Richard Leland - VP, IR, and Treasurer Gerry Smith - CEO Stephen Hare - EVP and CFO.

Matthew Fassler - Goldman Sachs Daniel Thomas Binder - Jefferies Anthony Chukumba - Loop Capital Markets Christopher Harvey - JPMorgan Atul Maheswari - UBS.

Good morning and welcome to the Office Depot's Second Quarter 2017 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 now begin..

Good morning, and thank you for joining us. This is Rich Leland, and I am here with Gerry Smith, our CEO; and Steve Hare, our Executive Vice President and CFO. On today's call, Gerry will summarize the second quarter results and provide an update on the business. Steve will then review the company's quarterly financial results and outlook.

Following Steve's discussion, we'll have some closing comments and then open up the line for your 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 U.S.

Securities and Exchange Commission. During the 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 Office Depot's CEO, Gerry Smith..

Thank you, Rich, and good morning to everyone on the call. I am happy to be here with you today to discuss Office Depot's second quarter results. Beginning on slide four, total sales in the quarter were $2.4 billion, a decrease of 9% from the second quarter of 2016. The planned U.S.

retail store closures accounted for approximately 3% of this total sales decline, excluding store closures adjusted sales were down 6%. Operating income in the second quarter was $46 million compared to $271 million in the prior year; please remember that the 2016 results include the impact of the $250 million Staples termination fee.

Adjusted operating income in the second quarter was $68 million, a decrease of $10 million compared to the prior year. Adjusted operating margins in the second quarter decreased roughly 10 basis points to 2.9% compared to the same period in 2016.

The negative flow through impact from the lower sales in the quarter more than offset the benefit for license store closures, expense reductions and merger integration synergies.

Earnings per share from continuing operations in the second quarter of 2017 were $0.04 per share compared to $0.41 per diluted share in the second quarter of 2016, which also benefited from the Staples termination fee.

Adjusted earnings per share in the second quarter were $0.06 per share flat to the prior year also we benefited in the quarter from a lower share count and lower interest expense as a result of our shareholder return initiatives.

For the first half of 2017, both adjusted operating income and adjusted earnings per share were on track with our internal expectations and performed ahead of the prior year. We have also made great progress on divesting on international businesses and are very close to being completed.

We recently finalized the sale of our businesses in South Korea and in mainland China and are now waiting final regulatory approval in order to conclude our sales in Australia and New Zealand. The proceeds from the international divestitures were further enhanced our financial flexibility, as we focus on growing our businesses in North America.

Turning to slide five, I’ve spend a significant amount of time recently working with my executive team and talking with customers and key vendors about how we can change the company’s landscape and position Office Depot for the future.

Our objective is to grow topline revenue both organically and inorganically through a competitive Omni channel in a greater shell offering, building a world-class business platform that offers services, products and solutions for consumers small and medium business in enterprise customers.

Leverages all routes to markets including last mile delivery and drive a focus on operating income in free cash flow through productivity gains and expense management. In some ways, we're also returning to our routes. You may have seen that we recently launched our new Taking Care of Business advertising campaign.

This brand message was used effectively by the company for many years and we’ve been told by customers that this slogan truly speaks to our company's mission of helping customers to take care of business in the office, in the classroom, and on the go.

But delivering on this brand promise today is a much more than just a competitive selection of products. I believe taking care of business today means finding ways to leverage our integrated business channels, retail stores as last mile points for distribution and a growing portfolio of services to provide real solutions to our customers.

Whether you are a new business who needs to help get started or a small or medium-sized business looking for furniture or copy and print or technology solutions or even a large business looking for purchasing efficiencies, Office Depot's ideal business partner to provide you with the solutions you need either on the web, in our stores or through our dedicated sales teams on both a local and nationwide basis and with offering that can scale to meet your business needs.

I believe this integrated model is a key differentiator for us against competitors and we are one of the few companies focus on taking care of this business opportunity. Now, clearly, we still have some work to do in order to achieve this vision. And I have the internal teams focused around the number of initiatives to strength our core.

While identifying opportunities to transform our business as we build out our capabilities to deliver a relevant business services and products to customers.

And lastly to disrupt traditional ways of thinking and find innovative new ways to leverage our assets in the future, while we are building these capabilities, it is a key that we move quickly and I have a focused necessary to address some of our structural issues.

For this reason, I have recently reorganized the company’s operations under two business unit presidents focused on serving B2B and B2C customers. This structure provides improved focus and a clear line of sight to the needs of our customer base as we execute against our strategic initiatives.

I now want to share with you some of our -- the details of the initiatives that are underway across the business. As noted on slide six, we are focused on strengthen the retail channel by reaching out to our customer base with new marketing, value propositions and product offerings.

We recently changed advertising agencies and rolled out our Taking Care of Business advertising campaign.

Customer’s feedback has been very positive in the advertising spots will run across all marketing vehicles including TV, radio, inserts direct mail, email, online and social media and our design to drive awareness in traffic especially during the important back-to-school season.

