ODP Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the ODP Corporation's Second Quarter 2024 Earnings Conference Call. All lines will be on a listen only mode for today's call, after which instructions will be given to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations and Treasurer. Mr.

Operator

Perrott, you may now begin.

Speaker 1

Good morning, and thank you for joining us for the ODP Corporation's Q2 2024 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 results and accomplishments for the Q2 of 2024, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Jerry's commentary, Anthony will then review the company's Q2 financial results, including highlights of our divisional performance. Following Anthony's comments, we will open up the line for questions.

Speaker 1

Before I begin, I'd like to inform you that certain comments made on this call include forward looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements reflect the company's current expectations concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties 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. 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'll now turn the call over to Jerry Smith.

Speaker 1

Jerry?

Speaker 2

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you being here with us to discuss our results for the Q2 of 2024 as well as to provide insight into our progress and initiatives we are taking to improve business performance going forward. As you can see in the press release that we issued this morning, our performance in the quarter was below our expectations. We are disappointed in this performance and view this as unacceptable. We have faced ongoing macroeconomic headwinds in a challenging business environment, which reduced the level of corporate and personal spending, impacting our ability to gain top line traction back to the level we were expecting.

Speaker 2

That said, we put into motion many initiatives based on our learnings in the quarter and first half of the year to improve traction on our top line and strengthen our foundation and positioning us to drive greater revenue velocity as we exit 2024. We are already beginning to see the green shoots of these efforts, which ultimately can change the trajectory for our business. This includes a number of significant opportunities at ODP Business Solutions and there that we're working hard to realize in 2024, which can improve our top line exit velocity to build incremental success in 2025. Although early, some of these bright spots can be seen at VER as the investments that we have made are positioning Verus to accelerate opportunities with 3rd parties. Additionally, with the exit of Verus and our strong focus on capital allocation and shareholder return, we are reprioritizing our growth investments around our core business, balancing that against the continued return of capital to shareholders in the form of buybacks.

Speaker 2

We've also spent considerable time with our Board on strategic growth initiatives, while continuing to drive our 5 gs culture and our low cost business model, which has driven our success in the past. Our Board's focus is on strategically transforming our top line growth trajectory in our core business. In one of these focus areas, we are driving a business transformation and AI process focus across the entire enterprise to capture productivity opportunities to help fuel future growth and additional capital allocation opportunities. We've also recently kicked off 5 major business process improvement initiatives, what I call the big five, which we expect will drive significant growth and profitability in 2025 and beyond. Lastly, we are engaging in partnerships to drive additional traffic in our retail division as well.

Speaker 2

More on this later. Let me provide additional context of our performance in the quarter as shown on Slide 4 of our presentation. Overall, our performance in the quarter was impacted by the ongoing challenging macroeconomic and business environment as well as other challenges related to customer onboarding and conversion. The generally weaker macroeconomic environment reduced consumer and business spending, resulting in lower demand, which created headwinds in our efforts to drive better revenue traction in the quarter. This impacted our results at both ODP Business Solutions and Office Depot.

Speaker 2

In our B2B business, ODP Business Solutions, enterprise spending levels remain highly constrained and the impacts of reductions in force along with customers taking longer than normal to switch suppliers impacted our top line results. While this environment has created challenges for our business based on what we have learned, we have put targeted action plans in place that leverage our strong customer base, the attractive value proposition, positioning us to regain revenue traction over the long run. And as I mentioned, we are working on several opportunities that could change the trajectory of this business and significantly accelerate 2025. I will provide more details on our initiatives later on the call. In our B2C channel, Office Depot, while we did see top line trends improve sequentially, consumer traffic and demand were lower in the period compared to last year, again impacted by weaker macroeconomic factors causing sluggish consumer activity, including customers being more discerning in product price points and selection.

Speaker 2

This, along with the year over year impact of store closures, resulted in lower revenue compared to last year. Conversely, at Ver, our supply chain business, we continue to see great progress as they execute across their growth strategy, attracting new third party customer relationships and driving healthy increases in external EBITDA. And while the brand VAR is still relatively new, it leverages the long history of supply chain excellence we have built servicing both retail and B2B customers. Ver has a unique asset base that provides a competitive advantage in the marketplace. We are very excited about the path that Ver is on with the investments we have made to date, Ver is in a position to further accelerate its growth path with 3rd party customers.

