Q3 2024 The ODP Corp Earnings Call
The End
Speaker Change: Good morning and welcome to the ODP Corporations 3rd Quarter 2024 earnings conference call.
Speaker Change: All lines will be in all this and only mode for today's call. After which instructions will be given to ask a question.
Speaker Change: at the request of the ODP corporation today's call is being recorded. I would like to introduce him Perrott Vice President and Vester relations and Treasurer. Mr. Perrott, you may now begin.
Tim Perrott: Good morning and thank you for joining us for the ODP Corporations 3rd Quarter 2020 for earnings conference call.
Speaker Change: This is Tim Perrott, and I'm here with Gerry Smith, our CEO. Also joining us on the call today is Max Hood, our Chief Accounting Officer and Co-Innerom CFO, and Adam Haggard, our Senior Vice President of FPNA and Co-Innerom CFO.
Speaker Change: During today's call, Gerry will provide an update on the business, focusing much of this commentary on our results and accomplishments for the third quarter of 2024, including the progress we are making on our B2B pivot and initiatives to drive Sherhoader value.
Speaker Change: After Gerry's commentary, Maxwell then reviewed the company's third quarter financial results, including highlights of her divisional performance, followed by Adam, who will highlight our balance sheet and outlook. Following our comments, we will then open up the line for your questions.
Speaker Change: Before we begin, I need to inform you that certain comments made on this call include Ford-looking statements, which are subject to the safe harbor provisions of the private securities litigation reform act of 1995.
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.
Speaker Change: A detailed discussion of these risks and uncertainties are contained in the company's filings with the U.S. Securities and Exchange Commission.
Speaker Change: During the call, we will use some non-gaps and answer measures as we describe business performance.
Speaker Change: The SEC filings, as well as the earnings press release.
Speaker Change: Presentations slides at a company today's comments.
Speaker Change: and Reconciliation of the non-gapsanantual measures to the most directly comparable gaps and natural measures. Are all available on our website at investor.theodpcorp.com.
Tim Perrott: Today's calling-insolide presentation is being final cast on our website and will be archived there for at least one year. I'll now turn the call over to Gerry Smith. Gerry?
Gerry Smith: Thank you Tim and good morning to everyone joining our call today.
Gerry Smith: We appreciate you being here with us to discuss our results and accomplishments for the 3rd quarter of 2024.
Tim Perrott: This morning, I'll cover our recent performance along with our progress in our BDB pivot, and the niches we're implementing to position the business for future growth. As you can see in our press release this morning, our results on third quarter will below expectations.
Speaker Change: Driven primarily by challenges in a retail division's performance.
Speaker Change: Week, macroeconomic conditions impacted the man in both our B2C and B2B channels, during what proved to be a highly competitive back to school season.
Speaker Change: This was further compounded by major hurricane to negatively affecting cutoreactivity and silver operations in our largest service areas in the south.
Speaker Change: Despite these challenges, we're making significant progress on our strategic B to B pivot.
Speaker Change: By leveraging our core strengths, we're accelerating our pivot and gaining traction to securing key BDB contracts and our traditional business categories. While expanding our influence to the adjacent high value industry sectors where our expertise also resonates.
Speaker Change: Although it would take time for these efforts to be fully reflected in our results, our progress is helping us regain momentum and position ODP to pursue sustainable, high growth, market segments now and in the future.
Speaker Change: Let me provide more insight to our results in accomplishments for a third quarter and then I will highlight a few key points about a strategy and focus as we move forward.
Speaker Change: As I mentioned, our overall performance in the quarter was impacted by ongoing, challenging, and macroeconomic conditions.
Speaker Change: Impacting Demand during a very competitive back to school season, and creating headwinds into our efforts to regain revenue traction. The largest impact was felt in our BDC division, Office Depot, or consumer traffic and demand were lower due to challenging factors I mentioned, along with changes in spending priority.
Speaker Change: This wasn't unique to us, much of the retail industry faced similar challenges.
Speaker Change: Overall for the industry back to school demand to client compared to last year down about 5% while consumers prior sized their budgets amidst right-eat energy and food costs.
Speaker Change: Additionally, the major hurricanes that hit our largest markets, disrupted customer activities, caused temporary store closures and affected surrounding communities. Fortunately, all of our employees are safe, however, the business impacts are still being felt as we enter the fourth quarter.
Speaker Change: Some more conditions affected are BDB segment, ODP Business Solutions.
Speaker Change: The challenging macroeconomic environment, including enterprise-level workforce reductions, continue to restrict spending during a highly competitive period.
Speaker Change: While we have yet to regain stronger revenue traction, we do believe that the top line trends have largely stabilized.
Speaker Change: Daily sales have shown more consistency over the past several weeks and throughout much of the quarter, giving us growing confidence that we've reached the bottom of the cycle.
Speaker Change: Furthermore, we're seeing a stronger pipeline of exciting opportunities, which we're successfully converting into new business wins.
Speaker Change: More to come on this in a few minutes.
Speaker Change: And in our supply chain business there, we continue to see great progress as they execute across their growth strategy, attracting new third-party customers and driving healthy increases in external revenue up about 30% over last year.
Speaker Change: Bayer is also executing on its tech modernization roadmap, investing integrating key technologies supported by Gardner Magic Quadrant level partners and significantly advancing its capabilities and service levels.
Speaker Change: And while the brand there is still relatively new, it leverages the long history of supply chain excellence we have built servicing both retail and B2B customers.
Speaker Change: There indeed represents a key B2B pivot for ODP and its future is very bright.
Speaker Change: So overall, while it was a challenging quarter for the business, we are making strong progress on our B2B pivot and securing new business wins.
Speaker Change: Let me highlight some of this progress and key points regarding a strategy as we move forward. This is shown beginning on slide 5.
Speaker Change: Recognizing the evolving consumer dynamics and the opportunities in the enterprise space, we are accelerating our pivot to B2B.
Speaker Change: Despite some perception of ODP as a retail-only business, our true strength lies in our robust B2B asset base built over the last 40 years.
Speaker Change: Unlike traditional retailers, we can leverage our nationwide supply chain, extensive B2B customer base, compelling value proposition, and strong balance sheet to drive sustainable EBITDA and cash flow growth.
Speaker Change: And we're making significant progress, capturing major new business wins and building momentum.
Speaker Change: In our business solutions division, our pipeline is expanding and today we're thrilled to announce a key new business win representing one of our largest B2B contracts in company history.
Speaker Change: This new contract, worth up to $1.5 billion over a 10-year period, will allow our new partnership to utilize our comprehensive offerings, national distribution, and e-commerce platform to provide excellent service to customers.
Speaker Change: While we're not able to disclose the name of the new customer at this time, we will provide more specific details when appropriate in the future.
Speaker Change: We are very excited about this trajectory-changing win for ODP, and we've already begun the onboarding and transition process.
Speaker Change: Also, within ODP Business Solutions Division, in alignment with our strategic growth objectives, we're actively pursuing opportunities in higher growth adjacent industry segments.
Speaker Change: Specifically, we're focused on building long-term distribution relationships in product and service categories that go beyond our traditional office supply offerings.
Speaker Change: And I'm happy to report that we're making significant strides in this area, forging new relationships in adjacent industry segments where our core competencies resonate. In fact, one of the areas that we are targeting and is showing great promise is the hospitality industry.
Speaker Change: The hospitality industry is a large and growing market segment and our core strengths in supply, distribution, and service reliability are an excellent match to meet the needs and requirements of customers in the space.
Speaker Change: We are very excited about pursuing growth in this industry segment as it marks an important step in our B2B evolution and spotlights our distribution and supply chain proficiency
Speaker Change: our ability to supply products beyond office supplies, and our commitment to service excellence.
Speaker Change: We're also continuing to execute our strategy at VEHR, growing our supply chain business and gaining momentum by attracting new third-party B2B customers.
Speaker Change: We're already serving some of the most recognized internationally known brands providing essential supply chain services that support their operations.
Speaker Change: Building on the success, Vera recently won a major contract with one of the world's largest social media focused e-commerce companies to deliver warehouse and fulfillment services for their online sales.
Speaker Change: We've recently invested in additional resources and integrated their products into our distribution centers, onboarding this customer in record time.
Speaker Change: The feedback to date has been excellent, and we are poised to deliver exceptional service during the upcoming holiday season.
Speaker Change: This relationship is not only significant in size, but also represents a pivotal moment for ODP, positioning us to pursue further growth in supply chain services for e-commerce companies.
Speaker Change: So overall, we're making significant strides in our B2B pivot, successfully capturing meaningful new business and positioning O2P to pursue growth in new, valuable industry segments.
Speaker Change: And as a component of this transformation, we've also streamlined operations by completing the sale of our Varus division.
Speaker Change: This action simplifies our business structure and removes future capital commitments to Veris outside of the transaction while allowing us to retain a minority stake to benefit from any potential future growth.
Speaker Change: We're also encouraged by our ongoing comprehensive strategy review with the board which includes the ongoing assessment of our B2C business to ensure we adopt the optimal operating model for the future.
Speaker Change: We have significant flexibility in a retail business with an average store lease life of just less than three years, which affords us the opportunity to continue evaluating our store footprint strategy to optimize this business.
Speaker Change: So we're making excellent progress in our pivots, securing new business,
Speaker Change: developing relationships to expand into related industry segments where our core competencies excel, all positioning ODP to drive sustainable EBITDA and cash flow in the future.
Speaker Change: Next, we're accelerating our investment in core B2B resources to capture these large opportunities and drive top-line growth.
Speaker Change: Our capital allocation strategy remains centered on investing in areas that offer the highest returns.
Speaker Change: And with that focus and the goal of building a stronger foundation for sustainable growth, we have an enormous opportunity to invest into our core business to improve our future trajectory.