Second, we introduced the new customer loyalty program at the end of the second quarter. The new rewards program was tested in several markets and successfully resulted increased customer enrollments, higher sales and overall better satisfaction scores. Under the new program we were just simple to earn and simple to redeem.

All members will receive 2% back in everything in the store and online as well as member only promotions and opportunities for additional savings such as bringing ink or toner products recycling or writing online product review. Member of the VIP Tier received 5% back on paper, ink, toner and copy and print services.

In addition, they are receiving free delivery with no minimum order size. All members can redeem their rewards instantly at any check out with no minimum thresholds. We believe our customers will appreciate the added value in ease of use of this new program provides.

Lastly, we believe we are well-positioned for this year's back-to-school season with a number of attractive promotions on supplies as well as green [ph] that's currently underway to provide additional value across a variety of categories.

Customers will also see a number of new products in the store this quarter with a goal of driving attachment and increase basket.

This include expanding our very successful private brand line of tool pins and note taking products into a broader assortment of colors that are perfect for school and rolling out a selection of high performance gaming PCs that I am sure we'll appeal to many of the students in our stores.

We are also moving into new category such as LED light that will appeal to both consumers and business customers.

Lastly, we are building on our leadership position in exceeding category which were number one by rolling out a new line of Serta iComfort chairs under our WorkPro private brand that utilizes the same foam technology used in Serta's premium mattress lines.

In fact, a recent research report conducted by independent third-party named Office Depot America’s number one retailer for the home office chairs based on market share, I’m sure these new iComfort chairs will help strengthen our position even further.

Turning to slide seven, I recently promoted Steve Calkins as President of the Business Solutions division. He had significant amount of experience and successfully led this division in the past and improve profitability.

Steve has recently reorganized the business for the greater focus on the customer and routes to market, a structure that I have successfully used in the past. We also had a number of initiatives underway to strengthen the core of our BST division.

I am pleased to report that our sales teams continue to win new businesses at an aggressive pace and our sales pipelines today is probably as healthy as it was before the Staples acquisition attempt. Unfortunately, we continue to be impacted by challenging market conditions in prior period customer losses.

Based on the strength on these sales pipeline, we have experienced in the first half of the year. We expect implementation of new customer wins to ramp-up in the second half of the year. I am also pleased with the growth we are experiencing in our adjacent category expansion strategy.

As I mentioned on last quarter’s call, we hired a new executive with deep industry experience and cleaning in break room at the end of the April and then have added approximately 10,000 new SKUs into our product assortment.

During the second quarter and year-to-date, we experienced growth in the facilities category as a result of our initiative this year.

We’re continuing to build our capabilities in these adjacent categories in order to strengthen our core business as well as looking at organic and inorganic transformational ideas to become a more important provider of solutions to our business customers as I look to consolidate the vendor relationships.

We will reach another milestone for the company later this year as we are near in the completion of the OfficeMax integration. The project remains on track to be substantially complete by the end of 2027, now it continues to realize the synergy benefits.

As I mentioned last quarter, the supply chain consolidation is nearly complete and now I want to take our supply chain to the next level. We recently held my first vendor partnership meeting here in Boca with our top suppliers and executive teams. The message was very clear.

Our goals to grow our business and deliver a superior customer experience and with their partnership we can win together. We committed with them to a continuous improvement process with quarterly business reviews and improved vendors scorecard to attract KPIs.

As they say, feedback is a gift and we also invite our vendors to provide feedback going forward, so we can continue to get better as an organization.

In addition, we now have John Gannfors leading our supply chain with his experience and background in Lean Six Sigma, we believe we can drive additional process improvement and cost reduction opportunities.

We’ve planned to make additional investments in our supply chain and last mile capabilities in the future as we look to take the supply chain from good to great. Much of the remaining integration activity is focused on the migration of the legacy OfficeMax contract customers onto the Office Depot platform.

Over 75% of accounts have either started or completed the migration process and customers feedback remains positive based on the platform enhanced functionality and assortment.

We are on track to be substantially complete with a customer migration by the end of 2017 and then can begin the final processes of decommissioning many of the legacy IT system. Lastly, I remain very pleased with the growth, we are experiencing in our omnichannel programs.

Consumers continue to see the benefits of our convenient buy online pickup and store functionality with this business growing approximately 30% over the prior year. We also now have our ship from store capability operational across to all stores to serve both B2C and B2B customers.

We see this program ramping up quickly as customers can benefit from inventory that may not be available in our distribution centers. And finally, beginning in the fourth quarter we’ll be rolling out ship-to-store for our contract customers, we'd prefer to pick up one of our retail locations.

For even more customer convenience, we just announced on Monday, same-day delivery service from our stores in select markets and we have received positive early feedback. We expect to roll this service out to additional markets by the end of the year.

All of these capabilities are key enhancements to our core operations as we leverage our integrated channels for the benefit of customers. As I mentioned earlier, beyond strengthening our core operations, we are continuing to evaluate opportunities to transform our business for the future.