Speaker 2

In fact, we are currently working to close on a significant trajectory changing opportunity at Ver and we look forward to telling you more about this in the near future. Let me be clear, while overall top line performance was disappointing and we are pacing below our previous expectations, we are not standing still. We have put in place many initiatives across the business to improve the trajectory of our top line, remaining focused on capturing long term opportunities Next, our balance sheet and liquidity position continue to be sources of strength, allowing us the flexibility to invest in our core business and return capital. Along with investments we are making in our core operations, I'm pleased to report that we have continued to repurchase a meaningful amount of shares during this period. In the quarter and through today, we repurchased over $140,000,000 of stock including over $170,000,000 under the recently announced authorization.

Speaker 2

Moving forward, we will continue to balance our capital allocation strategy remaining mindful of market conditions and business performance. Next, we made tremendous progress under Project Core, our enterprise wide initiative that further streamlines our operations and sharpens our core focus. We've remained laser focused on continuous improvements across the business to leverage our foundation to deliver future EBITDA and free cash flow growth. Through the actions we have taken to date, we are on a path to achieve annualized run rate savings of at least $100,000,000 when fully implemented, significantly improving our position for future growth. These savings are being achieved through cost efficiency measures across the entire enterprise, including our organizational structure, supply chain and cost of goods sold savings through further efficiencies.

Speaker 2

As I mentioned earlier in our Big 5 initiatives, we've embarked on business process and AI transformation that we're confident will position us to generate significant growth and savings in the future. Additionally, we're encouraged by the comprehensive strategic review of potential growth initiatives that we perform with our Board and are optimistic about our business in the future. Next up is Verus. After a thorough process, we have arrived at a path forward for Verus that aligns with our stated objectives of finalizing our capital commitment to the business, while providing ODP with a continued vested interest in the opportunities ahead. We have entered into a non binding term sheet with a third party for the sale of ARRIS, retaining an approximately 20% current stake in the entity.

Speaker 2

We will announce further details of the transaction upon close, which we expect to be completed in Q3. Lastly, I'd like to comment on our guidance for 2024. In light of the challenging macroeconomic environment and our weaker than expected performance in the first half of the year, we are lowering our outlook for the year while also taking the steps necessary to improve our performance and foundation to regain growth. While we are disappointed with our current performance, we remain committed and encouraged about the future and confident in our operational excellence approach. We remain enthusiastic about the future based on early signs we are seeing from our top line initiatives that will help provide greater near term stability and set us up for growth in 2025 and beyond.

Speaker 2

These opportunities have the potential to simply change the trajectory of our business in late 2024 and beyond. Anthony will have additional details about our revised guidance for the year later on the call. Now beginning on Slide 5, I'd like to provide additional insight into the performance of our business units, including our initiatives to improve performance starting with our B2B business, ODP Business Solutions. It was a clearly challenging quarter and first half of the year for Business Solutions. A number of factors occurring simultaneously created headwinds in our ability to regain top line traction.

Speaker 2

We've already mentioned the weaker macroeconomic environment, which remained a challenge and has led to more restricted budgets and spending levels among our customers. The well publicized corporate layoffs that have occurred over the last year have added to this challenge along with a general pause in the pace of return

Speaker 3

to office

Speaker 2

mandates. Currently, this lower level of spending from the existing base has impacted our top line results. I use the word currently because these spending levels tend to be cyclical and I believe we are near the lower end of this cycle, but it is taking some time for this to turn around. Adding to this challenge, the new customer onboarding difficulties that we mentioned last quarter have continued with delays persisting beyond our expectations, including one that failed to materialize. This has impacted our results to date and expected revenue trajectory for the second half

Speaker 3

of the year.

Speaker 2

Additionally, certain government funded programs supporting tech and supply resources for public entities previously strong in 2022 and 2023 have yet to be fully released in 2024, causing additional headwinds in certain categories of sales, namely technology products. In light of these challenges, we're taking actions to address. We have implemented and are on a path to start several initiatives to accelerate our sales pipeline conversion, drive additional avenues for growth with existing customers and win new business. These include executing weekly high priority pipeline and customer reviews. This is similar to contract profitability reviews we executed in fiscal 2022 that led to margin improvements.

