ODP - NASDAQ

Good morning, and welcome to the ODP Corporation's First Quarter 2025 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 now like to introduce Tim Perrott, Vice President, Investor Relations and Treasurer. Mr. Perrott, you may now begin.

Good morning and thank you for joining us for the ODP Corporation's first quarter 2025 earnings conference call. This is Tim Perrott, and I'm here with Gerry Smith, our CEO. Also joining us on the call today are Max Hood and Adam Haggard, our co-CFOs. During today's call, Gerry will provide an update on the business, focusing much of his commentary on our results and accomplishments for the first quarter of 2025, including the progress we're making on our B2B pivot and our expansion into higher growth industry segments. After Gerry's commentary, Max will then review the company's results for the quarter, including highlights of our divisional performance, followed by Adam, who will highlight our balance sheet and comment on our go-forward plans. Following our comments, we will open up the line for questions. 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. Security and Exchange Commission. 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 one year. I will now turn the call over to Gerry Smith. Gerry?

Thank you, Tim, and good morning, everyone. I'd like to start out by thanking all of you for joining our call today to review ODP's results and accomplishments for the first quarter of 2025. We appreciate your continued interest and support as we execute on our strategy to transform our business and position ODP for long-term growth. This morning, I'll provide an overview of our performance for the quarter and share updates on the progress we're making with our Optimize for Growth plan and our B2B pivot. Both initiatives are helping us adapt to evolving market conditions, improve operational efficiency, and position the company for future top-line opportunities. As I walk through our performance, I want to focus on a few key themes that reflect our progress and provide context for our results as shown on Slide four of the presentation. First, our strategy is focused on leveraging our core strengths to accelerate our B2B pivot and enhance our position in our traditional enterprise market segment while expanding into new higher growth segments like hospitality and supply chain as a service. Our supply chain assets, distribution capabilities, and enterprise customer base set us apart in industry and provide a strong foundation for future growth in both our traditional segments and beyond. As a key element to our strategy, we are executing our Optimize for Growth restructuring plan that realigns our organizational structure, product offerings, and go-to-market strategies to accelerate our B2B pivot and expand into new enterprise segments. This plan also helps us reduce fixed costs, increase operational flexibility, while reducing future reliance on our retail business. Second, strong execution of our strategy has led to early signs of traction in key areas of the business. In the quarter, we improved our overall year-over-year performance trends and generated significantly higher adjusted free cash flow, placing us in a better position as we move throughout the year and execute our strategy. Additionally, while yet to be notable in our results, we are making progress in expanding to new markets beyond traditional office supplies. And finally, we have a solid balance sheet and available liquidity and a business model that generates free cash flow, all which supports our strategy and provides flexibility for future growth. Let me now expand on these points and provide more detail on our performance for the quarter starting with Slide five of the presentation. Overall, we're off to an encouraging start to the year, with our overall performance reflecting positive momentum and improving year-over-year comparable trends in the first quarter. Our focus on core operations and the execution of our strategy help us deliver a sequential improvement in adjusted EBITDA and generate a meaningful increase in adjusted free cash flow compared to last year. Specifically, on an adjusted basis, we drove $76 million in EBITDA and $45 million in free cash flow. Our performance was led by our consumer division, Office Depot, which delivered better top-line trends compared to last year while delivering higher margins on a sequential basis. This helped drive stronger cash flow generation driven by targeted consumer initiatives supported by our Optimize for Growth plan. While store closures impacted our total top-line results, we're happy to report that our comparable store trends improved 300 basis points from the fourth quarter of 2024 and improved 500 basis points from the same period last year. Average order volumes are up over last year, our loyalty program enrollments are climbing, and categories like paper are performing better. This performance trend accelerated in the month of April gave us confidence in our momentum as we move into the next quarter and throughout the balance of the year. In our B2B business, top-line trends were about the same as last year, reflecting the continued soft market demand and the impact of comping over one large customer loss from mid last year. I would also note that some of our recently announced new business contracts are still in the onboarding phase and are not yet running at full speed. That said, we're making progress in several areas. We're continuing to win new business and we're making progress