ODP Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 4 speakers on the call.

Operator

Good morning, and welcome to the ODP Corporation's First Quarter 2023 Earnings Conference Call. All lines will be on listen only mode for today's call, after which instructions will be given in order to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations and Treasurer. Mr.

Operator

Parat, you may now begin.

Speaker 1

Good morning, and thank you for joining the ODP Corporation's 1st Quarter 2023 Earnings Conference Call. This is Tim Perrott, and I'm here with Jerry Smith, our CEO and Anthony Scaglione, our Executive Vice President and CFO. During today's call, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments For the Q1 of 2023, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Jerry's commentary, Anthony will then review our Q1 financial results, including highlights of our divisional performance. Following Anthony's comments, we will then open the line for your questions.

Speaker 1

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. These forward looking statements reflect the company's current expectations concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in the company's filings with the U. S. Securities and Exchange Commission.

Speaker 1

During the call, we will use some non GAAP financial measures as we describe business performance, The SEC filings as well as the earnings press release, presentation slides that accompany today's comments and reconciliations of the non GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor. Dot theodpcorp.com. Today's call and slide presentation is being simulcast on our website and will be archived there for at least 1 year. I will now turn the call over to Jerry Smith. Jerry?

Speaker 2

Thank you, Tim, and good morning to everyone on the call. We really appreciate you joining our call today, And we're excited to be here with you this morning to discuss our Q1 2023 results. As you can see in the earnings release that we issued this morning, We're off to a terrific start to the year, delivering better than expected results in a mixed demand environment as we made significant progress accelerating our platform under our new 4 business unit structure. As highlighted on Slide 4 of our presentation, our continued commitment to operational excellence And our low cost model approach again positioned us to deliver strong results in the quarter despite an overall challenging macroeconomic backdrop. We improved on nearly all of our operational KPIs in the quarter, driving strong increases in operating income, EBITDA, Earnings per share and cash flow.

Speaker 2

And we delivered the strong performance while continuing to execute on our $1,000,000,000 share repurchase authorization, Buying back over $200,000,000 of our shares during the quarter and over $350,000,000 since we launched the program in Q4. This is all made possible through the tremendous efforts from all of our team members. I'd like to recognize our team for remaining focused and delivering these strong results, which is a true testament to our team's unrelenting commitment to operational excellence, placing us well in the path of achieving the long term goals we identified during our Investor Day meeting. Before I highlight our major accomplishments and performance in the quarter, I'd like to take a moment to reflect upon our transformation and the value that we are creating through our new four business unit structure. Over the past several years, we've created a much more dynamic and capable company With a realigned structure that allows us to more fully utilize our assets, provide greater transparency into the value of our business and create new avenues for growth.

Speaker 2

We are a new ODP and we're on a path to unlocking the full potential of our business and setting us apart from others in the industry. We believe we are only in the early stages of unlocking our potential through this transformation, which is only beginning to be recognized externally. As I look back, we are vastly different and more dynamic company today compared to when I joined over 6 years ago. We have streamlined our cost structure, Specifically reducing costs in our operations with over $500,000,000 removed from the business from a SG and A perspective, Realigned our assets to drive stability and long term growth and embedded our 5 c culture through the organization, driving better performance across all our business. This has resulted in a stronger foundation and has positioned ODP to pursue new and exciting growth opportunities.

Speaker 2

This is shown on Slide 5. Let me start with ODP Business Solutions. ODP Business Solutions is a large and growing B2B Distribution Business was over $4,000,000,000 in annual revenue, serving enterprise level companies, as well as medium and small businesses. It serves over half the Fortune 100 and provides customers with a highly curated procurement solution, Delivering core business products along with growing categories and adjacencies products such as Janssen, cleaning and break room, tech, workspaces and compi and print products and services. In fact, our Janssen business alone generates about $700,000,000 on an annual basis making us one of the larger distributors of Janssen related products in the U.

Speaker 2

S. As highlighted during our Investor Day, ODP Business Solutions is focused on growing its business, expanding to new product categories and growing its margin profile back to pre pandemic levels with a goal of 5% plus EBITDA margins along with strong cash flow conversion. This is a highly valuable B2B distribution business with a solid path for long term growth. Next is Office Depot, Our most familiar brand name, which for the first time is now a true omnichannel consumer business with a profitable retail footprint and award winning e commerce platform. Office Depot continues to be a cash generation engine for ODP.

Speaker 2

And with our focus on 4 wall risk adjusted positive contribution, we've generated strong consistent EBITDA and cash flow, while also improving the customer experience with 1 of the highest NPS scores in the industry. Next up is Verra Logistics. While a relatively new brand name, Ver has been in the making for over 30 years and is our world class supply chain services and sourcing provider. Bear is one of the largest and unique supply chain operations in North America with the capability to serve 98.5% of the North American zip codes with next day service, along with capability to deliver directly to the desktop for our enterprise customers. Behr serves its internal customers, ODP Business Solutions and Office Depot with best in class low cost efficient service while also leveraging its existing capacity to provide logistics services to 3rd party customers.