Turning to slide eight, I’d like to give you an update on the store in the future test that we have underway. At the end of the second quarter, we had 46 stores converted into the new format spread across 22 states to provide some geographic diversity in the tests.

The test results remain positive with the stores experienced both higher customer satisfaction scores and improved overall sales trends versus the peer group of control stores.

The new format also places a greater emphasis on services I'm very pleased that we’re continuing to see an attractive sales lift in our copy and print and tech service businesses in these stores.

For the next phase of the test we plan to expand to a full market and have all 14 of our stores in Austin Texas, converted to origin of the new format, leveraging specific services and product offerings depending on the hyper local locations in the market.

By bringing all stores under one banner and a common platform we can then implement a coordinated marketing strategy to drive the awareness and communicate the benefits of the new formats to customers.

We plan to leverage our e-commerce and BSP sales channels for cross-promotional opportunities to further drive awareness traffic in new customer acquisition.

The official market launches expected to be in the fourth quarter of this year and we’re very excited to see how this format can perform and potentially enhance future growth across our channels in the aftermarket place.

In total, we expect that approximately 75 stores across the country converted into the store of the future format by the end of 2017. Turning to slide nine, I believe that services will play an important role on delivering on our taking care of business promise to customers and we’re building on a strong foundation.

In our copy and print business we’re in the middle of rolling out wide format printing, scanning functionality across the entire chain and expect to have these enhanced capabilities implemented all of our stores by the end of the year.

We also recently begin a process to provide a copy and print production associates with an in-depth multi-day training program to make sure they are experts in the using the new technology. The team has also developed targeted selling strategies in the several high value customer segments that drive sales growth in this area.

Beyond copy and print we also expanded the selling resources in our managed print service business and in addition to building the selling strategies with our tech services business to focus on some attractive vertical market opportunities.

We have an attractive pilot currently underway offering enhanced tech services in our stores to smaller medium business. Each of these businesses show a great potential and we continue to explore partnership opportunities as a way to expand our current capabilities and accelerate revenue growth in services.

To lead these efforts, we recently hired Janet Shines to oversee the copy, print and text services business as well as manage our regional print facilities across all our customer channels.

Janet is a season executive coming to us from Verizon where she was successful in driving customer growth and revenue enterprise, commercial and government channels. We see a large growth opportunity in our portfolio of service offerings I'm extremely happy with leadership so far in driving our transformation efforts within our service business.

As I mentioned earlier, we’re also looking at opportunities to define disruptive innovations that can create longer term value for our shareholders. As shown on slide 10 our recent partnership with Centric Technologies is an example we think can be a disruptive technology.

For those of you who are familiar with the application Centric currently provides home owners with an award-winning asset management platform that also connects to product manufacturers for support and easy one-click order placement perks and accessories.

It’s very quickly been adapted by home owners and real estate agents as a way to provide buyers with the inventory of all existing household assets like the brand and models of refrigerator, air conditioner, water heater et cetera.

We believe this platform has other potential applications to provide a unique service solution so we entered into an exclusive license agreement with Centric to capitalize on these solutions as well as take a small equity investment position with our company.

Our focus and work with Centric is to develop a B2B version of their current app that will enable businesses to better track and manage our assets on a single platform and form any device. We think this could also open up additional opportunities to service replace assets during their life cycle.

Whether a business needs to manage their printers, PCs or other assets providing additional services and solutions to our customers we’re further enhanced value Office Depot brings to customers and differentiate us from our competitors.

I'm a strong believer in the value of partnerships like the one we have with eccentric technologies, we continue to score additional opportunities to build out our platform as service offerings and bring enhance values to our customers. We are committed executing is the right strategic initiatives to transform our business.

I’ll now turn the call over to our CFO, Steve Hare, who can provide more details on our second quarter financial results.

Steve?.

Thank you, Gerry, and good morning, everyone. I'm happy to be here today to discuss our second quarter results. As noted on slide 12, we have highlighted some key performance measures for the second quarter and first half of 2017.

Some of other previous calls, I will primarily focus my comments on the performance from our continuing operations as we’re nearing completion of the plan divestitures of our international businesses. Total company sales declined 9% in the quarter compared to the same period last year. Excluding the impact from planned U.S.

retail store closures in the prior 12-month period and foreign currency translation, adjusted sales declined 6% compared to the prior year. The decline was primarily due to continuing overall competitive pressure and prior-year customer losses in our business solutions division as well as lower traffic in our retail stores.

Second quarter operating income decreased to $46 million compared to $271 million in the prior-year. As a reminder, the prior-year’s operating income included the stable termination fee of $250 million.

During the quarter, the company incurred $22 million of operating expenses related to the OfficeMax merger integration, restructuring activities, executive transition and assets impairment costs.

