our ability to gain top-line traction back to the level we were expecting. That said, we put into motion many initiatives based on our learnings in the quarter and first half of the year to improve traction on our top line and strengthen our foundation, and position us to drive greater revenue velocity as we exit 2020.
Speaker Change: That said, we put into motion many initiatives based on our learnings in the quarter and first half of the year to improve traction on our top line and strengthen our foundation and position us to drive greater revenue velocity as we exit 2024.
Gerry Smith: We are already beginning to see the green shoots of these efforts, which ultimately can change the trajectory for our business. This includes a number of significant opportunities at ODP Business Solutions and there that we're working hard to realize in 2024, which can improve our top line exit velocity to build incremental success in 2025. Although early, some of these bright spots can be seen at Bayer, as the investments that we have made are positioning Bayer to accelerate opportunities with third parties.
Speaker Change: We are already beginning to see the green shoots of these efforts, which ultimately can change the trajectory for our business.
Speaker Change: This includes a number of significant opportunities at ODP Business Solutions and there that we're working hard to realize in 2024 which can improve our top-line exit velocity to build incremental success in 2025.
Gerry Smith: Additionally, with the exit of Veris and our strong focus on capital allocation and shareholder return, we are reprioritizing our growth investments around our core business, balancing that against the continued return of capital to shareholders in the form of buyback. We've also spent considerable time with our board on strategic growth initiatives while continuing to drive our 5C culture and our low-cost business model, which has driven our success in the past. Our board's focus is on strategically transforming our top-line growth trajectory in our core business.
Speaker Change: We've also spent considerable time with our board on strategic growth initiatives while continuing to drive our 5C culture and our low-cost business model, which has driven our success in the past.
Speaker Change: Our board's focus is on strategically transforming our top-line growth trajectory in our core business.
Gerry Smith: In one of these focus areas, we're driving a business transformation in AI process focus across the entire enterprise to capture productivity opportunities to help fuel future growth and additional capital allocation opportunities, as well as other challenges related to customer onboarding and conversion. In our B2B business, ODP Business Solutions, enterprise spending levels remain highly constrained, and the impacts of reductions in force, along with customers taking longer than normal to switch suppliers, have impacted our top-line results.
Speaker Change: In one of these focus areas, we are driving a business transformation in AI process focus across the entire enterprise to capture productivity opportunities to help fuel future growth and additional capital allocation opportunities.
Speaker Change: Let me provide additional context of our performance in the quarter as shown on slide 4 of our presentation.
Speaker Change: In our B2B business, ODP Business Solutions, enterprise spending levels remain highly constrained and the impacts of reductions in force, along with customers taking longer than normal to switch suppliers, impacted our top-line results.
Gerry Smith: I will provide more details on our initiatives later in the call. In fact, we are currently working to close on a significant trajectory-changing opportunity at VEHR, and we look forward to telling you more about this in the near future. Next, our balance sheet and liquidity position continue to be sources of strength, allowing us the flexibility to invest in our core business and return capital. Moving forward, we will continue to balance our capital allocation strategy, remaining mindful of market conditions and business performance.
Speaker Change: In our B2C channel, Office Depot, while we did see top line trends improve sequentially,
Speaker Change: Consumer traffic and demand were lower in the period compared to last year.
Speaker Change: Again, impacted by weaker macroeconomic factors, causing sluggish consumer activity, including customers being more discerning in product price points and selection. This, along with the year-over-year impact of store closures, results in lower revenue compared to last year.
Speaker Change: VERR has a unique asset base that provides a competitive advantage in the marketplace.
Speaker Change: In fact, we are currently working to close on a significant trajectory-changing opportunity at VEHR, and we look forward to telling you more about this in the near future.
Speaker Change: Let me be clear, while our overall top line performance was disappointing and we are pacing below our previous expectations, we are not standing still.
Speaker Change: solid balance sheet, 5C culture, low-cost business model, and flexible foundation drive growth and future earnings.
Gerry Smith: Next, we made tremendous progress under Project CORE, our enterprise-wide initiative that further streamlines our operations and sharpens our core focus. We've remained laser focused on continuous improvements across the business to leverage our foundation to deliver future EBITDA and free cash flow growth. As I mentioned earlier, in our big five initiatives, we've embarked on a business process and AI transformation that we're confident will position us to generate significant growth and savings in the future.
Speaker Change: We've remained laser focused on continuous improvements across the business to leverage our foundation to deliver future EBITDA and free cash flow growth.
Speaker Change: These savings are being achieved through cost-efficiency measures across the entire enterprise, including our organizational structure, supply chain, and cost-of-goods sold savings through further efficiencies.
Gerry Smith: Additionally, we're encouraged by the comprehensive strategic review of potential growth initiatives that we have undertaken with our board and are optimistic about our business in the future. In light of the challenging macroeconomic environment and our weaker than expected performance in the first half of the year, we are lowering our outlook for the year while also taking the steps necessary to improve our performance and foundation to regain growth. The well-publicized corporate layoffs that have occurred over the last year have added to this challenge, along with a general pause in the pace of return-to-office mandates.
Speaker Change: We will announce further details of the transaction upon close which we expect to be completed in Q3. Lastly, I'd like to comment on our guidance for 2024.
Speaker Change: In light of the challenging macroeconomic environment and our weaker than expected performance in the first half of the year, we are lowering our outlook for the year while also taking the steps necessary to improve our performance and foundation to regain growth.
Speaker Change: These opportunities have the potential to significantly change the trajectory of our business in late 2024 and beyond.
Anthony Scaglione: Anthony will have additional details about our revised guidance for the year later on the call. Now beginning on slide 5, I'd like to provide additional insight into the performance of our business units including our initiatives to improve performance starting with our B2B business ODP business solutions.
Anthony Scaglione: It was a clearly challenging quarter and first half of the year for Business Solutions. A number of factors occurring simultaneously created headwinds in our ability to regain top-line traction.