Speaker Change: We're prioritizing investments in talent, operations, and technology at both VEHR and Business Solutions, positioning our B2B businesses for growth.
Speaker Change: We're very excited to invest in these B2B growth initiatives as we believe this offers the best use of capital and generates the highest return on investment.
Speaker Change: Given our plans to reprioritize our capital allocation into our core to drive growth, we expect to substantially reduce the pace of our share repurchases.
Speaker Change: We believe this investment approach will maximize long-term value for shareholders.
Speaker Change: Additionally, as we accelerate investment in our core business against the backdrop of our year-to-date performance and challenging macroeconomic environment, we have decided to modify our operational guidance for 2024.
Speaker Change: In summary, despite the near-term challenges, we have an attractive path to the future, leveraging our core strengths and accelerating our B2B focus.
Speaker Change: While it is taking time to be reflected in our results, we are making meaningful progress to regain traction, and we are building a more sustainable foundation to drive future profitable growth.
Speaker Change: We're already seeing progress in prioritizing our investments for the future in our core B2B business.
Speaker Change: to capture these opportunities.
Speaker Change: Our team is committed and focused, confident in our operational excellence to drive long-term success. With that, I will turn the call over to Max Hood.
Max Hood: Thank you, Gerry, and good morning to everyone on the call.
Speaker Change: I'm Max Hood, Chief Accounting Officer and Co-Interim CFO.
Speaker Change: Please note that our results, as presented, are for continuing operations.
Speaker Change: We generated total revenue of $1.8 billion in the quarter, which was down about 11% compared to last year's third quarter.
Speaker Change: This was primarily driven by lower sales in Office Depot, including the effect of 53 fewer stores in service compared to last year, and lower volume in a highly competitive back-to-school season, as well as lower sales in ODP Business Solutions.
Speaker Change: GAAP operating income in the quarter was $102 million versus $108 million in the prior year period.
Speaker Change: Operating results in the third quarter of 2024 included 61 million of credits, primarily due to the company recognizing 70 million of income related to legal matter monetization, where the company is engaged in legal proceedings as a plaintiff.
Speaker Change: This was partially offset by $2 million in net merger and restructuring expenses and $7 million non-cash asset impairment related to the operating lease right-of-use assets associated with the company's retail store locations.
Speaker Change: Excluding these charges, our adjusted operating income for the third quarter was $41 million, compared to $112 million in last year's third quarter.
Speaker Change: Unallocated corporate expenses were $19 million in Q3.
Speaker Change: Adjusted EBITDA was $62 million in the quarter compared to $138 million in last year's third quarter. This includes depreciation and amortization expense of $24 million in the third quarters of 2024 and 2023, respectively.
Speaker Change: Excluding the after-tax impact from the items mentioned earlier, adjusted net income from continuing operations for the third quarter was $24 million, or $0.71 per diluted share, compared to adjusted net income of $85 million, or $2.17 per diluted share in the prior year period.
Speaker Change: Turning to cash flow, operating cash flow from continuing operations in the quarter was $81 million, which included about $10 million of restructuring spend.
Speaker Change: This was down compared to $120 million in the same period last year.
Speaker Change: primarily due to the flow-through impact of lower sales and timing related to working capital. Capital expenditures in the quarter were 22 million dollars versus 20 million dollars in the prior year period, reflecting growth investments in the company's core operations.
Speaker Change: Adjusted free cash flow in the quarter was $68 million compared to $102 million last year.
Speaker Change: Now turning to our results in our business units, starting with our B2B distribution division on slide 8.
Speaker Change: ODP Business Solutions performance was impacted by the continued weak macro environment and challenging business conditions.
Speaker Change: Including the effects of well-publicized corporate layoffs, these conditions led to continued tight budgets and constrained enterprise spending, all against a very intense competitive period for the business.
Speaker Change: Additionally, the hurricanes also impacted performance, shutting down distribution centers and disrupting business usage in our largest markets.
Speaker Change: While we have seen pressure throughout much of this year in our B2B division, as Gerry mentioned, it does not appear to be getting worse, and top-line trends have largely stabilized.
Speaker Change: Our daily sales trends have remained generally consistent over the past several weeks, giving us greater confidence that we are at the bottom end of the cycle.
Speaker Change: Revenue was $916 million in the third quarter, which was down about 8% compared to last year, driven by the factors I mentioned.
Speaker Change: From a product standpoint, most categories were lower on a year-over-year basis, as were the sales of technology products.
Speaker Change: a factor that many other companies are experiencing industry-wide.
Speaker Change: Lower sales of larger ticket items in our furniture category also contributed to the softer top line
Speaker Change: While we expect some enterprise softness to remain in the near term, we are encouraged by the early signs of traction resulting from the initiatives that we've put in place.
Speaker Change: We just signed one of the largest contracts in our company's history, and we're beginning to see better deal flow and larger opportunities building in our late-stage pipeline.
Speaker Change: And, as Gerry mentioned, we are well positioned to target additional growth opportunities in the large and growing nontraditional industry segments, namely in the hospitality arena.
Speaker Change: Breaking down our sales data further, our adjacency product categories as a percentage of total revenue, a primary KPI, was 44% in the quarter, generally consistent with last year and recent trends.
Speaker Change: From an operating perspective, the flow-through effect of lower revenues, pricing mix, and the related fixed-cost deleveraging resulted in operating income of $28 million in the quarter compared to $56 million in the prior year period.
Speaker Change: EBITDA margins were approximately 4% in the quarter, down year over year.
Speaker Change: While we are disappointed with our performance in the quarter and year-to-date results, we are encouraged by the traction we're gaining on our initiatives, leveraging our strong competitive position and value-added capabilities.
Speaker Change: winning new business.
Speaker Change: and positioning to target higher growth industry sectors in the future.
Speaker Change: Now, turning to our results in our Consumer Division, Office Depot, as shown on slide 9.
Speaker Change: In the third quarter, Office Depot's top line continued to be challenged as the weaker economy and the impact of inflation reduced the pace of spending during what turned out to be a highly competitive back-to-school season.
Speaker Change: Demand in certain back-to-school categories, industry-wide, were lower, compounded by consumers reprioritizing spend due to rising energy and food costs.
Speaker Change: Additionally, fewer stores in service versus last year, compounded by the hurricanes that hit our largest service territories, also negatively impacted sales.
Speaker Change: Reported revenue for the quarter stood at $861 million, a 15% decline, driven by 53 fewer retail stores in service versus last year.
Speaker Change: as well as lower traffic and transactions in both our retail and e-commerce channels.
Speaker Change: Demand was lower across most categories, including supplies, print, and furniture.
Speaker Change: On a comparable store basis, sales were down about 10% as lower traffic, fewer transactions, and lower average order volume outweighed strong conversion metrics.
Speaker Change: From an operating perspective, operating income was $23 million in the quarter, driven by the flow-through effect of lower sales, mix, and deleveraging in supply chain and occupancy costs.
Speaker Change: Moving forward, we will continue optimizing our store footprint and look to further expand our customer value proposition through a wider variety of products and services.
Speaker Change: We're also enhancing our value proposition through a multitude of partnerships, including with Telos for our TSA sign-up programs available in about 170 stores.
Speaker Change: and relationships with Dormify, Hallmark, and Dun & Bradstreet, among others.
Speaker Change: Also, we're taking the learnings from our recent performance in back-to-school category sales, and we're implementing strategies that focus on earlier execution of our capabilities, such as school supply lists and teacher wish lists for their classrooms.
Speaker Change: We also have refined our pricing and promotion strategy moving forward to maximize elasticity of demand.
Speaker Change: Now, turning to Bayer's performance, as shown on slide 10.
Speaker Change: Bayer continued 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 driving revenue growth from third-party customers.
Speaker Change: On a consolidated basis, VEIR delivered sales of approximately $1.2 billion, derived predominantly from supporting our purchasing and supply chain operations, which are effectively eliminated upon a consolidation.
Speaker Change: They are continuing to make strong progress with third party customers, including winning a major contract with one of the world's largest social media focused e-commerce companies as Gerry mentioned earlier.
Speaker Change: Keeping in mind that some of VEIR's third-party profitability is accounted for as a contra expense instead of flowing through revenue, for Q3, VEIR delivered third-party revenue of over $14 million, or approximately a 30% increase over last year.
Speaker Change: They drove third-party EBITDA of $3 million, slightly down year-over-year, as the company invested in resources to quickly onboard its slate of new customers in the quarter.
Speaker Change: As part of the agreement, we will fund up to $4 million of expenses that may be incurred by Veris following the transaction date until the end of 2025.
Speaker Change: Beyond this, we have no other funding obligations to VERUS.
Speaker Change: Other terms of the transaction did not result in a materially different impact than we previously estimated in our Q2 financial statements.
Speaker Change: The completion of this sale unburdens our P&L and reduces cash flow demands while continuing an invested interest in future growth opportunities.
Speaker Change: Now I'll turn it over to Adam to cover our balance sheet highlights and amended 2024 guidance.
Speaker Change: Thank you, Max, and it's great to be here with everyone this morning. I'm Adam Haggard, Senior Vice President of FP&A and Co-Interim CFO.
Speaker Change: Turning to slide 12, our balance sheet and liquidity position remain strong, ending the quarter with total liquidity of $728 million, consisting of $192 million in cash and cash equivalents.
Speaker Change: including $11 million that is presented in current assets held for sale related to the VAERS division.
Speaker Change: and $536 million of available credit under the Fourth Amended Credit Agreement.
Speaker Change: Total debt was $246 million.
Speaker Change: Moving on to capital allocation.
Speaker Change: 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.
Speaker Change: In the third quarter, we repurchased just over $100 million of our stock.