Speaker 2

We expect this process will lead to improved sales over time. Creating targeted incentives and implementing extensive sales training to drive higher conversion to help drive sales and capture new wins. We're also aggressively pursuing opportunities in industries where a high touch service model creates a competitive advantage like in hospitality. Also, we have recently redesigned our go to market strategy in our B2B business over the past year improving our position for future growth. We are also leaning into category expansion in certain areas such as Jansan Select MRO, packaging and interior finishings all in line with our PowerOne initiative as I will describe in just a minute.

Speaker 2

Lastly, we have a number of trajectory changing opportunities that have been in the works and we are driving to close those as quickly as possible. Along with these efforts, we have implemented an initiative we call the Power of 1, which is ability to add value to customers through an offering 1 more product or suite of products to help them succeed. As an excellent example, we recently were awarded a sizable order for standalone air conditioning units for a government entity, something that is not top of mind when you think of our business, but it showcases the trust customers have in our capabilities to source, deliver and solution a variety of products and services to meet customer needs. All these initiatives are helping us address the challenges and position us to build strong revenue velocity as we work through the back half of the year and into 2025. We are already seeing the benefits of our actions as more and more opportunities are coming into our late stage pipeline and we're working hard to convert these into revenue.

Speaker 2

We're also enthusiastic about the expanding portfolio of products and services we are launching that are beginning to show early signs of progress. That said, until we have these opportunities fully converted, we're not baking these into our outlook for the year. So overall, despite the challenges, we remain confident in the future supported by our committed team focused on driving operational excellence and we're excited about the opportunities before us that can change our trajectory of the business in late 2024 and into 2025. Next up is Office Depot, our omnichannel consumer business that provides a strong value proposition to small business, education and home office customers. Although we did see improving overall revenue trends on a sequential basis, Q2 proved to be another challenging quarter for Office Depot.

Speaker 2

Again, the weaker macroeconomic environment continued to impact the level of consumer activity market wide, both in our business and for many others in the retail industry. The revenue decline was driven by a combination of fewer stores and service compared to last year and from lower in store and online traffic and demand. The weaker economy moderated the pace of consumer spending and impacted overall demand. General supplies, furniture and printing services were all down compared to last year and the expected recovery in our technology categories while improving have yet to materialize to levels expected. That said, with the acceleration of AI and increasing need for computing power as well as the new Windows release, we expect growth for the anticipated PC refresh in the second half of the year supporting sales.

Speaker 2

Q2 is seasonably our weakest quarter. And from an operating standpoint, our team worked to manage our expense structure. However, the flow through effect of the lower top line results impacted EBITDA margins in the quarter. And we have initiatives in place and in flight to further stabilize the business, some of which I will cover now. We have made significant progress in our loyalty program with enrollments up significantly for both consumer and business select accounts.

Speaker 2

We've also set early for the back to school season and we've been executing on our Education 3 5 initiative, which involves both our B2B and our omnichannel business and is an integrated year round approach to improve our reach and better serve teachers, students, parents and school systems. This has included investments we have made to launch new capabilities, including expanding our offerings with dedicated landing pages for school supply lists, allowing parents to quickly download and access their children's school supplies list created by their specific teacher. We've also launched our classroom wish list capability, allowing teachers to create a customized wish list of any of the multitude of items available at officedepot.com, making it easy for parents to support their classroom. In addition, we remain committed to our strong 5 C culture, giving back to the communities we serve. Purchases through these programs are eligible for back to school program, which provides 5% of eligible sales directly back to their child's school to purchase critical supplies for the school year.

Speaker 2

We've also continued to leverage partnerships with other companies, something we spoke about last year, expanding our value proposition with our customers. This included test and learn pilots and leaning into new product categories and service offerings, including expanding our TSA sign up service and passport photo services. We have over 70 stores live for TSA sign up services, expect this to climb to over 125 by the end of the third quarter. Additionally, our celebrations in dorm room product category expansion is beginning to receive positive recognition as a greater number of customers realize that OD Does It, the theme of our new marketing outreach campaign showcases all we can offer. We are also evaluating other partnerships that can bring innovative products and services in store.

Speaker 2

Overall, we remain encouraged by the potential of all these efforts and are expected positive impacts to sales in the future. Now turning to our continued progress and momentum at Vare. Vare, our supply chain services and logistics provider, continued strong performance and momentum in the quarter. As I pointed out on previous calls, our progress with external third party customers is one of the key areas of focus to assess Bayer's success and value creation. Bayer continues to make strong progress efficiently providing service for its internal customers, while continuing to grow its business for 3rd party customers.