Excluding these in other special items from 2017 and 2016 results, our adjusted operating income in the second quarter of 2017 was $68 million, a decrease of $10 million compared to the prior-year period. Adjusted operating income for the first half of 2017 was $220 million and an increase of $18 million or 9% compared to the first half of 2016.

The decrease in the second quarter was driven primarily by the sales decline and a lower gross margin rate. The gross margin rate in the quarter was negatively impacted by sales deleverage that exceeded the rate of reductions in our store and supply chain expenses which are more fixed in nature.

These negative impacts were partially offset by lower selling general and a ministry of expenses realized as driven by our comprehensive business review initiatives.

Excluding the $13 million an after tax of fact from charges and credit, second quarter adjusted net income from continuing operations was $34 million or $0.06 per share compared to $35 million or $0.06 per share in the prior year.

Year-to-date, adjusted net income from continuing operations was $122 million or $0.23 per share compared to $104 million or $0.19 per share in the first half of 2016. This is a year-over-year improvement of 21% in adjusted earnings per share.

Our earnings performance through the first half of the year is in line with our internal expectation and we continue to move toward our full year $500 million adjusted operating income targets. Turing to slide 13, comparable sales in the Retail Division declined 6% in the quarter compared to the prior year.

The comp sales decline was mainly driven by lower store traffic and a slightly lower average order value during the period. Total retail sales in the quarter decreased 11% versus the prior year including the impact from the planned store closures in the prior 12-month period.

Looking at our performance by product category, retail sales decreased across most of our product categories, primarily in ink, toner and other technology items.

However, sales in our cleaning and break room categories increase that mix single-digits compared to the prior year period as we benefited from repositioning the location of these products towards the front of the store making them more readily accessible to our customers.

The retail division reported operating income of $20 million in the second quarter of 2017 compared to $million to 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, which more than offset lower selling general and administrative expenses realized from the company store closure program and comprehensive business review initiatives.

Looking at the performance for the first half of 2017 comparable sales declined 5% compared to the first half of 2016. However, year-to-date retail division operating income was flat compared to the same period in the prior year of $132 million.

Despite the lower sales operating margins increased 55 basis points to 5.3% in the first half of the year compared to the same period in the prior year. During the quarter, we closed 31 stores and ended the second quarter with the total count of 1408 stores in the retail division.

Slide 14, shows the performance of our Business Solutions Division or BSD sales in the second quarter of 2017 were $1.2 billion, a decrease of 6% from the prior year period as reported and in constant currency.

The sales decline was primarily driven by continued competitive pressures, the impact from prior year customer losses, the ongoing reduction and catalog sales through our call centers as well as the increase sales from our omnichannel programs, which are recorded in the retail division where these orders are fulfilled.

We are pleased that our pipeline and new customer wins continue to improve and look forward to realizing the sales potential of these new customers once fully implemented. Looking at our performance by product category, BSD sales decrease versus the prior year in supplies, technology and furniture.

However, we continued to achieve positive sales growth in cleaning and break room and in copy and print. The BSD division reported operating income of $64 million in the second quarter of 2017 compared to $63 million in the prior year period.

Although operating income was slightly higher than the prior year, operating margin increased almost 40 basis points compared to the prior year.

This improvement was primarily driven by lower selling general and administrative expenses from cost savings and efficiencies which more than offset the negative flow through impact from lower sales and a lower gross margin rate.

On a year-to-date basis, BSD sales in the first half of 2017, declined 5% compared to the same prior year period, while operating income increased $13 million to $122 million compared to the first half of 2016.

BSD operating margins increased 73 basis points year-to-date to 4.8% as cost savings and efficiencies outpace the rate of deleverage from lower sales. Turning to slide 15, during the second quarter we successfully completed the sale of our business in South Korea and on July 28 we finalized the sale of our business in Mainland, China.

Also during the quarter on April 18, we announced an agreement to sell the operations in Australia and New Zealand to platinum activity leading global private equity firm. We expect the transaction to close as soon as the buyer obtains the necessary regulatory approvals in each country.

We're retaining the global sourcing and trading operations in Asia, which were previously included in the former international division. These businesses contributed $4 million in sales and an operating loss of $1 million in the second quarter of 2017.

The results from these operations are reported as another segment outside of the two primary operating segments.

Turning to the balance sheet and cash flow highlights on slide 16, we ended the second quarter of 2017 with total liquidity of $1.8 billion consisting of $763 million in cash and cash equivalents associated with continuing operations and $1 billion available under our asset base lending facility.

Total debt at the end of the quarter was $375 million excluding $787 million in non-recourse debt related to the timber notes.

For the second quarter of 2017, cash provided by operating activities of continuing operations was $27 million this included outflows of approximately $15 million of restructuring activities and $13 million in OfficeMax merger integration cost.

Capital expenditures were $25 million in the second quarter, $3 billion of which related to the OfficeMax merger integration. As part of our shareholder return initiative, the company repurchased approximately 2 million shares of its outstanding common stock during the quarter for a total cost of $7 million.