Speaker 2

We have just begun to unleash Verra's unique and valuable assets and capabilities. These include a large private fleet of approximately 600 vehicles, over 9,000,000 square feet of distribution and logistics space, A national network of approximately 100 facilities, including distribution centers, cross docks and import facilities, a global sourcing presence and numerous long standing relationships with international and national carriers, including last mile providers. I would highlight that our global sourcing office and presence in Asia is a key differentiator and a unique asset that provides us The significant presence in the region, allowing us to stay on the pulse of the manufacturing market and supply chain dynamics. They're also has been modernizing and building additional capabilities in the management information systems that it uses to run its business. We're partnering with deploying a Gartner Magic Quadrant level tech stack that is allowing us to more effectively manage our business, improve service levels and provide flexibility to deliver services to external third parties.

Speaker 2

For example, we can implement our FlowPath cost technology, Providing critical cost intelligence to optimize our operations, we've also begun to deploy our new warehouse management system, supporting our operations and automating task as well as implementing our direct inject capabilities, both improving our ability to integrate and provide services to 3rd party customers. We've implemented transportation management tools, providing intelligence for load tendering and routing and other analytic tools that helps us optimize our service levels and improve our ability to provide supply chain and logistics services to 3rd parties and internal customers. The enormous capabilities we've developed and the value of these assets alone would be very challenging to recreate in today's market. We've transformed VAIR from a cost center into its own focused business and profit center To capture the full value of these unique assets today and to help drive a new narrative for ODP and our shareholders, driving value in this business. Verus is already driving success adding new external customers as well as way to achieving the goals we identified during our recent Investor Day meeting.

Speaker 2

And finally, Verus. Verus is a transformative digitally native B2B procurement platform business that we've been creating over the last couple of years. As a category creator, Verus is focused on transforming the complete procurement ecosystem for buying organizations and the suppliers who serve them, allowing for a more modern, frictionless consumer like experience For B2B buyers and suppliers, the market potential for Verus is huge. Over $4,000,000,000,000 in gross indirect transaction volume exists within our target market. While we're still in the early stages having recently launched this platform at the end of last year, Verus is making good progress, adding customers to its platform, enhancing its tech capabilities.

Speaker 2

Overall, our realigned business model is a game changer for ODP and its shareholders, allowing for greater asset utilization, more transparency into the value of each of our business units and new avenues to pursue profitable growth. Combining these attributes with our disciplined capital allocation strategy, ODP is in an excellent position to drive strong long term value and returns for shareholders. And we're executing upon this new foundation to what I call our 3 Horizon strategy as shown on Slide 6. Our 3 Horizon strategy puts into perspective how we will drive our business in order to unlock the underlying value of our business, Build long term sustainable growth, expand our EBITDA multiple and maximize shareholder value. Let me briefly highlight this approach.

Speaker 2

Our first horizon focuses on continuing to drive Office Depot's strong operating performance, excellent customer service and net promoter scores, And most importantly, strong EBITDA and cash conversion. Office Depot is a cash generation engine and this horizon continues that focus getting the most out of this engine. We will continue to optimize and nurture this business, add a new product assortment aligned with customer needs, While continuing to provide value to small business, education and home office customers, Office Depot meets the needs of our customer base across the consumer, small business and education markets and we're excited about the capabilities that we now have under our omni channel approach. In fact, we recently began testing and expanding our product assortment, launching both our Celebrate As college dorm packages further leaning into the both party essentials for the home and office as well as products featuring furniture and fixtures further supporting parents and students in their educational journey. I'm excited about these initiatives and their potential.

Speaker 2

Our second horizon is focused on continuing to drive our B2B Distribution Business, ODP Business Solutions, driving growth, margin expansion and cash flow. This is a business with a solid runway ahead for profitable growth and over time should command a higher multiple in line with other B2B distribution businesses. As you can see in our release this morning, We are moving well along that path, doubling its operating income from a year ago. Our team is executing upon this horizon, Gaining traction with current and new customers, expanding its products and services, expanding its margins, all aligned with our long term targets. We believe as we continue to execute, the market will begin to recognize the value of this higher multiple business and this will be reflected in ODP's overall value.

