Q4 2024 The ODP Corp Earnings Call
Speaker Change: Good morning, and welcome to the ODP Corporation's fourth quarter and full year 2024 earnings conference call.
Speaker Change: All lines will be on a listen-only mode for today's call, after which instructions will be given to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President of Investment Relations and Treasurer. Mr. Perrott, you may now begin.
Speaker Change: Good morning, and thank you for joining us for the ODP Corporation's fourth quarter 2024 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 are Max Hood and Adam Haggard, our co-CFOs.
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 fourth quarter and full year 2024, including the progress we are making on our B2B pivot and our expansion into higher growth industry segments.
Speaker Change: After Gerry's commentary, Max will then review the company's results for the quarter and year, including highlights of our divisional performance, followed by Adam, who will highlight our balance sheet and comment on our go-forward plans.
Speaker Change: Following our comments, we'll 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.
Speaker Change: 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: 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: Thank you for joining us today to review our results and accomplishments for the fourth quarter and full year 2024.
Gerry Smith: This morning I'll walk you through our recent performance and the market challenges we faced over the past year.
I'll also focus on our promising strategic path forward.
Gerry Smith: highlighting the significant progress we're making in our B2B transformation and the exciting strides we've taken to position ODP for growth and new and expanding segments beyond traditional office supplies.
Gerry Smith: As I reflect on 2024, it was undoubtedly a challenging and dynamic year for ODP.
Gerry Smith: While we met our revised guidance, we were disappointed in our results for the year.
We face a number of challenges, both macroeconomic and structural.
Gerry Smith: during a highly competitive period for our business, impacting our business and our industry.
Gerry Smith: And we are not alone, as many businesses across several industries, particularly those with retail exposure, face similar challenges.
Gerry Smith: Over the past year, our management team and board have taken a hard look at the state of our industry and our business.
Gerry Smith: While our recent results have been challenging, we've been working diligently behind the scenes to change our trajectory and position ODP for a stronger future.
Gerry Smith: Our team has been analyzing and working to address the challenges facing the retail industry and traditional market segments.
Gerry Smith: We've been identifying winning strategies that leverage our core strengths and work to align our business to seize new growth opportunities.
Gerry Smith: recognizing our unique strengths in supply chain and distribution operations, we're realigning our business, making target investments in our core capabilities, and strategically positioning ourselves to expand in new market segments that require unique capabilities and a commitment to exceptional service quality.
Gerry Smith: Today, we're excited to see the early stages, what we call the green shoots, of these efforts beginning to take shape.
Gerry Smith: This, at its core, is what our B2B Pivot is all about.
transforming our business to unlock sustainable growth and long-term success.
Gerry Smith: Looking back on both the highlights and the challenges and our recent progress in positioning our business for future growth, I want to focus my remarks on three key message points that I hope to leave with you from this call today.
These are outlined on slide four of the presentation.
first.
While market-wide challenges have presented headwinds,
Gerry Smith: The core competitive strengths that underpin our business provide a solid and flexible foundation for our future growth.
These strengths include our robust supply chain assets,
Distribution Capabilities
Gerry Smith: an expansive B2B customer base that sets us apart in the industry.
Gerry Smith: They not only enable us to continue winning new business in our traditional segments, but also position us to successfully expand into new and growing industry sectors, providing key competitive advantages to win in dynamic industry segments.
Gerry Smith: This is the heart of our B2B pivot. Leveraging what we do best to drive sustainable growth and unlock new opportunities.
Second, leveraging these core strengths
Gerry Smith: We are making extraordinary progress on our B2B pivot, and we are expanding our business beyond traditional office supplies and into new, large, and growing industry segments.
Gerry Smith: We are on the brink of one of the most pivotal periods in our company's history.
Gerry Smith: as our core competencies are being recognized and are opening new and exciting avenues for future growth.
Gerry Smith: The first of these is in the hospitality industry, a growing $16 billion marketplace where we recently announced a milestone agreement with a leading hospitality management company to become a key supplier and distribution partner.
Gerry Smith: And third, building on our recent successes and momentum, we are accelerating our B2B pivot and have launched our Optimize for Growth restructuring plan to accelerate revenue growth in our B2B business.
Gerry Smith: We are realigning our resources and capital to more rapidly capture B2B growth opportunities.
while simultaneously reducing our reliance on retail.
Gerry Smith: Let me take a few moments to expand on these points.
and provide more insight into our recent results and accomplishments.
This is shown beginning on slide 5 of the presentation.
Gerry Smith: As I stated, 2024 was clearly a challenging year for our industry and for our business.
Gerry Smith: The weak macroeconomic environment impacted demand in both our B2C and B2B channels during a highly competitive period for our business, creating pressure on our results.