Anthony Scaglione: We've already mentioned the weaker macroeconomic environment, which remained a challenge and has led to more restrictive budgets and spending levels among our customers. The well-publicized corporate layoffs that have occurred over the last year have added it to this challenge, along with a general pause in the pace of return to office mandates.
Anthony Scaglione: I use the word currently because these spending levels tend to be cyclical and I believe we are near the lower end of this cycle, but it is taking some time for this to turn around.
Anthony Scaglione: Additionally, certain government funded programs supporting tech and supply resources for public entities, previously strong in 2022 and 23, have yet to be fully released in 2024, causing additional headwinds in certain categories of sales, namely technology products.
Gerry Smith: In light of these challenges, we're taking actions to address them. These include executing weekly high-priority pipeline and customer reviews. This is similar to contract profitability reviews we executed in Fiscal 22 that led to margin improvements. We expect this process will lead to improved sales over time. Also, we have recently redesigned our go-to-market strategy in our B2B business over the past year, improving our position for future growth. We are also leaning into category expansion in certain areas, such as Janssen Select MRO, packaging, and interior finishings, all aligned with our Power One initiative, which I will describe in just a minute.
Anthony Scaglione: These include executing weekly high-priority pipeline and customer reviews. This is similar to contract profitability reviews we executed in Fiscal 22 that led to margin improvements. We expect this process will lead to improved sales over time.
Anthony Scaglione: creating targeted incentives and implementing extensive sales training to drive higher conversion to help drive sales and capture new wins. We're also aggressively pursuing opportunities in industries where a high-touch service model creates a competitive advantage like in hospitality.
Gerry Smith: Lastly, we have a number of trajectory-changing opportunities that are in the works, and we are driving to close those as quickly as possible. As an excellent example, we recently were awarded a sizable order for stand-alone air conditioning units for a government entity, something that is not top of mind when you think of our business, but it showcases the trust customers have in our capabilities to source, deliver, and support a variety of products and services to meet customer needs. The revenue decline was driven by a combination of fewer stores in service compared to last year and lower in-store and online traffic and demand.
Anthony Scaglione: Along with these efforts, we have implemented an initiative we call the Power of One, which is the ability to add value to customers through an offering one more product or suite of products to help them succeed.
Anthony Scaglione: As an excellent example, we recently were awarded a sizable order for stand-alone air conditioning units.
Anthony Scaglione: for a government entity, something that is not top of mind when you think of our business, but it showcases the trust customers have in our capabilities to source, deliver, and solution a variety of products and services to meet customer needs.
Anthony Scaglione: All these initiatives are helping us address the challenges and position us to build strong revenue velocity as we work through the back half of the year into 2025.
Anthony Scaglione: We are already seeing the benefits of our actions as more and more opportunities are coming into our late stage pipeline and we are working hard to convert these into revenue.
Anthony Scaglione: We're also enthusiastic about the expanding portfolio of products and services we are launching that are beginning to show early signs of progress. That said, until we have these opportunities fully converted, we're not baking these into our outlook for the year.
Anthony Scaglione: So overall, despite the challenges, we remain confident in the future, supported by our committed team, focused on driving operational excellence, and we're excited about the opportunities before us that can change our trajectory of the business in late 2024 and into 2025.
Anthony Scaglione: Next up is Office Depot, our omni-channel consumer business that provides a strong value proposition to small business, education, and home office customers.
Anthony Scaglione: Although we did see improving overall revenue trends on a sequential basis, Q2 proved to be another challenging quarter for Office Depot. Again, the weaker macroeconomic environment continued to impact the level of consumer activity market-wide, both in our business and for many others in the retail industry.
Anthony Scaglione: The revenue decline was driven by a combination of fewer stores and servers compared to last year and from lower in-store and online traffic and demand.
Anthony Scaglione: The weaker economy moderated the pace of consumer spending and impacted overall demand.
Gerry Smith: General supplies, furniture, and printing services were all down compared to last year, and the expected recovery in our technology categories, while improving, has yet to materialize at the levels expected. That said, with the acceleration of AI and the increasing need for computing power, as well as the new Windows release, we expect growth for the anticipated PC refresh in the second half of the year, supporting sales, some of which I will cover now.
Anthony Scaglione: Some of which I will cover now.
Anthony Scaglione: We've also set early for the back-to-school season, and we've been executed on our Education 365 initiative, which involves both our B2B and our omni-channel business, and is an integrated year-round approach to improve our reach and better serve teachers, students, parents, and school systems.
Gerry Smith: This includes investments being made to launch new capabilities, including expanding our offerings with dedicated landing pages for school supply lists, allowing parents to quickly download and access their children's school supply lists created by their specific teacher. We've also launched our classroom wish list capability, allowing teachers to create a customized wish list of any of the multitude of items available at officedepot.com, making it easy for parents to support their classroom.
Anthony Scaglione: This includes investments being made to launch new capabilities, including expanding our offerings with dedicated landing pages for school supply lists, allowing parents to quickly download and access their children's school supplies lists created by their specific teacher.
Anthony Scaglione: We've also launched our Classroom Wish List capability, allowing teachers to create a customized wish list of any of the multitude of items available at OfficeDepot.com, making it easy for parents to support their classroom.
Gerry Smith: In addition, we remain committed to our strong 5C culture, giving back to the communities we serve. We've also continued to leverage partnerships with other companies, something we spoke about last year, expanding our value proposition with our customers. This included test and learn pilots and leaning into new product categories and service offerings, including expanding our TSA signup service and passport photo service.
Anthony Scaglione: We've also continued to leverage partnerships with other companies, something we spoke about last year, expanding our value proposition with our customers.
Anthony Scaglione: This included test and learn pilots and leaning into new product categories and service offerings, including expanding our TSA sign-up service and passport photo services.
Anthony Scaglione: We have over 70 stores live for TSA sign-up services. Expect this to climb to over 125 by the end of the third quarter.
