Richard Leland - Office Depot, Inc. Stephen E. Hare - Office Depot, Inc. Roland C. Smith - Office Depot, Inc. Mark S. Cosby - Office Depot, Inc..

Ryan D. Himmelberg - JPMorgan Securities LLC Matthew J. Fassler - Goldman Sachs & Co. Simeon Ari Gutman - Morgan Stanley & Co. LLC Daniel Thomas Binder - Jefferies LLC Michael Louis Lasser - UBS Securities LLC.

Good morning and welcome to the Office Depot's third quarter 2016 earnings conference call. All lines will be on a listen-only mode for today's call. After which, instructions will be given in order to ask a question. At the request of Office Depot, today's call is being recorded.

I would like to introduce Richard Leland, Vice President, Investor Relations, and Treasurer. Mr. Leland, you may begin..

Good morning and thank you for joining us. This is Rich Leland, and I'm here with Roland Smith, our Chairman and CEO; Steve Hare, our Executive Vice President and CFO; and Mark Cosby, our North American President. On today's call, Steve will review the company's third quarter financial results and 2016 outlook.

Roland will then provide a business update, including our 2017 preliminary outlook. Following Roland's remarks, we'll 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 factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission.

During this call, we'll 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.officedepot.com.

Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year. I'll now turn the call over to our CFO, Steve Hare..

Thank you, Rich, and good morning, everyone. I'm happy to be here today to discuss with you our third quarter results. Given the significant actions taken during the quarter, we thought it would be better to start with a review of the financials in order to highlight our progress and some of the differences compared to prior period reporting.

As you saw in our press release this morning, we have made the strategic decision to sell substantially all of the operations previously included in our international division.

As you will note on slide four, the results from these businesses have been reclassified on our income statement and are now reported on a separate line labeled, discontinued operations net of tax. The balance sheet and cash flow statements have a similar separated financial reporting treatment.

We believe this reclassification highlights our continuing North American business, which is the foundation of our new three-year strategic plan to achieve profitable growth and generate shareholder value. Total company sales declined 7% in the quarter, compared to the same period last year.

As in previous quarters, this decline reflects the impact of a planned U.S. store closures, as well as customer losses in our Business Solutions Division that originated primarily during the attempted Staples acquisition period. Excluding the impact of U.S. retail store closures, adjusted sales declined 4% in the quarter.

Operating income in the quarter increased to $117 million, compared to $81 million in the third quarter of the prior year. During the quarter, the company incurred $40 million of operating expenses related to the Staples acquisition, OfficeMax integration, asset impairments, and other restructuring activities.

Excluding these special items, our adjusted operating income in the third quarter was $158 million, and essentially flat with the prior-year period.

The benefits from store closures, expense reductions and merger integration synergies helped offset the negative flow-through impact from lower sales, resulting in an increase in adjusted operating margin of 30 basis points in the quarter.

Despite the significant business disruption we have experienced this year, we also achieved an increase in our year-to-date adjusted operating income and margins. Net income from continuing operations for the third quarter was $330 million, or $0.61 per diluted share, compared to $42 million, or $0.08 per share in the third quarter of 2015.

The current year result includes a non-cash tax benefit of approximately $240 million, offset in part by a $15 million loss on the extinguishment of debt related to the 9.75% senior secured notes that were retired in the quarter. The income tax benefit reported in the third quarter this year reflects the reversal of a substantial portion of our U.S.

federal and state valuation allowances recorded in prior years. Based upon the current and projected improved financial performance of our U.S. businesses, we determine that the benefits of certain of our deferred tax assets were now likely to be realized.

Our decision to sell substantially all of the businesses in our International Division resulted in recording a loss from discontinued operations of $286 million in the third quarter, net of tax.

For financial reporting purposes, the assets and liabilities of the International Division are now classified as held for sale and reported as discontinued operations.

The loss from discontinued operations reflects the current period performance, asset impairments, and a loss on classification as discontinued operations to reflect the lower of carrying value or estimated fair value less cost to sell net of tax.

Excluding the after tax effect of all of these special items, third quarter adjusted net income from continuing operations was $89 million, or $0.16 per share, compared to $92 million, or $0.17 per share in the prior year.