Speaker 2

And as I mentioned earlier, Verisk extensive expertise in servicing over 98.5% of the U. S. Zip codes with next business day service along with their unique intellectual property places them in a strong position to capture sizable new opportunities. In the quarter, Bayer continued to add new external customers to its portfolio of business, including some of the world's most renowned brands and drove strong EBITDA growth from 3rd party customers. In fact, EBITDA from 3rd party customers increased 17% year over year.

Speaker 2

Verra has made tremendous progress and continues to build upon its go to market service capabilities as ex unit its modernization roadmap, adding additional functionality into information systems that run the business. VAR is also deploying a Gartner Magic Quadrant level tech stack by partnering with world class tech companies along with internal development to help further improve service levels, manage our business and provide the flexibility necessary to deliver services to external third parties more effectively. So overall, we are very encouraged by Verisk's continued strong progress and how this positions ODP to drive profitable growth in the future. Before I turn the call over to Anthony, I want to emphasize that we are enthusiastic about the future. As I mentioned, the strategy sessions we held with our Board are positioning us to realign, improve the framework by which we can pursue top line growth opportunities and continue to leverage our amazing foundation.

Speaker 2

We are executing on 5 key short term growth and profitability projects on an accelerated basis with extensive weekly reviews. This includes the business process transformation driven through AI and process mapping effort, which we expect will yield significant profitability and growth engine opportunities in the years ahead. Lastly, we are pursuing numerous opportunities that could change the trajectory of our business at ODP Business Solutions and at Bayer, and we're working hard to close these in 2024, building greater revenue velocity as we exit 2024 and into 2025. I personally recognize the near term challenges that me along with my leadership team and the whole enterprise remain committed as a team to drive our business forward. With the early signs of progress from the big five business process initiatives, which include driving AI to create additional growth and efficiency opportunities, as well as the large opportunities before us in Verint and ODP Business Solutions, we're optimistic about the growth in the future, particularly as we exit this year with better velocity for 2025 and beyond.

Speaker 2

As we look forward, our team will remain vigilant in executing the initiatives in the second half of the year, building a strong revenue profile for the future, while continuing to remain disciplined and balanced in our capital allocation approach. I will now turn the call over to Anthony.

Speaker 3

Thank you, Jerry, and good morning to everyone on the call. Echoing Jerry's comments, while it has been a tough quarter and first half of the year, we remain confident about the future of our business. We have a strong platform with a diverse customer base, multiple routes to market, strong balance sheet and a team that focuses every day on driving operational excellence. Additionally, while it is early, we are beginning to see progress from the initiatives we have put in place to regain stronger top line traction in the long run. As Jerry mentioned, a few of these could be trajectory changers for our business.

Speaker 3

While we haven't built much of this into our outlook for the balance of the year, we do believe this further strengthens our foundation for increased revenue velocity as we close out 2024 and look forward. Now let me turn to the specifics of our results for the Q2 on Slide 9. Please note that our results as presented are for continuing operations. We generated total revenue of $1,700,000,000 in the quarter, which was down about percent compared to last year's Q2. This was primarily driven by lower sales in Office Depot, including the effect of 58 fewer stores in service compared to last year, as well as lower sales in ODP Business Solutions.

Speaker 3

GAAP operating income in the quarter was only slightly positive. These results included $33,000,000 of charges of which $25,000,000 were related to net merger and restructuring expenses, stemming from project core activities and $8,000,000 of non cash asset impairments primarily related to the operating lease right of use assets associated with our retail store locations. Excluding these changes, our adjusted operating income for the Q2 was $33,000,000 compared to $67,000,000 in last year's Q2. Unallocated corporate expenses were $18,000,000 in Q2. Adjusted EBITDA was $57,000,000 in the quarter compared to $95,000,000 in last year's Q2.

Speaker 3

This includes depreciation and amortization expense of $24,000,000 $25,000,000 in the 2nd quarters of 2024 and 2023 respectively. Excluding the after tax impact from the items mentioned earlier, adjusted net income for the Q2 was $20,000,000 or $0.56 per diluted share compared to adjusted net income of $48,000,000 or $1.22 per diluted share in the prior year period. In the quarter, both GAAP operating income and adjusted net income were positively impacted by the reversal of certain incentive based compensation programs that are projected to no longer be met for fiscal 2024. Turning to cash flow. I would point out that the Q2 is typically our lowest quarter for cash flow generation as it tends to be a slower sales cycle and at the same time we are settling inventory in advance of our back to school selling season.