Anthony Scaglione: Additionally, our celebrations in dorm room product category expansion is beginning to receive positive recognition as a greater number of customers realize that OD Does It, the theme of our new marketing outreach campaign, showcases all we can offer.
Gerry Smith: We're also evaluating other partnerships that can bring innovative products and services to stores. Now turning to our continued progress and momentum at Bayer. VEHR, our supply chain services and logistics provider, continued its strong performance and momentum in the quarter.
Anthony Scaglione: We are also evaluating other partnerships that can bring innovative products and services in store. Overall, we remain encouraged by the potential of all these efforts and our expected positive impact to sales in the future.
Speaker Change: Now turning to our continued progress and momentum at VERA.
Speaker Change: VEHR, our supply chain services and logistics provider, continued strong performance and momentum in the quarter. As I pointed out on previous calls, our progress with external third-party customers is one of the key areas of focus to assess VEHR's success and value creation.
Gerry Smith: As I pointed out on previous calls, our progress with external third-party customers is one of the key areas of focus to assess VEHR's success and value creation. Vera continues to make strong progress efficiently providing service for its internal customers while continuing to grow its business for third-party customers. And as I mentioned earlier, Bayer's extensive expertise in servicing over 98.5% of the U.S. ZIP Codes with Next Business Day service, along with their unique intellectual property, places them in a strong position to capture sizable new opportunities.
Speaker Change: And as I mentioned earlier, Bayer's extensive expertise in servicing over 98.5% of the U.S. ZIP Codes with Next Business Day service, along with their unique intellectual property, places them in a strong position to capture sizable new opportunities.
Gerry Smith: In the quarter, Bayer continued to add new external customers to its portfolio of business, including some of the world's most renowned brands and drove strong EBITDA growth from third-party customers. In fact, EBITDA from third-party customers increased 17% year-over-year.
Gerry Smith: Vera has made tremendous progress and continues to build upon its go-to-market service capabilities as it executes its modernization roadmap, adding additional functionality and information systems that run the business. So overall, we are very encouraged by Avera's continued strong progress and how this positions ODP to drive profitable growth in the future. Before I turn the call over to Anthony, I want to emphasize that we are enthusiastic about the future. As I mentioned, the strategy sessions we held with our board are positioning us to realign, improve the framework by which we can pursue top-line growth opportunities, and continue to leverage our amazing foundation.
Speaker Change: Bayer is also deploying a Gartner Magic Quadrant level tech stack by partnering with world-class tech companies, along with internal development, to help further improve service levels, manage our business, and provide the flexibility necessary to deliver services to external third parties more effectively.
Speaker Change: So overall, we are very encouraged by Avera's continued strong progress and how this positions ODP to drive profitable growth in the future.
Gerry Smith: We are executing on five key short-term growth and profitability projects on an accelerated basis with extensive weekly reviews. This includes business process transformation driven through AI and process mapping efforts, which we expect will yield significant profitability and growth engine opportunities in the years ahead. I personally recognize the near-term challenges, but myself, along with my leadership team, and the whole enterprise, remain committed as a team to driving our business forward. With the early signs of progress from the big five business process initiatives, which include driving AI to create additional growth and efficiency opportunities, as well as the large opportunities before us in Vera and ODP business solutions, we're optimistic about growth in the future, particularly as we exit this year with better velocity for 2025 and beyond.
Speaker Change: This includes the business process transformation driven through AI and process mapping effort which we expect will yield significant profitability and growth engine opportunities in the years ahead.
Speaker Change: We're optimistic about the growth in the future, particularly as we exit this year with better velocity for 2025 and beyond.
Anthony Scaglione: Echoing Gerry's comments, while it has been a tough quarter and first half of the year, we remain confident about the future of our business. We have a strong platform with a diverse customer base, multiple routes to market, a strong balance sheet, and a team that focuses every day on driving operational excellence. Additionally, while it is early, we are beginning to see progress from the initiatives we have put in place to regain stronger top-line traction in the long run.
Speaker Change: We have a strong platform with a diverse customer base, multiple routes to market, strong balance sheet, and a team that focuses every day on driving operational excellence.
Anthony Scaglione: As Gerry mentioned, a few of these could be trajectory changers for our business. While we haven't built much of this into our outlook for the balance of the year, we do believe this further strengthens our foundation for increased revenue velocity as we close out 2024 and look forward. Now let me turn to the specifics of our results for the second quarter on slide 9. Please note that our results, as presented, are for continuing operations.
Speaker Change: As Gerry mentioned, a few of these could be trajectory changers for our business. While we haven't built much of this into our outlook for the balance of the year, we do believe this further strengthens our foundation for increased revenue velocity as we close out 2024 and look forward.
Anthony Scaglione: We generated total revenue of $1.7 billion in the quarter, which was down about 10% compared to last year's second quarter. This was primarily driven by lower sales in Office Depot, including the effect of 58 fewer stores in service compared to last year, as well as lower sales in ODP Business Solutions. Gap operating income in the quarter was only slightly positive. These results included $33 million of charges, of which $25 million were related to net merger and restructuring expenses stemming from project core activities, and $8 million of non-cash asset impairments primarily related to the operating lease right-of-use assets associated with our retail store location. Unallocated corporate expenses were $18 million in Q2.
Anthony Scaglione: Adjusted EBITDA was $57 million in the quarter, compared to $95 million in last year's second quarter. This includes depreciation and amortization expense of $24 million and $25 million in the second quarters of 2024 and 2023, respectively. In the quarter, both GAAP operating income and adjusted net income were positively impacted by the reversal of certain incentive-based compensation programs that are projected to no longer be met for fiscal 2024. Turning to cash flow, I would point out that the second quarter is typically our lowest quarter for cash flow generation as it tends to be a slower sales cycle and, at the same time, we are settling inventory in advance of our back-to-school selling season
Anthony Scaglione: In the quarter, operating cash flow was slightly negative, down primarily due to the flow-through impact of lower sales and timing related to working capital as we invested in inventory. Capital expenditures in the quarter were $19 million versus $17 million in the prior year period. Adjusted free cash flow in the quarter was $5 million.