in our expansion into the hospitality industry. On the new business front, we recently added CoreTrust, a large group purchasing collective with over 3,500 enterprise members to our portfolio. We're actively onboarding CoreTrust and other large new business wins, which we expect will add to our performance in the second half of the year. Additionally, we expect that the progress we are making in the hospitality sector will begin to more meaningfully contribute to our results in the second half of the year, helping us change our trajectory. In all, given the new business we've added, our expected progress in the pace of onboarding, and our launch in the hospitality sector, we have growing confidence that our results will improve in the second half of the year. In our supply chain business, VEYER, we continue to deliver strong results, achieving over 85% year-over-year revenue growth from third-party customers, and adding significant new accounts to its portfolio. This performance highlights the value of our supply chain capabilities and the growing demand for our services. And finally, from a cash management standpoint, our team continues to effectively manage the business and inventory to maximize cash flow. Cash conversion improved significantly in the quarter, helping us generate $45 million in adjusted free cash flow, which was more than double the free cash flow we generated in the same period last year. I'd like to thank my team for their dedication and focus on cash management. Turning to Slide six, I'd like to provide an update on our progress in the hospitality market. Three months ago, we announced a strategic partnership with one of the world's largest hotel management organizations, becoming a preferred provider for operating supplies and equipment. While we're at the early stage of our deployment, we made progress in expanding into this growing $16 billion market segment. We're excited about this opportunity, as it aligns perfectly with our core strengths in supply chain and distribution and represents an important step in our efforts to diversify beyond office supplies. Our first partnership covers approximately 15,000 potential customer locations within this hotel management group, and we believe it will serve as a foundation for future growth in this segment and other related industries. Our key accomplishments include establishing agreements with leading suppliers like Sobel Westex and Hunter Amenities, giving us access to supply of premium hospitality products, such as linens, towels, and personal care items. Next, building up inventory to meet anticipated demand. While inventory build and sourcing has taken a bit longer than we anticipated, we're gaining momentum and building our position to meet future demand. Next, adding sales talent with a deep hospitality experience to direct growth. Additionally, engaging with potential customers and franchisees whose feedback regarding our services has been positive and encouraging. Next, forge a relationship and sign a supply agreement with a key industry player that we believe will accelerate discussions with other hotel management companies. And lastly, we're also in ongoing discussions with several other key market participants to develop future relationships. While we are still in the early stages of our launch and have more work ahead, these efforts are laying the groundwork for ODP to deliver meaningful growth in this segment. We expect these initiatives to begin contributing more significantly to our results beginning in the second half of the year. And finally, I want to highlight the progress we're making with our Optimized for Growth Restructuring Plan. This is shown on Slide seven. As a reminder, this initiative focuses on capitalizing on our core strengths to accelerate growth in the B2B distribution and third-party logistic segments while reducing our fixed-cost infrastructure and limiting future retail exposure and associated liabilities. The plan realigns our organizational structure, product offerings, and go-to-market strategies to target high-growth opportunities in the B2B market, while also expanding into new enterprise segments including hospitality, healthcare, and adjacent sectors. We made significant progress in the quarter, executing efficiency measures targeted at reducing fixed costs. We closed nine retail stores in the program and eliminated areas of corporate support structure. The progress we are making is helping us redirect resources and add flexibility to operations in both our consumer and B2B divisions. Before I turn it over to Max, I'd like to reiterate that we are off to a better start to the year, driving improved overall trends, and generating a significant increase in adjusted free cash flow. Our consumer business has improved, and we are anticipating continued momentum in months ahead. In our B2B business, we are winning new business and are anticipating better trends in the second half of the year as we onboard new customers and drive more meaningful results in the hospitality segments. We will continue to focus on the core, driving our strategy and initiatives, remaining committed to generating value for our shareholders. I'd also note that we are evaluating the tariff situation that has been evolving over the past few months. While we're not immune from potential impacts, our team has been working closely with our vendors, evaluating strategies, and we've taken previous actions we believe will help us mitigate potential impacts. With that, I'll turn it over to Max.

