Good morning, and welcome to The ODP Corporation's Third Quarter 2020 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 The ODP Corporation, today's call is being recorded.

I would like to introduce Tim Perrott, Vice President Investor Relations. Mr. Perrott you may now begin. .

Good morning. And thank you for joining us for The ODP Corporation's Third Quarter 2020 Earnings Conference Call. This is Tim Perrott, and I'm here with Gerry Smith, our CEO and Anthony Scaglione, our Executive Vice President and CFO who will provide additional details on our financial results.

During today's call, Gerry will provide an update on the business, focusing much of his commentary on our accomplishments in the third quarter and highlighting how the strength of our ecosystem, financial position, and strategy is helping address the challenges posed by the pandemic and positioning ODP for future growth.

Anthony will then review the company's financial results, including highlights of our divisional performance. And following Anthony's comments, we will open up the line for questions.

But before we begin, I need to inform you that certain comments made on this call include forward-looking statements, which are subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements reflect the company's current expectations concerning future events, and are subject to a number of risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in the company's filings with the U.S.

Securities and Exchange Commission. During the call, we will use some non-GAAP financial measures, as we describe business performance.

The SEC filings as well as the earnings press release, presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor.theodpcorp.com.

Today's call and slide presentation is being simulcast on our website, and will be archived there for at least one year. I will now turn the call over to ODP's CEO, Gerry Smith.

Gerry?.

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you joining us this morning, and we hope that all of our listeners and their families are safe and healthy.

I'm happy to be here with you today to discuss our results for the third quarter, and how the elements of our diverse ecosystem, and low-cost model drove our improved performance. Before I begin, I would like to thank all of our associates for their continued commitment in supporting our customers throughout the pandemic.

I can't express enough gratitude to our team in living up to our five C culture, serving customers and supporting our communities during the challenges posed by the COVID-19 outbreak. It is the energy and commitment that has helped us generate strong results in a challenging business environment.

The highlights of our major accomplishments in the third quarter are outlined on slide 4, starting off with our continued commitment to safety. Maintaining a safe environment remains our top priority.

We have continued the actions, we took in the early stages of the pandemic to enhance safety protocols to help protect our employees, and create a safer environment for our customers. Customers continue to have trust in us to safely meet their needs during these unprecedented times. Turning to the highlights for the quarter.

Despite the continued challenging conditions, the powerful combination of our diverse ecosystem and low-cost model drove significantly improved performance in the quarter. Our balanced channels to market allowed us to support our customers operating in all environments, helping offset some of the negative impacts related to the COVID-19 outbreak.

And our value proposition continues to resonate with customers, whether they're working, or learning from home in the office or at school. We're meeting our customer needs by helping them remain effective, safe and operational with a broader set of products and services delivered by a reliable supply chain best suited to serve their needs.

We delivered a strong sequential increase in revenue and drove improvements in our operating results. Revenues increased 18% sequentially and more importantly, our operating results approached the levels of the pre-COVID environment in last year's third quarter.

This terrific performance, including generating adjusted free cash flow of over $300 million against the backdrop of a very challenging environment highlights the strength and agility of our ecosystem. We are continuing to build upon this ecosystem and made solid progress on our B2B pivot to drive future growth.

We initiated our maximized B2B restructuring plan, which will reduce our retail lease liabilities improve our cost structure and provide cash and resources to generate future growth on our B2B platform.

We continue to leverage our supply chain capabilities and build key relationships to enhance our leadership position and to reliably serve our customers. We are listening to our customers, meeting their needs with our products and services, and we're building upon our go-to-market engine to drive future growth.

Let me now give you some additional insight on the dynamics in the quarter and how the balanced nature of our model has us well positioned to drive stronger performance and its continued economic uncertainty. I will start by highlighting some of the evolving customer needs caused by the pandemic as shown on slide 5.

As we know the pandemic has impacted the business environment and altered at least temporarily the way most of us work, learn and live. Several businesses have paused operations and many schools have either restricted in-class teaching or moved to a hybrid environment.