For additional information on our quarterly and year-to-date results, including the discontinued operations, I encourage you to review the more detailed information contained in Note 3 of our Form 10-Q, as well as the non-GAAP reconciliations found on our Investor Relations website.

Turning to slide five, on September 23, we announced a deal to sell our European business to the AURELIUS Group, a leading European based asset manager. The transaction is subject to regulatory approval from the European Commission and consultation with the central works council in France.

And we are optimistic the transaction can close by the end of 2016. Additionally, our board of directors approved a plan to sell substantially all of the remaining international businesses in Australia, New Zealand, South Korea, and mainland China. These businesses generate approximately $600 million of combined revenue and an operating loss.

We are actively marketing these businesses for sale, and expect the process to be completed within the next 12 months. We currently intend to retain our sourcing and training operations in Asia ,and the results from these operations will be reported as other continuing operations outside of the North American segments.

These retained operations generated $6 million of sales and were essentially break-even in the third quarter. Turning to slide six, same-store sales in the North American Retail Division declined 2% in the quarter compared to the prior year.

The comp sales decline was mainly driven by lower store traffic, transaction counts, and a slightly lower average order value during the period.

The decline was also influenced by the comparison to a strong back-to-school performance last year, which generated a positive 3% comp growth, as well as having fewer tax-free days this year in many key states. Total retail sales decreased 8% versus prior year, primarily due to the impact from the planned U.S.

store closures in the prior 12-month period. Looking at our performance by product category, retail sales increased in cleaning and breakroom, furniture and copy and print compared to the prior-year period. We experienced sales declines in ink, toner, and other technology items.

Excluding the decline in our technology category, retail comp sales would have been flat to the prior year. The back-to-school season this year was very competitive, as customers increasingly have a wide selection of options to purchase essential school supplies.

Our Gear Up for School campaign and Teacher Appreciation Days were well received and offered customers exceptional value. As a result of these and other initiatives, we were able to achieve positive same-store sales growth for the quarter in the school supplies category.

The North American Retail Division reported an operating income of $105 million in the third quarter of 2016, compared to $120 million in the prior-year period.

This year-over-year decline was primarily driven by the flow through impact from lower sales and a lower gross margin rate as well as $7 million in favorable legal settlements that were recorded in the third quarter of 2015.

The negative impact from these two items was partially offset by lower occupancy cost and selling, general, and administrative expenses including payroll and other store costs. During the quarter, we closed seven stores as part of the second phase of our retail optimization plan announced in August.

As of the end of the third quarter, the North American Retail store count was 1,506. Slide seven highlights our Business Solutions Division or BSD results. Sales in the third quarter of 2016 were $1.3 billion, a decrease of 6% from the prior-year quarter both as reported and in constant currency.

The decline in sales was mainly attributable to the contract channel. The sales decline in the contract channel was driven primarily by customer attrition and fewer new customer additions during the period of business disruption related to the Staples acquisition.

We have recently seen improvements in both customer retention and in our contract customer pipeline. However, there is often an integration period necessary before new customers begin to place orders and incremental sales are realized.

In the direct channel, sales declined mainly due to the ongoing reduction in catalog sales and an increase in our buying online, pick-ups in store program. Although these purchases are made online, they are fulfilled with store inventory and by store personnel, and therefore get recorded in our North American Retail Division.

This program continues to grow in popularity, and has increased significantly over the prior year. Sales through this omni-channel program, in addition to our ship-from-store program, are expected to reach approximately $120 million in 2016.

Looking at our performance by product category, BSD sales decreased versus the prior year across the majority of our product categories. However, we did experience positive sales growth in copy and print and in our cleaning and breakroom category. Third quarter sales in the U.S.

contract channel also increased in our K-12 education customer group, compared to the same period last year. This area of our business continues to deliver positive sales growth and strong overall performance, and is a key initiative for expansion within the contract channel.

The BSD division's operating income for the third quarter of 2016 was $81 million, an increase of $15 million compared to the prior-year period.

The division's operating margins substantially improved by approximately 150 basis points, primarily due to lower selling, general and administrative expenses, including payroll and synergy benefits, which helped to offset the negative flow through impact of lower sales. The gross margin rate for the division was flat in the quarter.