Since the share repurchase program began in May of last year, we have repurchased 41 million shares of common stock for a total cost or approximately $149 million with an average price of $3.65 per share. At the end of the second quarter $101 million remain available for repurchase under the current $250 million buyback authorization.

In addition, a quarterly cash dividend of $0.025 per share was paid on June 15, to shareholders of record for a total of approximately $13 million. Slide 17 shows the major components of our cost savings and efficiency programs that are currently underway across the organization.

We announced these initiatives about a year ago and began implementing the programs in late 2016. Since that time our teams have made significant progress and I’d like to update you on some of the key accomplishments.

As I mentioned earlier, we closed a total of 31 retail stores in the second quarter bringing the total closures onto the second phase of our retail optimization plan to 105 stores. We are pleased that our sales transfer rates continue to exceed expectations and we expect to close approximately 40 additional stores in the second half of the year.

Through our ongoing negotiations with landlords we have been able to achieve incremental rent savings and square footage reductions across the retail network.

Our efforts to move toward a lower cost operating model continue to gain traction and is evidence by the lower expense levels at G&A reductions across the business and improved year-to-date operating margins on a consolidated basis and for both the retail and BSD divisions, we have identified additional business process improvement opportunities across the business an example which was a comprehensive workout session recently aimed and reducing shrink expense.

Our cash flow and procurement initiatives remain a significant opportunity for us. We have dedicated teams in place that are working hard with our vendors at reducing spend, consolidating supplier contracts, negotiating lower price and improving terms.

Overall, we have made significant progress on our cost savings and efficiency initiatives and remain on track toward achieving our goal of more than $250 million in incremental cost savings by the end of 2018. Slide 18 outlines the key components of our 2017 outlook.

We continue to anticipate total company’s sales in 2017 will be lower than 2016 on a comparable 52-week basis. This decline is primarily a result of our planned retail store closures ongoing competitive pressures in the market and the continued impact from prior year customer losses in our contract channel.

We do however expect an improvement in the BSD rate of sales decline for the second half of the year as we anniversary prior customer losses, new customer wins or fully implemented and turn into revenue and growth from strategic business initiatives.

The company also continues to expect adjusted operating income of approximately $500 million in 2017, a comparable year-over-year increase of approximately 10% excluding last year’s benefit from the 53rd week.

Our first half performance was in line with our internal expectations as adjusted operating income increased 9% compared to the same period in the prior year. Our 2017 non-GAAP annual effective tax rate is estimated at approximately 41%, but the rate will depend on the mix and timing of income.

For 2017, we continue to expect to generate more than $300 million of free cash flow from continuing operations, but timing of our one-time cost associated with implementing the cost savings programs are now anticipated to be higher in 2017 than originally planned, but lower in 2018.

The acceleration of 2017 cost is largely offset by reductions to our capital expenditure spend, which is now estimated to be about $150 million this year.

We anticipate depreciation and amortization expense to remain at approximately $150 million in 2017, but free cash flow outlook includes a cash tax rate of approximately 15% as we continue to utilize available tax operating loss carry forwards and credits.

Now, I will turn the call back over to Gerry for his closing comments, Gerry?.

Thanks, Steve. I am pleased with the progress we made in the first half of the year on our strategic initiatives and that we remain on track to deliver our 2017 operating plan.

As I mentioned earlier, I have the internal teams focused on around of critical priorities to strength our core, while identifying opportunities to transform our business and disrupt traditional ways of thinking as we first build the foundation for profitable top-line growth continue to develop our omnichannel capabilities and leverage our retails stores for a unique last mile delivery platform for customers.

Third, expand even faster on the attractive growth opportunities that we have identified adjacent products and services, continue to execute on our cost savings and efficiency program to deliver the full financial benefits and utilize business process improvements to drive additional margin and free cash flow opportunities across the businesses to deliver shareholder value.

My goal is to expand our customer base and it get more important to our customers in order to stabilize and eventually prevent towards profitable top line growth and position the Office Depot for long-term future success.

We are on the process of building out the capabilities to provide our customers with superior solutions that were truly embody our taking care of business customer mission. I look forward to updating on our progress in future quarters. I will now turn the call back over to....

[Operator Instructions]. Your first question comes from Matt Fassler. Please state your company. Your line is open..

Thanks so much, its Goldman Sachs and good morning.

My question relates to BSD sales, can you talk about the puts and takes between the sales trends presumably declined based on the numbers with existing accounts relative to the sales movement associated with account wins or loses just as we think about with that underlying same store trend is, if you will in similar run rates is constants just understanding the rate of which the overall sales growth can improves as your new customer when the dynamics are improved?.

Hello?.

Operator, they are not hearing our response..

I apologize there will be a slight delay in today’s conference. Please hold and the conference will resume momentarily..

Pardon me, Mr. Fassler could you please repeat your question..

Sure, is everybody back on? Is the management back on the line? I'm happy to repeat my question.