Gerry Smith: This was compounded by unusually severe weather conditions occurring in the second half of the year, impacting our operations and customer behavior in some of our major markets in the South.
Gerry Smith: We felt the impact of these challenges across all channels of our business.
Gerry Smith: In our B2C channel, Office Depot, we experience lower consumer traffic and demand in both our in-store and online channels.
Gerry Smith: This was largely driven by the macroeconomic factors I mentioned earlier, along with shifting consumer spending priorities as rising energy and food costs pressured household budgets.
Gerry Smith: These challenges were not unique to us, as many other retailers have faced similar headwinds.
Gerry Smith: That said, we have not been sitting still, and we've been working to drive demand by introducing new products and partnerships to deliver greater value to our customers.
Gerry Smith: We've expanded our product assortment to include celebration categories and greeting cards.
Gerry Smith: while also enhancing our service offerings with PSA sign-up services, expanded printing services, and wireless services through Verizon.
Gerry Smith: And over the past several weeks, we began to see improved traction in our retail business.
Gerry Smith: driven by targeted profitable sales campaigns and value-added promotions which are helping to boost demand as we start the new year.
Gerry Smith: In our B2B channel, O2P Business Solutions, we face headwinds throughout the year, including high inflation, constrained corporate spending budgets and layoffs, and strong competition.
Additionally, certain product categories continue to experience structural declines.
However, our core strengths, including a robust supply chain,
Gerry Smith: Flexible distribution capabilities and broad enterprise customer base remain key differentiators that enhance our competitive position.
Despite these challenges, we achieved significant wins.
Gerry Smith: securing large and profitable new B2B contracts that position us well for the future.
Gerry Smith: Our pipeline of new business opportunities also remains strong and continues to grow.
Meanwhile...
Gerry Smith: in our supply chain business there, we made remarkable progress attracting new third-party customers and delivering impressive growth in third-party revenue up 150% compared to the same period last year and up over 50% overall in 2024.
Gerry Smith: While these challenges weighed on our performance, our team has been diligently aligning the core assets that form the backbone of our business to strengthen our competitive position.
Gerry Smith: The flexibility and competitive advantage these assets provide enable us to drive growth in both our traditional market segments and our emerging markets.
and in new higher growth industries.
Gerry Smith: To that end, we continue to secure meaningful new business contracts in our traditional segments.
while positioning ourselves to expand in new industry segments.
Gerry Smith: For example, as we announced in Q4, we secured the largest new contracts in our company's history within our traditional B2B distribution and supply chain segments.
Gerry Smith: This included the largest enterprise contract we've ever won, a landmark agreement valued up to $1.5 billion in revenue over a 10-year period.
Gerry Smith: We're making solid progress onboarding this new customer and expect revenue contributions to ramp up as we move through the year and beyond.
Gerry Smith: In our supply chain business, we successfully launched strategic warehousing and fulfillment services
These are just two examples of transformative new business wins.
with our strong pipeline and core competencies.
Gerry Smith: We are confident in our ability to secure additional customers of similar size and scale in the year ahead.
Gerry Smith: The flexibility of our asset base allows us to leverage our core strengths across multiple industries.
positioning ODP to expand in new higher growth segments.
Speaker Change: This brings me to my second key message, which is highlighted on slide 6.
Speaker Change: We are making monumental progress in our B2B transformation, positioning ODP to drive profitable growth in new and expanding industry segments.
Speaker Change: and what I believe is one of the most exciting developments in the history of our company. Let me say that again, in the history of our company.
Speaker Change: and the results of focused strategic efforts by our team we have secured a landmark agreement with one of the world's leading hotel management companies to become a preferred supplier and distribution partner in the hospitality industry.
Speaker Change: This agreement marks a pivotal step in our evolution beyond traditional office supplies and is truly a game changer for ODP.
Speaker Change: representing a significant inflection point as we enter the 16 billion dollar hospitality supply industry, a market that is growing steadily and offers immense potential for ODP.
Speaker Change: Our partner was extremely impressed by the strength, reliability, and technical capabilities of our supply chain and distribution operations, selecting ODP as one of only a few preferred providers for operating supplies and equipment, or OS&E.
Speaker Change: Another key attribute that was mentioned, and perhaps the most important, was that ODP is very easy to do business with, listens to the customer, and delivers a very high level of customer service.
Speaker Change: Underpinning this commitment was VERA's unique visibility capabilities where customers can view product availability, lead times,
deliveries can track the product through our supply chain.
Speaker Change: This is a unique capability in the market that few, if any, possess.
Speaker Change: Through this partnership, ODP Business Solutions will serve as a distribution partner supporting the reoccurring in-room supply needs essential to run hotel operations.
Speaker Change: resetting rooms between stays, and helping our customers exceed their gift expectations.
This includes providing high-quality terries and towels.