Speaker Change: and a total of $295 million for the year to date.
Speaker Change: As Gerry mentioned, moving forward, we are redirecting investment into core B2B resources to capture the large growth opportunities
Speaker Change: that are before us at ODP Business Solutions and at VEYR.
Speaker Change: Considering the large amount of shares we already repurchased this year and our focus on reprioritizing investments into our core to drive growth, we expect to substantially reduce the pace of our share repurchases as we close out the year.
Speaker Change: We have a tremendous opportunity to invest in growth in our B2B businesses, and we believe this approach will drive the highest ROI and create long-term value for shareholders.
Speaker Change: Now turning to our guidance on slide 13.
Speaker Change: As you heard this morning, our results here to date have clearly been pressured by the continued challenging macro and business environment, strong competition, and the impacts from the recent hurricanes.
Speaker Change: That said, we are making very meaningful progress on several initiatives to drive sustainable growth in the future.
Speaker Change: While it does take time to be reflected in our results, we are investing in these opportunities and are confident we are on the right path to create increased shareholder value.
Speaker Change: considering our performance to date, current market dynamics, and our decision to fast-forward investments in future growth opportunities.
Speaker Change: We are amending our 2024 guidance as follows.
Speaker Change: We are maintaining our revenue guidance at approximately $7 billion for 2024.
Speaker Change: We're lowering our adjusted EBITDA outlook to a range of $260 to $300 million and our adjusted operating income to a range of $160 to $200 million.
Speaker Change: We are also lowering our outlook for adjusted earnings per share to a range of $3.10 to $3.80 per share. And finally, we are suspending our guidance for adjusted free cash flow as we invest in the exciting growth opportunities that we previously mentioned.
Speaker Change: Overall, to reiterate, our revised guidance takes into consideration the near-term investment demands occurring before year-end and initiatives to capture new growth opportunities we described, including the pursuit of attractive new industry segments as discussed.
Speaker Change: With that, I will turn the call over to Gerry for his final remarks.
Gerry Smith: Thank you, Adam. Before I turn it over for Q&A, I would like to highlight four key points about our performance and strategy and the reason for our enthusiasm as we move forward. First, there's no question that our business has faced challenges this year, and our overall performance has been below expectations.
Speaker Change: While it has been difficult, we are working to navigate through the challenging macroeconomic environment, and we are making progress in positioning our business to gain better traction in the future.
Speaker Change: Second, underneath the surface, we're making significant progress in leveraging our core strengths to evolve our business to higher growth and more sustainable B2B market opportunities.
Speaker Change: Our core strengths are centered around our flexible nationwide supply chain, our large and growing B2B customer base, and our strong value proposition.
Speaker Change: all backed by a solid balance sheet.
Speaker Change: Third, we are gaining traction and building momentum for the future.
Speaker Change: We are leveraging these assets and winning meaningful new contracts in our traditional business, including winning one of the largest contracts in our company's history.
Speaker Change: We're also evolving our capabilities to pursue growth in new, non-traditional industry segments. These new industry segments are relevant adjacencies to our core and offer tremendous opportunities for growth. And as I mentioned, one of the areas we are targeting and showing great promise is in the hospitality industry segment.
Speaker Change: And last, we are strategically investing to seize these opportunities.
Speaker Change: We believe that channeling capital into our core areas to drive growth will yield strong returns on investment and deliver the best long-term value for our shareholders.
Speaker Change: While it may take time for these efforts to reflect in our results, we have a clear and promising path ahead.
Speaker Change: Our team is focused on capturing these B2B opportunities.
Speaker Change: driving operational excellence and delivering long-term value to our shareholders. With that, operator will turn it over for questions and answers.
Speaker Change: Thank you. At this time, we will conduct the question-and-answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Thank you.
Speaker Change: Thank you. Bye.
Speaker Change: Our first question comes from the line of Michael Lasser of UBS. Your line is now open.
Michael Lasser: Good morning. Thank you so much for taking my question.
Michael Lasser: It's on how did ODPs...
Michael Lasser: market share trend across both
Michael Lasser: the business solutions division, as well as retail, within not just the last quarter, but over the last few quarters.
Speaker Change: Because it does seem like there is progressive weakness in the business, driven in part by a loss of customers, and that is harder to ascribe to simply the macro environment. Thank you very much, and then I will follow up.
Speaker Change: Hi, good morning Michael, this is Gerry and I'll let Adam and Max jump in as well.
Speaker Change: I would say we're holding our own. I mean, you saw the B2B win we just had. That's a very, very sizable win on the B2B space in the traditional office supply segment. That's obviously will be extremely accretive to us as we ramped up that over a period of time.
Speaker Change: from a BDC perspective.
Speaker Change: I definitely, you know, I would say we're holding our own, I mean, the hurricane impact and having three hurricanes in the quarter in our biggest markets in Florida and Texas.
Speaker Change: Those weren't just a couple day type of impacts. We had distribution centers, we had B2B business all impacted by that. But I think, I'll let Max and Adam jump in, but I don't think we're losing a huge amount of market share to a specific person.
Speaker Change: Yeah, and I'll jump in as well. Hi Michael, this is Adam Haggard. One of the nice things that we're seeing is that the trends moving forward are definitely more positive for us as we exit Q3 into Q4 and heading into next year. We were very optimistic the new wins that we have and we think that they're going to be really accretive to the business as we move forward as time moves on. Obviously those those wins need to ramp up and they'll take some time and we need we need some near-term investment around them, which is great. It's a great problem to have for us.
Speaker Change: And we really are excited about the trajectory-changing new winds that we have underneath our belt at this point. And October and early November has been stronger across especially the BTC business compared to Q3.
Michael Lasser: Okay, my follow-up question is, obviously there's a ton of moving parts with ODP corpse, you know.
Speaker Change: But the market's going to extrapolate some of the recent performance.
Speaker Change: into next year. So, A, why is that wrong? Why should the market not just take what has been the performance of the last few quarters and think that's a reasonable basis?
Speaker Change: on how to look at 2025 from a profitability perspective. And B, how will the new distribution agreement as well as customer wins quantifiably impact ODP Corp's profitability next year? Thank you very much.
Speaker Change: So, I'll jump in first and we'll let the guys jump in over the top after, but the big difference is the trajectory change in opportunities. I talked about that last time, there's three we're working on, we've delivered two.
Speaker Change: Obviously, the $1.5 billion over 10 years is very, very significant.
Speaker Change: working a lot of other pieces so we think that plus the
Speaker Change: continue progress we made in VERA from a revenue perspective are our trajectory changing. There's other things we're working on also that it's new business that we're not...
Speaker Change: disclosing and discussing at this time, so and I think we're seeing some stabilization from a market perspective that you know which was which has given us some optimism.
Speaker Change: The second piece, and I want to emphasize, is we're going to go look at the optimal operating model for a B2C business.
Speaker Change: And just at a high level, we addressed SG&A really well at this company over the last six or seven years. We're really going to start digging into the fixed asset structure cost of the business.
Speaker Change: A exciting path to the future of how we get back to a profitable growth across the business.
Speaker Change: And again, and lastly...
Speaker Change: We do a really good job from an operating model perspective of driving cash and we're going to continue to do that of driving costs across the business.
Speaker Change: But I want to use the three words, optimize for growth.
Speaker Change: That's going to be a rallying cry, what we've focused on strategy-wise as a board and we think we have the right adjacency markets that are similar in size, Michael, to our office supply markets and they're growing at a 4-6% CAGR, depending on the market. And those markets...
Speaker Change: fit perfectly with what our capabilities and strengths are from a supply chain, customer base.
Speaker Change: Many of the customers are already customers who are in some of these markets. And so we're gonna go leverage the entrance to these markets as a way to grow as well. The optimize for growth, optimize the BDC structure, continue to look at the fixed cost structure and the new shoots are all ways to get a different trajectory in the business in 25.
Speaker Change: Thank you for watching!
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Greg Burns of Hidoti. Your line is now open.
Greg Burns: Thanks. I just wanted to maybe follow up on the new industry segments you're targeting.
Greg Burns: You gave us just a little bit of color, the size and the growth of some of those markets, but could you just help us understand how you're penetrating those markets, what the conversations are like?
Speaker Change: Trying to move into these new markets sounds like Hospitalities may be a little bit more developed than maybe some of the other areas that you're you're looking at any other Kind of additional color on on how you're approaching expanding into these non You know traditional office categories
Speaker Change: Yeah, the key is it's leveraging our core strengths, and some of the customers in these markets are already existing customers, and honestly, the conversations really were created out of conversations with our Dave Sales team and the customers.
Speaker Change: And so we found that our core strengths can be leveraged in some of the other segments they operate in.
Speaker Change: And what I like about these segments are, A, they're growing, unlike office supplies, which is great. It's a similar market size.
Speaker Change: We already have a number of the customers as customers. We already have trucks delivered to a lot of these locations as well. So you can leverage that supply chain infrastructure. And you need that competitive.
Speaker Change: A lot of things you can't just get from a normal e-commerce type of play. And so it fits well from a competitive perspective, and we think there's a growth opportunity. And we're well into conversations, and we're going to attack this market aggressively. We think it's a...
Speaker Change: And I love the fact it's literally almost the same size as our current B2B office supply market as well. So getting into the growth market, same skill set, same supply chain, same customer footprint, same sales team, et cetera, et cetera.
Speaker Change: Okay and obviously you announced the large 1.5 billion dollar deal but what does the pipeline look like in terms of maybe
Speaker Change: size of opportunities relative to maybe that 1.5 billion dollar deal you announced and how
Speaker Change: How far along maybe some of these conversations are where you maybe have line of sight on signing a couple of new kind of trajectory changing deals in the first half of next year?
