Office Depot, Inc ODP CEO Gerry Smith on Q4 2019 Results

Thank you, Tim, and good morning to everyone joining our call today. It's great to be here with you this morning to discuss our accomplishments for the fourth quarter and full year 2019 and our outlook for the year ahead. We made specific progress throughout the year on our transformation, improving our platform for profitable growth and extending our position as a leading integrated B2B provider of business products and services. Since 2017, we embarked on a multi-year transformation strategy rooted in strengthening our B2B business, developing more predictable revenue streams, and leveraging our assets to derive long-term profitable growth. Our primary focus in 2019 was to further improve our operating structure and enhance our competitive agility, and as evidenced by our results, we made tremendous progress. For the year, we improved our profitability, expanded our value proposition, and leveraged key assets to enhance our B2B platform. As shown on slide 4, I would like to highlight the primary drivers in the year supporting our goals. First, through a solid execution of our business acceleration program, we streamlined our operations and made sustainable improvements to our business model. As a result, we exceeded our operational goals for the year. As a reminder, our business acceleration program, or BAP as we refer to it, is a multi-year effort designed to create a more competitive enterprise, driving cost efficiencies that provide additional sources of capital to improve customer satisfaction and importantly fuel future growth. This program exceeded even our own ambitious goals for the year, delivering significant cost savings and driving improved operating performance. Profitability is up year-over-year in each of our divisions after implementing this program, resulting in a 2% increase in adjusted operating income for the year and 10% in the quarter. We will continue to drive this program and use the benefits to make additional growth investments in the year ahead. Second, we continue to make enhancements to our integrated B2B platform to generate future profitable growth. Our B2B businesses, which includes our BSD and CompuCom divisions, generate approximately 60% of our total revenue and well over half of our operating income. Under our new leadership in both divisions, we took several actions to build a stronger, more profitable pipeline for future growth. We refined our value proposition, improved our sales operations and quality, and refocused our strategy at CompuCom. These efforts, combined along with the BAP, resulted in significant improvements in profitability and positions us to compete more effectively going forward. Next, we continue to gain traction outside of our traditional office product offerings, generating growth in adjacent categories like cleaning and break room and copy and print services. Our adjacency categories are over a third of our sales in our BSD division, and we're only at the beginning stages as these adjacency categories represent large and growing revenue opportunities. We grew service revenues during the year in both our BSD and retail divisions, which were up 8% and 6% respectively, and improved the efficiency of our supply chain and formed new partnerships. Finally, we strengthened our balance sheet, generated strong cash flow, and remained shareholder focused with our continued balanced capital allocation focus. We paid down debt, we returned cash to shareholders in the form of dividends and share buybacks, and invested in high-value areas like supply chain, distribution, and customer operations. To strengthen our balance sheet even further in 2020, we are happy to announce that we completed the final maturity of the timber note receivable, resulting in a net cash receipt of approximately $88 million received in the first quarter. We remain in a position of strength with approximately $1.7 billion in total available liquidity when considering the cash received from the timber note receivable. Our performance for the year was punctuated by our strong performance in the fourth quarter. As shown on slide 5, we drove strong results in the fourth quarter as targeted actions to improve profitability resulted in significant increases in operating income. However, as we have mentioned on previous calls, some of these actions have had an adverse near-term impact to revenue. These actions, along with lower sales in our retail division with fewer stores and service, impacted revenue which was down in the year and quarter 3% and 6% respectively. That said, we believe that these actions are necessary to improve our operations and to enhance our low-cost delivery model designed to drive future growth in our BSD and CompuCom divisions. Our operational results were terrific. We generated $156 million in adjusted EBITDA, a 13% increase over the same period last year, and adjusted operating income of $92 million, a 10% increase over the prior year. We generated $135 million in adjusted free cash flow in the quarter and beat last year's earnings per share by 3 cents. Continued strong performance of our business acceleration program, supply chain efficiencies, and deliberate actions we have taken to improve profitability drove these strong results. We continue to make progress on our transformation in the quarter, enhancing our B2B platform, driving increases in service revenues, and gaining traction in certain adjacency categories. Services revenue is up 14% in BSD, and total service revenue remained at 16% of our consolidated revenue in the fourth quarter. We are continuing to focus on growing our services, and with CompuCom's refocused strategy, we expect to see higher levels of growth in service revenue in the future. We grew certain adjacency categories in the quarter, including our cleaning and break room and copy and print adjacency categories. The investments we've made in our supply chain, the backbone of our business, continue to deliver with the highest productivity and customer satisfaction metrics on record for our company. We also entered into new innovative partnerships with companies such as Shipt. Shipt is a member-based delivery marketplace that offers personal shopping and same-day delivery services. Through our partnership, Shipt members in more than 200 markets serving over 60 million households have the ability to source products from Office Depot on a same-day delivery basis. We are