Speaker 2

Our 3rd horizon is building value and pursuing higher long term growth opportunities through both VAR And Verus, both of the business units represent significant long term growth and multiple expansion opportunities for ODP. Ver, As a growing supply chain and logistics company with long term EBITDA growth, inventory procurement management remains a key focus And we will use the strength and agility of our supply chain to chase demand. As I said earlier, VAER is off to a great start and well on its way to meeting or exceeding the goals we established during our Investor Day meeting. And Verus, serving as a high growth, high multiple Components to this long term horizon, Verus represents the largest addressable market opportunity for ODP With a scalable business model in a very large target market, we're excited about the path that Verus is on and the numerous opportunities to pursue growth, scale the business and drive further value to our shareholders. So overall, executing along our 3 horizon strategy will allow us to continue to drive our near term cash flow engines, while positioning us to pursue both mid and long term growth in higher multiple businesses, which we believe will create significant value for our shareholders.

Speaker 2

Of course, this is all anchored in our low cost business model focus and capital deployment plans driving both EBITDA and EPS growth and continuing to live our 5C culture. Lastly, We will continue to demonstrate our operational excellence, which is fundamental to our success. Now turning to highlights for our key accomplishments for the Q1 as shown on Slide 7 through 13. 1st, we drove strong overall operating performance in the Q1. While revenue was down slightly largely due to fewer stores and service and lower traffic, we delivered strong increases in adjusted operating income, EBITDA earnings per share, which is up 40% over last year and a significant increase in cash flow.

Speaker 2

Our commitment to operational excellence and our low cost model approach combined with flexible pricing and distribution strategies helped drive the strong performance against the ongoing challenging macroeconomic backdrop hampered by high inflation and sluggish consumer growth. I can't say enough about our team's continued focus and discipline in achieving these strong results in the quarter. Anthony will provide more of these details on the drivers in his prepared remarks later on the call. Next, we continue to aggressively execute upon our $1,000,000,000 share repurchase authorization that our Board of Directors put in place in November of last year. During the quarter, we repurchased approximately 4,000,000 shares for just over $200,000,000 And since the beginning of the authorization, we have repurchased approximately 7,600,000 shares in total for approximately $354,000,000 Putting this activity into context, over the past two quarters, We have bought back nearly 20% of the market value of the company.

Speaker 2

Moving forward, we will continue to be disciplined, Monitoring market and economic conditions and continue to prioritize capital allocation while prudently managing our 4 business unit model. Next, our business units continue to deliver strong performance and KPIs that indicate we are making progress against the goals we set during our Investor Day meeting. These highlights are shown on the following few slides. ODP Business Solutions grew its top line 3%, improved its margin performance and doubled its operating income over last adjacency penetration was 44% of division revenue and revenue retention rate remained high at 98%. This was incredible performance for the team, especially in light of certain one time COVID related test kits that occurred in Q1 of last year.

Speaker 2

Office Depot continued to generate strong margin performance and cash flow generation despite lower overall revenue, largely due to fewer stores and service and lower omnichannel traffic. We are in early days of the omnichannel efforts and remain optimistic, but are monitoring the state of the consumer while leveraging our key segments in Education and Small Business. Ver delivered strong performance in the quarter, maintaining cost effective services for its internal customers, while generating revenue and EBITDA growth from external customers. Bayer continues to be a shining example of operational excellence and continues to deploy and use business management systems to more effectively drive its business. In the quarter, Verint continued to improve upon its service level metrics, while driving efficiency throughout the network, utilizing route management tools to optimize the network, driving more capacity to our own private fleet and balancing capacity among our 3PL partners.

Speaker 2

We also continue to make progress on our tech stack deployment and capabilities, improving our position to serve external third party customers and improve internal operations. We started to go live with what we call direct freight inject, which provides greater capabilities intelligence to more efficiently integrate and provide third party freight services. We also begin to deploy our new warehouse management system technology or WMS in our Dallas facility, which aims to streamline our operations and provide greater capabilities to serve 3rd party customers and Verintelligence, a technology that helps us improve inventory management. So overall, we're very excited by the progress we are making for the future of Ver. Ver continued to make progress in providing services to external third parties During the quarter, relative to last year, sales of EBITDA generated from 3rd party customers were up over 50% and nearly 100% respectively.

Speaker 2

Verus is well on its way to double EBITDA from 3rd party customers in 2023 and on a path to meet or exceed its longer term goals. And Verus has continued to onboard and ramp new customers on its recent launch platform, driving transaction volume to suppliers During the Q1, Verus is making excellent progress, enhancing its capabilities and onboarding new customers to the platform. We also hosted a demo of the platform back in March allowing investors to see firsthand the capabilities of the platform and its consumer like experience. We are excited about the path that Verra is on and look forward to providing more updates in the future. So overall, our business unit performance in the quarter provides strong evidence that we are well on our way to reaching our long term goals.