Speaker Change: Unallocated corporate expenses were $18 million in Q2.
Speaker Change: In the quarter, both GAAP operating income and adjusted net income were positively impacted by the reversal of certain incentive-based compensation programs that are projected to no longer be met for fiscal 2024.
Speaker Change: Capital expenditures in the quarter were $19 million versus $17 million in the prior year period.
Anthony Scaglione: While we recognize we have had a slower first half of the year, as we have proven in the past, our teams remain focused on managing the variables of cash flows to reach our goals for the year. Now, turning to our results in our B2B distribution division on slide 10. As Gerry mentioned, ODT Business Solutions had a tough quarter as challenging macroeconomic and business conditions, including more cautious enterprise spending, ongoing delays in the onboarding of new customers, and customer losses, impacted our ability to regain stronger top-line traction in the quarter.
Speaker Change: Adjusted free cash flow in the quarter was $5 million. While we recognize we have had a slower first half of the year, as we have proven in the past, our teams remain focused on managing the variables of cash flows to reach our goals for the year.
Speaker Change: Now, turning to our results in our B2B Distribution Division on slide 10.
Speaker Change: As Gerry mentioned, ODP Business Solutions had a tough quarter as challenging macroeconomic and business conditions, including more cautious enterprise spending, ongoing delays in the onboarding of new customers, and customer losses impacted our ability to regain stronger top-line traction in the quarter.
Anthony Scaglione: Revenue was $917 million in the second quarter, which was down about 8% compared to last year. Given the soft economic climate affecting the entire industry, business spending has been lower, driven by enterprise budget constraints as well as the impact of corporate layoffs.
Speaker Change: Revenue was $917 million in the second quarter, which was down about 8% compared to last year.
Speaker Change: Given the soft economic climate affecting the entire industry, business spending has been lower, driven by enterprise budget constraints, as well as the impact of corporate layoffs.
Anthony Scaglione: With the effects of inflation over the past two years and customers looking for relief across their expense categories, we have seen a competitive environment that was more intense combined with delays in onboarding new customers, including certain prospective wins that failed to materialize as we had previously anticipated, all of which impact our outlook for the full year. Breaking down our sales further, our adjacency product categories as a percentage of total revenue, a KPI for ODP Business Solutions, were 43% in the quarter, consistent with recent trends.
Speaker Change: With the effects of inflation over the past two years and customers looking for relief across their expense categories, we have seen a competitive environment that was more intense combined with delays in onboarding new customers, including certain prospective wins that failed to materialize as we had previously anticipated.
Speaker Change: Lower sales of larger ticket items in our furniture category also contributed to the softer top line.
Speaker Change: Breaking down our sales further, our adjacency product categories as a percentage of total revenue, a KPI for ODP Business Solutions was 43% in the quarter, consistent with recent trends.
Anthony Scaglione: From an operating perspective, the flow-through effect of lower revenues resulted in an operating income of $29 million in the quarter compared to $45 million in the prior year period. EBITDA margins were just approximately 4% in the quarter, down year over year.
Speaker Change: From an operating perspective, the flow-through effect of lower revenues resulted in an operating income of $29 million in the quarter compared to $45 million in the prior year period. EBITDA margins were just approximately 4% in the quarter, down year over year.
Anthony Scaglione: While we are disappointed with our performance in the quarter and slower first half, we remain encouraged as we execute on our initiatives, leveraging our strong competitive position, compelling customer offerings, and highly capable sales force. Now turning to our results in our Consumer Division, Office Depot, as shown on slide 11. This was compounded by fewer stores in service. Reported revenue for the quarter stood at about $800 million, a 12% decline, driven by 58 fewer retail stores in service versus last year, as well as lower traffic and transactions in both our retail and e-commerce channels. Demand was lower across most categories, including supplies and furniture.
Speaker Change: While we are disappointed with our performance in the quarter and slower first half, we remain encouraged as we execute on our initiatives, leveraging our strong competitive position, compelling customer offerings, and highly capable sales force.
Speaker Change: Despite the near-term headwinds, we remain in a position of strength to work with our customers across multiple dimensions to drive our value proposition, giving us confidence in our foundation to drive improved future results.
Speaker Change: In the second quarter, while showing improvements sequentially, Office Depot's top line continued to be challenged as the slowing economy and inflation impacted the pace of spending.
Speaker Change: This was compounded by fewer stores in service.
Speaker Change: Reported revenue for the quarter stood at about $800 million, a 12% decline, driven by 58 fewer retail stores in service versus last year, as well as lower traffic and transactions in both our retail and e-commerce channels.
Anthony Scaglione: On a comparable store basis, sales were down about 6.5% as lower retail and online traffic and transactions outweighed higher conversions. In all, we remain focused on continuing to drive this cash engine going forward. Now turning to VEAR's performance, as shown on slide 12. VEAR, our comprehensive supply chain services and logistics provider, continued to drive strong momentum in the quarter, managing lower volumes from its internal customers, ODP Business Solutions, and Office Depot, while continuing to build its momentum and capabilities, driving EBITDA growth from external third-party customers.
Speaker Change: Demand was lower across most categories, including supplies and furniture. On a comparable store basis, sales were down about 6.5%, as lower retail and online traffic and transactions outweighed higher conversion.
Speaker Change: From an operating perspective, operating income was $17 million in the quarter, impacted by the flow-through effect of lower revenue performance.
Speaker Change: Moving forward, we are continuing to optimize the store footprint and expanding our value proposition through a multitude of partnerships, while remaining focused on driving operational excellence throughout the organization.