in the early stages of this opportunity, but we are very encouraged by the progress we made thus far. And lastly, our approach to capital allocation remained balanced, and we return value to shareholders through dividends, paying down debt, and buying back $29 million of our stock. Moving to slide 6, let me turn our attention to highlights within our business segments, beginning with our BSD division. Our Business Solutions Division, the largest component of our B2B platform, serving about 10 million business customers including 200,000 enterprise customers and about half the Fortune 500, drove improvements in operating performance throughout the year. Under new leadership, BSD's primary focus for the year was centered on improving profitability and building a stronger platform for future growth. Targeted actions to improve the quality of the sales efforts and to enhance operational efficiency drove significant increases in our operating performance. As evidence of our progress, operating income was up an impressive 28% in the fourth quarter versus the prior year and at 12% for the year. Revenue was flat year-over-year and down 3% in the fourth quarter, largely due to the targeted actions taken to improve operating margins and reduce unprofitable sales activities. While these actions had a near-term adverse impact on revenue, we believe it's the right approach to prepare a platform to drive profitable growth in the future. Revenue also includes results from our stated strategy of acquiring leading players in previously underserved localized markets. These smaller positions have allowed for an increase of means to grow our business customer base, expand our distribution presence, and grow our offering beyond traditional office supplies. We have completed and integrated five of these acquisitions throughout the year, and all are performing well. One of our long-term strategies for growth is expanding our product offerings beyond traditional office supplies into what we refer to as adjacencies. These adjacency categories accounted for 37% of total BSD sales in the quarter. Adjacency categories include cleaning, break room, copy and print, furniture, and technology products. Cleaning and break room was a standout among these categories, up over 8% for the year. This category alone represents nearly 40% of our total adjacency revenue, as this category is a $26 billion growing industry. We are still in the very early stages of capitalizing on this attractive growth opportunity. Additionally, our copy and print visits grew throughout the year, up 6%, and now represents over half a billion dollars in revenue in both BSD and retail, and it is growing on an annual basis. Overall, BSD delivered exceptional operating results in 2019, and now it's time to grow the top line in the coming year. With a stronger platform and improved processes, we're investing to derive the next phase of revenue growth in BSD. I'd like to take a moment to discuss these drivers. Using a targeted growth approach, our team has established new rigor and discipline, improving sales efficiency and repositioning our value proposition. We are utilizing data analytics to better understand customer segmentation, allowing us to deploy our resources most effectively to increase sales in existing accounts and improve targeting of new customer accounts. We will expand our distribution reach through high-quality customer acquisitions and importantly, continually expand share of wallet opportunities by driving adjacency sales growth and evaluating new product category offers. There are several new in-demand adjacency categories that we are evaluating in which we have a competitive advantage to serve given our business relationships backed by our world-class supply chain. Additionally, we will continue to capture the numerous cross-selling opportunities between BSD and CompuCom. Over the past three years, we have changed the trajectory of BSD from a business that was declining into a growing and profitable business. Our platform is poised to drive the next phase of growth. We are already seeing early signs of success. Our sales productivity is becoming stronger, our total pipeline of new business is increasing, and our adjacency categories are growing. We are excited about the early progress as we execute our growth plan in 2020. I now like to take some time to discuss our progress with CompuCom, starting on slide 7. CompuCom is an important part of our B2B business and a key asset for us in developing our services businesses. With a 33-year history, a blue-chip customer base including half the top 10 Fortune 500 companies, and a brand name that stands for quality, their world-class offerings and large field force of highly trained technicians differentiate us from the competition and positions us for opportunities that we could not pursue without them. Turning to slide 8, CompuCom clearly had a very challenging start to the year in 2019. However, CompuCom has since made progress, stabilized operations, driving higher operating income, increasing pipeline and new business. As part of this turnaround, we hired a new leader for the division, Mick Slattery, one with significant experience and a great vision and strategy. He and his team have refreshed CompuCom's strategy and brought new energy to accelerate future profitable growth. With the initial focus on improving profitability, CompuCom drove increases in operating income throughout the year and is building a pipeline of new business that we expect will drive higher revenue growth in late 2020 and beyond. The investments we made in new technology, actions we've taken to improve operations, and strong execution of the BAP have resulted in improving profitability in the quarter. CompuCom generated $9 million in operating income, an 80% increase over last year, and won new business in excess of $300 million in total lifetime contract value. Revenue was lower by 16% in the quarter compared to last year, largely related to deliberate actions taken to improve profitability as well as the timing of both product orders and project-related work. As you heard last quarter, CompuCom has refocused its strategy, injecting new energy and taking full advantage of the company's core strengths and capabilities. At its core, CompuCom is the organization that enables enterprise employees to be productive, and its refocused strategy of connecting people, technology, and the edge in a seamless experience is