Speaker 2

Next on Slide 13, We're continuing to invest in the future of our business, enhancing our digital platform and e commerce capabilities as well as our supply chain network to more effectively provide logistics services to external third party customers. And as I mentioned, we have and continue to evaluate Selective category expansion opportunities in both our B2B and consumer divisions. Additionally, we expanded our relationship with Microsoft to include Microsoft's Azure OpenAI service advanced artificial intelligence technology to evaluate ways we can enhance our customer experience, Drive operational efficiencies and more effectively pursue growth opportunities. We're excited about this technology and how this can help further transform our business and drive additional efficiencies aligned with our low cost model. And finally, subsequent to the quarter end, We completed the sale and partial leaseback of our headquarters building.

Speaker 2

This was a significant accomplishment for our team and a great example of prudent asset management, which will result in additional operational efficiencies and leaner structure moving forward. I am still proud of our team and all the accomplishments in the quarter. Looking ahead to the balance of the year, we remain cautiously optimistic as we continue to navigate the challenging macroeconomic environment and its related negative impact on consumer activity. We've maintained our previously issued guidance for the year and remain in a As we move through the year and monitor consumer activity, we will continue to prioritize capital allocation, while prudently managing our 4 business unit model, remaining focused on delivering strong shareholder returns. With that, I will turn the call over to Anthony for a review of our financial results.

Speaker 1

Thank you, Jerry, and good morning to everyone on the call today. I'm happy to be here today to provide more detail on our financial results for the Q1. As I begin, I'd like to say thank you to our entire team for remaining focused and delivering strong performance while navigating through the effects of high inflation and an evolving macroeconomic environment. As we stood up our 4 business units late last year, this is the first Full quarter to start our fiscal year under the new structure. In the quarter, we drove improvements in the majority of the KPIs we identified during our Investor Day meeting last resulting in strong financial performance in Q1.

Speaker 1

Compared to last year, we drove double digit Our performance was as a result of our operational excellence and our capital allocation focus, a combination that will continue to enhance value to our shareholders. And to emphasize what Jerry said earlier, we have repurchased over $350,000,000 of our stock since putting the new plan in place back in November of last year. This represented nearly 20% of our market value. Overall, our strong performance and disciplined capital allocation in the quarter is a clear demonstration of our focus and continues to be a testament of our winning 5C culture. We remain excited about our new four business unit structure and how this positions us to more fully utilize our assets and pursue greater opportunities for long term growth.

Speaker 1

We are making progress along the path we set during our Investor Day meeting. ODP Business Solutions continues to gain momentum. They are now positioned to pursue new third party services. Office Depot continues to leverage its omnichannel capabilities to meet customer needs and drive strong cash generation. And Verus has launched its network and is onboarding new customers while continuing to enhance its capabilities.

Speaker 1

We are a new ODP and these 4 BUs pursuing growth independently and working in concert should drive significant shareholder value over time. As you heard from Jerry, the macro environment remains challenging, not just for us, but for the majority of businesses in nearly all industries. Inflation remained at record highs outpacing wage increases, placing additional strain on consumers. For ODP, high inflation continues to impact the average cost of goods sold via our product baskets along with other input costs of the business. And as widely reported, slowing GDP growth and higher interest rates has reduced consumer activity, negatively impacting nearly all companies with consumer exposure.

Speaker 1

Supply chain conditions have improved from the peaks of last year, but continue to remain challenging, although we expect them to be a tailwind in 2023. Overall, our ability to execute and navigate this challenging environment is a testament to the investments we have made over the years and is a core strength in our foundation. Our diverse routes to market illustrate the value of our platform. While it's still early in our journey to show how we are creating differentiated value for our customers, which will drive shareholder value. I feel our best days are still ahead as we execute across our long term strategy.

Speaker 1

Now turning to the highlights of our financial results as shown on Slide 15. Consistent with previous quarters, we have provided our results both on a GAAP and adjusted basis. Turning to the specifics of our results, we generated total revenue of $2,100,000,000 in the first quarter, down 3% versus Q1 of last year. The reduction in revenue was primarily driven by lower sales in our consumer business Office Depot, partially due to 73 fewer stores in service compared to last year, coupled with lower traffic, lower e commerce sales and lower comparable sales for products previously in higher demand last year in the later stages of the pandemic. This was partially offset by stronger sales in ODP Business Solutions as return to office Trends and business activity remained strong in the quarter.

Speaker 1

In addition, ODP Business Solutions overcame approximately $50,000,000 in one time COVID test kit sales in the prior year that didn't repeat. So overall growth in Business Solutions was really impressive. GAAP operating income in the quarter was $95,000,000 up 25% from Q1 of last year. Also included in operating income was a net $4,000,000 of charges associated with non cash asset impairment, primarily related to the right of use assets associated with our store locations. Adjusted operating income for Q1 was $99,000,000 up $88,000,000 last year.