Speaker Change: We are also leveraging our one ODP approach to our education customers through education 365 Which we anticipate will improve our position moving forward and we are set and engaged for the back-to-school season
Speaker Change: We have implemented our new digital school list tool for teachers and parents and recently launched a partnership with Dormify, and while early, we expect this will help build greater traction for school needs in the future.
Speaker Change: We are also excited about our expanding TSA sign-up program in our stores, where we are beginning to see stronger traffic trends in the locations that we have launched. We have over 65 stores launched with plans to grow to over 125 active stores in the next few months.
Speaker Change: In all, we remain focused on continuing to drive this cash engine going forward.
Anthony Scaglione: On a consolidated basis, VEARS delivered sales of approximately $1.2 billion, derived predominantly from supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation. A key attribute to assessing its success, VEIR continued to make strong progress with external third-party customers, continuing to attract new external customer logos and providing service for some of the nation's most renowned brands. This is impressive given that we are still in the early stages of getting the word out about Bayer's value proposition of providing high-quality, low-cost supply chain and procurement services across our nationwide network and global sourcing capabilities. For Q2, they delivered third-party revenue of $10 million. But most importantly, from a bottom-line perspective, Veyr drove a 17% increase in EBITDA from third-party customers, delivering third-party EBITDA of $4 million in the quarter. Now, turning to Veris,
Speaker Change: Now turning to VAERS performance as shown on slide 12.
Speaker Change: There, our comprehensive supply chain services and logistics provider continue to drive strong momentum in the quarter, managing the lower volumes from its internal customers, ODP Business Solutions and Office Depot, while continuing to build its momentum and capabilities, driving EBITDA growth from external, third-party customers.
Speaker Change: On a consolidated basis, VEARS delivered sales of approximately $1.2 billion, derived predominantly from supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation.
Speaker Change: A key attribute to assessing its success, Vayor continued to make strong progress with external third-party customers, continuing to attract new external customer logos and providing service for some of the nation's most renowned brands.
Speaker Change: This is impressive given that we are still in the early stages of getting the word out about Bayer's value proposition of providing high-quality, low-cost supply chain and procurement services across our nationwide network and global sourcing capability.
Speaker Change: Keep in mind that some of VEIR's third-party profitability is accounted for as a contract expense instead of flowing through revenue. For Q2, VEIR delivered third-party revenue of $10 million.
Speaker Change: But most importantly, from a bottom line perspective, Vayor drove a 17% increase in EBITDA from third party customers, delivering third party EBITDA of $4 million in the quarter.
Speaker Change: As Gerry mentioned, we are evaluating a few significant opportunities with additional world-renowned third-party customers.
Gerry: Vayer's capabilities are built off of decades of investments we have made and our ability to source, stock, pick and deliver is a strategic asset that we are just beginning to harness externally. It is evident that through Vayer's capabilities and compelling value proposition, we are winning new customers and the future is bright in this higher multiple business.
Anthony Scaglione: As you know, last quarter, our Board of Directors approved a plan to pursue a sale of Veris, and from an accounting standpoint, Veris is now classified as a discontinued operation. As we announced today, after a thorough process involving both strategic and financial acquirers, we have entered into a non-binding term sheet agreement with a third-party financial sponsor for the sale of Verit. Under the proposed terms, ODP would retain an approximately 20% current stake in the entity. The total debt was $183,000.
Speaker Change: Now turning to Veris. As you know, last quarter our Board of Directors approved a plan to pursue a sale of Veris and from an accounting standpoint, Veris is now classified as a discontinued operation.
Speaker Change: As we announced today, after a thorough process involving both strategic and financial acquirers, we have entered into a non-binding term sheet agreement with a third-party financial sponsor for the sale of Veris.
Speaker Change: Under the proposed terms, ODP would retain an approximately 20% current stake in the entity. We expect to announce further details of the proposed transaction upon close, which we expect to be completed in Q3.
Speaker Change: Now, briefly turning to our balance sheet highlights as shown on slide 14.
Speaker Change: Our balance sheet and liquidity position remain strong, ending the quarter with total liquidity of $831 million, consisting of $190 million in cash and cash equivalents, including $10 million that is presented in current assets held for sale related to the Veris division.
Speaker Change: and $641 million of available credit under the fourth amended credit agreement. Total debt was $183 million.
Speaker Change: I am happy to report that during the quarter, we renewed and extended our existing ABL credit facility with a new five-year agreement, extending the maturity date to May 2029.
Speaker Change: This new $800 million facility includes certain more attractive credit terms and conditions, enhancing our balance sheet and liquidity position to support our future growth. I'd like to thank the entire Treasury team, led by Tim, on a successful renewal.
Speaker Change: Moving on to capital allocation, we continue to execute our capital allocation strategy, both investing in the future of our business while returning capital to shareholders under our buyback authorization. In the second quarter and to date, we repurchased over $140 million of our stock and a total of over $190 million for the year.
Anthony Scaglione: Moving forward, we will continue to balance our capital allocation strategy, remaining mindful of market conditions and business performance as we continue to drive our low-cost business model through Project Core. As a result of our first half performance, along with the continuing challenging macroeconomic environment and lower than anticipated sales pipeline conversion at ODP Business Solutions, we are lowering our outlook for the full year. We are updating our 2024 guidance as follows. Given our slower top-line performance in the first half of the year, we are now expecting revenues of at least $7 billion for 2024.
Speaker Change: As a result of our first half performance, along with the continuing challenging macroeconomic environment and lower than anticipated sales pipeline conversion at ODP Business Solutions, we are lowering our outlook for the full year.
Speaker Change: Given our slower top-line performance in the first half of the year, we are now expecting revenues of at least $7 billion for 2024.
Anthony Scaglione: Considering the flow-through effect of our revenue guidance, we are lowering our adjusted EBITDA outlook to a range of $310 million to $350 million. We are also lowering our adjusted operating income to a range of $200 to $240 million and adjusted earnings per share to a range of $4.25 to $5 per share. And finally, we expect our Adjusted Free Cash Flow generation to be approximately $200 million for the year.