This environment has shifted product demand and channel mix in our business, but we have been able to leverage our balanced ecosystem and B2B platform including our supply chain to address these evolving needs. And it's all about our customer needs.

Customers continue to rely on ODP for their products and services to remain productive and we continue to meet their needs on their terms either with buy online-pick up in-store options, which is BOPUS, curbside, home or office delivery.

The flexible ecosystem that we have built over many years is uniquely positioned to address these needs and make them successful. And this was evident with our improving results. At the heart of our ecosystem is our unique and reliable supply chain.

We have one of the largest and scalable supply chain operations in North America, consisting of multiple distribution centers, cross-docks, a large private fleet of about 1,000 vehicles at an established network of third-party and international freight arrangers.

Our supply chain assets give us the ability to consistently and cost effectively serve customers at-home, in the office or through our retail facilities. In many markets, we provide next day and even same-day delivery.

As we know supply chain reliability and capacity has been a significant challenge for many in the market throughout the pandemic for the largest online retailers, as well as the largest distribution companies.

The capabilities that we have created over many years provides us with a key competitive advantage not only positioning us to reliably serve customers when others can't, but also attracting early interest from other third-party companies seeking to use our supply chain as a service for their business, creating additional future commercial revenue opportunities.

Another key attribute on our ecosystem is our balanced routes to market, providing options for our customers to source the products and services they need and where they need them.

We have a direct supply chain serving our large enterprise customers, a robust e-commerce platform serving businesses and consumers, retail locations offering the convenience of BOPUS and curbside pickup options.

And through CompuCom we have over 6,000 technology support personnel including our tech field force, serving the technology and service support needs of our customers. We also continue with our strategy of acquiring attractive, regional business customer bases and assets increasing our reach in the marketplace.

This diverse channel approach is proving to be a very important asset during the unusual business environment we find ourselves in this year, providing our customers with options and helping us balance operating performance.

Another key aspect of our ecosystem is our growing set of products and services that we offer positioning us to meet our customer needs in any environment.

Not only do we provide the traditional office supplies that we are all well-known for, we also have technology and communication products and bundles to support our customer needs including home office, workspaces and furniture and cleaning and breakroom.

We also provide a broad set of services including copy and print, as well as technology services, including security and device management and services on the edge through CompuCom. We continue to evaluate launching new categories, leveraging our capabilities and customer relationships.

Solid demand continues for PPE, a category we launched last quarter and illustrates the agility of our underlying sourcing and supply chain capabilities.

Together with our low-cost model, our unique ecosystem is meeting our customers' needs in a challenging environment and can be seen in our operating trends that drove our results as shown on slide 6. As we've discussed the COVID-19 outbreak has created a very challenging business environment.

While we are beginning to see early signs of recovery, business operations at many of our customers remain impacted and as widely publicized schools including higher education have either delayed opening or operating remotely or adopted a hybrid approach.

While this has created a headwind, impacting revenue compared to last year and shifting the demand curve of our back-to-school selling season, we've been able to help offset these impacts by using the diverse nature of our distribution channels to address the changes in mix.

For example, we continue to drive a significant increase in demand from business customers and consumers through our e-commerce channel, which was up significantly over last year and now approaching over $1.2 billion in sales.

Our retail channel continues to be a convenient and resourceful means for businesses and consumers to source the products and services they need. Total omnichannel sales including delivery BOPUS and same-day orders were up over 30%. In fact BOPUS sales nearly doubled from the last year.

This balance help us to offset lower volume in our contract channel related to the COVID outbreak. Our value proposition and broad product assortment continued to resonate with business customers as evident in the significant increase in demand in our work-from-anywhere category, including home office, technology and workspaces.

Our Be Well At Work categories, which include Cleaning & Breakroom, PPE and sanitation also exhibited strong demand versus last year. This progress has helped offset lower demand in some of our more traditional supply categories, which were negatively impacted by COVID.

As evidenced, adjacency category sales which include Cleaning & Breakroom, technology, furniture copy and print and PPE compromised about 47% of total BSD sales and we continue to see good market opportunities in those categories. Furniture and fixtures were a bright spot of the quarter.