Thank you, Gerry, and good morning to everyone on the call. I'm Max Hood, co-CFO. I would like to cover the specifics of our results for the first quarter on Slide 9. Please note that our results, as presented, are for continuing operations. We generated total revenue of $1.7 billion in the quarter, reflecting a 9% decline compared to the first quarter of last year. However, this result marks an improvement in the year-over-year trend compared to prior quarters. The decline in sales was primarily driven by several factors, including 46 fewer stores in operation, reduced retail and online consumer traffic, and lower sales within ODP business solutions. Our GAAP results in the quarter included $86 million of charges, primarily related to $48 million of restructuring expenses associated with our Optimize for Growth plan, and $30 million in non-cash asset impairments of operating lease right-of-use assets associated with our retail store locations and distribution centers. The balance of the charges in the quarter were related to the impairment of certain software and other store-related fixed assets. Notably, the initial restructuring charges associated with the Optimize for Growth plan included $36 million of severance costs that we are estimating to incur over the life of the plan. Considering these charges, GAAP operating loss in the quarter was $32 million versus GAAP operating income of $41 million in the prior year period. Excluding these charges, adjusted operating income for the first quarter was $54 million compared to $66 million in last year's first quarter. Unallocated corporate expenses were $20 million in Q1. Adjusted EBITDA was $76 million in the quarter compared to $91 million in last year's first quarter. This includes adjusted depreciation and amortization expense of $25 million in the first quarters of 2025 and 2024. Excluding the after-tax impact from the items mentioned earlier, adjusted net income from continuing operations for the first quarter was $32 million, or $1.06 per diluted share, compared to $50 million, or $1.31 per diluted share in the prior year period. Now turning to our strong cash flow generation in the quarter. Operating cash flow from continuing operations in the quarter was $57 million, which included $10 million in restructuring spend. This compared to cash provided by operating activities of continuing operations of $44 million, including $4 million in restructuring spend in the same period last year. The year-over-year increase in operating cash flow was a result of our operational discipline and prudent working capital management, converting recent inventory investments into cash, as we indicated last quarter. This led to strong cash conversion in the quarter. Capital expenditures were $21 million in the first quarter of 2025 versus $31 million in the prior year period, as we continued to prioritize capital investments towards B2B growth opportunities, supporting our supply chain operations, distribution network, and digital capabilities. Adjusted free cash flow in the quarter was $45 million, a significant increase as compared to adjusted free cash flow of $17 million generated in the same period last year. Now turning to our consumer business, Office Depot, as shown on Slide 10. Office Depot is off to a strong start to the year, with year-over-year top-line trends and margins improving in the quarter as targeted profitable sales strategies gain traction. Reported sales were $838 million in the quarter, down 11% compared to the prior year. This result represented an improvement in the year-over-year trend we reported in the same period last year. Overall sales were impacted by 46 fewer retail locations and service associated with planned store closures, as well as lower traffic trends and online sales, partially offset by higher average order volumes and the positive impact of targeted sales promotions. In total, we closed 12 retail stores in the quarter and had 857 stores at quarter end. Our targeted sales initiatives are helping to drive a significant improvement in comparable store sales metrics. On a same-store basis, sales were down 5% year-over-year, representing a 500 basis point improvement in our same-store comp over last year's first quarter. From an operational standpoint, operating income for the quarter was $45 million. On a percentage of revenue basis, this result represented a sequential increase in margins, as our sales mix and targeted initiatives helped to partially offset the impact of lower revenues. On a year-over-year basis, operating margins were flat. Moving forward, we will continue to execute upon our profitable sales initiatives in our retail business, balancing our pricing and promotion strategy with demand elasticity. We are excited about our progress, and as Gerry mentioned, our efforts have continued to gain momentum as we entered the second quarter. We will also continue executing our Optimize for Growth plan that will target efficiency gains across the organization and help us lower fixed costs. Now, turning to ODP business solutions, as shown on Slide 11. Demand remained soft during the quarter, consistent with trends in the same period last year. As cautious business conditions and restricted enterprise spending budgets persisted. Reported revenue was $852 million, down 8% year-over-year, but showing slight improvement compared to the trend in the fourth quarter of last year. Results were impacted by weaker enterprise spending and the lingering effects of a large customer loss mid-last year. However, we expect a comp over this customer loss by next quarter, which should help improve trends. Furthermore, while onboarding of certain recent new customer wins has been slower than anticipated, progress is being made, and we expect these contracts to contribute more meaningfully to future quarters. Regarding new business, we are executing initiatives to convert our strong new business pipeline into revenue to help us regain top-line traction. We're initiating service for one of the largest contracts in company history, as we previously announced, and are winning key new contracts, including our agreement with CoreTrust and over 3,500 business member purchasing collective serving major industries in manufacturing, retail, hospitality, and finance. In all, when you look at the past three quarters, we have won contracts that represent over $500 million in annual spend when fully implemented. Only a portion of this is currently onboarded, but as we progress, these contracts should help improve the trends beginning in the second half of the year. Another area that we see great promise is in the hospitality market. While it has only been a couple months since our announcement of our entry into this industry sector, we are making great progress and building the foundation for future growth in this segment. We've built key relationships with major suppliers in the industry. We have forged new relationships with other key players in the industry, and we have met with many potential customers, receiving great feedback regarding our service and entry into the industry. Considering our progress, we are anticipating that our efforts in this area will more meaningfully contribute to our results in the second half of the year and beyond. From a product standpoint, most categories were lower on a year-over-year basis, including technology products, a factor that many other companies are experiencing industry-wide. Our adjacency product categories as a percentage of total revenue, a primary KPI, remained at 44% in the quarter, generally consistent with last year and recent trends. From an operating perspective, the flow-through effect of lower revenues, pricing mix, and related fixed-cost deleveraging resulted in operating income of $21 million in the quarter compared to $31 million in the prior year period. Despite the challenges, we are encouraged by our improving position for the future as we execute our strategy and expand into new market segments. This positions us to improve recent trends and drive our B2B business as we move into the second half of the year. Now, turning to our results in our supply chain business, VEYER, as shown on Slide 12. VEYER's reported top-line performance reflected lower sales from its internal customers, ODP Business Solutions, and Office Depot, partially offset by continuing to build momentum and driving revenue growth from third-party customers. On a consolidated basis, VEYER delivered sales of $1.2 billion in the quarter, primarily derived from supporting the purchasing and supply chain operations of ODP Business Solutions and Office Depot, which are effectively eliminated upon consolidation. VEYER continued to make strong progress in executing its strategy to serve third-party customers, adding new logos to its customer list and driving a strong increase in external revenue. Being mindful that some of VEYER's third-party profitability is accounted for as a contra expense instead of flowing through revenue, for Q1, VEYER delivered third-party revenue of $17 million, up 89% over last year. VEYER drove third-party EBITDA of $3 million, flat with the prior year, as the company invested in resources to onboard its slate of new customers in the quarter. Now I'll turn it over to Adam to cover our balance sheet highlights.