Speaker Change: such as robes and slippers and towels, to elevated bed linens, such as pillows and duvets, and beauty products such as shampoos and soaps, all thoughtfully packed to meet the unique needs of each client and their guests.
Speaker Change: Additionally, we'll be expanding our product portfolio to include hotel room technology and in-room amenities, further enhancing the guest experience.
to put this in perspective.
Speaker Change: This agreement places ODP as one of only a few preferred and trusted suppliers in the $16 billion per year hospitality supply industry.
Speaker Change: A large industry that values our core strengths is growing mid-single digits.
Speaker Change: And while this is early, we're already beginning to receive inbound calls from other potential customers in the industry.
as well as related industries inquiring about our capabilities.
Speaker Change: And when you consider the related segments where our core competencies also shine, including health care and other industries,
Speaker Change: collectively to over 60 billion dollars per year in total addressable market.
Speaker Change: Our partner is excited about this newly expanded collaboration, and our team is ready and excited. We've already begun fulfilling some early initial orders and serving customers.
Speaker Change: We are excited that ODP is uniquely positioned to create a new standard of quality and a reliable service in this growing industry segment.
Now turning to my final point.
Speaker Change: following a comprehensive review of our business and building on our recent successes including our entry into the hospitality industry.
Speaker Change: We're excited to announce the launch of our Optimize for Growth plan.
robust distribution network, and strong B2B customer relationships.
Speaker Change: This plan focuses on driving growth in the B2B distribution and 3PL industry segments while reducing our reliance on retail business and its associated liabilities.
Speaker Change: Unlike previous restructured efforts, this initiative is not solely about improving efficiencies.
Speaker Change: instead is a forward-looking strategy aimed at realigning our resources and investments to enable us to more quickly capture the significant B2B growth opportunities we've discussed today while reducing fixed costs.
As part of this effort,
We are reshaping our organizational structure.
Speaker Change: refining our product offerings, enhancing our go-to-market strategies to better position ODP for success in the B2B marketplace.
Speaker Change: Additionally, we are accelerating our expansion into new and growing industry segments
including the hospitality
healthcare, and other adjacent sectors we discussed earlier.
In support, we are prioritizing investments in the resources
and infrastructure critical to drive B2B growth.
Speaker Change: while simultaneously reducing fixed costs associated with our retail operations such as store and select distribution leases.
Speaker Change: At the same time, we are suspending growth investments in our retail business as we continue to optimize our retail store footprint.
Speaker Change: However, I want to emphasize that while we are eliminating growth investments in retail
Speaker Change: We remain fully committed to delivering exceptional customer experience in our active retail locations.
from a financial perspective.
We expect this plan to be accretive to the business.
Speaker Change: generating more than 1.3 billion dollars in total value over its duration.
Speaker Change: This estimate does not include the additional value we anticipate from the early capture of our B2B revenue opportunities, which we believe will further enhance our growth trajectory.
Speaker Change: In summary, 2024 brought us market-wide challenges that said, over the past year, we've evaluated the current state of our business and the relative strength and capabilities of our core competencies.
from this.
Speaker Change: We've taken action and we've made meaningful progress in our B2B pivot.
Speaker Change: significantly strengthening our platform to drive growth in expanded and rapidly evolving marketplace.
Speaker Change: We recognize that our key assets continue to provide a flexible foundation that enhances our competitive position in both our traditional segments and positions us to enter new industry sectors.
Speaker Change: We are using these assets to drive growth in industry sectors where our core competencies provide a competitive advantage.
This is the essence of our B2B Pivot.
Speaker Change: We are making progress and entering large and growing new industry segments.
where these core strengths resonate.
Speaker Change: And while it is still early, we're beginning to see the benefits from our efforts and expect this to grow throughout the year.
Speaker Change: And we are aligning our business to more rapidly capture these B2B opportunities and reduce our reliance on retail.
Speaker Change: Well, it takes some time for these efforts to fully materialize in our financial results.
Speaker Change: We are confident that the opportunities we are pursuing will pave the way for sustainable, profitable growth in the future.
Speaker Change: The future is bright, and ODP is well positioned to capitalize on these opportunities and deliver long-term value for our stakeholders.
Speaker Change: With that, I will now turn the call over to Max Hood for a review of our financial results.
Speaker Change: Thank you, Gerry, and good morning to everyone on the call. I'm Max Hood, co-CFO.
Speaker Change: I would like to cover the specifics of our results for the fourth quarter on slide 10.
Speaker Change: Please note that our results, as presented, are for continuing operations.
Speaker Change: We generated total revenue of $1.6 billion in the quarter, which was down about 10% compared to last year's fourth quarter.
Speaker Change: This was largely related to lower sales in our retail business, Office Depot, primarily due to 47 fewer stores in service compared to last year and reduced retail and online consumer traffic, as well as lower sales in ODP Business Solutions.