Speaker Change: Considering the flow-through effect of our revenue guidance, we are lowering our adjusted EBITDA outlook to a range of $310 million to $350 million.
Anthony Scaglione: Our revised guidance considers that some of the top line challenges persist in the near term and the macro stays relatively consistent with the first half of the year. Additionally, although we are excited about the current prospects for both VEIR and ODP business solutions, leveraging the power of one, we did not incorporate any material impact of new wins in our outlook at this time. Furthermore, our operating income and EPS guidance takes into consideration the impact of the reversal of certain full-year incentive programs that are not projected to be met this year.
Speaker Change: Furthermore, our operating income and EPS guidance takes into consideration the impact of the reversal of certain full-year incentive programs that are not projected to be met this year.
Anthony Scaglione: In summary, notwithstanding our performance in the first half of the year and the macro challenges we faced, we believe we are on the right path to drive stronger traction on our top line and deliver improved performance in the long run. With that, Operator, we will now take questions.
Speaker Change: In summary, notwithstanding our performance in the first half of the year and the macro challenges we faced, we believe we are on the right path to drive stronger traction on our top line and deliver improved performance in the long run.
Operator: Certainly. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. And our first question will come from Greg Burns of Sidoti. Your line is open, Greg.
Speaker Change: And our first question will come from Greg Burns of Sidoti. Your line is open, Greg.
Greg Burns: Morning. I just have a couple questions about the conversion rates at Solutions. What has been the delay in some of the enterprise customers that you announced as having won maybe a couple of quarters ago? Has the delay in rolling them out been on your end? Have you had an issue there, or has it been customer related? Then also, could you give us maybe a little bit more color on the customer that you lost? Was that an existing customer, a pipeline customer, and is there any risk of?
Greg Burns: Morning, I just have a couple questions around the conversion rates at Solutions. What has been the delay in some of the
Greg Burns: Maybe further for the loss out of the pipeline. And then, I guess, lastly, could you just give us, given what's been going on over the last couple of quarters there with the execution, what gives you confidence in the pipeline that you see for the back half of the year and your ability to convert against that?
Greg Burns: maybe further for the loss out of the pipeline and then I guess lastly could you just give us given what's been going on over the last couple of quarters there with the execution you know what gives you confidence
Anthony Scaglione: Very great. Maybe I'll start and then Gerry can add on. So right now, I think what we're seeing, broadly speaking, is customers being more cautious across the portfolio, and that's impacted our top line and delayed onboarding for a variety of reasons. Prioritizations, organizations going through their own respective restructurings, all the things that you can imagine delay the focus on onboarding and switching providers. And frankly, you know, we've had a few wins get pulled, meaning customers reprioritized and stayed with the incumbent.
Speaker Change: All right, Greg, maybe I'll start, and then Gerry could add on. So right now, I think what we're seeing, broadly speaking, is customers being more cautious across the portfolio, and that's impacted our top line and delayed the onboarding for a variety of reasons, prioritizations, organizations going through their own respective restructurings.
Anthony Scaglione: Now typically, that's going to happen on both ends where we win, sometimes we lose, and there's delays in how that occurs in the quarter. We've just seen a concentrated effort in the first half of this year with that level of delay happening. We've been focused, as we mentioned, on preparing remarks for weekly deal reviews. We're leaning in strategically. We're looking at adjacency, power of one contributions. We're seeing some green shoots, so we're really excited about early signs around how this could change its trajectory going forward. But our guidance, as implied, assumes a continued conservative view as it relates to the overall macroeconomic environment. Yeah, I'll just add on. Again, we're focused.
Speaker Change: early signs around how this could change its trajectory going forward, but our guidance, as implied, assumes, you know, a continued conservative view as it relates to the overall macroeconomic environment.
Gerry Smith: Yeah, I'll just add, again, we're focused, Greg, really hard on Dave and his team on some of these trajectory-changing deals. Those take time.
Gerry: Yeah, I'll just add on. Again, we're focused, Greg, really hard on Dave and his team on some of these trajectory changing deals.
Gerry Smith: They obviously have taken longer than we hoped for, but we have confidence that we're going to be able to change those. From a VERA perspective... We have a verbal agreement that was just awarded, literally, about 30 to 40 minutes ago, that will, out of the gate, have the potential to almost double VEAR's top line from the prior year. So I'll say that again so everyone hears that.
Speaker Change: Those take time, obviously they've taken longer than we hoped for, but we have confidence that we're going to be able to change those. From a VERA perspective,
Speaker Change: We have a verbal agreement that was just awarded literally about 30 to 40 minutes ago.
Speaker Change: out of the gate has the potential to almost double.
Gerry Smith: This is a trajectory pivot for the business overall and for VEAR. But we've signed a verbal deal with a large e-commerce company for a warehouse and supply chain service deal that, again, has the potential to be almost double the previous year's revenue level, which is very, very significant. And that deal will be implemented in the very near future, in Q3.
Speaker Change: the business overall and for VERA, but...
Speaker Change: verbal deals with a large e-commerce company for a
Speaker Change: a warehouse and supply chain providing deal that is, again, has the potential to be almost double last, you know, the previous year's revenue level.
Gerry Smith: We're hiring. We're ramping up. It's real, and we're super excited about that. And that obviously could lead to a ton of potential in the future as we execute that across the business. So we're hoping to get some of the trajectory changers in earlier. But that's – I'm super excited about that because that is a significant opportunity for us as a business, an affirmation of our third horizon. And lastly, I'll just say we spent a ton of time with the board, as I said in my scripts.
Speaker Change: We're hiring, we're ramping up.
Speaker Change: It's real and we're super excited by that and that obviously could lead to a ton of potential.