Thank you, Max, and it's great to be here with everyone this morning. I'm Adam Haggard, co-CFO. Turning to Slide 14, our balance sheet liquidity position remains solid, ending the quarter with total liquidity of $653 million, consisting of $185 million in cash and cash equivalents and $468 million in available credit under the fourth amended credit agreement. Total debt was $262 million. Moving on to capital allocation, we continue to execute our capital allocation strategy, primarily investing in our core to drive the future of our business. We invested $21 million in CapEx in the quarter versus $31 million in the prior year period, targeted in our supply chain operations, distribution business, and digital capabilities to set ourselves apart in the industry. As we move forward, we expect to prioritize our capital allocation towards investment in core B2B resources, positioning us to capture the growth opportunities Gerry discussed earlier. We believe investing in our B2B business and expanding into new market segments will drive the highest ROI and create long-term value for shareholders. Before I turn the call back to Gerry, I would like to make a few comments about our preparedness regarding the evolving tariff situation that has been unfolding over the past few months. As Gerry mentioned, we have taken proactive measures to position ourselves effectively to mitigate potential impacts as the tariff situation continues to evolve. Over the past several years, we have diversified our sourcing strategy, shifting away from China to other countries in the region for direct imports supporting our private label products. On the indirect side, we are closely collaborating with our vendors, monitoring developments, and implementing actions to minimize potential impacts. These measures include sourcing products from countries less affected by tariffs, introducing strategic pricing initiatives where feasible, and identifying alternative brands to reduce exposure. While we recognize that we are not entirely immune to the changes in the tariff environment, we are confident that the steps we have taken have positioned us well to navigate this dynamic situation. Looking ahead, while we are not providing detailed guidance at this time due to market dynamics and ongoing tariff uncertainty, we can share the following directional outlook for the year. We anticipate continued improvement and trends within our consumer business over the coming quarters. In our B2B business, we expect to see improving trends as we onboard new customers and gain traction in the hospitality sector, with the majority of this improvement expected in the second half of the year. VEYER is expected to maintain its momentum by converting its customer pipeline, expanding its customer base, and driving growth and third-party revenue. Finally, we anticipate significantly higher adjusted free cash flow generation compared to last year, along with further improvements to our leverage ratio by year-end. We remain focused on executing our strategic priorities and focused on our core to deliver on these expectations. With that, I turn the call back to Gerry.