Speaker Change: Yeah, so on the $1.5 billion deal, that deal is signed and we're already working on the transition and implementation plans across that business, so you'll see that grow.
Speaker Change: throughout. We'll start to ship a little bit this quarter and a lot more into 25.
Speaker Change: and so super happy because that is obviously...
Speaker Change: A number of other deals are in the pipeline, obviously for competitive reasons I'm not going to get a lot of detail, but we have some other trajectory changing opportunities we're going to work on through Q4 and Q1, and we're very optimistic that, I really want to emphasize that we think the B2B pivot is working, and this is the first
Speaker Change: Stake in the sand on that. Plus, the VEIR supply chain opportunity is a significant opportunity, and as I said in the last earnings, it's as big as what 2023 revenue was for VEIR, and so that is the case and could be higher than that.
Speaker Change: And so we're going to continue to grow that opportunity because we think that can yield additional results for the bearer business also. So we think our future is in B2B. We're going to go look for the optimal.
Speaker Change: Operating model for B2C. Again, I want to really focus, having an investor here, we're really going to look at the fixed cost infrastructure around that business and find the optimal model to put us in a more profitable competitive position going forward.
Speaker Change: Okay, and then when we think about kind of the level of reinvestment that you're making, you didn't talk too much about Project Core in your pair remarks, but how should we think about kind of
Speaker Change: What you've talked about targeting is the hundred million you're targeting from Project Core versus maybe what's going back in the business Is there a net number we should think about next year?
Speaker Change: or for NTOTAL. Let me talk high level, then I'll flip it over to Max and Adam.
Speaker Change: The project core is pretty much complete. We did have, we know 100 million for 2025 operating.
Speaker Change: is the right number. And again, as we look at the optimal, you know, operating model for our B2C business, we're gonna continue to look at.
Speaker Change: The fixed cost structure plus the SG&A structure across the businesses and more to come in the late February, early March meeting, but Max, Adam, anything to add?
Speaker Change: Hi, Greg. This is Max. I just wanted to add quickly progress on Project CORE. We are right on track of where we want to be. The majority of actions are in this year, and we're substantially complete with our spend. So right on track for what Gerry said for next year.
Speaker Change: Now, yes, we're putting investment back into the business, but for competitive reasons, we want to make sure we can't disclose that, but we're investing in.
Speaker Change: Obviously ramping the inventory to ramp up the...
Speaker Change: The large new wind and obviously the infrastructure from a VEIR perspective to ramp up the large customer we already have as well.
Speaker Change: so that we are making investments in those categories and if we...
Speaker Change: As we enter into some of these other segments, we'll make investments because those are new suppliers and new opportunities and new inventory also.
Speaker Change: So, we're not, you know, we're not being, you know...
Speaker Change: did this orderly from an investment and inventory perspective. But it is taking some, in the short term, some of the cash. I do want to highlight, we're not negative on cash. We're producing positive cash flow through the year. We're just, because of these investments, it was hard to guide to the exact number.
Speaker Change: Adam, you want to add any color on that? Yeah, no, it's a great point, Gerry, right? At the end of the day, we have a little bit of a near-term bubble of work and capital investment that we expect between now and the end of the year, right?
Speaker Change: We're highly focused on that return on invested capital and moving into these new green shoots that we see out there. So, very exciting, yes. We have...
Speaker Change: of a high, you know, degree of
Speaker Change: of Belief in our cash generation throughout the end of the year. We do believe we'll create positive cash between now and the end of Q4, so we'll be able to manage the near-term investment and creating a positive cash environment for ourselves. So, exciting days ahead. We look forward to this opportunity to reinvest our capital as we move on.
Speaker Change: All right. Thank you.
Speaker Change: Thank you so much.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Joe Gomes of Noble Capital. Your line is now open.
Joe Gomes: Good morning.
Speaker Change: Good morning, Joe. I was wondering...
Joe Gomes: Could you quantify the impact of the hurricanes for the quarter?
Speaker Change: It's very difficult to do because, yes we can quantify it, a store was closed for this period of time, here's the average store sales.
Speaker Change: But what it doesn't do is, and which we know is a much larger impact and harder to quantify, and I'm looking at my chief legal officer here because we've had that debate of, we know it's a big number.
Speaker Change: But, you know, we had DC's, for example, closed after Helene and Milton in Florida, in backstage B2B business.
Speaker Change: I sit in a daily retail B2C review with Kevin Moffitt every day and we know that those regions were down substantially day after day. Jolene was probably the most impactful hurricane we've ever seen.
Speaker Change: And so, hard to go quantify, as we compare that number to other regions, it was much, much lower.
Speaker Change: But, you know, it's hard to say this is the exact number, but it is.
Speaker Change: a big impact and, you know, three within the quarter and we saw it leaning into Q4 as well obviously with Milton.
Speaker Change: And so another reason why it's like, you know, you can't make up four hurricanes in 100 plus days.
Speaker Change: and so but it is a substantial impact you know and but macroeconomic conditions are an impact as well you know it's a competitive market as well and so it you know all those things had an impact so it's really hard for us to land on it on an exact number
Speaker Change: But in my tenure here, it's the biggest impact we've seen.
Speaker Change: Okay, and then on the adjacencies, I kind of want to attack that one more time. You mentioned hospitality. Maybe you can give us an idea of some of the other ones that you're looking at.
Speaker Change: And obviously these people, these companies, are getting the supplies that they need already.
Speaker Change: Is it similar competition, you know, some of the same on the office supplies? Are you looking at new competitors in that space? And if so, maybe, you know, give us some of the bigger competitors that you're going against in the new adjacent spaces.
Speaker Change: Well, it's new competitors, new suppliers.
Speaker Change: I'll say complicated type of delivery that's difficult to do from an e-commerce perspective or a different path. And it's really an adjacency segment, it's not a big step outside the core too far.
Speaker Change: and so we think we can compete, we think we can be cost competitive.
Speaker Change: And the VERA business has the ability to cost in a very unique way that very few people have. We built that tool internally.
Speaker Change: We have the ability to cost to a skew pick level.
Speaker Change: which very few 3PLs have, and so we know we can be competitive, we know we can do it at a competitive rate, and so...
Speaker Change: We think it's a market we can compete in and put pressure on some of the competitors in space. Hey, but always respect competitors. I'm not going to go off and say we think we can compete and be effective. Are we going to get 100% share? Heck no. But we're going to go off and we think we can compete into a growth market with...
Speaker Change: The infrastructure we have, we do it, again, we deliver trucks to a lot of those customers already.
Speaker Change: and so we think there's a unique advantage that we have compared to others.
Speaker Change: And I think, you know, we're excited with that opportunity.
Speaker Change: And I think if you look at, you know, beyond that, we think we can get into, for example,
Speaker Change: some of the same.
Speaker Change: suppliers that deliver into hospitality we think could deliver into some of some of the much larger healthcare areas.
Speaker Change: but we think we can be competitive in all those areas. And Dave and his team and Tom and that team have done a great job of identifying this. And again, our customers helped identify some of these segments, which is fantastic. And so we're going to pivot hard to it. We're going to get into growth segments.
Speaker Change: and I think that's how we how we grow value in this business over the long term. Leverage our fixed cost infrastructure, make sure it's optimal, go get the B2B business growing and add our capabilities, what we really do well at and that's where we're going to go in.
Speaker Change: Okay, great. Thanks for taking my questions.
Speaker Change: Thank you. Appreciate it. One moment for our next question.
Speaker Change: The next question comes from the line of Michael Lassner of UBS. Your line is now open.
Michael Lassner: One quick follow up question for you guys. When do you think you'll have enough visibility into your free cash flow generation to start providing guidance on that again? And is there a minimum that you would expect to be able to generate?
Speaker Change: I'll let Adam and Max take that one.
Speaker Change: So, we know we'll have positive cash in Q4.
Speaker Change: That's going to be the key. The reason why we're not running with guidance right now on that metric is because there is a little uncertainty, to put it another term, on the...
Speaker Change: the shifting of working capital needs that are warranted, right?
Speaker Change: Also, we're investing in people and processes, so we have a little bit of a technology investment that's going to be going on as well, which is going to utilize cash. So there's a little bit of a short-term bubble of volatility that we have to get through. But I can say that we do think that there will be a nice positive cash generation. Just how much? A little uncertain right now, just because of all the opportunities we see in front of
Speaker Change: and how we're allocating the capital in the right places at the right time to really propel ourselves into 2025.
Speaker Change: Thank you very much.
Speaker Change: Thank you, Michael.
Speaker Change: If there are no more questions, I will turn the call back over to Gerry Smith, ODP's CEO.
Gerry Smith: Thank you for our analysts as well as all our other listeners today for joining us Again, we're not happy with Q3 performance and we're doing our best to turn that into a
Speaker Change: Change that, we're seeing some stabilization here.
Speaker Change: I've talked about trajectory changing opportunities the last one we delivered two big ones and we're very pleased with that
Speaker Change: and there's more to come and we're going to continue to work on that.
Speaker Change: And we believe we have the right operating model, we have the right infrastructure, the supply chain was a huge asset for us, our 5C culture, our low-cost model, and our ability – and we haven't talked about it at all – we have a strong balance sheet.
Speaker Change: And we continue to have a strong balance sheet and we're liquid and we're continuing to generate cash as a company.
Speaker Change: And so we're going to invest that cash into growing this B2B segment, both the 3PL supply chain segment, as well as the, you know, B2B traditional segment, our federation, as well as
Speaker Change: our hospitality and other segments going forward. So thank you for your time today. Come back to you in 90 days with a fuller plan on the B2C Optimal Optimization Plan. Thank you team for joining us today.
Speaker Change: Thank you for your participation. This concludes today's call. You may now disconnect.