The question relates to the trend in BSD, it's comparing the underlying trend from existing accounts presumably declines given the overall sales decline to what you're seeing from new accounts to net loss just to understand since you agreed which the underlying sales run rate or the reported sales run rate should improve this net new customer dynamic changes?.

I apologize Mr. Fassler, there will be another slight delay in today’s conference. Please hold and the conference will resume momentarily. Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today’s conference, please hold and the conference will resume momentarily. Thank you for your patience..

Hey Matt, Steve here.

Can you hear me now?.

I hear you, can you hear me?.

Yes. We've heard your question twice Matt, we hope Steve answer, we apologize for the technical challenges..

It's all good. Thank you..

So, Matt to your question around BSD, and what we are seeing is obviously there are the rebuilding of the pipeline since the Staples transaction, where the pipeline went down, basically zero as result of that expanded transaction.

And what we've been pleased with is the rate of wins in the marketplace and the ability to rebuild that pipeline, as Gerry mentioned to actually a level higher than it was free of those merger discussions.

Lastly good news however as you saw in the second quarter, you did see the sales continue to decline and actually reduce quarter-over-quarter by about a point and what we're seeing there is some of the just competitive pressures in the marketplace there and the decline in usage of a lot of our key accounts there that are offsetting pace of wins and as you know, the wins when these contracts take a while to implement.

So, there is a timing factor so that was part of our reason as we look at the outlook for the second half of the year and part of our optimism about being more on track for the year is that we do believe you will see improvement in the pace of BSD sales in the second half of the year..

Yes. Thanks, Steve. .

This is Gerry. I’ll add one more comment as well.

We’ve also - Steve's organized by -- I had talked about my piece but by the route to market I think that’s important and he made a significant adjustment from an operating expenses perspective, from on the plan we think we’re getting seller closer to customers and I think our conversion rate will improve as a result of that..

If I can ask two very brief follow-ups directly related to that question.

The first is, how does the equivalent of the comp store number compared to that reported number? And then secondly, the margin implications of some of the new account wins I know from time-to-time they tend to come in at somewhat lower margins and so you ramp them and get deeper into the catalog and after front list?.

Sure, Matt, that is the nature of that contract, part of our BSD business.

With the pace of wins that we’re seeing it is an environment where it is very competitive and what generally you’ll see is as we implement these accounts they start off at a lower level profitability and as we work those accounts and build the relationship and broaden out while we’re selling to those accounts the margin spend will improve overtime..

Thank you so much..

[Operator Instructions] Your next question comes from the line of Dan Binder. Please state your company. Your line is open..

Thank you. It’s Jefferies.

I was wondering if you could just tell us a little bit about how the back-to-school business is doing thus far versus last year? I realize there is a lot stored in front of us, any update there would be helpful and then also on that topic you mentioned introducing gaming PCs I was just curious what kind of exposure you actually have on that it seems like kind of a risky bets since it’s a category that I think sort of other retailers have considered kind of the go-to for on that?.

I’ll start with the gaming piece and I'll let Steve - a little bit on back-to-school and Steve jump in as well. Our vendor communities actually are the ones who we collaboratively reached out together and we both think it’s an opportunity; the gaming is obviously one of the fastest growing areas in the tech space.

I think our last mile footprint in advantage and I think we’re excited with the partnerships with two of the larger PC companies that want to partner with us and bring gaming into the market place.

I know there is other competitor out there that have this but we’re excited that it’s an opportunity and I think it’s an exposure for the customers we have coming to the stores. It’s an exciting tech opportunity and we’re going to highlight that again in our store in the future in Austin as well. Back-to-school the assortments has improved.

We’re optimistic with our ability to have the right merchandising and the right products. At our vendor conference, a couple of weeks ago we did a just an alignment with the vendors there and we mediate rapid adjustments where we thought there were areas we’d either improve also but we’re optimistic on back-to-school. I’ll let Steve comment as well..

Yes, I think obviously in Q3 is a big quarter for us and a lot of that depends on our success right on back-to-school.

We were pleased with what we have seen in the marketplace and as Gerry mentioned, I think we improved our marketing campaign which hopefully you’ve seen in the market place over the last couple days and we’re very optimistic that we’ll do well compared to last year as we have to work through this season..

And a follow-up on retail could you discuss the value you see in potentially buying a significant number of stores in the space if they became available?.

That’s a cleverly to introduce that question, I like that. Obviously, we can’t comment on acquisition activities, as a result of what our competitors or the people do in the market place.

What I will say is we’re always looking both organically and inorganically to grow our business and we’ll be continued to pursue those opportunities as I have stated all along. Our number one objective is to grow the top-line and to also hit our $500 million plan that Steve has committed to and I have committed to today as well.

And we’re going to always look for opportunities to enhance the capabilities..

Okay. Thanks..

Your next question comes from Kate McShane. Please state your company, your line is open..

Hi, this is Chris filling in for Kate. Good morning.