Speaker 1

Unallocated corporate expenses were $23,000,000 adjusted EBITDA of $131,000,000 for the quarter compared to $125,000,000 in last year's Q1. This includes depreciation and amortization expense of $30,000,000 $34,000,000 in the 1st quarters of 2023 and 2022 respectively. Excluding the after tax impact from the item mentioned earlier, adjusted net income for the Q1 was $75,000,000 or $1.78 per diluted share compared to adjusted net income of $64,000,000 or $1.27 per diluted share in the prior year period. This represents a 40% increase in adjusted EPS driven by both higher net income and a reduction in share count as a result of our Strong execution under our share repurchase program. Turning to cash generation.

Speaker 1

In the quarter, we drove very strong increases in cash flow. We generated operating cash flow of $157,000,000 which included about $5,000,000 related to restructuring items. Overall, we were up significantly compared to operating cash flow of $30,000,000 last year. Capital expenditures in the quarter were $27,000,000 compared to $21,000,000 in the prior year period, reflecting targeted growth investments in our digital transformation, supply chain and distribution network and e commerce capabilities, partially offset by lower CapEx in our retail division. Adjusted free cash flow in the quarter was $133,000,000 a significant increase from $16,000,000 in I want to thank our entire team for being laser focused on managing our working capital and driving the strong increase in cash flow.

Speaker 1

Our cash generation in the quarter was a result of our overall stronger operating performance and influenced by the timing of certain working capital items, which were more impactful this quarter. This was primarily related to our management of cash flow items at the end of the calendar year, which as we described on the last call, happened to be aligned with our fiscal year end. As a result, Q1 cash flow benefited from some of the shift. And as we move throughout the balance of 2023, We will remain disciplined as we manage through the seasonal effects of cash in our business, specifically as we build inventory in the coming quarters and in advance of the back to school season. Overall, excluding some timing elements, we remain focused on cash conversion as a key enterprise metric, and I couldn't be prouder.

Speaker 1

Now I would like to cover our business unit performance starting with our ODP Business Solutions division on Slide 16. ODP Business Solutions continues to deliver improving results as return to the office trends maintain traction, Generating revenue of just over $1,000,000,000 in Q1, up 3% in the quarter relative to Q1 of last year. As I highlighted, this revenue increase is even more impressive given we are comping over a very large one time PPE order that was included in last year's Q1 results that did not repeat this year. Overall, looking at ODP Business Solutions, our core contract business, Our Granite toy business in Canada and in particular, our Federation Companies all delivered year on year growth. As a reminder, our Federation companies are the regional tuck in acquisitions we have been executing over the past few years, including a regional acquisition in Texas this year, Expanding our distribution reach and continuing to leverage our distributed infrastructure.

Speaker 1

We have been successfully executing this strategy and growing this business, which now generates well over $500,000,000 in revenue on an annual basis. This independent dealer market continues to be highly fragmented And our disciplined approach gives us tremendous runway to keep growing our platform strategically over time. From Our adjacency product categories as a percentage of total revenue, a key KPI for ODP Business Solutions remained at 44%. This percentage may toggle from quarter to quarter, but our long term objective is to consistently grow adjacencies both on an absolute dollar and percentage basis. As we expand our value proposition and continue to leverage our strength in core categories.

Speaker 1

For 2023, we expect this percentage to be flat slightly up as compared to fiscal 2022 as core categories continue to have good growth from the rebound in back to office activity. And consistent with our Investor Day meeting, ODB Business Solutions is on a path to drive its EBITDA margins back to pre COVID levels with an opportunity to expand long term margins beyond this level by staying true to our low cost business model. ODP Business Solutions continued to make great progress on this goal throughout the quarter, generating operating income of $39,000,000 doubling last year's Q1 results. This represents a nearly 200 basis points margin improvement as a percentage of sales. This is a huge accomplishment and places ODP Business Solutions well on the path and pricing discipline helped to mitigate inflationary pressures and positioned us to drive these strong results.

Speaker 1

I would add that the work that we started Early last year, utilizing our data driven approach and performing line level reviews of customer contracts continues to contribute to our success. Now turning to our Consumer division results as shown on Slide 17. Our Office Depot Consumer division continued to provide excellent service, Strong NPS scores and a compelling value proposition to its small business, home office, education and consumer customers. NPS scores remained at over 70%, some of the best satisfaction scores in the industry. Reported revenues in the quarter were down 8% to 1 point $1,000,000,000 driven largely by 73 fewer retail stores in service this year versus last year related to planned store closures, as well as lower traffic in both our retail and e commerce channels as more customers return to the office.

Speaker 1

On a same store sales basis, Sales were down approximately 3%. Sales per shopper was down slightly, mostly due to lower average order volumes, partially offset by higher conversion rates. Lower sales for product categories previously in higher demand during the window of the pandemic contributed to lower year over year revenues as did lower omni channel sales. A good example of this is protective equipment and cleaning products as well as tech, partially offsetting lower demand in And as evident in media reports, consumer activity in the quarter remained sluggish, contributing to lower overall omni channel sales. This is an area we are continuing to monitor very closely as we move throughout the year.