Thanks, Adam. Before we turn it over for questions, I'd like to reiterate a few key points. First, we're off to a better start to the year, improving our consolidated year-over-year trends, and generating a significant increase in adjusted free cash flow. While the consumer business was the primary driver of our improved trends and this performance has accelerated as we enter the second quarter of the year, we believe that our B2B business is in position to generate improving trends as we move forward, particularly in the second half of the year. We have continued to win new business. In fact, over the past three quarters, we have won new contracts worth over one-half of a billion dollars in annual revenue when fully implemented. We are encouraged by our progress and recognize we have more work to do as we focus on our core business. Second, we are successfully executing on our strategy and making progress in our expansion into the hospitality industry sector. We have forged key agreements with major suppliers and key market participants. We have met with many potential customers covered in our first agreement, and we are receiving very positive feedback. We are engaging in discussions with other large hospitality management companies for future agreements, and we are adding to our sales expertise and building relevant inventory to help us meet future demand. In all, while we are in the early innings, we believe our efforts to expand into the hospitality sector will more meaningfully contribute to our results in the second half of the year. Third, we are actively executing our Optimize for Growth restructuring plan, which is designed to reduce fixed costs, accelerate our B2B pivot, and gradually decrease our reliance on retail. Furthermore, as highlighted earlier, our flexible business model proactively measures have positioned us well to help mitigate potential tariff impacts effectively. And last, considering our strong balance sheet, valuable asset base, supply chain and distribution capabilities, and strong cash flow profile, we believe ODP offers a unique and compelling value for shareholders as we execute our strategy. With that operator, we'll turn it over for questions.

[Operator Instructions]. Our first question comes from the line of Greg Burns with Sidoti.

Can we maybe just start off with getting a little bit more insight into some of the momentum you have on the retail side of the business, maybe a little bit more detail on what kind of sales promotions and sales strategies you've been implementing that have been driving the improved performance?

Sure. Hey, good morning, Greg. This is Gerry. Thanks for joining the call today. I'd love to say that first, I'm super excited with the progress there. Our strategy for our retail business is to spread cash and margin, and that team is doing it. So I would say there's four key things to that. First, over the last seven years, we've developed a really good muscle in our store that took a long time to develop with our store leadership of meeting and greeting customers to drive our net promoter score. We've taken that muscle and turned it into a sales motion. So they're meeting, greeting, and selling at the front door. Second, we've had a significant change in our merchandising strategy starting last year at the UBS conference with Michael. I teased a little bit of that in March. But we're finding a different way to sell. We have a number of product categories that are copying much better than years before, and we think that we're giving a different value to our customers through that. Third, very importantly, we have a daily management system, and Kevin Moffitt, my president of the division, is doing a great job with this and Andrew, but I joined that call as well. We look at every store every day. We look at every district, 42 districts every day, and we look at the performance of the three regions every day. And having that, I'll say, gamified system that we put in place 60 days ago-ish has made a dramatic difference in the business. Merchandising peak started in Q4. Our CEO of our advertising business came up with a great idea, and we drove that. But it's across these four things which has driven tremendous improvements. I mean, having a 500 basis point difference in comp is dramatic from a year-over-year perspective. I will tell you, Greg, and I'll tell everyone publicly, April is even better from a comp perspective. We're about a negative four, roughly, in April from a comp perspective. And sequentially in the first nine days of May, we're even better than that. So we're really excited with performance. I want to thank Kevin, [Dish] [ph], Andrew, and his team, and especially my three store leaders, Carlos, Billy, and Chris, where they're absolutely executing brilliantly across the store chain. And this is important. This generates a tremendous amount of cash flow, a tremendous amount of margin dollars. And as Max and Adam both said in their prepared remarks, we're seeing a difference, and we're optimistic this is going to make a difference for us over the long term as we ramp up both there and in the B2B businesses.