Speaker Change: Gap operating income in the quarter was $20 million versus $52 million in the prior year period.
Speaker Change: This included $12 million of charges primarily related to non-cash asset impairments of operating lease right-of-use assets associated with the company's retail store locations.
Speaker Change: Excluding these charges, Adjusted Operating Income for the fourth quarter was $32 million compared to $57 million in last year's fourth quarter.
Speaker Change: Unallocated corporate expenses were $21 million in Q4. Adjusted EBITDA was $58 million in the quarter, compared to $83 million in last year's fourth quarter.
Speaker Change: This includes depreciation and amortization expense of $24 million in the fourth quarters of 2024 and 2023, respectively.
Excluding the after-tax impact from the items mentioned earlier,
Speaker Change: Adjusted net income from continuing operations for the fourth quarter was $20 million or $0.66 per diluted share, compared to adjusted net income of $43 million or $1.13 per diluted share in the prior year period.
Speaker Change: Turning to cash flow, operating cash flow from continuing operations in the quarter was $34 million, which included $70 million related to legal matter monetization, where the company is engaged in legal proceedings as a plaintiff, partially offset by $4 million in restructuring spend.
Speaker Change: This compared to cash provided by operating activities of continuing operations of $71 million in the same period last year.
Speaker Change: The reduction in cash flow was primarily due to the flow-through impact of lower sales, but also the timing of certain smaller items related to working capital, including inventory investments related to new business wins and forward buys to help mitigate tariff risks.
Speaker Change: We expect these investments and working capital to turn into cash relatively quickly in the first half of the year.
Speaker Change: Capital expenditures in the quarter were $25 million, flat with the prior year period, targeted primarily in growth investments in the company's core operations.
Speaker Change: Adjusted free cash use in the quarter was $57 million, compared to free cash flow of $48 million generated in the same period last year.
Speaker Change: Turning to slide 11, I've highlighted some key performance measures for the full year 2024.
Speaker Change: Total company sales for the year were $7 billion, compared to $7.8 billion in the prior year.
Speaker Change: The decrease in revenue was largely related to lower sales in Office Depot, primarily due to fewer stores in service, as well as lower traffic in-store and online, as well as lower sales volume in ODP Business Solutions.
Speaker Change: As reflected on a full year gap basis, we recorded operating income of $163 million versus $330 million in the prior year.
Speaker Change: Full Year Adjusted Operating Income was $173 million compared to $351 million in 2023.
Speaker Change: Adjusted operating income from continuing operations excludes 70 million of income related to legal matter monetization where the company is engaged in legal proceedings as a plaintiff, offset by a total of 80 million dollars of charges related to asset impairments and restructuring.
Speaker Change: Excluding the after-tax impact from the items mentioned earlier, 2024 adjusted net income from continuing operations
Speaker Change: was $114 million, or $3.30 per share, compared to $263 million, or $6.61 per share in the prior year.
Speaker Change: Finally, regarding cash flow for the year, cash provided by operating activities was $159 million compared to $360 million last year.
Speaker Change: CapEx was $98 million in 2024, reflecting growth investments in the company's core operations.
Speaker Change: In total, we generated adjusted free cash flow of $33 million in the year.
Speaker Change: Now, I would like to cover a business unit performance, starting with our ODP Business Solutions Division on slide 12.
Speaker Change: ODP Business Solutions faced a challenging year as performance was influenced by a persistently weak macroeconomic environment and difficult business conditions.
Speaker Change: Elevated inflation and widely publicized corporate layoffs contributed to tighter budgets and reduced enterprise spending, all within an intensely competitive landscape.
Speaker Change: From a product standpoint, most categories were lower on a year-over-year basis, including technology products, a factor that many other companies are experiencing industry-wide.
Speaker Change: 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 related fixed-cost deleveraging resulted in operating income of $25 million in the quarter compared to $34 million in the prior year period.
Speaker Change: Despite the challenges, we are encouraged by our recent momentum, highlighted by significant new customer wins and an overall improvement in deal flow, which is strengthening our late-stage pipeline.
Speaker Change: Notably, we are making progress in onboarding the largest new customer in our history. A milestone we expect will drive meaningful contributions to our business in future quarters.
Gerry Smith: As Gerry mentioned, we anticipate securing additional large-scale business customers of similar size this year.
Gerry Smith: We're also thrilled about our recent entry into the hospitality industry, which positions us to deliver our value proposition in a large and rapidly growing market.
Gerry Smith: Overall, while the past year presented challenges, we are optimistic about our long-term trajectory and expect ODP Business Solutions' top-line performance to stabilize and begin to improve in future quarters.