Gerry Smith: We are investing in a number of growth areas, and we're going to continue to right-size this business. We drove the low-cost model with Project Core. We have these five initiatives we're driving for the midterm, as we talked about in the script. And now we're focused on the strategic growth pieces across the business over the next – in the near term, midterm, and long term as well. And we're confident that over time, it will make a difference in the business.
Speaker Change: We are investing in a number of growth areas, and we're going to continue to...
Speaker Change: at Right Sizes Business.
Speaker Change: in the near-term, mid-term, and long-term as well. We're confident over time that we'll make a difference in the business.
Operator: Thank you. One moment for our next question. Again, if you would like to ask a question, please press star 1 1. Our next question will be from Michael Lasser of UBS. Your line is open, Michael.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Again, if you would like to ask a question, please press star 1 1.
Speaker Change: Our next question will be coming from Michael Lasser of UBS. Your line is open, Michael.
Michael Lasser: Good morning. Thank you so much for taking my question. How much is the more intense competitive landscape playing into the shortfall that you're expecting in the back half? If you had to divide it between the macro remaining challenging versus the more competitive landscape, how would you do so?
Michael Lasser: Thank you. Good morning. Thank you so much for taking my question.
Michael Lasser: How much is the more intense, competitive landscape playing into the shortfall that you're expecting in the back half, if you had to divide it between the macro remaining challenging?
Speaker Change: versus the more competitive landscape, how would you do so?
Gerry Smith: I would say, of course, it's a competitive environment, but I'll let Anthony comment as well, but my perspective is this is softness in macroeconomic conditions. This is our B2B as well as B2C customers buying less. There are a number of retailers out there that have seen softness. There's a lot of B2B companies that are seeing softness. We don't have a trove of customers' losses.
Speaker Change: I would say of course it's a competitive environment, but I'll let Anthony comment as well, but my perspective is this is softness in macroeconomic conditions, this is our B2B as well as B2C customers buying less.
Anthony Scaglione: There's a number of retailers out there that have seen softness, there's a lot of B2B companies that are seeing softness.
Gerry Smith: We have our current customers buying less. As we said in the script, people have had layoffs. People have reduced their spending, et cetera, et cetera, which is why we're working hard on the trajectory change in opportunity. Yes, competition is always fierce, but I don't see it any more fierce than it has been in the past.
Anthony Scaglione: You know, we're not, we don't have a trove of customers' losses. We have customers, our current customers buying less. As we said in the script, you know, people have had layoffs, people have reduced their spending, etc., etc., which is why we're working hard on the trajectory changing opportunities.
Anthony Scaglione: Yes, competition is always fierce, but I don't see it any more fierce than it's been in the past.
Anthony Scaglione: Yeah, I think, Michael, good to hear from you. I think it's been a combination of a perfect storm, you know, a longer closed cycle, some customers trading down from a product standpoint, delayed big-ticket purchases, and a consumer that, I think you can agree, has been challenged overall. So we experience this every single day, but I feel like it's almost a perfect storm; it's all happening at once. So to Gerry's point, I think a lot of this has to do with the macro, which is delaying purchases, and it's trading down purchases, all having an impact both on the top line and bottom line.
Anthony Scaglione: I think it's been a combination of a perfect storm, a longer closed cycle, some customers trading down from a product standpoint, delayed big ticket purchases.
Anthony Scaglione: and a consumer that I think you can agree has been challenged overall. So we experience this every single day, but what I feel like it's almost a perfect storm. It's all happening at once.
Anthony Scaglione: So to Gerry's point, I think a lot of this has to do with the macro, which is delaying purchases, it's trading down purchases, all having an impact both on the top line and bottom line.
Anthony Scaglione: My second question is on gross margin, what needs to happen in order to reverse the significant erosion in gross margin from the last couple of quarters, because the comparisons on the gross margin line get much more difficult, and it doesn't seem like the environment's going to get any easier in the back half of the year.
Speaker Change: My second question is on your gross margin.
Speaker Change: What needs to happen in order to reverse the significant erosion in gross margin from the last couple of quarters? Because the comparisons on the gross margin line get much more difficult, and it doesn't seem like...
Anthony Scaglione: Yeah, so we obviously have Project Core, which will begin to cascade more meaningfully in the back half. However, most of the actions occurred in Q2. We have a little bit of action in the back half, but most of the actions were completed by the end of Q2, which gives us confidence that the benefits will start to accrue in Q3 through the balance of the year, so that should improve the gross margin.
Speaker Change: the environment is going to get any easier in the back half of the year.
Speaker Change: Yeah, so we have obviously Project Core, which will begin to cascade more meaningfully in the back half. Most of the actions occurred in Q2. We have a little bit of actions in the back half, but most of the actions were completed by the end of Q2, which gives us confidence that the benefit, you'll start to see that accruing in Q3 through the balance of the year, so that should improve the gross margin.
Anthony Scaglione: I think a lot of it has to do with the top line stabilizing; the pull-through effect of that deleveraging of the top line coming down obviously has an impact on gross margins. And to Gerry's point, we have some green shoots, one of which he just announced, that should bring some volume back into the higher fixed costs that occur within our supply chain, which should help gross margins going forward.
Jerry Smith: I think a lot of it has to do with the top line stabilizing, the pull-through effect of that deleveraging of the top line coming down obviously has an impact on gross margins. And to Gerry's point, we have some green shoots, one of which he just announced, that should bring some volume back into the higher fixed costs.
Anthony Scaglione: My final question is, what have you seen in the laptop category? There are some indications that that category has started to improve, and what percentage of your laptop sales in the last couple of months have been AI-enabled laptops?
Jerry Smith: that occurs within our supply chain that should help the growth margins going forward.
Speaker Change: My final question is, what have you seen...
Jerry Smith: In the laptop category, there's been some indications...
Speaker Change: that that category has started to improve and what percentage of your laptop sales
Speaker Change: in the last couple of months have been AI-enabled laptops.