We recently launched a new product suite of higher-end shares with a Shaquille O'Neal Executive Office Seating line. It is worth noting that our accomplishments for the quarter included limited back-to-school season benefits when compared to prior years as many school systems have delayed opening.

This had the effect of shifting some demand for our back-to-school season into the fourth quarter and perhaps into the first quarter of next year depending on the cadence of school openings and models. And lastly, I'd like to spend a few moments on our low-cost model approach, which is at the core of our strategy.

Over the past year, we have driven cost efficiencies in our business through our Business Acceleration Program or BAP as well as other cost efficiency measures that we have implemented throughout our business. This has resulted in a more cost-effective structure.

Also, as we previously announced this year, we are in the early stages of our maximized B2B restructuring plan. This long-term plan will significantly reduce our retail lease exposure, drive further cost efficiencies and generate resources to help continue to fuel our B2B pivot. I'd now like to provide a few comments on our divisional performance.

This is shown on slide 7 starting off with our BSD division. As the overall business environment is beginning to show signs of recovery, our BSD division consisting of our large enterprise contract channel and e-commerce channel drove improving sequential revenue trends.

That said, these results were lower than last year related to COVID-19 impacts to the business environment disrupting the operations of many of our customers.

We have experienced a mix shift both in channels and products and our broad ecosystem is providing balance, driving stronger performance in our e-commerce and retail channels and stronger demand for our work and learn from home products.

Customers are asking more from us and our sales engine continues to win new business with a net new customer wins at one of the highest level in recent history. We are in an excellent position to capitalize on the growth opportunity as the business environment stabilizes.

Our retail business has been a key source for our business customers and consumers to safely procure the products and services they need during the pandemic. We continue to offer curbside contactless pickup at all of our locations and are driving demand through our BOPUS offering.

We have seen strong demand for work and learn from anywhere categories for our business customers and students helping us manage the mix shift in core supplies and copy and print.

Revenues are down only slightly relative to last year despite over 70 fewer stores in service and the remaining stores have performed better on a relative basis over last year. Our operating performance was up significantly driven by our efforts to optimize the store operating model, managing our inventory and driving down corporate support costs.

This was achieved despite notable headwinds and shifts in back-to-school, which typically lands in Q3. And perhaps what we are most proud of is our continued support for schools and community outreach.

We have held many major events across the nation for our Start Proud School campaign program that raised millions of dollars in donations for Title I schools. I congratulate all of our associates who have participated in the support of our communities and our customers. At CompuCom the impact from COVID-19 pandemic continues to affect results.

The good news is the annuity services component of the business continues to be strong helping to offset sluggish project-related work in product sales. We remain encouraged by the opportunities ahead, particularly, in relation to their capabilities to address the evolving trends in the future work and cloud-based services.

With unique capabilities to support distributed workforces, with state-of-the-art technology and an expansive technical and field support structure, CompuCom is well-positioned to capitalize on opportunities in the future.

However, we recognize that CompuCom has not performed up to its potential, and we're taking action including embarking on an end-to-end business review and evaluating all options to drive future value and success in 2021 and beyond. These may include potential partnerships, joint ventures or other structural changes to increase future value.

Before I turn it over to Anthony, I want to highlight the strength of our position to drive profitable growth today and in the future. This is shown on slide 8. Our vision for the business is to be the trusted B2B platform providing unmatched value for customers to manage and grow their business.

And everything we have built to-date has us well positioned to fulfill this vision. We have built a flexible and broad ecosystem and we made investments to optimize its capabilities to serve our B2B customers. We originally built this network to drive growth in office supplies and adjacency products.

However our sights are set on expanding our ecosystem's influence into higher growth opportunities in the future. At the core of this ecosystem is our expansive supply chain which we've continued to invest in.

This is complemented by our customers and vendor relationships and a strong and flexible go-to-market engine to satisfy our customers and drive growth. We continue to drive cost efficiencies in our business because we know that the low-cost model wins.