Speaker 3

In the quarter, operating cash flow was slightly negative, down primarily due to the flow through impact of lower sales and timing related to working capital as we invested in inventory. Capital expenditures in the quarter were $19,000,000 versus $17,000,000 in the prior year period. Adjusted free cash flow in the quarter was $5,000,000 While we recognize we've had a slower first half of the year, as we have proven in the past, our teams remain focused on managing the variables of cash flows to reach our goals for the year. Now turning to our results in our B2B Distribution division on Slide 10. As Gerry mentioned, ODP Business Solutions had a tough quarter as challenging macroeconomic and business conditions, including more cautious enterprise spending, ongoing delays in the onboarding of new customers and customer losses impacted our ability to regain stronger top line traction in the quarter.

Speaker 3

Revenue was $917,000,000 in the 2nd quarter, which was down about 8% compared to last year. Given the soft economic climate affecting the entire industry, business spending has been lower driven by enterprise budget constraints as well as the impact of corporate layoffs. With the effects of inflation over the past 2 years and customers looking for relief across their expense categories, we have seen a competitive environment that was more intense combined with delays in onboarding new customers, including certain perspective wins that failed to materialize as we had previously anticipated, all of which impacts our outlook for the full year. From a product standpoint, most categories were lower on a year over year basis as were the sales of technology products, a factor that many other companies are experiencing industry wide. Lower sales of larger ticket items in our furniture category also contributed to the softer top line.

Speaker 3

While we expect some enterprise softness to remain in the near term, we are encouraged by the early signs resulting from the initiatives that we have put in place. We are beginning to see better deal flow and larger opportunities building in our late stage pipeline that we are working to close as well as additional sales opportunities through our Power of 1 effort that Jerry mentioned earlier. We also expect some of the tech sales will rebound in the second half of the year as product life cycles including the Windows refresh and increasing investment in AI enabled technologies help fuel PC sales. Breaking down our sales further, our adjacency product categories as a percentage of total revenue, a KPI for ODP Business Solutions was 43% in the quarter consistent with recent trends. From an operating perspective, the flow through effect of lower revenues resulted in operating income of $29,000,000 in the quarter compared to $45,000,000 in the prior year period.

Speaker 3

EBITDA margins were just approximately 4% in the quarter, down year over year. While we are disappointed with our performance in the quarter and slower first half, we remain encouraged as we execute on our initiatives, leveraging our strong competitive position, compelling customer offerings and highly capable sales force. Despite the near term headwinds, we remain in a position of strength to work with our customers across multiple dimensions to drive our value proposition, giving us confidence in our foundation to drive improved future results. Now turning to our results in our consumer division Office Depot as shown on slide 11. In the Q2, while showing improvements sequentially Office Depot's top line continued to be challenged as a slowing economy and inflation impacted the pace of spending.

Speaker 3

This was compounded by fewer stores in service. Reported revenue for the quarter stood at about $800,000,000 a 12% decline driven by 58 fewer retail stores in service versus last year as well as lower traffic and transactions in both our retail and e commerce channels. Demand was lower across most categories including supplies and furniture. On a comparable store basis sales were down about 6 0.5% as lower retail and online traffic and transactions outweighed higher conversion. From an operating perspective, operating income was $17,000,000 in the quarter, impacted by the flow through effect of lower revenue performance.

Speaker 3

Moving forward, we are continuing to optimize the store footprint and expanding our value proposition through a multitude of partnerships, while remaining focused on driving operational excellence throughout the organization. We are also leveraging our 1 ODP approach to our education customers through Education 365, which we anticipate will improve our position moving forward, and we are set and engaged for the back to school season. We have We have implemented our new digital school list tool for teachers and parents and recently launched a partnership with Dormify. And while early, we expect this will help build greater traction for school needs in the future. We are also excited about our expanding TSA sign up program in our stores, where we are beginning to see stronger traffic trends in the locations that we have launched.

Speaker 3

We have over 65 stores launched with plans to grow to over 125 active stores in the next few months. In all, we remain focused on continuing to drive this cash engine going forward. Now turning to Veyer's performance as shown on Slide 12. Veyer, our comprehensive supply chain services and logistics provider continued to drive strong momentum in the quarter, managing the lower volumes from its internal customers, ODP Business Solutions and Office Depot, while continuing to build its momentum and capabilities, driving EBITDA growth from external third party customers. On a consolidated basis, Vayers delivered sales of approximately $1,200,000,000 derived predominantly from supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation.