Turning to the balance sheet and cash flow highlights on slide 8, we ended the third quarter of 2016 with total liquidity of $1.9 billion, consisting of $800 million in cash and cash equivalents associated with continuing operations, and $1.1 billion available under our asset-based lending facility.

On September 15, we utilized approximately $262 million of cash to redeem our 9.75% senior secured notes due in 2019, reducing the company's overall debt and providing about $24 million in future annual cash interest savings. At the end of the third quarter, debt was $388 million, excluding $803 million in non-recourse debt.

For the third quarter of 2016, cash provided by operating activities of continuing operations was $199 million. This included the spending of $25 million in OfficeMax merger integration, $14 million in Staples acquisition-related costs, and $8 million in restructuring activities.

Capital expenditures were $26 million in the third quarter, $8 million of which related to the OfficeMax merger integration. As part of our shareholder return initiative, the company repurchased 16 million shares of its outstanding common stock during the quarter for a total cost of $55 million.

In addition, a quarterly cash dividend of $0.025 per share was paid on September 15 to shareholders of record for a total of approximately $13 million. Slide 9 provides some components of our 2016 outlook.

We expect total company sales in the fourth quarter to decline compared to 2015, although at an improving sequential rate, as prior period contract channel customer losses begin to be offset by new customer additions.

Additionally, our decision to accelerate the store closure program will have a negative impact to sales, as we plan to close approximately 65 stores in the fourth quarter. The company continues to expect adjusted operating income of between $450 million and $470 million in 2016.

This range is an increase over the prior year's comparable adjusted operating income of $438 million, excluding the results from discontinued operations. Capital expenditures for continuing operations are estimated to be around $120 million in 2016.

We expect approximately $30 million of the total capital spend will be related to the merger integration. Depreciation and amortization expense this year is now estimated to be approximately $190 million, excluding the discontinued operations.

The company's effective GAAP tax rate will continue to be benefited in the fourth quarter by the reversal of the U.S. valuation allowance. We are currently expecting an annual non-GAAP effective tax rate of approximately 40% for 2016.

We estimate our cash tax rate will range between 10% and 15% as we continue to utilize available tax operating loss carryforwards and credits. Based on these assumptions and the planned divestiture of the International Division, we now expect to generate free cash flow from continuing operations in excess of $375 million in 2016.

I will now turn the call over to our CEO, Roland Smith, to give you an update on our three-year strategic plan.

Roland?.

changing approximately one-third of the products in the store by removing slower-selling and lower-margin SKUs and adding a more relevant assortment, including higher quality and commercial grade products; curating the assortment of products in a good, better, and best arrangement to help our customers more easily select the right product for their needs; improving product adjacencies in order to encourage complementary purchases across categories; lowering fixtures, improving signage and navigation, and adding a wide center aisle to allow customers to more easily find their way around the store; and most importantly, dedicating a considerable amount of space to expand our key service offerings, such as copy, print, and tech services provided by specially trained associates.

We are still in the testing phase of this program, but so far customer feedback has been very positive and we are encouraged by the financial results.

As we continue to convert more locations into our Store of the Future format and evaluate the longer-term performance of these stores, we will obtain a better understanding of the financial returns this format can provide.

Our current plan is to have approximately 25 stores opened by the end of this year and we are targeting to expand the test to 100 stores in 2017. The third pillar of our strategy is the implementation of a number of cost saving programs across our business.

But before I review our new savings initiatives, I'd like to remind you that we still have additional savings to realize from our OfficeMax integration. As presented on slide 16, we fully expect to achieve the more than $750 million in synergy benefits from the merger.

As I mentioned earlier, the remaining integration activities are focused on customer migration, supply chain consolidation, and consolidation of our IT systems as we convert our entire North American business on to the legacy Office Depot platform.

These initiatives are well underway, have detailed project plans and governance, and we continue to expect the merger integration to be substantially complete by the end of 2017. As you may remember from our last call, our comprehensive business review process identified several additional opportunities to reduce costs across our organization.

These opportunities include the efficiencies and cost savings from the streamlining of our retail store operating model and the benefits derived from the second phase of our store optimization/closure plan that I mentioned earlier.

In addition, we have reviewed our general and administrative costs and identified opportunities to simplify operations, remove redundancies, reduce unnecessary expenses, and combine responsibilities in our support functions.