We have made great strides in this effort through several of our cost-efficiency programs and we remain focused on driving additional cost out of this model. This effort is supported by our maximized B2B restructuring plan which will further improve our cost structure and lower fixed-cost exposure in our business.

And finally, we are in a strong financial position to execute. We have a very strong balance sheet and liquidity position to both invest in the growth of our B2B platform and enhance shareholder returns along the way.

We are excited about our future and we will continue to drive our low-cost business model, while investing and leveraging our B2B platform to drive long-term growth and shareholder value. We look forward to telling you more about our plans for growth at our upcoming Investor Day that we are scheduling for the first quarter of next year.

With that I will turn the call over to Anthony for an overview of our financial results. .

Thank you Gerry and good morning everyone. I'm happy to be here today to discuss the strong financial results we delivered in the quarter, against a challenging macroeconomic environment. The balanced nature of our business model drove improving sequential revenue performance and aligned with one of my key priorities as CFO, our low-cost approach.

This drove operating results that exceeded last year's pre-COVID levels and generated very strong free cash flow. Turning to the highlights of our financial results as shown on Slide 10, consistent with previous quarters, we have provided our results on both a GAAP and adjusted basis.

Total revenue of $2.5 billion in the third quarter was down 9% from last year largely driven by the effects of the COVID-19 outbreak resulting in lower sales in our BSD and CompuCom divisions. In addition, we had 73 fewer retail stores in service relative to last year.

Also impacting year-over-year revenue comparison was a slower-than-normal back-to-school selling season as the impact from COVID shifted some of this demand from the third quarter to the remainder of this year and perhaps into early next year.

Partially offsetting these impacts was our balanced channel approach and broad product assortment both of which helped us address the evolving needs of our customers.

This approach gave us the ability to handle the demand changes in our channel mix, driving increases in sales through our e-commerce and retail channels, and address the increasing need for work- and learn-from-home products. We drove improving revenue performance on a sequential basis with revenue up 18% over the second quarter.

And when comparing quarter-over-quarter revenue trends our performance improved by 800 basis points. Therefore while the business environment is only beginning to recover, our revenue performance is trending in the right direction. GAAP operating income in the quarter was $102 million, down slightly from $108 million last year.

Included in operating income was $26 million in merger and restructuring charges, $17 million of which is associated with our maximized B2B restructuring plan and $5 million associated with our Business Acceleration Program or BAP. We also recognized $10 million in asset impairments mostly related to operating lease right-of-use assets.

Excluding these and other items, our adjusted operating income for the third quarter was $138 million exceeding the $137 million we generated in last year's pre-COVID third quarter. This is a significant accomplishment considering the challenges posed by the pandemic.

Our focus on a low-cost business model helped to drive this result driving SG&A lower as a percentage of revenue to about 18% of revenue in the quarter. Although not likely to be linear, we believe we can drive SG&A as a percentage of revenue to be consistently in the mid-teens over time.

Additionally, we drove supply chain efficiencies during the quarter helping offset some of the increased third-party costs we have incurred during the shift to work from home that we have experienced during the pandemic.

Our large private fleet and multiple relationships with third-party carriers has our supply chain well positioned to continue to reliably and cost effectively serve our customers. Turning to the rest of the P&L. Unallocated corporate expenses were $29 million in the quarter, up slightly from the prior year.

Adjusted EBITDA was $186 million for the quarter compared to $191 million in last year's third quarter. This includes adjusted depreciation and amortization expense of $45 million and $51 million in the third quarter of 2020 and 2019 respectively.

Excluding the after-tax impact from the items mentioned earlier adjusted net income for the third quarter was $97 million or $1.80 per diluted share, up 18% over last year compared to adjusted net income of $84 million or $1.53 per diluted share in the prior year.

Despite the continuing challenging conditions our team maintained their focus on cash in the quarter delivering significant operating and free cash flow. Operating cash flow in the quarter was $309 million which included $4 million in integration costs and $17 million of restructuring costs.

Working capital efficiencies and prudent inventory management along with the $44 million AMT tax credit refund which last year occurred in Q4 helped to drive this result.