Speaker 3

A key attribute to assessing its success, Veyer continued to make strong progress with external third party customers, continuing to attract new external customer logos and providing service for some of the nation's most renowned brands. This is impressive given that we are still in the early stages of getting the word out about Bayer's value proposition of providing high quality, low cost supply chain and procurement services across our nationwide network and global sourcing capability. Keep in mind that some of their third party profitability is accounted for as a contra expense instead of flowing through revenue. For Q2, Veyer delivered 3rd party revenue of $10,000,000 But most importantly, from a bottom line perspective, Veyer drove a 17% increase in EBITDA from 3rd party customers, delivering 3rd party EBITDA of $4,000,000 in the quarter. As Jerry mentioned, we are evaluating a few significant opportunities with additional world renowned third party customers.

Speaker 3

Their capabilities are built off of decades of investments we have made and our ability to source, stock, pick and deliver is a strategic asset that we are just beginning to harness externally. It is evident that through Bayer's capabilities and compelling value proposition, we are winning new customers and the future is bright in this higher multiple business. Now turning to Verisk. As you know, last quarter our Board of Directors approved the plan to pursue a sale of Verus. And from an accounting standpoint, Verus is now classified as a discontinued operation.

Speaker 3

As we announced today, after a thorough process involving both strategic and financial acquirers, we have entered into a non binding term sheet agreement with a third party financial sponsor for the sale of Verus. Under the proposed terms, ODP would retain an approximately 20% current stake in the entity. We expect to announce further details of the proposed transaction upon close, which we expect to be completed in Q3. Now briefly turning to our balance sheet highlights as shown on slide 14. Our balance sheet and liquidity position remained strong, ending the quarter with total liquidity of $831,000,000 consisting of $190,000,000 in cash and cash equivalents, including $10,000,000 that is presented in current assets held for sale related to the Verus division and $641,000,000 of available credit under the 4th amended credit agreement.

Speaker 3

Total debt was $183,000,000 I'm happy to report that during the quarter, we renewed and extended our existing ABL credit facility with a new 5 year agreement, extending the maturity date to May 2029. This new $800,000,000 facility includes certain more attractive credit terms and conditions, enhancing our balance sheet and liquidity position to support our future growth. I'd like to thank the entire treasury team led by Tim on a successful renewal. Moving on to capital allocation. We continue to execute our capital allocation strategy, both investing in the future of our business while returning capital to shareholders under our buyback authorization.

Speaker 3

In the Q2 and to date, we repurchased over $140,000,000 of our stock and a total of over $190,000,000 for the year. Moving forward, we will continue to balance our capital allocation strategy, remaining mindful of market conditions and business performance as we continue to drive our low cost business model through Project CORE. Now moving on to slide 15 that highlights our updated guidance for 2024. As a result of our first half performance along with the continuing challenging macroeconomic environment and lower than anticipated sales pipeline conversion at ODP Business to grow our top line, leveraging our low cost business model, strong balance sheet and diverse routes to market. We are updating our 2024 guidance as follows.

Speaker 3

Given our slower top line performance in the first half of the year, we are now expecting revenues of at least $7,000,000,000 for 2024. Considering the flow through effect of our revenue guidance, we are lowering our adjusted EBITDA outlook to a range of $310,000,000 to $350,000,000 We are also lowering our adjusted operating income to a range of $200,000,000 to $240,000,000 and adjusted earnings per share to a range of 4.25 dollars to $5 per share. And finally, we expect our adjusted free cash flow generation to be approximately $200,000,000 for the year. Our revised guidance considers that some of the top line challenges persist in the near term and the macro stays relatively consistent with the first half of the year. Additionally, although we are excited about the current prospects in both their and ODP Business Solutions, leveraging the Power of 1, we did not incorporate any material impact of new wins in our outlook at this time.

Speaker 3

Furthermore, our operating income and EPS guidance takes into consideration the impact of the reversal of certain full year incentive programs that are not projected to be met this year. In summary, notwithstanding our performance in the first half of the year and the macro challenges we faced, we believe we are on the right path to drive stronger traction on our top line and deliver improved performance in the long run. The initiatives we have in place are helping us build a stronger pipeline of new business and we are leveraging the attributes of our strong foundation to deliver more value added products and services to our customers. While we acknowledge the current results are unacceptable, we remain encouraged by our strong foundation, the flexibility of our business model, focused on operational excellence and our disciplined capital allocation approach, which when all combined help us create a very compelling algorithm and value proposition for all shareholders. With that, operator, we will now take questions.