Gerry Smith: Now, turning to our results in our Consumer Division, Office Depot, as shown on slide 13.
Gerry Smith: Office Depot's top line continued to be challenged as the weaker economy and the impact of inflation reduced the pace of spending during a highly competitive period for our business.
Gerry Smith: Traffic trends and demand were lower year over year, compounded by consumers reprioritizing spend due to high energy and food costs.
Gerry Smith: Additionally, we had fewer stores in service versus last year, and the effects related to the severe weather negatively impacted sales.
Gerry Smith: Reported revenue for the quarter stood at $784 million, a 13% decline, driven by 47 fewer retail stores and service versus last year, 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.
On a comparable store basis, sales were down 8%.
Gerry Smith: That said, we've begun to see improved traction in our retail business, driven by profitable sales campaigns and value-added promotions, which are helping to boost demand as we start the new year.
Gerry Smith: From an operational standpoint, operating income for the quarter was $30 million, reflecting the impact of lower sales, mix, and deleveraging in supply chain and occupancy costs.
Gerry Smith: While this result was lower compared to the same period last year, it did show sequential improvement.
Gerry Smith: Moving forward, we will continue optimizing our store footprint as we execute on our Optimize for Growth restructuring plan.
Gerry Smith: We're also working to further enhance our customer value proposition through a wider variety of products and services.
Gerry Smith: We are expanding our value proposition through a multitude of partnerships, including with Telos for our TSA sign-up programs, now available in about 210 stores, and relationships with Hallmark, Crayola, Dun & Bradstreet, and Verizon.
Gerry Smith: We are also applying key learnings from last year's performance in the back-to-school categories to refine our strategies and drive stronger results.
Gerry Smith: Additionally, we have optimized our pricing and promotion strategy to better align with demand elasticity, helping to improve our performance moving forward.
Now, turning to Bayer's performance as shown on slide 14.
Gerry Smith: Bayer continued to experience 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, VEIR delivered sales of $1.1 billion in the quarter, primarily derived from supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation.
Gerry Smith: VEHR continued to make strong progress with third-party customers including onboarding and executing upon a major contract with one of the world's largest social media focused e-commerce companies that Gerry mentioned earlier.
Gerry Smith: For Q4, VEIR delivered third-party revenue of $20 million, up 150% over last year.
Gerry Smith: VEHR drove third-party EBITDA of $1 million down year-over-year as the company invested in resources to onboard its slate of new customers in the quarter.
Gerry Smith: Now, I'll turn it over to Adam to cover our balance sheet highlights and amended 2024 guidance.
Gerry Smith: Thank you, Max, and it's great to be here with everyone this morning. I'm Adam Haggard, Co-CFO.
Turning to slide 16.
Gerry Smith: Our balance sheet and liquidity position remains solid, ending the quarter with total liquidity of $644 million, consisting of $166 million in cash and cash equivalents.
Gerry Smith: and $478 million of available credit under the Fourth Amended Credit Agreement. Total debt was $279 million.
Moving on to capital allocation
Gerry Smith: We continue to execute our capital allocation strategy, primarily investing in our core to drive the future of our business.
Gerry Smith: We invested $25 million in CapEx in the quarter, targeted in our supply chain operations, distribution business, and IT innovation to set ourselves apart in the industry.
Gerry Smith: We also bought back $43 million in share repurchases in the quarter. As we move forward, we expect to prioritize our capital allocation towards investment and core B2B resources over share repurchases, positioning us to capture the growth opportunities Gerry discussed earlier at ODP Business Solutions and AVAIR.
Gerry Smith: We have tremendous opportunity to invest in growth in our B2B business and we believe this approach will drive the highest ROI and create long-term value for our shareholders.
Speaker Change: Before I turn the call back to Gerry, I would like to make a few final comments about our Optimized for Growth Restructuring Plan and Outlook.
This is shown on slide 17.
Gerry Smith: As Gerry mentioned, this plan is focused on positioning ODP to accelerate revenue growth in our B2B business and to reduce fixed costs throughout the organization.
Gerry Smith: Throughout this multi-year plan, we will prioritize investments in resources and infrastructure critical to growth in the B2B sector.
Gerry Smith: while reducing fixed costs associated with retail operations, including store and distribution center leases.
Gerry Smith: Concurrently, we will suspend growth investments in our consumer and retail business as we continue to optimize our retail store footprint.
Gerry Smith: Over the life of this restructuring plan, we expect to incur total cash costs in the range of $185 to $230 million, while generating a total uplift in EBITDA of $380 million over the life of the plan.
Gerry Smith: This is driven by cost savings related to store consolidation and supply chain optimization.
Gerry Smith: When considering the total expected value generated, including the reduction of lease liabilities, the plan is expected to generate approximately 1.3 billion dollars in total value.