Capital expenditures in the quarter were $14 million compared to $32 million in the prior year period, reflecting lower investment in our retail operations, while continuing investments in our B2B platform, distribution network and e-commerce capabilities.

Adjusting for cash charges of $17 million associated with the company's restructuring plans, adjusted free cash flow in the quarter was $312 million, up nearly 50% over last year, a testament to the team, our cost focus, as well as meeting our customers' needs in all channels.

Let's now turn to slide 11, which highlights the performance of our BSD division. As a reminder, BSD is the largest component of our B2B integrated distribution platform serving customers from the Fortune 500 to small and medium-sized companies. BSD consists primarily of serving customers through both our contract and e-commerce channels.

As we know, the outbreak of COVID-19 caused significant business disruption for our B2B customers and schools. While we are beginning to see signs of recovery, this has not been a business-as-usual situation, and the effect of the pandemic has most notably impacted top line results in our BSD division.

However, our balanced channels to market have helped offset the mix shift we've experienced in our contract channel, shifting business customer demand into other channels, including e-commerce and retail. This balanced approach has helped us make progress despite the challenging conditions. Reported sales in the quarter for BSD were $1.2 billion.

While this result is 11% lower than last year, revenue trends improved sequentially highlighted by a 1,200 basis point quarter-over-quarter improvement. Our channel mix and product breadth helped offset some of the negative impacts and drove the improved sequential performance.

Sales increased over 20% in our e-commerce channel and demand increased for products supporting work and learn from home and essential products, with technology sales up over 30% and cleaning and breakroom sales including PPE up nearly 20% versus last year.

Our total adjacency category grew relative to last year and comprised approximately 47% of total revenue in our BSD division. This balance helped to partially offset the impacts related to the COVID pandemic, negatively impacting core supply categories.

Sales trends improved throughout the third quarter as business activity increased and many individuals began to adjust their needs for the work-from-home environment. We are continuing to monitor the pace of business and school reopenings as this will impact the speed of our top line recovery.

Operating income was $45 million in the third quarter compared to $71 million in the prior year period. The decrease in operating income versus last year was related to the COVID impact to sales and product mix partially offset by SG&A cost improvements related to our cost-efficiency programs. Turning to slide 12.

Reported sales in the quarter for our Retail Division showed significant sequential improvement down only 3% to $1.15 billion. This was achieved despite 73 fewer stores compared to one year ago and a slower back-to-school selling season due to COVID.

Offsetting lower store traffic was higher average order volume and sales per shopper helping drive an increase in year-over-year sales for stores in operation during the quarter.

We saw increased demand for work and learn-from-home products supporting business, customers and consumers as well as essential cleaning products including PPE to address customers' needs posed by the pandemic. Categories such as furniture, technology and peripherals and cleaning products saw strong double-digit increases in demand.

The combination of our curbside pickup option and BOPUS offering remain popular, with BOPUS demand up over 80% as customers chose the convenience of this option. Ship from store and same-day deliveries were also up highlighting the flexibility of our delivery capabilities. Moving to mix.

While product revenue held its own and was flat last year, service revenue was down 22% negatively impacted by the COVID-19 pandemic. We once again delivered strong operating performance.

Operating income was $119 million in the third quarter, up over 40% compared to the same period last year, or as a percentage of sales a 320 basis point improvement in margin.

This improved performance was largely related to lower SG&A from cost-efficiency initiatives and an improvement in distribution and inventory management costs as well as lower operating lease costs. Looking at slide 13, we highlight the performance of the CompuCom division.

The conditions related to the COVID pandemic continued to weigh on CompuCom's performance in the quarter. Sales were $197 million, down 22% versus the prior year period.

While annuity services revenues remained relatively stable, the decrease was largely due to lower product sales and customer-imposed project delays as the COVID pandemic impacted our customers' operations. We expect some recovery in project work for the balance of the year.

The CompuCom division reported operating income of $3 million in the third quarter of 2020 flat with the prior year period. BAP cost-efficiency measures and other cost-reduction efforts helped to drive the year-over-year margin improvement despite lower revenue.