Okay, great. Thanks. I guess considering the improved results and the traction you're seeing, how should we think about the pace of store closures going forward? I guess also considering the Optimize for Growth plan, like how this all plays together in terms of store optimization.

Yes. Optimize for Growth will look at what's the best path for optimizing the most cash flow and the most margin dollars for the business. I will say with some of these cost levels, it will completely change some of the trajectory of Optimize for Growth because as their shareholders, they want more cash. They want more margin dollars. Obviously, more cash will be great for the business, and we will evaluate the stores. Adam and Mike are running models right now looking at if we keep this negative 5, negative 4 comp, which is different than our model, what does it mean from a plan perspective? And then we'll evaluate that going forward. But I want all our shareholders to hear the most important thing is optimizing cash, optimizing margin. And I'm excited because we're demonstrating the results they're going to produce, as Adam said in his prepared remarks. We're going to generate more cash flow for the year, and we're super excited by that. And our balance sheet got stronger on a quarter-over-quarter basis, and this is a retail business that should eliminate a lot of the fear that your shareholder base, hey, what's going on with our retail business? Our retail business is running extremely well right now, and we're going to continue to focus on the merchandising, the great store leadership, the daily management model, to optimize cash and margin dollars across the business. Adam, back to you.

Yes. I'd like to just reiterate your comment and just say that, as we go through each quarter, we'll be continuously staring at the different stores and understanding the modeling and trying to extend stores as much as possible to drive as much cash flow in the future as we possibly can.

All right, great. And then on the solution side, why is the onboarding -- what has been holding up the onboarding process with some of these contracts?

I think it's different reasons for different customers. From a hospitality perspective, we're really early. This is a completely different industry. We're learning from a supplier perspective. We love the supply relationships, but the lead times are much longer. So as we said in our preparative remarks, it takes us longer to actually just get inventory in on some of the key, you know, minimal viable categories. And so we're rushing hard to do that. We are hiring a ton of people, qualified individuals to drive in that space. And I think from just the size of our relationship with CoreTrust, it's a huge contract. There's a lot of people to contact. And we're working really hard. We're really pleased with the CoreTrust relationship and that team, Mahesh and Greg and the whole organization. But we will continue. It's coming, and we think it's coming in the second half. But we're going to start a daily focus and daily business like we did Kevin's. So that worked. Adam, Max, and I think we talked about that earlier this morning. So we're going to have that same daily momentum, because I think that daily discipline and emphasis on results is going to, what we took and what we found super successful in retail and gamifying who's first and who's last, will be a great motivator for our B2B sales teams as well.

Thank you. Our next question comes from the line of Michael Lasser with UBS.

Good morning. Thank you so much for taking my question. What categories within the retail business have you seen strengthen over the last few months, and is there evidence that you're seeing any signs of pull forward of demand as the consumer is trying to race out and buy some products ahead of what could be some price increases in reaction to the tariffs? Thank you.

Michael, and be warned, Michael, thanks again for hosting me back in March. We really appreciated that. Great conference.

Great to see you, Gerry. Great to see you.