Speaker 1

From an operating perspective, we continued to deliver solid operating margin performance in the quarter despite the lower traffic and higher supply chain and inflationary costs. On lower revenue, we maintained margins at 8% compared to last year, resulting in operating income of $85,000,000 in the quarter compared to $96,000,000 last year. Lower operating income compared to last was primarily driven by lower sales and higher costs related to inflation. We remain excited by the launch of our new Imagine Success campaign, which highlights how we are a destination for small business, home office, education and consumer customers who can rely on us to meet their growing needs. And as we mentioned during our Investor Day meeting, our KPIs for Office Depot are focused on improving our same store sales comp and driving e commerce sales.

Speaker 1

For the year, we're focusing on delivering same store sales comp in the range of negative 2% to negative 3% on a comparative basis, which is a slight improvement over fiscal 2022. We also expect that our online penetration will be a source of strength as we continue to execute on the full potential of our omni channel strategy. Now turning to Slide 18. I want to highlight financial results and provide insights into Vayer's operations. As Jerry mentioned earlier, we have separated Vayer into its own business and its own reporting unit.

Speaker 1

Bayer specializes in B2B and consumer business service delivery with core competencies in distribution, fulfillment, transportation and procurement, which includes our global sourcing operation in Asia. As we outlined at Investor Day, Bayer serves the internal needs of its primary customers, Office Depot and ODP Business Solutions as well as 3rd parties through our procurement and supply chain business. As a reminder, our intercompany agreements between Vayer and the business units stipulate the cost and fees charged for procurement of goods and supply chain services. Their mission is to be an efficient supply chain provider to Office Therefore, as Veyer undertakes actions to drive efficiencies, including strategically optimizing working capital and distribution effectiveness, The intercompany revenue and corresponding allocated profit to Veyer could fluctuate over time. As an example, As Bayer successfully pursues new sourcing activities that should reduce the inflationary impact we have seen in certain categories, Therefore benefiting the total ODP Enterprise, the fees there collects from the sourcing component of the intercompany transactions could be lower, resulting in lower allocated operating profit at VAER.

Speaker 1

Therefore, as we proceed throughout this year and going forward, it will be helpful to provide investors with as to the fluctuations in Bayer's operating results from these intercompany activities, ensuring that we provide optimal cost to the business while continuing to leverage the infrastructure for 3rd party growth. Regarding its financial results for Q1, Bayer drove sales of 1,400,000,000 predominantly supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation. Excluding intercompany sales, Veyer drove approximately $7,000,000 in sales to external parties, up over 50% compared to the same period last year. From a bottom line perspective, Bayer's total operating income for Q1 was $15,000,000 compared to $8,000,000 last year, primarily due to the aforementioned intercompany transactions, mix and third party activity. Specifically, as a key metric that we identified during our Investor Day meeting, We are beginning to see solid early traction in EBITDA generated from 3rd party customers.

Speaker 1

And while still small, this is one of our key metrics going forward. In the quarter, we generated about $2,000,000 in EBITDA from 3rd party customers, a significant increase over prior year, positioning us well on our way to more than double EBITDA from 3rd party customers in 2023 compared to 2022. Now turning briefly to Verus on Slide 19. As you heard from Jerry, Verus is our digitally native B2B procurement platform that aims to provide a more modern and convenient experience, A consumer like experience connecting buyers and suppliers in a way that solves the pain points that exist in B2B procurement today. While just launched, Verus is continuing to add customers and suppliers to its network with a goal of driving In the quarter, Verus is ramping its first wave of customers and beginning to drive transaction volume to Verus suppliers.

Speaker 1

Keeping in mind that the platform only recently launched from a results perspective, Verisk generated about $2,000,000 in revenue in the quarter, primarily from subscriptions derived from existing customers. As we previously announced, we expect that 2022 was the peak investment year for Verus as we prepared and launched the platform and positioned the business to scale for the future. Related to this effort, Verus' operating loss was $17,000,000 in the quarter, down slightly sequentially from Q4 of last year. It's still early days, but we remain We ended the quarter with total liquidity of over $1,000,000,000 consisting of $343,000,000 in cash and cash equivalents, which includes cash held internationally of $117,000,000 $803,000,000 in availability under our asset based lending facility. During the quarter, we drew down $100,000,000 to help fund the timing related to the share repurchase from Achevar and for general working capital purposes.