Just kind of curious with Staples, probably going private, do you see any change in the competitive landscape going forward?.

I think the way I look at that is, I always respect our competitors whether they're public or private and I think it's - we need to focus on growing Office Depot and growing our customers and really leveraging our strategic assets which is our three routes to market, our last mile I think is a huge advantage you saw our - two days ago we announce ship from store same day, same day delivery we're excited about in three markets, we have ship from store, we have online, our online and pickup in stores growing rapidly.

So, we're focused on growing our business and I think it's we respect our competitors and we need to make sure Office Depot is ready to compete..

All right. Thank you.

And also on the CapEx reduction, can you talk about what drove the reduction versus your prior estimate and is that turning by the reduction in converting stores to the Store of the Future format?.

Hey, Chris that was a big piece of the pull back, the target we have at the beginning of the year was at budget for the year as we looked at timing and what we think will actually hit this year, that was a component now that, but we did pull back on that number of Stores of the Futures that we will complete this year.

Although as Gerry mentioned, we are also improving that program by taking all market focus on Austin, Texas, so we'll continue to reinvest in Stores of the Futures program. But in aggregate that's part of the reduction to our target now.

I think just to add on the Store of the Future. I think the approach, approaching by markets is a good one, and we're obviously testing Austin, we're going to invite down in Austin, once we roll this out, we think it's an opportunity, because it's not just a common platform where - I think it's important I mentioned the hyper local type of approach.

We'll have various formats to pay in where that stores located in that market, they're all going to be common, but there is going to be tweaks and nuances relative to some will be more heavily services orientated, some could be more furniture orientated, some could be more technology orientated as well.

And as we rollout the market I think you guys will be excited with the - what their approach we're taking and we'll continue to - as we rollout Austin will continue to at other markets we can expand that into in the future as well..

All right, great. Thanks, and good luck..

Thank you..

Your next question comes from Anthony Chukumba. Please state your company, your line is open..

Good morning. I'm with the Loop Capital Markets. I guess, you sort of touch of update in an earlier question.

But I guess I'm just struggling with the business solutions division and the declines that we see in there, in fact that it accelerated in the second quarter, I mean if we think that given at the fact that the Staples speculation is so far in the rear view mirror at this point that we would see better trends there, and I guess, I mean is it just increase competitions, just sector declines and use of office supplies, I guess I'm just trying to figure out why we're not seeing better figures there and then more importantly once you confidence given the strength that the trends, the top-line trend will improve significantly back half of this year? Thanks..

Yes, Anthony. This is Steve.

I agree with you I think from a timing standpoint we had gone into this rebuild from the Staples transaction thinking that we could as we solve the pipeline build that we would start to see the sales improve a little faster and as you’ve seen it's taken us longer, but I still think directionally and the initiatives we have in place are moving also in that direction, and that's why our outlook for the second half of the year is to see that the change in sales improve as we continue to look at the number of wins we're bringing in and the timing of then bringing those accounts to where we're now recognizing revenue we'll know.

So, I think it's a timing issue I think from a competitive situation that market is always competitive, the Staples transaction doesn't really change the competitive contacts were in there, we are fighting hard to win new business, and we're being successful and we're happy with the pace of wins but we think it's taking longer to actually realize the sales improvement that we had hope for..

Okay.

Then just one question I mean so you mentioned to me, the marketplace is always very competitive I mean that's obviously changed over the last several years, but are you seeing any incremental competition in terms of new entrance on the Amazon business or just sort of changes in competitive dynamics, people getting more aggressive or anything among those lines?.

I think it's fair to say there is lot of companies that are seeing specific competition from online retailers and that’s why it’s so important we're executing in sort of strategic initiatives.

As I discussed about we have the strength of making sure our last mile foot print is an advantage and I think we are taking in different approach than other competitors but we really think our integrated omnichannel approach will be a way that customers respond that allow us to compete longer term effectively over period time.

We are making significant investments in and making sure supply chain as well classes well and that’s going to be a differentiator over a period of time also.

So, it’s supply chain, it’s our integrated channel, we step back and charge and getting the market that in the segmentation to correct and we are seeing the results is been place two and a half months to three months now and we are going to see that optimization take place..

Anthony, I would add to that I think that what we talk about live in the new wins or not as a part in our sales numbers I think part of that is exactly what you pointing out is that people like in Amazon business are pulling away some business from our poor customer bases even though their contract customers to us or the safest and that’s a phenomenon that we are dealing with and that’s also part of the sales change overall but overtime our place of wins should drive that number in a positive direction..

I think the operating income that Steve produced for the quarter is a positive as well, even with the challenges we have but we are seeing that the operating income improved and as I said in my statement earlier, there is significant expense reduction in our go-to market expenses in the second half that Steve already captured and executed against which is very significant, which allow us to be competitive and it would be aggressive in growing the business..

That’s all very helpful. Thank you..

Your next question comes from the line of Christopher Harvey. Please state your company, your line is open..