CompuCom's support for its customers during the pandemic has been stellar and their core competencies and support platform has them well positioned for the future. We are focused on accelerating our business growth and bringing our vision regarding the future of work to life at an accelerated pace.

As you heard Gerry mentioned and as part of the normal course of business, we continue to explore options for partnerships, teaming and joint investments all options that will help us accelerate our business and unlock value. Now turning to the balance sheet and cash flow highlights as shown on slide 14.

We ended the quarter with total liquidity of over $1.7 billion, consisting of $743 million in cash and cash equivalents and $1 billion of availability under our ABL, after paying down $300 million of the ABL during the period.

Total debt at the end of the quarter was approximately $375 million, of which $100 million remains outstanding under the ABL facility, which does not mature until 2025. We ended the quarter with a pristine balance sheet and it remains a source of strength, which provides us flexibility as we execute our strategy and pursue growth.

I already covered cash flow in my earlier remarks. However, I would point out that despite the challenging conditions, we prudently managed cash in the quarter through strong working capital improvements, including solid inventory management resulting in adjusted free cash flow generation of $312 million versus $209 million in the prior year period.

Aligned with one of my top priorities as CFO, our capital allocation will remain focused on investing in our B2B platform to drive profitable growth, including expanding our supply chain network and distribution capabilities.

We believe that investing in and leveraging our B2B ecosystem will continue to position us to drive long-term shareholder value. Also, as we announced this morning, our Board approved the resumption of our existing share buyback program with the goal of enhancing shareholder returns.

We have approximately $130 million left on the existing $200 million authorization, which will resume in the fourth quarter and run through the end of 2021.

Our decision to resume our share buyback program as well as paying down borrowings under our ABL reflect the strength of our business and financial position and highlights our commitment to maximizing returns for our shareholders. I look forward to sharing more about our overall capital-allocation strategy at our Investor Day scheduled for Q1.

Finally, I too would like to thank all of our associates who continue to make a difference and live up to our 5C culture. We once again delivered strong performance against a backdrop of a challenging market.

The strength of our assets, strong free cash flow growth and the ability to generate substantially higher EBITDA growth in the future, creates a very compelling opportunity to drive significant value at ODP, expanding our multiple and delivering sustainable long-term growth. With that, operator, we will now open the line for questions..

[Operator Instructions] Our first question will come from the line of Chris McGinnis. Please state your company name, and proceed with your question..

Yeah. Good morning. Chris McGinnis from Sidoti & Company. Thanks for taking my question. Can you maybe just start around the commentary around the SG&A, obviously, a great job in terms of controlling the cost there? You talked about a mid-teen target going forward.

Can you just talk about how you see that playing out given the recovery? How much you need to kind of invest back in SG&A as the economy possibly strengthens? And then, maybe just also on the consolidated operating margin a really strong number. How sustainable that is going forward? Thanks..

Hey. Good morning, Chris, and thank you. I'll take the first part, then I'll -- Anthony -- I'll flip it over to Anthony for some comments as well. So, really pleased with the progress from an overall SG&A perspective. This is a long-term program we put in place when I came in.

We'll continue that great work by our leadership across my entire staff, but we really embarked on a zero-based budgeting type of program a couple of years ago, which is really BAP. Multiple work streams to drive cost out of the business and our teams. It's really been inoculated in the culture of our company. I'd like to say the low-cost model wins.

I say that constantly, and we're going to continue to drive that through a number of actions where --- whether it's optimization in our supply chain, continued great work by Kevin and his team in retail. I mean across the board, there's been significant savings, shifting our go-to-market model in some areas.

I think it's very sustainable, and I think it's something that we're going to continue to drive aggressively, because we could be well positioned as we shift to B2B. I'm going to ask -- let Anthony add some color as well..

Hey. Good morning, Chris. So to Gerry's point, with the actions we've taken with BAP and other initiatives, we've created structural changes in our operating cost model driving that low-cost model including operating changes at the labor model within retail. So, we're seeing some of those benefits driving the quarter and the cash flow.

Some of the variable costs in SG&A will come back in 2021 as the business rebounds, but for the most part the costs we've taken out are permanent in nature.