Anthony Scaglione: I think the AI what we've seen is the demand is coming from AI, as you know, it's what will happen over the next six to 12 months. I think it's going to provide that refresh cycle even more meaningful than what we've seen, and most of our sales are going to be laptops versus your traditional desktop Pillar, so it's going to be mostly in the laptop category as it relates to PC sales.
Speaker Change: I think the AI, what we've seen is the demand is coming from the AI.
Speaker Change: ...occurring over the next 6 to 12 months, I think it's going to provide...
Speaker Change: that refresh cycle even more meaningful than what we've seen. And most of our...
Speaker Change: Sales are going to be laptop versus your traditional desktop pillar, so it's going to be mostly in the laptop category as it relates to PC sales.
Anthony Scaglione: If I could add one more question, what have you seen so far early in the back-to-school holiday season? Has it been a continuation of the trends that you experienced in the second quarter?
Speaker Change: If I could add one more question, what have you seen so far early in the back-to-school holiday season? Has it been a continuation of the trends that you experienced in the second quarter?
Anthony Scaglione: Back to school is really early right now, so we're early on the flights. You know, we prepared the staging earlier. So from a showcasing standpoint, we're ready. We're leveraging our teacher and school supply list, which is the first time that we've launched that. We're outfitting certain stores with Dormify dorm room accessories, higher ed, leveraging our assortment and reach. So we feel like we're really well positioned. It's a very competitive back to school environment.
Speaker Change: Back to school is really early right now. We're early in the flights. You know, we've we've prepared the staging earlier, so from a showcasing standpoint.
Speaker Change: We're ready. We're leveraging our teacher and school supply list, which is the first time that we've launched that. We're outfitting our certain stores with the Dormify dorm room accessories, higher ed. Leveraging our assortment and reach, so we feel like we're really well positioned.
Anthony Scaglione: We saw that last year, and we're seeing that this year as well. But we're positioned where we think we have the breadth and depth of the products and services that we can provide our customers. Early days in the flights, Michael, but we're encouraged by where we stand from an inventory standpoint, as well as in terms of product and service.
Speaker Change: It's a very competitive back-to-school environment. We saw that last year and we're seeing that this year as well, but we're positioned where we think we have the breadth and depth of the products and services that we can provide our customers. Early days in the flights, Michael, but we're encouraged by where we stand from an inventory standpoint as well as product and service.
Michael Lasser: Thank you very much and good luck.
Operator: And that concludes the Q&A session for today. I will now turn the call back to ODP's Corporation CEO, Gerry Smith, for his closing remarks.
Speaker Change: Thank you very much and good luck.
Michael Lasser: Thanks, Michael. Bye.
Michael Lasser: And that concludes the Q&A session for today. I will now turn the call back to ODP's Corporation's CEO , Gerry Smith's, closing remarks.
Gerry Smith: Well, thank you for joining our call today. I just want to reiterate a couple things. Obviously, this performance in Q2 was unacceptable. We clearly recognize that.
Gerry Smith: Thank you for joining our call today. I just want to reiterate a couple things. Obviously, this performance in Q2 was unacceptable. We clearly recognize that.
Gerry Smith: Second, we took the action we took on Project CORE to get our cost position back in line. We're going to continue to drive our low-cost model and walk our culture. Third, we talked about our Big Five initiatives. Those are structural initiatives that help improve growth as well as profitability. Those were kicked off in late Q1, early Q2.
Gerry Smith: Second, we've taken the action we did on Project CORE to get our cost position back in line. We're going to continue to drive our low-cost model and walk our culture.
Gerry Smith: Third is we talked about our big five initiatives. Those are structural initiatives that help improve growth as well as profitability. Those were kicked off in
Gerry Smith: We're starting to see traction around those, and we're going to continue to drive those so we have a good exit velocity in 24. And lastly, as we talked about a number of strategic reviews with the board from a growth perspective across the business, we see lots of green shoots that are changing our trajectory. We're super pleased with the opportunity for our purveyor this morning, almost doubling their business from last year. The potential to do that
Gerry Smith: Now, late Q1, early Q2, we're starting to see traction around those and we're going to continue to drive those so we have a good exit velocity in 2024. And lastly, as we talked about, a number of strategic reviews with the board from a
Gerry Smith: a growth perspective across the business. We see lots of clean shoots that are trajectory changing.
Speaker Change: Super pleased with the opportunity on our purveyor this morning.
Gerry Smith: And within Q3, we're going to implement that business, and we think that's a huge step forward from a traction perspective. And we have, again, a number of trajectory changers in the ODP business solution business we're going to work hard to close in 2024 that will make a huge difference going forward in 25. And lastly, we're going to work very, very hard to get this business right, and we fully support our share buyback plan, and we're moving forward with our capital allocation.
Speaker Change: on the almost doubling their business from last year potential to do that.
Speaker Change: And within Q3, we're going to implement that business, and we think that's a...
Speaker Change: And we have, again, a number of trajectory changers in the ODP business solution business we're going to work hard to close in 2024 that will make a huge difference going forward in 2025.
Speaker Change: And lastly, we're going to work very, very hard to get this business right-sided and
Speaker Change: You know, we fully support our share buyback plan and we...
Gerry Smith: And so across the board, we know we have a lot of work to do, and we're all on board to change the course of this business and get us back into a performance level that is acceptable and creative for the marketplace. Thank you for joining us on the call this morning, and we'll speak again.
Speaker Change: We're moving forward with our capital allocation, and so across the board, we know we have a lot of work to do, and we're all on board to change the course of this business and get us back into a performance level that is acceptable and creative for the marketplace. Thank you for joining the call this morning, and we'll speak again.
Operator: Thank you for your participation. This concludes today's call. You may now disconnect.
Speaker Change: Thank you for your participation. This concludes today's call. You may now disconnect.
Speaker Change: www.officedepot.com www.officedepot.com
Speaker Change: ?? ?? ?? ?? ??
Speaker Change: Copyright © 2020, New Thinking Allowed Foundation