Thanks, JP Morgan. So, I want to talk a little bit about the gross margin. The past couple of years has been up and then there is a different direction this quarter.

So, is that a change in the pace of rent reductions versus prior periods? Is it something about the mix in the business that is changing or perhaps both in any quantification or back in any of those shifts would be great?.

Hey Chris, I will take sort of that question, I think as you are aware if you look back over the last couple quarters I think our overall focus around occupancy cost, the leverage that we received from closing stores has been beneficial to our gross margin and been a component of the overall improvement there.

If I look at the business, remember the second quarter is always as soft as quarter as we look at the margin and it think that as we look at the trends there sometimes they get amplified when we had soft sales, I tend to look at the year-to-date gross profit margin where we were just about flat year-over-year and think that that’s a little represented that but what we expect for the year from an overall outlook stand point..

Other thing on emphasizes we've said a few times just year-to-date we are ahead of our plan however we were last year and it’s like as important we emphasize that we are up year-to-date and this is our softest quarter, you choose our softest quarter and from a timing perspective, I like to look at things in bigger chunks in the first half and Steve went through it well, but I mean we are on track our $500 million operating plan..

Understood, So as you I guess one what I have expect has to take into a little bit so did sales mix to that component of gross margin changed trends in the second quarter outside of deleverage on occupancy but did sales mix change in trend because have you look at in your description on categories that was down Janssen, so what you have suggested mix benefited gross margin rate in the second quarter, did that happened and it simply that may be the -- it’s the benefits of the decline in TAC or just moderating as I category it just shrinks in penetration?.

Chris, I don’t think mix really play into that the margin the gross profit change in the second quarter.

I would say we did make a comment in our prepared remarks that one of the things we saw again in a seasonally soft quarter plus we did see the more fixed cost around supply chain we’re a part of the margin decline and we are as Gerry has mentioned we’ve got a number of initiatives to address supply chain thought but when you hit that in a softer second quarter from a sales standpoint it does magnify the impact of that so I would say that would be a one other issue as you dig down a little bit.

But I think hit us in the second quarter around gross profit that we think we can mitigate in second half of the year..

Understood.

And just the last question on gross margin so as you look forward you talked about gaming PCs you talked about the outlook for better contract growth in BSV, so is the expectation that what these lower sort of rate categories gets offset by the leverage on those fixed costs?.

Yes, I think that’s a fair comment, yes..

Okay, thanks very much..

Thank you..

And I’ll just add that scale always wins and I know this is a journey and we have to prove to you guys that we can grow and we will grow but as we start to grow we’re going to get scale advantages and that’s why the focus is both organic and inorganic growth..

Your next question comes from Michael Lasser. Please state your company, your line is open..

Hi this is UBS. This is actually Atul Maheswari filling in for Michael Lasser. Thanks a lot for taking our question.

So, we had a question on your $500 million target and presumably that would imply reasonable amount of margin expansion in the back half of the year so what is it outside of the cost savings that I know you spoke a little bit about fixed cost leverage from higher sales but other than these two factors what would, where would that margin expansion come from essentially?.

Yes so let me take that one I think in terms of our outlook for the year at the 500 what we look at is the increase that represents about a 10% increase year-over-year excluding the 53rd week that has been for last year on adjusted operating income.

If you look at the first half on a comparable basis we’re up about 9% so when we say we’re tracking to that number really based on the actual for the first half of the year.

I do think when we go forward then the other aspects are getting to that number, start revolve around the improvement we talked about in the second half for BSD with the pace of the new wins that we’ve talked about kicking in.

we do see the sales trends starting to improve in the second half of the year obviously the retail business we’re successful in back-to-school third quarter is a very big quarter for retail business and we can make a round there, compared to the second quarter of the year.

But then also as you mentioned the cost savings program is very important to us. So, if you remember we did a comprehensive business review going into this year and that was called for about $250 million including the benefits from the sport closure program that program is well along and I think you really do see the benefits about it.

If you look at SG&A for the first half of the year we’re down about a $125 million so on a rate basis even with softer sales you’re seeing about a 70-basis points improvement on SG&A as a percent so the impact of that program is very significant to us and very important as we whether the sport looks off their sales here as we’ve headed towards some of these longer-term growth initiatives that Gerry has talked about..

Okay, great. Thank you very much..

That concludes the Q&A session for today. I will now turn the call back over to Gerry Smith for any closing remarks..

Yes, I just want to thank everyone for being on the call today. I just want to reemphasize the fact that we’re going to grow as a company. We’re going to use an omnichannel approach, we’re going to be aggressive to both inorganically and organically, we think we're positioned well as Steve from an expense prospective.

And we believe we can -- we have a vision in place to strengthen our core, transform our business and disrupt new areas. And most importantly, we are -- this first half of the year we're still on track and from an operating plan perspective and we're committing to make sure we continue to execute going forward.

Thank you for your time today and we'll try to get in the near future..

Thank you for your participation. This concludes the call. You may now disconnect..