Gerry Smith: This does not include the expected benefits of early capture of B2B revenue opportunities.
Now, a final comment regarding our 2025 Outlook.
Gerry Smith: As we execute our restructuring plan and analyze the pace of our entry into the 16 billion dollar hospitality market and the traction of our new recent business wins.
Gerry Smith: That said, directionally, we expect to generate higher levels of free cash flow this year over last year, and expect to maintain the same level of leverage throughout the year.
Gerry Smith: We also expect to gain traction in our B2B segment through our new business contracts, including generating growth in the hospitality segment throughout the year.
With that, I will turn the call back to Gerry.
Gerry Smith: Thanks, Adam. Before we open the floor for questions, I'd like to take a moment to reiterate a few key points.
Gerry Smith: First, we recognize this has been a challenging and dynamic year for our company, our industry, and our shareholders.
Gerry Smith: I want to express my deepest gratitude to our entire team for their incredible efforts in working to navigate these headwinds and implement the initiatives necessary to position us for long-term success. Thank you, team, for your dedication and hard work.
Gerry Smith: Second, despite the challenges, we are genuinely excited about the future of our business.
Gerry Smith: Our core competitive strengths, such as our robust supply chain, advanced distribution capabilities, and expansive B2B customer base, provide a strong and flexible foundation for future growth.
These assets differentiate us in the marketplace.
Gerry Smith: and position us to win new business in our traditional segments while enabling us to expand into new and exciting growing industry sectors.
and we're already making great strides.
Gerry Smith: Not only are we securing significant new business in our traditional B2B segment, we've also successfully entered a large and rapidly growing new market, the hospitality sector.
Gerry Smith: This marks a monumental milestone for ODP as it allows us to leverage our core competencies into a new industry where our strengths are highly valued.
Gerry Smith: Beyond hospitality, we see significant opportunities in other adjacent industry segments that we believe will benefit from our expertise, and we are actively planning to target these segments in the future.
Gerry Smith: Finally, to accelerate these efforts, we're executing our Optimized for Growth Restructuring Plan. This initiative is designed to enhance our ability to capture B2B growth opportunities.
reduce fixed costs and decrease our reliance on retail.
Gerry Smith: Together, these efforts form a powerful formula for driving future growth and increasing shareholder value. We are confident the future is bright for ODP. With that, I'll turn over to the operator for your questions.
Speaker Change: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Our first question comes from the line of Greg Burns with Sidoti. Your line is now open.
Good morning.
Speaker Change: Can you just talk a little bit about the genesis of the hospitality deal?
Did they come to you, or did you...
source that deal internally through some of your
external, I guess, growth initiatives and then...
Speaker Change: Now that the deal's been announced, can you talk about maybe the market reception to that deal and what kind of doors it's maybe opening up for you in the broader hospitality segment?
Speaker Change: Sure, Greg, thank you so much. First, we had an existing relationship on the traditional business side with that customer.
Speaker Change: And it really came from a question of what else can we do for you? And the procurement person there had the vision of...
had a need for a reliable, world-class, predictable supply chain.
Speaker Change: That started the genesis of it. That person saw five different distribution centers for our business.
Speaker Change: Not just one, but look at the five different ones and on stage in front of our sales teams basically said that despite our supply chains, the key weapon is going to be a differentiator for us, which we've been saying for a long time.
Speaker Change: We're super excited by this. This is an invention-only type of industry. It's complex, it's hard, but our supply chain motion has that capability. We have visibility tools.
you know, for their franchisees and for their customer base.
Speaker Change: There will be a lot of joint sales efforts across the board, but we have spent a long time working this. This was not an overnight piece.
Speaker Change: And, you know, it took a lot of time and effort and we realigned the entire company to go make sure we got this.
But yeah, we are super excited because
Speaker Change: You know, their distribution partners are limited, and so we're one of their preferred partners.
Speaker Change: We have some exclusive products with them as well. So we believe this is a huge opportunity for a growth sector that, you know, we've made the investments in inventory already, and so we're ready to go. And it's a matter of it's very early.
literally just launched in the last couple of weeks.
Speaker Change: But we're going to wrap this up, and again, it's a 46% Haggard per year, it's one of the top players in the industry, it's given us...
tons of credibility. We've had inbound calls.
Speaker Change: from people within that sector of the industry, some of the other large players.
Speaker Change: And because of the fact it's who it is, this partner, it gives us tremendous credibility from a... Because we've gone through the... They've gone through the due diligence and the...
Speaker Change: of us as a supplier. Also got calls from related industries as well, a part of that $60 billion segment that I spoke about in the script.
that are, because some of the suppliers have the,
Speaker Change: are the products that we need to go off and be successful in those segments.
Speaker Change: So we're excited by hospitality. We're excited by the adjacencies. I'm also super excited by...