From a category perspective, I'll sort of answer in a reverse direction. We're seeing success in sort of non-tariff categories, honestly. And we've done a really good job of mitigating tariff exposure. We saw a little bit early, like a two or three-day period for furniture and tech, we saw a bit of a spike. But that normalized pretty quickly. These are sort of in our core categories, Michael, across the board of core supplies. I think that I'm going to be careful, obviously. We have competitors sitting on the phone listening. But, yes, I'd be happy to spend time with you offline as well. But we really made a shift from our merchandising strategy, from our traditional high-low to a different merchandising strategy that's more value-oriented for our customers. I'm thinking that is really adding a lot of value. And maybe we can use that time later in the week or whenever you're available to let me catch up with you.

That sounds great. Count on it. How much of an impact will the tariff situation be to ODP Corp. across all of its segments? And how do you plan to mitigate the potential impact of tariffs?

We believe we've mitigated almost all the impact. Let me explain that because people will probably go, how did they do that? A lot of the impact was on minimum average price, what we call MAP products, that our partners, supply suppliers, so, for example, our tech providers, they just rate the actual COGS of the product. And so the whole market floats up. And so from us absorbing a cost increase, the whole market's doing that. The whole price floats up and we're able to pass that through contracts and pass that, and obviously change our storefront. That was the majority of a lot of it. Obviously, there could be some demand elasticity, but we haven't seen that yet. Second is we did a really good job on our direct imports. It's a big chunk of our COGS for private label, other pieces. Back in 2020, if you remember, we shipped a bunch out of China to other countries. And so Vietnam, Indonesia, Malaysia, a number of places. Sam and our GSO team has done a good job, and John's organization has done a great job of leading this. And so we've dramatically reduced our impact on our direct COGS in China. And so as we had the pause from a tariff perspective, obviously, and we're looking at that very, very carefully, and we have a three-times-a-week war room. That's my whole staff, whole procurement team, all the merchants are on, all looking at inventory. But because of the fact we've had that shift in that indirect COGS, we're not heavily exposed at this time. And if there's a 10%, we believe we can drive that into our pricing, and we're not going to have a huge impact. There is a small impact that we think we've mitigated over, and again, we'll look at this on a daily basis. As you know, something could change overnight, and something else could go up. Obviously, we're all hoping and praying that there's settlement in the future as well. So, appreciate it.

Got you. Okay, one last question. Recognizing you're not providing guidance, but how do you at least conceptually the B2B business in light of the potential for continued underlying softness in the core business, but being offset by the ramp in some of the new business activity that seems to be on the horizon? Thank you very much.

Yes, let me, I'll take a high level and let Max and I jump in on the details. At a high level, I think we do feel very confident from a cash flow perspective that we're going to be accretive for the year, as Adam said. And then, as we said in our prepared scripts, we do think there'll be sequential improvement in the second half of Dave's business. It's still too early to figure out that exact piece. But we do feel like we have line of sight into improvements in the second half of the year across Dave's business. But Adam and Max, please jump in.

Yes, Michael, it's Max. Good to talk to you again. Yes, so while we're not providing guidance, we do need to evaluate the tariff impact, what that's going to do to customer demand. But as Gary said, we tried to provide as much high level guidance as we could. One other point is on free cash flow. So the performance of our consumer business right now is driving more cash, more margin. So we expect to have higher free cash flows than we did last year as well. But really, we see a great trajectory with all three of our business units right now. I'm really excited about it.

Thank you so much, and good luck.

He does a solution, so everyone understands. Sorry about that.

Our next question comes from the line of Joe Gomes with Noble Capital.

I apologize. I fell off, so I missed some of the questions. So if I repeat something, just let me know, and we'll move on. So a lot of talk about the tariffs and the potential impact. I don't know if you'd break it out this way or not, but I guess what percent of the business revenues is consumable products versus non-consumable products?

Can you clarify what you mean, consumable versus non-consumable? You mean like...

So paper. I mean, you're in the office and you're using paper, you're consuming paper versus a desk. You're buying a desk once.

Got it. Versus like furniture, which is, I got it.

Yes.