Speaker 1

And at the end of the quarter, we repaid $60,000,000 of that draw. As a result, total debt at the end of the quarter was approximately $222,000,000 As Jerry previously mentioned, we have been aggressively buying back shares under our buyback plan we put in place in November of last year. In Q1, we repurchased about 4,000,000 shares for approximately $200,000,000 Adding this to our activity since the program began, We have retired about 7,600,000 shares for approximately $354,000,000 We continue to maintain a strong balance sheet allowing continued as shown on Slide 21. As I mentioned at the start, we are off to a great start to the year and remain cautiously optimistic regarding the balance of the year. We're enthusiastic about the opportunities ahead to pursue long term profitable growth by driving our 4 business unit model, executing along our 3 horizon strategies as Jerry identified, and remaining focused on prudently deploying capital to maximize shareholder value.

Speaker 1

That said, Overall, we are carefully proceeding with caution given some of the weaker consumer activity that we have recently witnessed. Considering this, we are maintaining our previously issued guidance for the year as follows. We are expecting to generate sales in a range of $8,000,000,000 to $8,400,000,000 which includes the impact of closed stores annualized and expected. We're expecting to deliver adjusted EBITDA between $400,000,000 to $430,000,000 and adjusted operating income between $270,000,000 to $300,000,000 We are aiming to drive adjusted earnings per share between $4.50 $5.10 per share. This range assumes the effect of our activity under our share repurchase program.

Speaker 1

We are targeting adjusted free cash flow between $200,000,000 to $230,000,000 and CapEx between $100,000,000 $120,000,000 A few additional comments about the guidance. Our guidance assumes stabilization in overall economic Trends throughout 2023. While we are encouraged by our strong start to the year, we are prudently reaffirming current guidance as we remain cautious on the state of the consumer and general macroeconomic conditions. Our guidance also assumes continued activity under our share buyback authorization, A similar pace of store closures at Office Depot and a continued top line and margin improvement at ODP Business Solutions. Additionally, we are assuming a stable supply and procurement environment at Verus and revenue growth and lower OpEx burden at Verus.

Speaker 1

In summary, I could not be more excited about the new ODP. Collectively, there is a new sense of enthusiasm within the organization as we stay committed

Operator

Thank you. And our first question comes from the line of Michael Lasser with UBS.

Speaker 3

Good morning. Thanks a lot for taking my question. Anthony, I want to dig into the comment that you just made about Recent consumer weakness, can you elaborate on that? Has that Has it been something that you witnessed in your own retail business along with the businesses of your customers?

Speaker 1

Hey, good morning, Michael. I think it's a general comment around the state of the consumer. As we think about our diverse routes to markets, continuing to see strength in our B2B channel exhibited with the results in Q1, but we're remaining cautious on the B2C side. Now one of the things that I'd like to highlight is, if you look at our B2C channel, we're not just exposed to the consumer. Our B2C channel also works with small businesses education, but staying cautiously optimistic for the remainder of this year on the consumer side, I think it's a prudent Way that we're looking at the business at this point.

Speaker 3

And my follow-up question is on the gross margin. What drove the gross margin expansion in the quarter? How much of that was simply seeing a benefit from lower supply chain costs as key inputs like

Speaker 2

Hey, Michael, good morning. This is Jerry. And thanks for your comments. And so I'll answer the first part and then flip it over to Anthony. But I think disciplined pricing has been very important.

Speaker 2

We continue to drive our operating Operating excellence and low cost model, so you've seen improvements from an SG and A perspective as well as procurement costs, but Anthony will comment on the supply chain piece.

Speaker 1

Yes. So Michael, if you think about and great question, we've seen reductions in both our ocean freight and other input costs like diesel. On the ocean freight side, it clearly has come down significantly from the peaks that we saw and some of the challenges that we face along with others In the industry around the ocean freight side, as we think about the cost side of that, it's really about landing the new products, turning those products. So generally speaking, Q1, we saw modest improvement in costs related to the product side as well as the ocean freight side, but we feel like as we go through the remainder of the year, we should start to see some of that benefit flow through.

Speaker 3

Got it. On the B2B business, What was the trend in orders per same customer? So how much did new business contribute, new business Wins not only within the Federation strategy, but also the rest of the business as well as trends on a legacy business on a same customer basis.

Speaker 1

Yes. So just to be clear, we had a small acquisition in the quarter, it contributed less than $10,000,000 So most of the growth MBSD was organic. And as I mentioned on the call, we had a very large one time. I don't like picking one time because we always have one time, but I thought it was important To note that last year we had a very large COVID test kit in the quarter that when you back that out and you comp BSD had a really good Quarter, and that was a combination of existing customer growth as well as new customer acquisition.

Speaker 2

I think we have a Two last ones. Sorry, go ahead. I was just going to add that we again, 45% of the business is non core, it's adjacency product, I think across Federation, across Dave has multiple routes to market. So I think that the strength across the business The diversification he has is very helpful on that.

Speaker 3

Got it. I think with respect to the Bayer business, you mentioned that a lot of the growth is coming from lot of the revenue right now is coming from existing customers. When can we start to see the contribution From new customers who are signing up on the platform.