Speaker Change: The actual suppliers are new to us, and we ramp those up very quickly, and our team did a great job at that, partnering with our
our partner and the suppliers.
Speaker Change: That's also a ticket in. You can't just walk into an industry. You have to have the supply base to do it.
We have that now, and we have some...
Speaker Change: with one of the providers. We're gonna do joint go-to-markets together, do a lot of distribution for them. So there's multiple angles of growth here, and we think it's, I believe it's the most important inflection point in the company in the last 15 years.
Speaker Change: versus retail and versus our core, this is a growth sector, this is an area that we can exit into and I think the potential is very large in the future.
Speaker Change: Great, and how should we think about the the revenue ramp from this deal?
Speaker Change: Is this like a hunting license? Do you now have to go out to the individual operators and secure business? You know, so will it ramp slowly over time? Like how should we think about how this this builds and how you gain share maybe from the the existing distribution partners?
Speaker Change: It's a combination of both. There are some products that they've given this exclusive distribution to, so that will be helpful as we ramp that up. And it also is a hunting license as well.
Speaker Change: And the ability for the partners and the joint selling that we're doing with that distribution, with that hospitality partner, having joint sales go to market with that is going to be very, very valuable for us as well. So we have to do both, but I think it's exciting that we have exclusive products.
Speaker Change: I'm excited with the go-to-market, and I'm excited with the go-to-market with the suppliers as well and to their customer base also.
and we're shifting assets.
Speaker Change: Sales assets to be exclusively dedicated on the hospitality segment and hiring capabilities from the outside as well. Dave and his team have done a great job. We put a bunch of resources dedicated to this across Dave's team and some of our most tenured people. So across the board, we've aligned and invested behind this.
Speaker Change: Okay, and then with the Optimize for Growth plan, the cost savings and the...
Speaker Change: the uplift in Abu Dhabi you're projecting. What is the time frame of that plan? Like, you know, when do you expect... you mentioned, I guess, 380...
Speaker Change: million of EBITDA uplift over a certain period. What is that time period and how should we expect, what is the cadence of that? Do you expect much this year or is it more back-end loaded?
Speaker Change: Hey, Greg. This is Adam Haggard. So, to answer your question, we're looking at a multi-year plan here, right? This isn't going to be a one or two year experience for us. We're looking at more of a three to four.
End of this.
Speaker Change: and continue to keep leverage and liquidity constant while we're working throughout this program.
Okay, thanks.
Speaker Change: When you look at the retail segment, I appreciate kind of the...
the acceleration of the optimization there.
Speaker Change: The refocusing of the assets, but have you considered maybe strategic alternatives for that business? I know in the past there's been
some thought about maybe splitting up the the two businesses?
Speaker Change: So, Greg, we always are looking for ways to, you know, maximize the shareholder value of our base, right? So, whatever that may look like, we're always open to exploring those opportunities.
Okay, thank you.
Speaker Change: Thank you. Our next question comes from the line of Michael Lasser with UBS. Your line is now open.
Speaker Change: Hi, good morning. This is actually Zain Barak on for Michael Lasser. Thanks a lot for taking our questions. Could you please discuss your assumption for the growth in the B2B office suppliers market this year and within the core segment, what are your expectations for ODP's market share through the course of the year?
Speaker Change: So, Zane, if I heard you correctly, you're looking for forward-looking, are we in the OP business, are we on a decline in the OP business, the office supply business? Is that the genesis of your question?
Speaker Change: We just wanted to share about your expectations on market share.
Speaker Change: Market share is a little tough to gauge. Right now we're seeing a lot of those products in that sector are on macro declines, right? They have been for quite some time. There's a, you know, it's becoming more and more fragmented as time moves on, so market share is a little hard to gauge as to what's going on in the office supply sector.
Speaker Change: Okay, and then your assumption for the growth in the B2B office suppliers market?
Speaker Change: Yeah, we, look, I mean, overall, what we're looking at in the B2B segment is that we're holding strong.
and Arlain at this point.
Speaker Change: The overall business itself has been on a constant trend. We saw throughout 2024, the business has been pretty consistent.
We don't see it really moving.
Speaker Change: Anything that changes, obviously, in future quarters, we'll have some guidance updates as we move forward. We'll give you an update as we see 2025.
Speaker Change: And as a part of that, what is the minimum capex that is needed for the B2C business going forward?
Speaker Change: I'll take the first part. Absolutely, the expectation is to grow in hospitality.
Groen 3PL, and the VERA business.
Speaker Change: at which will help offset over time. Obviously there's timing windows, but we believe that why this is so important is that the hospitality piece can be one of the largest segments of our business in the future.
Speaker Change: and that will help offset any type of optimization from a retail business perspective longer term.