well-positioned to capture growth in a market that is large and growing. We estimate the current addressable market for managed device, workplace, and infrastructure services in North America to be in excess of $130 billion. The industry is highly fragmented, and despite our growth over 32 years, we have only captured a small portion, leaving significant potential for growth. And although it will take some time to realize this growth and we have much more work to do, we believe CompuCom now is on the right path. I now I'd like to spend a few minutes on our retail division's performance and the mission underway to maximize value in this area of our business. We made good progress throughout the year optimizing our retail footprint and improving our operating performance. To offset the traffic challenges of the industry, we worked throughout the year to improve our in-store experience, incentivize our store managers, and use a local approach to execute creative marketing and promotional strategies to improve performance. As a result, we drove increases in key metrics such as our conversion rate and sales per shopper. Demand increased for our buy online, pick up in store offerings, up over 8% for the year, and services revenue grew 6% for the year as well, largely driven by increases in demand for our copy and print and subscription-based services. These positive trends, along with our client-centered selling culture and an increase in loyalty customers, partially offset lower traffic trends in the quarter. Same store sales were down about 4% for the quarter and for the year. These positives, taken together with strong execution of our business acceleration program, helped to drive higher margins, leading to a 21% increase in operating income in the fourth quarter and a 1% increase for the year. As I've mentioned in the past, we continually evaluate the profitability and strategic value of each of our retail locations to ensure we optimize our footprint. We have been refining our retail footprint, resulting in a higher number of store closures versus last year. While this has had a negative impact on our sales, contributing to the 6% decrease of revenue for the year, these actions are improving the vitality of our network and helping drive increases in profitability. That said, our retail footprint continues to be a complementary and important component for our overall distribution platform and a key differentiator versus online competitors. To that end, we continue to use our retail space differently and are pursuing additional ways to provide value from our footprint and increase store traffic. We have launched in-store pop-up opportunities with companies like Lenovo and established innovative services with partners like TELUS International, which positions us to deliver additional high-value services to targeted business and consumers alike. Going forward, we will continue to optimize our retail footprint to the benefit of our shareholders, reducing exposure and focusing on driving more efficiencies in our operations. Before I turn the call over to David for additional details on our financial results, I would like to discuss our focus for 2020, as shown on slide 10. As I've stated in the past, our progress today supports what I believe to be a very different business than what most perceive of Office Depot. As you've heard a few times today, we're a leading integrated B2B distribution company offering business products and services. We have a highly valuable asset base that includes one of the largest and most unique distribution supply chain networks in the country. Our transformation emphasizes B2B, reduces reliance on retail, and positions us to offer a broader array of products and services as we move forward. In 2020, our focus will be on delivering top-line growth utilizing our B2B platform. We will invest to drive growth in our BSD and CompuCom divisions, take advantage of our expanded product and service offerings, and continue to optimize our retail footprint to the benefit of our shareholders. In support of these growth initiatives, we're adding selling resources, investing in our delivery platform, utilizing new intelligent tools and technology, and leveraging our scale to reach more customers with a broader array of high-quality business products and services. Continued cost savings derived from both the business acceleration program and our retail optimization efforts will help support these investments in our future growth. Through our targeted growth plan in our BSD division, we will pursue growth through new customer wins, greater penetration of existing accounts, and business customer acquisitions where attractive. We'll continue to drive our adjacency product and service categories and evaluate new categories where we have a competitive advantage to serve our customers. In addition to our high-growth adjacency categories, we will continue to pursue additional opportunities that leverage our supply chain in unique ways. Another key component of growth is CompuCom. As you heard, we made significant progress in stabilizing this business and growing its pipeline of new customers, and we are very encouraged with our refocused strategies and new energy that takes advantage of CompuCom's core strengths. While this is still a work in progress, we have confidence that CompuCom is on the right path to generate profitable growth in 2020 and beyond. Underlying our growth objectives is our continued focus on driving a low-cost, sustainable business model. We made significant progress in the past year in creating a more efficient business model, driven largely by our business acceleration program. We will continue to execute upon this program and use these benefits, along with benefits generated from our retail optimization efforts, to help fund our growth initiatives. And we will remain committed to creating long-term value for shareholders. We will continue our balanced approach to capital allocation, including opportunistic share repurchases and making disciplined investments in our B2B growth initiatives. Additionally, we will continue to evaluate our operational structure to look for means to unlock further value. As an example of this effort, we anticipate completing our previously announced feasibility review of a potential holding company reorganization by the end of the first quarter 2020. With that, I will turn the call over to David for more detail on our financial results.