Operator

Certainly. And our first question will come from Greg Burns of Sidoti. Your line is open, Greg.

Speaker 4

Good morning. Just have a couple of questions around the conversion rates at Solutions. What has been the delay in some of the enterprise customers that you announced as having won maybe a couple of quarters ago? Has delays in rolling them out been on your end, some issue there? Or has it been customer related?

Speaker 4

Then also could you give us maybe a little bit more color on the customer that you lost? Was that an existing customer or pipeline customer? And is there any risk of maybe further loss out of the pipeline? And then, I guess lastly, could you just give us given what's been going on over the last couple of quarters there with the execution, what gives you confidence in the pipeline that you see for the back half of the year and your ability to convert against that? Thank you.

Speaker 3

Very great. Maybe I'll start and then Jerry could add on. So right now, I think what we're seeing broadly speaking is customers being more cautious across the portfolio and that's impacted our top line and delayed the onboarding for a variety of reasons, prioritizations, organizations going through their own respective restructurings, all the things that you can imagine delay the focus on onboarding and switching providers. And frankly, we've had a few wins get pulled, meaning customers reprioritized and stayed with the incumbent. Now that's typically that's going to happen on both ends where we win, sometimes we lose and there's delays in how that occurs in the quarter.

Speaker 3

We've just seen a concentrated effort in the first half of this year with that level of delay happening. We've been focused, as we mentioned in the prepared remarks, on weekly deal reviews. We're leaning in strategically. We're looking at adjacency, Power of 1 contributions. We're seeing some green shoots.

Speaker 3

So we're really excited about early signs around how this could change its trajectory going forward. But our guidance as implied assumes continued conservative view as it relates to the overall macroeconomic environment.

Speaker 2

Yes. I'll just add on again, we're focused, Greg, really hard on Dave and his team on some of these trajectory changing deals. Those take time. They obviously have taken longer than we hope for, but we have confidence that we're going to be able to change those. From a VER perspective, we have a verbal agreement that was just awarded literally about 30 to 40 minutes ago, that will out of the gate has potential to almost double the Verre top line from the prior year.

Speaker 2

So I'll say that again, so everyone hears that. This is a trajectory pivot for the business overall in for Verraer, but we've signed a deal with a verbal deal with a large e commerce company for a warehouse and supply chain providing deal that is again has the potential to be almost double last previous year's revenue level, which is very, very significant. And that deal will be implemented in the very near future in Q3.

Speaker 3

We're

Speaker 2

hiring, we're ramping up. It's real and we're super excited by that. And that obviously could lead to a ton of potential in the future as we execute across the business. So, trajectory we're hoping to get some of the trajectory changes in earlier, but that's super excited with that because that is a significant opportunity for us as a business, affirmation of our 3rd horizon. And lastly, I'd just say, we spent a ton of time with the Board, as I said in my scripts.

Speaker 2

We are investing in a number of growth areas and we're going to continue to right size this business. We drove the low cost model with Project Core. We have these 5 initiatives we're driving for the midterm, as we talked about in the script. And now we're focused on the strategic growth pieces across the business over the next in the near term, mid term and long term as well. And we're confident over time that we'll make a difference in the business.

Speaker 5

Okay. Thank you.

Operator

Thank you. One moment for our next question. Our next question will be coming from Michael Lasser of UBS. Your line is open, Michael.

Speaker 5

Thank you. Good morning. Thank you so much for taking my question. How much is the more intense competitive landscape playing into the shortfall that you're expecting in the back half? If you had to divide it between the macro remaining challenging as well as versus the more competitive landscape?

Speaker 5

How would you do so?

Speaker 2

I would say, of course, it's a competitive environment, but I'll let Anthony comment as well. But my perspective is this is softness in macroeconomic conditions. This is our B2B as well as B2C customers buying less. There's a number of retailers out there that are seeing softness. There's a lot of B2B companies are seeing softness.

Speaker 2

We're not we don't have a trove of customers' losses. We have customers our current customers buying less. As we said in the script, people had layoffs, people reduced their spending, etcetera, etcetera, which is why we're working hard on the trajectory change in opportunities. Yes, competition is always fierce, but I don't see it any more fierce than

Speaker 3

it's been in the past. Ken? Yes. I think, Michael, good to hear from you. I think it's been a combination of a perfect storm, longer close cycle, some customers trading down from a product standpoint, delayed big ticket purchases, and a consumer that I think you can agree has been challenged overall.