In the third quarter we also realigned our organization to create a more focused omni-channel structure, including promoting Troy Rice into the newly created position of Chief Operating Officer.

We believe this structure will create a more efficient organization that is focused on delivering a consistent and unique selling proposition to customers of all sizes regardless of what channel they prefer to shop. And finally, we have engaged Bain & Company to assist us with reducing the company's indirect procurement spend.

We currently spend approximately $2 billion across a variety of categories, including areas such as warehouse, packaging, transportation, facilities, travel, and professional services, just to name a few. We are developing a prioritized list of tactical initiatives and a detailed work plan to reduce these costs.

In addition, many of the vendor contracts these categories represent have not been renegotiated since the combination of Office Depot and OfficeMax. Overall, we expect that this initiative will generate substantial savings in the coming years.

In total, these cost-saving programs are expected to deliver over $250 million in additional annual run rate efficiencies by the end of 2018, and when combined with the synergies from the OfficeMax integration, bring our total annual estimated cost saving benefits to more than $1 billion.

Our fourth strategic pillar is dedicated to enhancing total shareholder return. As detailed on slide 17, we've redeemed our 9.75% senior secured notes for $262 million on September 15. By retiring this high coupon debt, we will realize approximately $24 million in annual cash interest savings going forward.

Second, we declared and paid our first quarterly cash dividend to shareholders in September, and the board has approved our next dividend to be paid on December 15. The quarterly dividend rate is $0.025 and represents an annualized dividend of $0.10 per share, or approximately a 3% yield.

Lastly, through the end of the third quarter, we have repurchased a total of approximately 23 million shares of common stock for an aggregate cost of approximately $81 million. We have approximately $170 million remaining on our current authorization, and we accelerated our repurchase activity in October.

Since announcing our new strategy just a few months ago, we have dedicated over $350 million or approximately 95% of our year-to-date free cash flow to improving shareholder returns. These actions demonstrate our ongoing commitment to returning capital to shareholders and enhancing overall shareholder value.

It also demonstrates our confidence in our ability to continue to grow profitability and generate future free cash flow. Building on our 2016 successes, we are providing a preliminary outlook for 2017 as detailed on slide 18.

While we anticipate total company sales will be lower in 2017 due to the continued challenging environment and additional store closures, we expect that the improvements we are making in our contract pipeline will result in improving sales trends for our BSD business as we move through the year.

We also expect to realize additional merger synergies and cost savings benefits in the year, and as the result, we are forecasting continued growth and profitability. Our preliminary outlook is to generate approximately $500 million of adjusted operating income in 2017, which is an increase of nearly 10% over the midpoint of our 2016 guidance.

Lastly, we expect continued improvement in operating cash flow in 2017, as we begin to move beyond the one-time costs related to the OfficeMax integration. Based on a capital expenditure forecast of approximately $200 million for the year, we anticipate that free cash flow from continuing operations in 2017 will be in excess of $300 million.

Overall, I am very encouraged by the progress we are making in moving our business forward, and I believe we are positioned to make significant additional progress in 2017. We have a clear and detailed strategic plan that is focused on profitable growth and providing shareholder value.

We are beginning to win new business, and have a strong start to rebuilding our contract sales pipeline. We are aggressively pursuing several attractive growth initiatives, and expect to deliver substantial incremental cost savings.

And finally, our solid liquidity position and ability to generate future cash flow allows us the flexibility to explore all opportunities to enhance shareholder return. I will now ask the operator to open the lines, and we will be pleased to take your questions..

Your first question comes from Christopher Horvers. Your line is open..

Hi; this is Ryan Himmelberg on for Christopher today. Thanks for taking the question. We just wanted to get some color around the existing customer retention trends. You talked about the new customer trends.

Could you talk about what you're seeing relative to the acquisition now on the existing customer side too please?.

Good morning, Ryan, it's Roland. I'm going to start off, and I think I'm going to pass it over to Mark. As you know from our prepared comments and one of the slides, we're pretty pleased with the way the pipeline has progressed over the last couple of quarters.

And as I've mentioned, we now are at a higher level of commitments on our pipeline than we have experienced in the last eight quarters. You also know from our prepared comments that turning those commitments into revenue and profitability takes a little bit of time.