Speaker Change: Write the transcript. So you can access the blog page from your smartphone or smartphone.
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Speaker Change: Good morning and welcome to the ODP Corporation's 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: All lines will be in a listen-only mode for today's call, after which instructions will be given to ask a question.
Speaker Change: 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.
Tim Perrott: Good morning, and thank you for joining us for the ODP Corporation's 3rd Quarter 2024 Earnings Conference Call.
Tim Perrott: This is Tim Perrott, and I'm here with Gerry Smith, our CEO.
Speaker Change: Also joining us on the call today is Max Hood, our Chief Accounting Officer and Co-Interim CFO, and Adam Haggart, our Senior Vice President of FP&A and Co-Interim CFO.
Speaker Change: During today's call, Gerry will provide an update on the business, focusing much of his commentary on our results and accomplishments for the third quarter of 2024, including the progress we are making on our B2B pivot and initiatives to drive shareholder value.
Speaker Change: After Gerry's commentary, Max will then review the company's third-quarter financial results, including highlights of her divisional performance.
Speaker Change: followed by Adam who will highlight our balance sheet and outlook.
Speaker Change: Following our comments, we will then open up the line for your questions.
Speaker Change: 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 1995.
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.
Speaker Change: A detailed discussion of these risks and uncertainties are contained in the company's filings with the U.S. Securities and Exchange Commission.
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.
Speaker Change: 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 Gerry Smith. Gerry?
Gerry Smith: Thank you, Tim, and good morning to everyone joining our call today.
Gerry Smith: We appreciate you being here with us to discuss our results and accomplishments for the third quarter of 2024.
Speaker Change: This morning, I'll cover our recent performance along with our progress on our B2B pivot and the initiatives we're implementing to position the business for future growth.
Speaker Change: As you can see in our press release this morning, our results for the third quarter were below expectations driven primarily by challenges in our retail division's performance.
Speaker Change: Weak macroeconomic conditions impacted demand in both our B2C and B2B channels during what proved to be a highly competitive back-to-school season.
Speaker Change: This was further compounded by major hurricanes negatively affecting customer activity and some of our operations in our largest service areas in the South.
Speaker Change: Despite these challenges, we're making significant progress on our strategic B2B pivot.
Speaker Change: By leveraging our core strengths, we're accelerating our pivot and gaining traction, securing key B2B contracts in our traditional business categories, while expanding our influence in adjacent high-value industry sectors where our expertise also resonates.
Speaker Change: Although it would take time for these efforts to be fully reflected in our results, our progress is helping us regain momentum and position ODP to pursue sustainable, high-growth market segments now and in the future.
Speaker Change: Let me provide more insight to our results and accomplishments for the third quarter and then I will highlight a few key points about a strategy and focus as we move forward.
Speaker Change: As I mentioned, our overall performance in the quarter was impacted by ongoing, challenging macroeconomic conditions.
Gerry Smith: impacting demand during a very competitive back-to-school season and creating headwinds into our efforts to regain revenue traction. The largest impact was felt in our BDC division, Office Depot, where consumer traffic and demand were lower due to challenging factors I mentioned along with changes in spending priority.
Gerry Smith: This wasn't unique to us. Much of the retail industry faced similar challenges.
Gerry Smith: Overall for the industry back-to-school demand declined compared to last year down about 5% while consumers prioritize their budgets amidst rising energy and food costs.
Gerry Smith: Additionally, the major hurricanes that hit our largest markets disrupted customer activities, caused temporary store closures, and affected surrounding communities. Fortunately, all of our employees are safe. However, the business impacts were still being felt as we entered the fourth quarter.
Gerry Smith: Similar conditions affected our B2B segment, ODP Business Solutions.
Gerry Smith: The challenging macroeconomic environment, including enterprise-level workforce reductions, continue to restrict spending during a highly competitive period.
Gerry Smith: While we have yet to regain stronger revenue traction, we do believe that the top line trends have largely stabilized.
Gerry Smith: Daily sales have shown more consistency over the past several weeks and throughout much of the quarter, giving us growing confidence that we've reached the bottom of the cycle.
Gerry Smith: Furthermore, we're seeing a stronger pipeline of exciting opportunities which we're successfully converting into new business wins.
Gerry Smith: More to come on this in a few minutes.
Gerry Smith: And in our supply chain business there, we continue to see great progress as they execute across their growth strategy, attracting new third-party customers and driving healthy increases in external revenue up about 30% over last year.
Gerry Smith: Bayer is also executing on its tech modernization roadmap, investing integrating key technologies supported by Gardner Magic Quadrant level partners and significantly advancing its capabilities and service levels.
Gerry Smith: And while the brand VAER is still relatively new, it leverages the long history of supply chain excellence we have built servicing both retail and B2B customers.
Gerry Smith: There indeed represents a key B2B pivot for ODP and its future is very bright.
Gerry Smith: So overall, while it was a challenging quarter for the business, we are making strong progress on our B2B pivot and securing new business wins.
Gerry Smith: Let me highlight some of this progress and key points regarding a strategy as we move forward. This is shown beginning on slide 5.
Gerry Smith: Recognizing the evolving consumer dynamics and the opportunities in the enterprise space, we are accelerating our pivot to B2B.
Gerry Smith: Despite some perception of ODP as a retail-only business, our true strength lies in our robust B2B asset base built over the last 40 years.
Gerry Smith: Unlike traditional retailers, we can leverage our nationwide supply chain, extensive B2B customer base, compelling value proposition, and strong balance sheet to drive sustainable EBITDA and cash flow growth.
Gerry Smith: And we're making significant progress, capturing major new business wins and building momentum.
Gerry Smith: In our Business Solutions Division, our pipeline is expanding and today we're thrilled to announce a key new business win representing one of our largest B2B contracts in company history.
Gerry Smith: This new contract, worth up to $1.5 billion over a 10-year period, will allow our new partnership to utilize our comprehensive offerings, national distribution, and e-commerce platform to provide excellent service to customers.
Gerry Smith: While we are not able to disclose the name of the new customer at this time, we will provide more specific details when appropriate in the future.
Gerry Smith: We are very excited about this trajectory-changing win for ODP, and we've already begun the onboarding and transition process.
Gerry Smith: Also, within ODP Business Solutions Division, in alignment with our strategic growth objectives, we're actively pursuing opportunities in higher growth adjacent industry segments.
Gerry Smith: Specifically, we're focused on building long-term distribution relationships in product and service categories that go beyond our traditional office supply offerings.
Gerry Smith: And I'm happy to report that we're making significant strides in this area, forging new relationships in adjacent industry segments where our core competencies resonate. In fact, one of the areas that we are targeting and is showing great promise is the hospitality industry.
Gerry Smith: The hospitality industry is a large and growing market segment, and our core strengths in supply, distribution, and service reliability are an excellent match to meet the needs and requirements of customers in the space.
Gerry Smith: We are very excited about pursuing growth in this industry segment as it marks an important step in our B2B evolution and spotlights our distribution and supply chain proficiency
Gerry Smith: our ability to supply products beyond office supplies, and our commitment to service excellence.
Gerry Smith: We're also continuing to execute our strategy at VAER, growing our supply chain business and gaining momentum by attracting new third-party B2B customers.
Gerry Smith: We are already serving some of the most recognized, internationally known brands, providing essential supply chain services that support their operations.
Gerry Smith: Building on the success, Vera recently won a major contract with one of the world's largest social media focused e-commerce companies to deliver warehouse and fulfillment services for their online sales.
Gerry Smith: We've recently invested in additional resources and integrated their products into our distribution centers, onboarding this customer in record time.
Gerry Smith: The feedback to date has been excellent and we are poised to deliver exceptional service during the upcoming holiday season.
Gerry Smith: This relationship is not only significant in size, but also represents a pivotal moment for ODP, positioning us to pursue further growth in supply chain services for e-commerce companies.
Gerry Smith: So overall, we're making significant strides in our B2B pivot, successfully capturing meaningful new business and positioning O2P to pursue growth in new valuable industry segments.
Gerry Smith: And as a component of this transformation, we've also streamlined operations by completing the sale of our Varus division.
Gerry Smith: This action simplifies our business structure and removes future capital commitments to Veris outside of the transaction while allowing us to retain a minority stake to benefit from any potential future growth.
Gerry Smith: We're also encouraged by our ongoing comprehensive strategy review with the board, which includes the ongoing assessment of our B2C business to ensure we adopt the optimal operating model for the future.
Gerry Smith: We have significant flexibility in a retail business with an average store lease life of just less than three years, which affords us the opportunity to continue evaluating our store footprint strategy to optimize this business.
Gerry Smith: So we're making excellent progress in our pivots, securing new business,
Gerry Smith: developing relationships to expand into related industry segments where our core competencies excel, all positioning ODP to drive sustainable EBITDA and cash flow in the future.
Gerry Smith: Next, we're accelerating our investment in core B2B resources to capture these large opportunities and drive top-line growth.
Gerry Smith: Our capital allocation strategy remains centered on investing in areas that offer the highest returns.
Gerry Smith: And with that focus and the goal of building a stronger foundation for sustainable growth, we have an enormous opportunity to invest into our core business to improve our future trajectory.
Gerry Smith: We're prioritizing investments in talent.
Gerry Smith: Operations and Technology at both VEHR and Business Solutions, positioning our B2B businesses for growth.
Gerry Smith: We're very excited to invest in these B2B growth initiatives as we believe this offers the best use of capital and generates the highest return on investment.
Gerry Smith: Given our plans to reprioritize our capital allocation into our core to drive growth, we expect to substantially reduce the pace of our share repurchases.
Gerry Smith: We believe this investment approach will maximize long-term value for shareholders.