Speaker 2

Well, we're excited that John has almost a dozen. I mean, I won't get specifically the number, but Across the multiple industries, so we're already seeing that traction. He's ahead of plan from a to hit his $30,000,000 external target. We're confident And it's target for this year as well. So we're seeing a lot of momentum, which we're excited by and we've had some And we continue to build out the tech stack like we talked about.

Speaker 2

Our warehouse management system is the new implementation working with the Korber on that. We're excited. Our work on Our direct inject freight, which allows us to bifurcate freight and bring it into our facilities, that went extremely well from our pilot facility. So And we have a number of it's early days, but we have a number of Gartner Magic Quadrant type of software partners that are really helping us build that capability out. But very bullish on the future of this.

Speaker 2

Early days, but momentum is there.

Speaker 3

Amazon Recently announced that it's going to increase its focus on the B2B segment. How do you see that potential impact for Verus?

Speaker 2

And then

Speaker 3

I have one last one.

Speaker 2

Well, I actually don't think there's any impact because that team came from Amazon Business. It's a completely different market. They are a tailspin, loose Ben, no contracts in place. And so I think it's a big market, but the customers are also asking for exactly what we're doing with Verus, which is a private marketplace contractual relationship. It's direct between buyer and seller.

Speaker 2

There's compliance. There's ability to use Amazon like type of tech platform, but we think this is an enormous opportunity. Customers are asking for this and we think that Amazon can operate successfully in their space and we think we can create this new category that we think is a giant white space and that's been affirmed with And we're focused on ramping revenue, ramping customers and our value propositions being proven. So we're excited.

Speaker 3

Got it.

Speaker 2

And then

Speaker 3

lastly, Jerry, you highlighted some of the actions that ODP Corp. Is taking with respect to artificial intelligence and generative AI. This has obviously been increasingly in focus and what this means for the broader state of the workforce. So as you look at it, how are you sizing up in your mind the impact of generative AI artificial intelligence more broadly as a friend to the business and the positive implications of this versus the negative implications as it displaces workers in our economy, especially white collar workers that serve at core On the customer base that OEP is serving.

Speaker 2

So we feel, Michael, as a huge positive. We started talking about it last November with our CTO, Karl Briscoe and Andy Perry, our CIO. We jumped on it early. Love the relationship we have with Microsoft, so I got to shout out to them. We have Our own OpenAI private instance within our secure firewall, which is really important, and we're already implementing across many parts of the business to drive.

Speaker 2

We think it's an accelerator of productivity. We have job descriptions that we have all kinds of road level work being done by the Chad, GPT. And we have the Office Depot assistant now that helps people from a productivity perspective as well. So we think it's an We believe in operational excellence. We think that's going to drive operational efficiency.

Speaker 2

We really think it's going to give our people more time to focus on what's most important is the customer and driving the most efficient business model across the business. So we're going to be diligent on governance and our Board and I and our Chief Legal Officer, Sarah, talked about that in great detail. We think there is a huge opportunity to make every one of our workers more productive. And again, more time to sell, more time to focus on the customer commitment, more time to focus on what's the right business model. We think it's a game changer and we're going to continue to invest in it and obviously be cautious from a because it's behind our firewall, we think that makes a huge difference from a

Operator

Thank you. I'll now turn the Q and A over to Tim Perrott, Vice President, Investor Relations and Treasurer.

Speaker 1

Great. Thanks, Andrew. I appreciate that. We just had a call sorry, a question that's come across on the web here that I would like to maybe pose to Jerry, so the question is you guys have done a great job in getting costs out of the business, but just how much juice is left In that low cost model going forward.

Speaker 2

Yes, I don't want to really emphasis to our investor base. There's a lot of juice There always is. But the mentality here is the low cost model wins. We never stopped. We didn't stop at $100,000,000 We didn't stop at $200,000,000 We're not stopping at $500,000,000 and we're going to we have a target this year, which I won't disclose, but it's aggressive.

Speaker 2

We're going to drive it. We've proven over the last 6 years that we do this, but we will never stop driving costs in this business. And I think the great question for Michael On OpenAI and how we're using chat GPT is a great one, but we always look at the business model, the opportunities to drive efficiencies across the business. And We spoke to all our leadership about transforming their business, being their own CEO, their business unit, we're going to drive that mentality across the entire organization We'll continue to drive that and show the success we've

Speaker 3

had. All

Speaker 2

right. Well, team, there's no more Further questions, I want to thank everyone for joining the call today. You have our commitment of the leadership here that will continue to focus on operational excellence. Obviously, we continue to focus on hitting our commitments for the year as well as driving our capital allocation plan in a balanced way, making sure we Keep our strong balance sheet, our focus on cash, our focus on driving top line and operating income as well. So thank you everyone for joining the call and I'll turn it back to the operator.

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Earnings Conference Call
ODP Q1 2023
00:00 / 00:00