It can take from a couple of weeks to a couple of months based on the complexity of the customer and also how much product they might currently have that they need to sell through. So we think that we're going to see sequential improvement in our BSD business in the fourth quarter, and we hope to see that also sequentially improve in 2017.

Mark, you want to add a little more color to what's going on from the pipeline?.

Yeah, I guess, big thing is we have been able to successfully compete for this business since the removal of the acquisition uncertainty back in May. In fact, our new customer commitments, as Roland said earlier, in Q3 were the best that they have been in a couple of years.

Keep in mind, as Roland said earlier, that the implementation of these new customers takes several weeks to several months before it turns into meaningful revenue, especially for the large and complex customers who require several levels of IT integration and must use their existing stock of inventory before they're able to ramp up towards us.

We will also benefit in the coming months by a much reduced pace of customer losses versus what we lost during the Staples cloud. It's also important to note that we always have had customer attrition, but we have historically been able to offset that attrition with new business.

In addition, we are implementing action plans to bring several elements of the strategy that Roland discussed to life, including increasing the capacity of our inside sales teams to further improve our overall sales effectiveness so that our field teams can focus on winning new customers and driving share of wallet opportunities.

We will also continue to expand our dedicated field hunting team to help us acquire new customers, and of course, the expansion of our Jan/San business will also contribute to improving our contract sales results. As a result of all of these efforts, we expect the sales trends to improve sequentially in the coming quarters.

We anticipate our BSD sales trends to continue to improve throughout 2017, ideally getting back to flat sales. Ultimately, though, our goal is to return to positive growth as we continue to execute against our three-year strategic plan.

As a footnote, and an important one, our BSD business back in 2014 was flat in terms of sales before the Staples acquisition announcement. So, we do believe we are poised for – to deliver future growth as we continue down our path..

Great. Thank you. That's really helpful.

Just one quick follow-up on that – on the cash flow guidance for next year, does that include any potential charges going forward related to mergers or anything else? The merger charges?.

Steve?.

Yeah, Ryan, that would be all inclusive. So, that free cash flow guidance is based on whatever restructuring type charges we would incur next year..

Okay. Thank you..

Your next question comes from Matt Fassler. Your line is open..

Thanks a lot and good morning. A couple questions. First, on the decision to divest the Asian businesses and your international businesses outside of Europe. You had shared I guess directionally, your expectations for proceeds from the European sale.

What's your thought process on whether you'll be extracting any cash from divesting the other $600 million of revenue?.

We'll start off with that, Matt, and then we'll let you ask the follow-up questions that it sounds like you have..

Sure. Thank you..

Then, I'll turn that over to Steve to talk a little about our business outside of Europe and what we might expect to happen this year..

Thank you..

Yeah, Matt, I think, we put out and gave you some detail around the aggregate financials around these other – the non-European international businesses we've got. So, in the aggregate, it's about a portfolio of $600 million in sales that in the aggregate is operating at a slight operating loss today.

So, the overall expectations of proceeds should reflect that kind of current performance, but we've got more work to do there before we can realize and get closer to seeing what we'll be able to realize in terms of proceeds..

Great. And then, one follow-up on the international sale.

As we think about beyond any proceeds that you do or don't get for selling these businesses, as we think about the way the balance sheet will change after you do these deals, particularly with regards to cash, should we assume that cash that you've included in discontinued ops is probably going to stay – well, cash and liabilities, frankly, that you include in discontinued ops is likely to stay with the businesses as you sell them?.

Yeah. So I think that's a fair assumption. So the break-out, what you see on the balance sheet, the $800 million of cash, that's cash related to the continuing operations.

And then, separately, there's cash that is attributed to the European business and the other international businesses that, as you said, is likely for the most part to go as part of the transfer..

Great. And then, just one final one, a follow-up to the prior question that was asked on BSD account wins.

What are the margin implications of getting some of this business? And as you think about the – what you're bringing to market to get these, if you find that these are price-driven initially, or is there another element to the value proposition that you're marketing that you think is helping you to win some of this business?.

So, Matt, are you referring specifically to the margins in our BSD division?.

I guess I'm thinking specifically about the new contract wins to the extent that you're moving that in the right direction.

Is the value proposition primarily price? And how do we think about the margin implications? Or as you market Office Depot to prospective new customers, is there another element to the value proposition that you think is helping you win some of this business?.