Gerry Smith: Additionally, as we accelerate investment in our core business against the backdrop of our year-to-date performance and challenging macroeconomic environment, we have decided to modify our operational guidance for 2024.
Gerry Smith: In summary, despite the near-term challenges, we have an attractive path to the future, leveraging our core strengths and accelerating our B2B focus.
Gerry Smith: While it is taking time to be reflected in our results, we are making meaningful progress to regain traction and we are building a more sustainable foundation to drive future profitable growth.
Gerry Smith: We're already seeing progress in prioritizing our investments for the future in our core B2B business.
Gerry Smith: to capture these opportunities.
Gerry Smith: Our team is committed and focused, confident in our operational excellence to drive long-term success. With that, I will turn the call over to Max Hood.
Max Hood: Thank you, Gerry, and good morning to everyone on the call.
Max Hood: I'm Max Hood, Chief Accounting Officer and Co-Interim CFO.
Gerry Smith: I would like to cover the specifics of our results for the third quarter on slide 7.
Gerry Smith: Please note that our results, as presented, are for continuing operations.
Gerry Smith: We generated total revenue of $1.8 billion in the quarter, which was down about 11% compared to last year's third quarter.
Gerry Smith: This was primarily driven by lower sales in Office Depot, including the effect of 53 fewer stores in service compared to last year, and lower volume in a highly competitive back-to-school season, as well as lower sales in ODP Business Solutions.
Gerry Smith: GAAP operating income in the quarter was $102 million versus $108 million in the prior year period.
Gerry Smith: Operating results in the third quarter of 2024 included 61 million of credits, primarily due to the company recognizing 70 million of income related to legal matter monetization, where the company is engaged in legal proceedings as a plaintiff.
Gerry Smith: This was partially offset by $2 million in net merger and restructuring expenses and $7 million non-cash asset impairment related to the operating lease right-of-use assets associated with the company's retail store locations.
Gerry Smith: Excluding these charges, our adjusted operating income for the third quarter was $41 million, compared to $112 million in last year's third quarter.
Gerry Smith: Unallocated corporate expenses were $19 million in Q3.
Gerry Smith: Adjusted EBITDA was $62 million in the quarter compared to $138 million in last year's third quarter. This includes depreciation and amortization expense of $24 million in the third quarters of 2024 and 2023, respectively.
Gerry Smith: Excluding the after-tax impact from the items mentioned earlier, adjusted net income from continuing operations for the third quarter was $24 million, or $0.71 per diluted share, compared to adjusted net income of $85 million, or $2.17 per diluted share in the prior year period.
Gerry Smith: Turning to cash flow, operating cash flow from continuing operations in the quarter was $81 million, which included about $10 million of restructuring spend.
Gerry Smith: This was down compared to $120 million in the same period last year.
Gerry Smith: primarily due to the flow-through impact of lower sales and timing related to working capital.
Gerry Smith: Capital expenditures in the quarter were $22 million versus $20 million in the prior year period, reflecting growth investments in the company's core operations.
Gerry Smith: Adjusted free cash flow in the quarter was $68 million compared to $102 million last year.
Gerry Smith: Now turning to our results in our business units, starting with our B2B distribution division on slide eight.
Gerry Smith: ODP Business Solutions performance was impacted by the continued weak macro environment and challenging business conditions.
Gerry Smith: Including the effects of well-publicized corporate layoffs, these conditions led to continued tight budgets and constrained enterprise spending, all against a very intense competitive period for the business.
Gerry Smith: Additionally, the hurricanes also impacted performance, shutting down distribution centers and disrupting business usage in our largest markets.
Gerry Smith: While we have seen pressure throughout much of this year in our B2B division, as Gerry mentioned, it does not appear to be getting worse, and top-line trends have largely stabilized.
Gerry Smith: Our daily sales trends have remained generally consistent over the past several weeks, giving us greater confidence that we are at the bottom end of the cycle.
Gerry Smith: Revenue was $916 million in the third quarter, which was down about 8% compared to last year, driven by the factors I mentioned.
Gerry Smith: From a product standpoint, most categories were lower on a year-over-year basis, as were the sales of technology products.
Gerry Smith: a factor that many other companies are experiencing industry-wide.
Gerry Smith: Lower sales of larger ticket items in our furniture category also contributed to the softer top line.
Gerry Smith: While we expect some enterprise softness to remain in the near term, we are encouraged by the early signs of traction resulting from the initiatives that we've put in place.
Gerry Smith: We just signed one of the largest contracts in our company's history, and we're beginning to see better deal flow and larger opportunities building in our late-stage pipeline.
Speaker Change: And, as Gerry mentioned, we are well positioned to target additional growth opportunities in the large and growing nontraditional industry segments, namely in the hospitality arena.
Gerry Smith: Breaking down our sales data further, our adjacency product categories as a percentage of total revenue, a primary KPI, was 44% in the quarter, generally consistent with last year and recent trends.
Gerry Smith: From an operating perspective, the flow-through effect of lower revenues, pricing mix, and the related fixed cost deleveraging resulted in operating income of $28 million in the quarter compared to $56 million in the prior year period.
Gerry Smith: EBITDA margins were approximately 4% in the quarter, down year over year.
Gerry Smith: While we are disappointed with our performance in the quarter and year-to-date results, we are encouraged by the traction we're gaining on our initiatives, leveraging our strong competitive position and value-added capabilities.
Gerry Smith: winning new business.
Gerry Smith: and positioning to target higher growth industry sectors in the future.
Gerry Smith: Now, turning to our results in our consumer division, Office Depot, as shown on slide nine.
Gerry Smith: In the third quarter, Office Depot's top line continued to be challenged as the weaker economy and the impact of inflation reduced the pace of spending during what turned out to be a highly competitive back-to-school season.
Gerry Smith: Demand in certain back-to-school categories, industry-wide, were lower, compounded by consumers reprioritizing spend due to rising energy and food costs.
Gerry Smith: Additionally, fewer stores in service versus last year, compounded by the hurricanes that hit our largest service territories, also negatively impacted sales.
Gerry Smith: Reported revenue for the quarter stood at $861 million, a 15% decline, driven by 53 fewer retail stores in service versus last year.
Gerry Smith: as well as lower traffic and transactions in both our retail and e-commerce channels.
Gerry Smith: Demand was lower across most categories, including supplies, print, and furniture.
Gerry Smith: On a comparable store basis, sales were down about 10% as lower traffic, fewer transactions, and lower average order volume outweighed strong conversion metrics.
Gerry Smith: From an operating perspective, operating income was $23 million in the quarter, driven by the flow-through effect of lower sales, mix, and deleveraging in supply chain and occupancy costs.
Gerry Smith: Moving forward, we will continue optimizing our store footprint and look to further expand our customer value proposition through a wider variety of products and services.
Gerry Smith: We're also enhancing our value proposition through a multitude of partnerships, including with Telos for our TSA sign-up programs available in about 170 stores.
Gerry Smith: and relationships with Dormify, Hallmark, and Dun & Bradstreet, among others.
Gerry Smith: Also, we're taking the learnings from our recent performance in back-to-school category sales, and we're implementing strategies that focus on earlier execution of our capabilities, such as school supply lists and teacher wish lists for their classrooms.
Gerry Smith: We also have refined our pricing and promotion strategy moving forward to maximize elasticity of demand.
Gerry Smith: Now, turning to Bayer's performance as shown on slide 10.
Gerry Smith: Bayer continued 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 driving revenue growth from third-party customers.
Gerry Smith: On a consolidated basis, VEHR delivered sales of approximately $1.2 billion, derived predominantly from supporting our purchasing and supply chain operations, which are effectively eliminated upon a consolidation.
Gerry Smith: They are continuing to make strong progress with third-party customers, including winning a major contract with one of the world's largest social media-focused e-commerce companies as Gerry mentioned earlier.
Gerry Smith: Keeping in mind that some of VEIR's third-party profitability is accounted for as a contra expense instead of flowing through revenue, for Q3, VEIR delivered third-party revenue of over $14 million, or approximately a 30% increase over last year.
Gerry Smith: They drove third-party EBITDA of $3 million slightly down year-over-year as the company invested in resources to quickly onboard its slate of new customers in the quarter.
Gerry Smith: Now, turning to other recent accomplishments, in October, we completed the sale of our Varus division while retaining a 19.9% stake in the company after the sale.
Gerry Smith: As part of the agreement, we will fund up to $4 million of expenses that may be incurred by Veris following the transaction date until the end of 2025.
Gerry Smith: Beyond this, we have no other funding obligations to VERUS.
Gerry Smith: Other terms of the transaction did not result in a materially different impact than we previously estimated in our Q2 financial statements.
Gerry Smith: The completion of this sale unburdens our P&L and reduces cash flow demands while continuing an invested interest in future growth opportunities.
Speaker Change: Now I'll turn it over to Adam to cover our balance sheet highlights and amended 2024 guidance.
Speaker Change: Thank you, Max, and it's great to be here with everyone this morning. I'm Adam Haggard, Senior Vice President of FP&A and Co-Interim CFO.
Speaker Change: Turning to slide 12, our balance sheet liquidity position remains strong, ending the quarter with total liquidity of $728 million, consisting of $192 million in cash and cash equivalents, including $11 million that is presented in current assets held for sale related to the VAERS division.
Speaker Change: and $536 million of available credit under the Fourth Amended Credit Agreement.
Speaker Change: Total debt was 246 million dollars.
Speaker Change: Moving on to capital allocation
Speaker Change: 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.
Speaker Change: In the third quarter, we repurchased just over $100 million of our stock.
Speaker Change: and a total of $295 million for the year to date.
Speaker Change: As Gerry mentioned, moving forward, we are redirecting investment into core B2B resources to capture the large growth opportunities.