Speaker 3

So we experience this every single day. But what I feel like it's almost a perfect storm. It's all happening at once. So to Jerry's point, I think a lot of this has to do with the macro, which is delaying purchases. It's trading down purchases, all having an impact both on the top line and bottom line.

Speaker 5

My second question is on your gross margin. What needs to happen in order to reverse the significant erosion in gross margin from the last couple of quarters because the comparison on the gross margin line get much more difficult and it doesn't seem like the environment is going to get any easier in the back half of the year?

Speaker 3

Yes. So we have obviously Project Core, which will begin to cascade more meaningfully in the back half. Most of the actions occurred in Q2. We have a little bit of actions in the back half, but most of the actions were completed by the end of Q2, which gives us confidence that the benefit will you'll start to see that accruing in Q3 through the balance of the year. So that should improve the gross margin.

Speaker 3

I think a lot of it has to do with the top line stabilizing, the pull through effect of that deleveraging of the top line coming down, obviously, has an impact on gross margins. And to Jerry's point, we have some green shoots, one of which he just announced. That should bring some volume back into the higher fixed costs that occurs within our supply chain that should help the gross margins going forward.

Speaker 5

My final question is what have you seen in the laptop category? There's been some indications that, that category has started to improve. And how what percentage of your laptop sales in the last couple of months have been AI enabled laptops?

Speaker 3

I think the AI, what we've seen is the demand is coming from the AI. As you know, it's what's occurring over the next 6 to 12 months. I think it's going to provide that refresh cycle, even more meaningful than what we've seen. And most of our sales are going to be laptops versus your traditional desktop pillar. So it's going to be mostly in the laptop category as it relates to PC sales.

Speaker 5

If I could add one more question. What have you seen so far early in the back to school holiday season? Has it been a continuation of the trends that you experienced in the Q2?

Speaker 3

Back to school is really early right now. We're early in the flights. We've prepared the staging earlier. So from a showcasing standpoint, we're ready. We're leveraging our teacher and school supply list, which is the first time that we've launched that.

Speaker 3

We're outfitting our certain stores with the Dormify dorm room accessories, higher ed, leveraging our assortment and reach. So we feel like we're really well positioned. It's a very competitive back to school environment. We saw that last year, and we saw we're seeing that this year as well. But we're positioned where we think we have the breadth and depth of the products and services that we can provide our customers early days in the flight, Michael, but we're encouraged by where we stand from an inventory standpoint as well as product and service.

Speaker 5

Thank you very much and good luck.

Speaker 3

Thanks, Michael.

Operator

And that concludes the Q and A session for today. I will now turn the call back to ODP's Corporation's CEO, Gary Smith, for closing remarks.

Speaker 2

Well, thank you for joining our call today. I just want to reiterate a couple of things. Obviously, this performance in Q2 was unacceptable. We clearly recognize that. 2nd, we've taken the action we did on Project Core to get our cost position in line.

Speaker 2

We're going to continue to drive our low cost model and walk our culture. 3rd is we talked about our big five initiatives. Those are structural initiatives that help improve growth as well as profitability. Those were kicked off in late Q1, early Q2. We're starting to see traction around those and we're going to continue to drive those.

Speaker 2

So we have a good exit velocity in 2024. And lastly, as we talked about a number of strategic reviews with the Board from a growth perspective across the business. We see lots of green shoots that are trajectory changing, super pleased with the opportunity on our Prevere this morning on that almost doubling their business from last year potential to do that. And within Q3, we're going to implement that business and we think that's a huge step forward from a traction perspective. And we have again a number of trajectory changes in the ODP Business Solutions business we're going to work hard to close in 2024 that will make a huge difference going forward in 2025.

Speaker 2

And lastly, we're going to work very, very hard to get this business right sided and we fully support our share buyback plan and we're moving forward with our capital allocation. And so across the board, we know we have a lot of work to do and we're all on board to change the course of this business and get us back into a performance level that is acceptable and accretive for the marketplace. Thank you for joining the call this morning and we'll speak again.

Operator

Thank you for your participation. This concludes today's call. You may now disconnect.

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Earnings Conference Call
ODP Q2 2024
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