Well, I think you can see from Q3 from the standpoint of where our margins netted out, overall margin improved in BSD, even though sales declined, but our gross margins stayed flat.

So, I think that – what that suggests is that while we're being incredibly competitive and we're winning new business, we are doing it in a kind of very disciplined manner, and we would expect that we would continue to be able to maintain the margins that we've enjoyed over the past couple of quarters..

Great. Thank you so much, guys..

Your next question comes from Simeon Gutman. Your line is open..

how does that look relative to prior years? I'm assuming it should improve, but I guess, it's hard because there's a lot of moving pieces. So just curious how you see it..

Well, obviously that erosion, Simeon, is going to be driven by what we are able to realize in revenue next year.

And as you know from our comments, we are still projecting that revenue will decline based on the continued secular decline in this industry, and also the inclusion of another 300 stores in retail that we obviously plan to kind of shut down.

That being said, we have also forecasted that we expect our revenue decline to sequentially improve, starting in the fourth quarter of this year and then moving through 2017. And so, while we still do see deleverage in 2017, we would hope that that deleverage would also begin to sequentially improve from what we've seen before.

Obviously, as we continue to talk about the savings, synergies, and efficiencies from the merger integration, and also the additional $250 million of savings that we expect to generate over the next two years, those are continuing to cover those declines or that deleverage with the ultimate plan being that we in fact get our growth initiatives working.

We begin to grow our revenue and then the benefit of those cost savings go directly to the bottom line..

Okay. And my follow-up -- I think, in the release, it talked about there was a little shift in business from, I think, it was BSD to retail driven by online pick-up in store. Did you quantify? I may have missed it.

Did you quantify what that impact may have been?.

No, what we did say is that initiative, along with the ship from store, the total of those two programs is growing fairly rapidly for us, so we're pleased with that. And in total, that will be about $120 million in sales this year..

Okay. Thank you..

Your next question comes from Dan Binder. Your line is open..

Thank you. My understanding was that when the deal was bought, you had a lot of positions at headquarters that still needed to be filled. I think, there was probably some challenges during that period to hire people. I was just curious where you are on that front. And then I had some follow-up questions..

Hey, Dan, I could talk at length about our cost-saving programs. I will try to go straight to your question, and then if you would like me to elaborate that, I would be happy to do that. You're absolutely correct.

During the 15 or so months when we were going through this process of kind of the Staples acquisition attempt, we certainly lost some associates due to the uncertainty, and we were unable to fill some of those jobs similarly because of that uncertainty.

As we came out of the attempted merger and we began to look at our four-pillar strategy, obviously one of those pillars is the cost-saving programs that we think we need to put in place to continue to cover the deleverage that I mentioned a few minutes ago as we put also into place some of the pillars that will ultimately provide growth in revenue as we go forward.

But, as we looked in particular at our G&A cost, we took the opportunity from the fact that we had some open positions to reorganize the company around a number of things that we believe will allow us to continue to achieve our key priorities but be more efficient in doing it.

From a G&A standpoint, we worked with our teams and over the last couple of months we simplified our operations, we've reduced redundancies, we've combined responsibilities, and we've eliminated unnecessary costs.

So the net benefit was that, while we have taken some head-count reductions, we were able to take some of the open positions that were in effect as we came out of the attempted merger and not fill those, and use those as cost savings as we moved forward..

So, at this point, you're fully staffed the way you would need to be?.

Yes, we believe that we currently have an organizational structure that will allow us to accomplish the four pillars that we have highlighted. As you know, we announced a couple of months ago a reorganization, particularly at headquarters. We've also done some reorganizations in the field.

We have established a new position of a Chief Operating Officer, which I mentioned in my prepared comments. Troy Rice has taken that position, we believe that provides us an opportunity to be more omni-channel focused.

And we have built around that particular organizational structure so that now we believe we have the right structure in place, we have the right people in place. Like any company, we have vacancies and we'll always have a percentage of vacancies, because that's life in a big company environment.

But we are pleased with the organization we have now, we're pleased with where our vacancies generally are falling out, and think that that is no longer an issue that would keep us from being successful..

Okay. My second question is related to the business solutions part of the company. You mentioned a lot of – I think, it was two-thirds of the OfficeMax customers are in process to get migrated to the platform, the ODP platform.