Thank you. As you heard, we made excellent progress throughout the year improving our operational performance and enhancing our position as a leading integrated B2B provider of business products and services. In 2020, our focus will be on investing to drive top-line growth in our BSD and CompuCom divisions, leveraging our low-cost business model, and continuing to rationalize our retail footprint. Our 2020 guidance is as follows: we expect sales of approximately $10.5 billion. We expect to generate approximately $550 million of adjusted EBITDA. We expect to deliver approximately $350 million in adjusted operating income, and expect to drive approximately $300 million in adjusted free cash flow. This guidance reflects positive sales trends in both our BSD and CompuCom divisions, offset by impacts from store closures as we continue to optimize our retail footprint. It also considers additional growth investments fueled by the continued execution of our business acceleration program. This guidance also assumes a stable global sourcing environment without significant disruptions from factors such as the coronavirus outbreak or significant changes in the tariff structure. I'll turn the call back over to the operator so we can take your questions at this time.

Thanks, Jason. From a go-forward perspective, I'll break it up into two categories. Number one, we believe that with the operational cost improvements we made throughout this last year, we have the ability now to reinvest in growth. From a cadence perspective, what we're looking for is the ability to target better our customers. We have a strategy in place in CompuCom now. We have a new targeted growth system from our B2B businesses. So we think that with the better cost basis, the new sales processes, the strategies we have in both of these units, and our two new leaders in both those units are confident that we have the ability to grow. And we're going to invest some of the operating income as well as the retail optimization into the growth of the business as well.

Thanks. We don't break out guidance by division profitability, but what I will say is we're confident in these numbers. I will say we're taking some of these investments, a lot of what we created from BAP, and we're investing it back into growing the B2B as well as the CompuCom businesses. We're confident we have the ability to go off and do this. I think Q4 demonstrated the value of our BAP program and our retail optimization. I think we were quite happy that we overachieved our targets for Q4 and the run rate, and we hit our run rates for the year. Going into 2020, it's all about growth and it's all about making sure we're taking BAP and putting that into growing the business as well as our operating profit.

Oh yeah, well obviously the teams interact and work on joint activities and customers, but from a segment reporting perspective, you have your retail business, then you have your BSD, our online as well as our B2B contract sales business, and CompuCom. They all operate from a go-to-market force perspective independently, but we do cross-sell across all our channels of distribution. Our mission is to be a trusted platform for B2B products and services. When we're selling to those B2B customers, we want to sell through our sales team, through our inside sales team, through our telesales, through our online platform, as well as through our CompuCom resellers as well. So we think all our channels are important, all are focused on creating a B2B marketplace platform to sell products and services to our customers. It will be better business long term for this business.

Thanks. I think from a retail perspective, Kevin and his team have done an outstanding job of optimizing the footprint. If you look at our profitability on a year-over-year basis on lower sales, from a year-over-year perspective we actually were up a couple million dollars, which I think is testimony to the great leadership and our work on really focusing on conversion. We also focus on additional services, services up roughly 6% to 8% depending on the services. So our whole focus is finding the optimized footprint in retail, and we're going to continue to try to drive profitability across the chain.

Well, from a store closure perspective, we're going to close slightly more stores in 2020 than we did in 2019 and continue to focus on optimizing the footprint and continue looking at ways to drive traffic and conversion. With TELUS International, the successful partnership has been a successful partner. We're always looking for new opportunities to drive that execution strategy. But I want to emphasize that the store footprint is important. We have six billion customers within a three or four square mile radius of our stores, so we're going to target those B2B customers. We started using local marketing programs in the second half of the year, and we're going to continue to do that to grow our B2B customer base.

Well, I think four things. Number one, we went out and looked at some of the unprofitable business that we had and we rectified that situation. Number two, I've got two great new leaders in the business, and that makes a difference. Number three, both have defined and refined new strategies on how we go to market. Mick has done a great job of simplifying the offering, getting a very clear and concise vision together, and you saw some of those results in Q3 and Q4, and I love the trajectory. Stephen has done a really good job of really focusing on our sales as a science and really getting our sales team engaged and energized on a systematic way of going to market. We've done some segmentation work as well, and we're very encouraged by what that segmentation work tells us. And lastly, we're investing. So if you go back to 2017, 2018, we were strengthening the core of the business. We got our cash generation vehicle, and you saw our net cash position, which I'm really proud of. So last year was really getting our cost structure in place. We're going to continue to drive to a low-cost model. This year, now that we have those two engines in place, we're going to go drive growth across the business, and we're committed to go make that happen.

Thank you all for joining us on the call today. We appreciate your time and support to be on the call, and we look forward to speaking with you again in the next quarter. Have a great morning, and thank you very much.