Speaker Change: that are before us at ODP Business Solutions and at VEYR.
Speaker Change: Considering the large amount of shares we already repurchased this year and our focus on reprioritizing investments into our core to drive growth, we expect to substantially reduce the pace of our share repurchases as we close out the year.
Speaker Change: We have a tremendous opportunity to invest in growth in our B2B businesses, and we believe this approach will drive the highest ROI and create long-term value for shareholders.
Speaker Change: Now turning to our guidance on slide 13. As you heard this morning, our results here to date have clearly been pressured by the continued challenging macro and business environment, strong competition, and the impacts from the recent hurricanes.
Speaker Change: That said, we are making very meaningful progress on several initiatives to drive sustainable growth in the future.
Gerry Smith: While it does take time to be reflected in our results, we are investing in these opportunities and are confident we are on the right path to create increased shareholder value.
Gerry Smith: considering our performance to date, current market dynamics, and our decision to fast-forward investments in future growth opportunities.
Gerry Smith: We are amending our 2024 guidance as follows.
Gerry Smith: We are maintaining our revenue guidance at approximately $7 billion for 2024.
Gerry Smith: We're lowering our adjusted EBITDA outlook to a range of $260 to $300 million and our adjusted operating income to a range of $160 to $200 million.
Gerry Smith: We are also lowering our outlook for adjusted earnings per share to a range of $3.10 to $3.80 per share. And finally, we are suspending our guidance for adjusted free cash flow as we invest in the exciting growth opportunities that we previously mentioned.
Gerry Smith: Overall, to reiterate, our revised guidance takes into consideration the near-term investment demands occurring before year-end and initiatives to capture new growth opportunities we described, including the pursuit of attractive new industry segments as discussed.
Gerry Smith: With that, I will turn the call over to Gerry for his final remarks.
Gerry Smith: Thank you, Adam. Before I turn it over for Q&A, I would like to highlight four key points about our performance and strategy and the reason for our enthusiasm as we move forward. First, there's no question that our business has faced challenges this year and our overall performance has been below expectations.
Gerry Smith: While it has been difficult, we are working to navigate through the challenging macroeconomic environment and we are making progress in positioning our business to gain better traction in the future.
Gerry Smith: Second, underneath the surface, we're making significant progress in leveraging our core strengths to evolve our business to higher growth and more sustainable B2B market opportunities.
Gerry Smith: Our core strengths are centered around our flexible, nationwide supply chain, our large and growing B2B customer base, and our strong value proposition.
Gerry Smith: all backed by a solid balance sheet.
Gerry Smith: Third, we are gaining traction and building momentum for the future. We are leveraging these assets and winning meaningful new contracts in our traditional business, including winning one of the largest contracts in our company's history.
Gerry Smith: We're also evolving our capabilities to pursue growth in new, non-traditional industry segments. These new industry segments are relevant adjacencies to our core and offer tremendous opportunities for growth. And, as I mentioned, one of the areas we are targeting and showing great promise is in the hospitality industry segment.
Gerry Smith: And last, we are strategically investing to seize these opportunities.
Gerry Smith: We believe that channeling capital into our core areas to drive growth will yield strong returns on investment and deliver the best long-term value for our shareholders.
Gerry Smith: While it may take time for these efforts to reflect in our results, we have a clear and promising path ahead.
Gerry Smith: Our team is focused on capturing these B2B opportunities.
Gerry Smith: driving operational excellence and delivering long-term value to our shareholders. With that, operator will turn it over for questions and answers.
Speaker Change: Thank you. At this time we will conduct a question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Gerry Smith: Thank you.
Speaker Change: Our first question comes from the line of Michael Lasser of UBS. Your line is now open.
Michael Lasser: Good morning. Thank you so much for taking my question.
Michael Lasser: It's on how did ODPs...
Michael Lasser: market share trend across both
Gerry Smith: the business solutions division, as well as retail.
Gerry Smith: within, not just the last quarter, but over the last few quarters, because it does seem like there is progressive weakness in the business, driven in part by a loss of customers, and that is harder to ascribe to simply the macro environment. Thank you very much, and then I have a follow-up.
Gerry Smith: Hi, good morning Michael, this is Gerry and I'll let Adam and Max jump in as well.
Gerry Smith: I would say we're holding our own. I mean, you saw the B2B win we just had. That's a very, very sizable win on the B2B space in the traditional office supply segment. That's obviously, it will be extremely accretive to us, you know, as we ramped up that over a period of time.
Gerry Smith: from a BDC perspective.
Gerry Smith: I definitely, you know, I would say we're holding our own, I mean, the hurricane impact and having three hurricanes in the quarter in our biggest markets in Florida and Texas.
Gerry Smith: Those were just a couple day type of impacts. We had, you know, distribution centers. We had B2B business all impacted by that. But I think, I'll let Max and Adam jump in, but I don't think we're losing a huge amount of market share to a specific person.
Gerry Smith: Yeah, and I'll jump in as well. Hi Michael, this is Adam Haggard. One of the nice things that we're seeing is that the trends moving forward are definitely more positive for us as we exit Q3 into Q4 and heading into next year. We're very optimistic. The new wins that we have, and we think that they're going to be really accretive to the business as we move forward as time moves on. Obviously, those wins need to ramp up, and they'll take some time, and we need
Michael Lasser: We need some near-term investment around them, which is great, it's a great problem to have for us. And we really are excited about the trajectory-changing new winds that we have underneath our belt at this point. And October and November has been stronger across especially the BDC business compared to Q3.
Speaker Change: Okay, my follow-up question is, obviously there's a ton of moving parts with ODP corpse, you know.
Speaker Change: but the market's going to extrapolate some of the recent performance.
Speaker Change: into next year. So A, why is that wrong? Why should the market not just take what has been the performance of the last few quarters and think that's a reasonable basis?
Michael Lasser: on how to look at 2025 from a profitability perspective. And B, how will the new distribution agreement as well as customer wins quantifiably impact ODP Corp's profitability next year? Thank you very much.
Speaker Change: So I'll jump in first and we'll let the guys jump in over the top after but from my The big difference is that the trajectory changing opportunities. We talked about that last time. There's three we're working on. We've delivered two
Michael Lasser: Obviously, the $1.5 billion over 10 years is very, very significant.
Michael Lasser: and working a lot a lot of other pieces so
Michael Lasser: We think that plus the...
Michael Lasser: continue progress we made in VEIR from a revenue perspective are our trajectory changing there's other things we're working on also that it's new business that we're not disclosing and discussing at this time so and I think we're seeing some stabilization from a market perspective that you know which was which has given us some optimism
Michael Lasser: The second piece, and I want to emphasize, is we're going to go look at the optimal operating model for our B2C business.
Michael Lasser: And just at a high level, we addressed SG&A really well at this company over the last six or seven years. We're really going to start digging into the fixed asset structure cost of the business.
Michael Lasser: And we think that is a significant driver for future profitability as we assess that. And we'll come back in the late February, early March when we do our earnings for 2024. And I think we'll have a very comprehensive strategy update for the market, and we're going to be able to address that.
Michael Lasser: A exciting path to the future of how we get back to a profitable growth across the business.
Michael Lasser: And again, and lastly...
Michael Lasser: We do a really good job from an operating model perspective of driving cash and we're going to continue to do that and driving costs across the business.
Michael Lasser: But I want to use the three words, optimize for growth, that's going to be a rallying cry of what we've focused on strategy-wise as a board, and we think we have the right adjacency markets that are similar in size, Michael, to our office supply markets, and they're growing at a four to six percent CAGR, depending on the market, and so, and those markets
Michael Lasser: fit perfectly with what our capabilities and strengths are from a supply chain, customer base.
Michael Lasser: Many of the customers are already customers who are in some of these markets.
Michael Lasser: And so we're going to go leverage to the entrance of these markets as a way to grow as well. Optimize for growth, optimize the BDC structure, continue to look at the fixed cost structure, and the new shoots are all ways to get a different trajectory in the business in 2025.
Speaker Change: Our next question comes from the line of Greg Burns of Hidoti. Your line is now open.
Greg Burns: Thanks. I just wanted to maybe follow up on the new industry segments you're targeting.
Greg Burns: You gave us just a little bit of the color, the size, and the growth of some of those markets, but could you just help us understand how you're penetrating those markets, what the conversations are like?
Greg Burns: Trying to move into these new markets sounds like Hospitalities may be a little bit more developed than maybe some of the other areas that you're you're looking at any other Kind of additional color on on how you're approaching expanding into these non You know traditional office categories
Speaker Change: Yeah, the key is it's leveraging our core strengths and you know some of the customers in these markets are already existing customers and honestly the conversations really were created out of conversations with our Dave's sales team and the customers.
Michael Lasser: And so we found that our core strengths can be leveraged in some of the other segments they operate in.
Michael Lasser: And what I like about these segments are A, they're growing, unlike office supplies, which is great. It's a similar market size. We already have a number of the customers as customers. We already have trucks delivered to a lot of these locations as well. So you can leverage that supply chain infrastructure. And you need that, you know, that competitive,
Michael Lasser: A lot of things you can't just get from a normal e-commerce type of play. And so it fits well from a competitive perspective, and we think there's a growth opportunity. And we're well into conversations, and we're going to attack this market aggressively. We think it's a...
Michael Lasser: And I love the fact it's literally almost the same size as our current B2B office supply market as well. So getting into the growth market, same skill set, same supply chain, same customer footprint, same sales team, et cetera, et cetera.
Speaker Change: Okay and obviously you announced the large 1.5 billion dollar deal but what does the pipeline look like in terms of maybe
Speaker Change: How far along maybe some of these conversations are where you maybe have line of sight on signing a couple of new kind of trajectory changing deals in the first half of next year?