Can you just give us a sense today how many have been fully migrated and what percentage of revenue that represents?.

You know, Dan, we have those numbers because we track this on a very disciplined work stream, as I've mentioned.

We have bi-weekly meetings where we actually talk about the targets and the metrics, and we have a number of customers both on-contract and off-contract so that we are able to complete the migration by the end of 2017, which we have confirmed yet today that we expect to do.

But we don't get into those particular numbers and what those dollars represent, although I can tell you that that is clearly something that we look at on a regular basis..

Okay. Thank you..

Your next question comes from Michael Lasser. Your line is open..

Good morning. Thanks a lot for taking my question.

Can you parse out your expectation of decelerating declines or sequential improvements in your BSD business between better retention of your existing customers, new customer wins, and how you see the environment playing out?.

Well, Michael, we obviously look at that on a regular basis, and as Mark relayed a few moments ago, with our business, if you go back over the last number of years, we always experienced some loss or some customer attrition as we go through the year.

Fortunately, we have typically been able to replace that attrition with even more customers that we sign into the business, so the net benefit, as Mark mentioned, in 2014 before we announced the deal with Staples was flat to approaching positive. So that's kind of the way our business typically kind of proceeds.

We do expect sequential improvement in the fourth quarter based on the strength of the pipeline that we shared with you today, also based on Mark's comments that we expect less attrition from customers as we roll over some of the large attrition that we had during the cloud of the Staples attempted acquisition, but we are not going to break that out specifically at this point.

We'll just have to leave you with the fact that we do believe in sequential improvement in the fourth quarter, and our goal would be to get to flat and ultimately grow this business as we close out 2017 and get into 2018..

So, Roland, do you have to see improvements in your new customer wins and the environment to get to flat over the next few quarters?.

We don't need improvement in what's going on with secular decline. We certainly need improvement in converting the commitments that we have seen in our pipeline into revenue and profitability, and we need to see improvement in – decline in attrition.

But we are seeing that decline in attrition, and we are seeing that improvement in our pipeline, and so that's why we're comfortable in suggesting that we are going to see sequential improvement..

Okay.

And then are you also assuming that the promotional environment, the promotional intensity remains the same to get to that improved EBIT expectation for next year?.

Well, now you're talking about both, I think, our BSD, our contract, and our retail business..

Correct..

Our retail business is much more promotionally-driven, obviously. We're a high-low price kind of provider, which means that kind of on a regular basis, we believe that our price is competitive based on the fact that we have promotions and coupons and rebates and loyalty programs.

And so when you add those all up, our net price, we think, is highly competitive. And we will continue to be a high-low promoter, and we will continue to be aggressive from that standpoint to make sure that we are having a nice balance of kind of promotion versus revenue.

From the contract stand of our business, obviously it's about negotiating new contracts with customers based on not only the pricing that we provide them, which is incredibly competitive, but also the additional services and value that we provide them with a dedicated sales force and desktop delivery, and a customized catalog, and IT integrated systems, and things like that that continue to kind of provide great services to our customers.

We are also, as you know, in the beginning phases, although we are making great progress and we like the results so far, of our small to medium business test called Business Select. That has been in the market now for a couple of quarters, and we are seeing kind of that progress nicely.

And I think as we mentioned on our prepared comments, we would anticipate or expect to roll that out nationally in 2017..

Okay. Thank you so much..

I have no further questions in queue. I'll turn back over the call for – to the company for closing remarks..

Well, thank you all again for participating with us this morning. I think I'd just like to kind of highlight a couple of comments. First, we do have a detailed strategic plan focused on profitable growth and providing shareholder value.

We are, as we mentioned and talked about quite a bit on the call, winning new business and rebuilding our sales pipeline. We're – and I want you to remember this – aggressively pursuing several attractive growth initiatives to include moving into Jan/San, MRO and our store of the future. We do expect to deliver substantial incremental cost savings.

As I mentioned, the combination of the integration of OfficeMax and our new cost saving program by the end of 2018 will generate on an annualized basis over $1 billion of savings. We also have a solid liquidity position and the ability to generate future free cash flows, and we continue to be committed to enhancing our shareholder return.

So thanks again, and we look forward to talking with you in the very near future..

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