Speaker Change: Now, that's not going to be an exact science, you know, but the reality is the opportunities there.
We have the entrance in, which, again, it's inventation only.
We've passed that...
Speaker Change: hurdle, we're ramping, we have new suppliers, so we got to go grow that business. Dave and his team are focused and dedicated to go off and go do that. John's going to go grow his business and over a period of time, we'll do everything we can to ensure we are supplementing decline on B2C with growth in B2B.
Speaker Change: Thank you. If I can ask one more, how much exposure does ODP have to the federal government? What could be the impact from the efficiency measures that are being implemented and has the company already seen an impact?
Speaker Change: Yeah, no, I mean, it's not a huge impact for our business. We don't do a ton of federal business at this moment.
Okay, thank you so much.
Hey, good morning, guys. Thanks for taking my question.
Thank you.
Speaker Change: So you guys touched some really on the guidance and preparing them more. Can you guys kind of expand on those remarks and maybe just add a bit more clarity to them?
Yeah, so Josh, it's Adam again.
Speaker Change: More or less the the new customer segments that we're heading into are they have a different pace Than our normal customer base and because of that different pace and revenue we are you know We're in early days, right if you give like a baseball analogy We just came out of spring training and we're in the first inning of this
Speaker Change: We're very excited about it. We know that it's going to have a meaningful change in the B2B business.
However, it does, it does, you know...
Speaker Change: It does give us pause with coming out with guidance right now just because of how that pace is going to work within our business. Not only that, but we're investing and changing our capital allocation to grow and create those unique assets inside that B2B business.
Speaker Change: and our delivery, our distribution side. More or less it's, you know, in the future coming quarters, it will have more certainty as to how that business is going to react into this new segment. And at that point, we'll be able to come out with firm guidance and be able to forward look better.
Speaker Change: Okay, that's helpful. And, you know, obviously, you know, you guys are seeing really good growth in that kind of hospitality segment, or future growth, and that it seems like it's a, you know, it's a bright spot for you guys. Can you guys talk about really maybe, you know, those adjacent markets that you guys maybe have seen, is there one that maybe has a bit more interest than the others? You know, maybe healthcare, cruise lines you guys have mentioned before. Can you guys just talk about a little bit of that pipeline?
Speaker Change: Yeah, I mean, obviously, you know, you think of towels and sheets and all, you know, amenities, all those are, you know, you go down the line, cruise lines, hospitals, you know, nursing homes.
Speaker Change: you know, prisons, you know, healthcare from a hospital perspective, all those are areas that we've had inbounds already from some of those sectors, so all those are potential. That's why I keep trying to highlight the importance of the supply base.
Speaker Change: So, we'll have over 60 new suppliers from this space, and that makes a huge difference because it allows us now an immediate entry in as we get these inbounds to have conversations of how we can fulfill.
And that's the $60 billion segment.
Speaker Change: Obviously, you know, it was negative in the quarter in the adjusted free cash flow way. Yeah, just a little bit more clarity and color on that.
Speaker Change: Yeah, there were three major areas of investment that were made in Q4. One was within our social media e-commerce customer that we had. We had a working capital investment that was there. We also had a working capital investment with, you know, trying to get ahead of the tariffs.
Speaker Change: And then the other working capital investment we had was going into this new hospitality segment. So those are three big points that we made a conscious investment into.
Speaker Change: and that conscious investment, we will reap the benefits of them through 2025. That's why we feel very confident in our free cash flow being up year over year.
Speaker Change: But that really sums up the experience as to what we tried to get ahead of in Q4. It was an investment that was consciously made, and yeah, that pretty much sums it up.
Thanks so much, guys.
Speaker Change: Thank you. That concludes the Q&A session for today. I will now turn the call back over to the ODP Corporation's CEO, Gerry Smith, for any closing remarks.
Speaker Change: Yes, so we thank you everyone for joining the call today, but I just want to emphasize that we believe this is an extremely important inflection point in our company's history.
We have an opportunity with a partner that's...
One of the largest in the hospitality sector.
We are now, you know...
Speaker Change: They're one of their preferred partners. We're starting to ship products. This opens up the $16 billion market It also opens up the supply base. I spoke about opens up the $60 billion market and You know, we still have a strong balance sheet and we have the ability with our extensive customer base
Speaker Change: to continue to do well in 3PL, continue to grow our share in B2B Core as well as we think this hospitality pivot is.
Speaker Change: It's extremely important for the business and we're going to continue to optimize for growth gives us tremendous value in the future from a EBITDA uplift perspective as well as Reducing our fixed cost exposure across the business as well as our lease liability
Speaker Change: So we think we're well positioned for a lot of value creation that we don't think we're currently receiving from a market perspective
Speaker Change: Thank you everyone for joining the call today, and we look forward to talking to you in the future.
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