Speaker Change: Yeah, so on the $1.5 billion deal, that deal is signed and we're already working on the transition and implementation plans across that business, so you'll see that grow.
Speaker Change: throughout. We'll start to ship a little bit this quarter and a lot more into 25.
Speaker Change: and so super happy because that is obviously...
Speaker Change: You know, a tremendous number of basis points to growth for us as a company.
Speaker Change: A number of other deals are in the pipeline, obviously for competitive reasons I'm not going to get a lot of detail.
Speaker Change: We have some other trajectory-changing opportunities we're going to work on through Q4 and Q1, and we're very optimistic that—I really want to emphasize that we think the B2B pivot is working, and this is the first—
Speaker Change: Stake in the sand on that plus the VEIR supply chain opportunity is a significant opportunity and as I said in the last earnings It's as big as what what 2023 revenue was for VEIR and so that it is the case and could be could be higher than that
Speaker Change: And so we're going to continue to grow that opportunity because we think that can yield additional results for the bear business also. So we think our future is in B2B. We're going to go look for the optimal.
Michael Lasser: you know, operating model for B2C. Again, I want to really focus on having an investor here, but we're really going to look at the fixed cost infrastructure around that business and find the optimal model, put us in a more profitable competitive position going forward.
Speaker Change: Okay and then when we think about kind of the level of reinvestment that you're making, you didn't talk too much about Project Core in your pair remarks, but how should we think about kind of
Speaker Change: What you've talked about targeting is the $100 million you're targeting from Project Core versus maybe what's going back in the business. Is there a net number we should think about next year?
Speaker Change: Let me talk high level and then I'll flip it over to Max and Adam.
Speaker Change: The project core is pretty much complete. We know $100 million for 2025 operating.
Speaker Change: is the right number.
Michael Lasser: Again, as we look at the optimal operating model for our B2C business, we're going to continue to look at...
Speaker Change: The fixed cost structure plus the SG&A structure across the businesses and more to come in the late February, early March meeting, but Max, Adam, anything to add?
Speaker Change: Hi Greg, this is Max. I just wanted to add quickly, progress on Project CORE. We are right on track of where we want to be. The majority of actions are in this year and we're substantially complete with our spend. So right on track for what Gerry said for next year.
Speaker Change: Okay, but just in terms of what you're now talking about reinvesting back in the B2B so that you're taking some of that hundred and putting it back in the business. Is there like a net number maybe we should think about?
Speaker Change: Now, yes, we're putting investment back into the business, but for competitive reasons, we want to make sure, we can't disclose that, but we are investing in.
Speaker Change: Obviously ramping inventory to ramp up the large new wind and obviously the infrastructure from a VEIR perspective to ramp up the large customer we already have as well. So that we are making investments in those categories and as we enter into some of these other segments we'll make investments because those are new suppliers and new opportunities and new inventory also.
Speaker Change: So, we're not being disorderly from an investment and inventory perspective. But it is taking some, in the short term, some of the cash. I do want to highlight, we're not negative on cash. We're producing positive cash flow through the year. Because of these investments, it was hard to guide to the exact number.
Speaker Change: Adam, do you want to add any color on that? Yeah, no, it's a great point, Gerry, right? At the end of the day, we have a little bit of a near-term bubble of work and capital investment that we expect between now and the end of the year, right?
Speaker Change: We're highly focused on that return on invested capital and moving into the these new green shoots that we see out there. So very exciting. Yes we have a high, you know degree of
Speaker Change: So, you know, exciting days ahead. We look forward to this opportunity to reinvest our capital as we move on.
Speaker Change: All right. Thank you.
Speaker Change: Thank you so much.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Joe Gomes of Noble Capital. Your line is now open.
Joe Gomes: Good morning.
Speaker Change: Good morning, Joe. I was wondering...
Joe Gomes: Could you quantify the impact of the hurricanes for the quarter?
Speaker Change: It's very difficult to do. Yes, we can quantify it. A store was closed for this period of time. Here's the average store sales.
Speaker Change: But what it doesn't do is, and which we know is a much larger impact and harder to quantify, and I'm looking at my chief legal officer here because we've had that debate of, we know it's a big number, but we had D.C.'s, for example, closed after Helene and Milton in Florida, and that's Dave's B2B business.
Speaker Change: I sit in a daily retail B2C review with Kevin Moffitt every day and we know that those regions were down substantially day after day.
Speaker Change: Jolene was probably the most impactful hurricane we've ever seen.
Speaker Change: And so, hard to go quantify, as we compare that number to other regions, it was much, much lower.
Speaker Change: But, you know, it's hard to say this is the exact number, but it is a big impact. And, you know, three within the quarter, and we saw it leaning into Q4 as well, obviously, with Milton. And so another reason why it's like, you know, you can't make up four hurricanes in a hundred plus days.
Speaker Change: and so but it is a substantial impact you know and but macroeconomic conditions are an impact as well you know it's a competitive market as well and so it you know all those things had an impact so it's really hard for us to land on it on an exact number but it's in my tenure here it's the biggest impact we've seen
Speaker Change: Okay, and then on the adjacencies, I kind of want to tack that one more time. You mentioned hospitality. Maybe you can give us an idea of some of the other ones that you're looking at.
Speaker Change: And obviously these people, these companies, are getting the supplies that they need already.
Speaker Change: Is it similar competition, you know, some of the same on office supplies, are you looking at new competitors in that space, and if so, maybe, you know, give us some of the bigger competitors that you're going against in the new adjacent spaces.
Speaker Change: Well, it's new competitors, new suppliers.
Speaker Change: I'll say complicated type of delivery that's difficult to do from an e-commerce perspective or a different path. And it's really an adjacency segment, it's not a big step outside the core too far.
Speaker Change: And so we think we can compete, we think we can be cost competitive. I mean the VEER business has ability to cost in a very unique way that very few people have. We built that tool internally. We have the ability to cost to a skew pick level.
Speaker Change: which very few 3PLs have, and so we know we can be competitive, we know we can do it at a competitive rate, and so...
Speaker Change: We think it's a market we can compete in and put pressure on some of the competitors in space. Hey, always respect competitors. I'm not going to go off and say, we think we can compete and be effective. Are we going to get 100% share? Heck no. We're going to go off and we think we can compete into a growth market with
Speaker Change: The infrastructure we have, we do it, again, we deliver trucks to a lot of those customers already.
Speaker Change: So there's a fixed cost, competitive...
Speaker Change: infrastructure advantages, if that truck's already going there, it's incremental.
Speaker Change: you know, cost to add something else to the truck.
Speaker Change: and so we think there's a unique advantage that we have compared to others.
Speaker Change: And I think, you know, we're excited with that opportunity.
Speaker Change: And I think if you look at, you know, beyond that, we think we can get into, for example,
Speaker Change: some of the same.
Speaker Change: but we think we can be competitive in all those areas. And Dave and his team, and Tom, and that team have done a great job of identifying this. And again, our customers helped identify some of these segments, which is fantastic. And so we're going to pivot hard to it. We're going to get into growth segments.
Speaker Change: and I think that's how we how we grow value in this business over the long term. Leverage our fixed cost infrastructure, make sure it's optimal, go get the B2B business growing and add our capabilities, what we really do well at and that's where we're going to go in.
Speaker Change: Great, thanks for taking my questions.
Speaker Change: Thank you. Appreciate it. One moment for our next question.
Speaker Change: Our next question comes from the line of Michael Lassner of UBS. Your line is now open.
Michael Lassner: One quick follow up question for you guys. When do you think you'll have enough visibility into your free cash flow generation to start providing guidance on that again? And is there a minimum that you would expect to be able to generate?
Tim Perrott: I'll let Adam and Max take that one.
Speaker Change: So, we know we'll have positive cash in Q4.
Speaker Change: That's going to be the key. The reason why we're not running with guidance right now on that metric is because there is a little uncertainty, to your term, on the...
Speaker Change: the shifting of working capital needs that are warranted, right?
Michael Lassner: Also, we're investing in people and processes, so we have a little bit of a technology investment that's going to be going on as well, which is going to utilize cash. So there's a little bit of a short-term bubble of volatility that we have to get through. But I can say that we do think that there will be a nice positive cash generation. Just how much? A little uncertain right now, just because of all the opportunities we see in front of
Speaker Change: and how we're allocating the capital in the right places at the right time to really propel ourselves into 2025.
Speaker Change: Thank you very much.
Speaker Change: Thank you, Michael.
Speaker Change: If there are no more questions, I will turn the call back over to Gerry Smith, ODP's CEO.
Gerry Smith: Thank you for our analysts as well as all our other listeners today for joining us. Again, we're not happy with Q3 performance and we're doing our best to change that. We're seeing some stabilization here in the last three or four weeks and going into November.
Speaker Change: We are very excited about our harder pivot to B2B. We'll evaluate and find an optimized operating model for our B2C business. We'll come back to you in the next earnings piece of that.
Speaker Change: I've talked about trajectory changing opportunities. The last one we delivered two big ones and we're very pleased with that.
Speaker Change: and there's more to come and we're going to continue to work on that.
Speaker Change: And we believe we have the right operating model, we have the right infrastructure, the supply chain was a huge asset for us, our 5C culture, our low-cost model, and our ability – and we haven't talked about it at all – we have a strong balance sheet.
Speaker Change: And we continue to have a strong balance sheet and we're liquid and we're continuing to generate cash as a company.
Speaker Change: And so we're going to invest that cash into growing this B2B segment, both the 3PL supply chain segment, as well as the, you know, B2B traditional segment, our Federation, as well as
Speaker Change: our hospitality and other segments going forward. So thank you for your time today. Come back to you in 90 days with a fuller plan on the B2C Optimal Optimization Plan. Thank you team for joining us today.