So first, a big piece of our business is paper, and all our paper supply is made in the USA. So, thank you for our two suppliers that have U.S. plants, and we also have facilities in Canada for our Grand & Toy business. So that's a super important piece because we don't have exposure of other companies who use imported paper versus being made in the USA. I would say that we've done a really good job on the consumable core products, which is what we're seeing to strengthen our B2C business that we talked about. The comp changes, that's all consumable product that's driving that. So why we're excited with the progress there is even during this tariff piece, we're seeing a substantial comp improvement on a monthly and weekly basis. And so we think our strategy's working. So we've gone across all those areas, and we've evaluated where we think impact is. Other consumable products are really affected by the minimum average pricing that we talked about, and that's, ink and toner and some of the technology products. And there was a pause on the higher tariffs on a lot of that, and so that's allowed us to not have the short-term impact or impact across the year at this time. There are increases on those products, but that's going to be if the whole market will go up. And it's honestly, that happens a lot throughout the last nine, 10 years pricing and costs go up, and there's a pretty consistent demand pattern as a result of that. So we don't have a lot of things that we don't think we're exposed longer term because of working with suppliers, making sure we're in the right low tariff locations. And honestly, stuff that wasn't, we didn't think was our position, we quit ordering. And we've been very disappointed in our procurement organization, which is part of VEYER, which is led by John Gannfors. Our procurement organization led by [Eric Bean] [ph] has done a great job of working with our partners and mitigating a lot of the exposure by being creative, looking at different suppliers, looking at different, obviously different factories they have across the world that are in low tariff locations.

Okay, thanks for that. And you talk about some initiatives to convert your strong pipeline of potential new business. I guess the question is kind of what's different, what are you doing new now that you weren't doing in the past to convert that pipeline into new business?

Yes, great question. First, we're bringing in additional leadership in some of these new categories. We're qualified in those marketplaces, which is super important. Second, we've started a really rigorous management system on a weekly basis. We're going to clip that up even more to make sure we're driving that. And then we're having a lot of, CEO-to-CEO meetings or President-to-President meetings on a frequent basis with these new partners and new customers to wrap up. And so, honestly, in hospitality, we're learning. It's a brand new category. We love it because it's an invitation-only category, which a lot of people can't just open the floodgates and run in, but it's a big market. We're learning, and I think that we're building the muscle, sort of like what I talked about in retail. We started building the muscle in Q4 on this merchandising change and store operations in the future. We feel we're sort of in this, and we're seeing those results now. We feel like we're sort of in that same pattern of building the muscle, building the sales capability. We've learned a ton about the inventory management and the lead time of the products and working with these partners and getting inventory in. And then we have to build that capability and starting to ramp it up across hospitality and across CoreTrust and across some of these other large ones we have across the business. So we believe in the second half where we have 13 results, and I think that will build a ton of momentum for us going into '26 as well.

Okay. And then lastly for me, I didn't hear any mention of the buyback. It's something that you guys have been, I know last year was pretty big, the year before, and at the end of the year, you had mentioned you were cutting back on that. So I don't know if you'd give us an update on that.

Sure. Thanks for the question. I recognize the unintended message it sends. Let me say that the board management team had complete confidence in the future of the company. And very importantly, we continually evaluate potential stock repurchases on a regular basis, and we assess if there are any legal or regulatory constraints. This approach also applies to potential management or director purchases as well. Additionally, we'll comment on their individual buying decisions. And so that's, I think I've answered as directly as I can.

Thank you. That concludes the Q&A session for today. I will now turn the call back over to the ODP Corporation CEO, Gerry Smith, for any closing remarks.

Yes. Excellent. Thanks everyone for joining the call today. We are confident that our core businesses is improving. We're going to continue to focus on our core. We're going to focus on continuing the B2C comp improvement across our merchandising, our store execution, which has been great, and our daily focus. We're going to also put that focus, continue our focus, our B2B business on ramping up our core business of these new big wins, as well as our hospitality business. And we're excited with the 85% year-over-year growth in John's business as well. And so we're going to stay focused on generating cash, driving margin dollars, and driving continued improvement as we follow a much stronger balance sheet from a Q4 to a Q1 perspective. And we're confident, as Adam and Max both said, that that's going to continue to improve in the future, and we'll have the ability to continue to generate cash to invest in future business opportunities to maximize our ultra value. Thank you so much, everyone, for joining the call today. Appreciate it greatly. Have a great day.