If you look at it from the statement around mid-teens, I think based on our channel shift the continued focus on the low-cost model as well as other initiatives we can accomplish that mid-teens target over time as we navigate into 2021 and beyond..

Great, thanks for that. And then, just moving to the Retail segment, strong operations there, both on the top and obviously on the bottom line.

I guess just -- is that improved of late? How does that play into your thoughts around the maximized strategy? Can you talk a little bit about how early or late you are into that maximize strategy and implementing it around it? And just any changes around retail given the strength recently. Thanks..

Yes. Again, we'll double team this one as well. Chris, at a high level, all our channels are important from a -- our ecosystem is important as we said in our script. All our routes to market are important, especially you've seen some of that shift.

Depending on the normalcy of how business operates in 2021 and 2022, the good thing is our online business is doing well. We've been able to capture some of that shift. But very, very importantly, Maximize B2B is a very important part of our strategy. We have to reduce our lease liability. We've ended 2019 at about $1.4 billion.

We're going to close 2020 at about $1.12 billion and we're going to get below the $1 billion mark and drive that down significantly. We'll talk about that more at Investor Day. But we have a very aggressive target to reduce our lease liability.

Very, very importantly really drive and generate tremendous amount of free cash flow over the next couple of years and obviously give us flexibility. And we're going to -- Kevin and his leadership team has done a tremendous job. We're going to give them the flexibility to drive profitable stores.

But what overarching that is, flexibility, cash reduced lease liability because, we think we need to be valued as a B2B company.

Anthony?.

And I think, you covered it well, Gerry. I would just say within Retail, we continue to see strong performance across core categories, work from home learn from home and PPE. So that continued the trend that we saw in Q2 and we expect that trend to continue..

Great. Thanks for taking my questions. I'll jump back in queue and good luck in Q4..

Thanks, Chris..

Your next question will come from the line of Michael Lasser. Please state your company name and then proceed with your question..

Good morning. It’s UBS. Good morning, Gerry. Thank you very much for taking my question.

Gerry, are you operating under the assumption that any of the strong demand you're seeing in the technology or PPE space is just simply pulling forward sales from future periods?.

No, not at all. And I think what we've seen and I think our online sales indicate that people are viewing this not just an office supply company. We've really broaden -- the whole focus and vision has been to be a B2B platform. And I'm very pleased with furniture sales. I'm very pleased with technology sales.

I'm very pleased with PPE sales, cleaning and breakroom. So people are coming to us through our retail channel. They're coming through us through our traditional B2B channel and our online channel as well. But we're very optimistic that we'll continue to have a multichannel approach and we'll be able to shift.

And again, spend the vision since day one to have broader and broader products and services and more to come at Investor Day really, really excited Investor Day to sort of show that next step of the evolution as well..

And Michael, the only thing I would add is, we're also overcoming a weaker-than-expected seasonal back-to-school. So, some of the performance is overcoming that weaker back-to-school to balance off the channel..

The NPD data says, there's about 47% of the schools are actually physically in-person right now across the country.

So, as that other 53% comes online, whether it's in Q4, whether it's in Q1, we've specifically kept ourselves in position from an inventory perspective and execution perspective to fulfill that, whether it's through our BSD channel, whether it's from our online channel, or whether it's through our retail channel.

So, we feel like we're ready to capture that demand. And depending on what happens in the future, we'll be able to -- we have the multichannel approach to be able to service it..

And presumably, we're well past the back-to-school season now that we're into November. So quarter to date, have you seen... .

Michael, we don't think that's the case. We actually think that there'll be demand as people shift into -- again half the people or students are still virtual. Eventually, I mean I can't predict when the pandemic will end. But hopefully, we'll make progress as a country on that.

But the reality is, as people start shifting to a physical or hybrid environment, we still think there's a lot of demand opportunity. We just think it's elongated. And I think it's important that there's still potential in Q4 and Q1..

Okay. And then, my last question is on the sustainability of the interaction between your SG&A CapEx and your sales. So your SG&A is down about 15% year-over-year in the most recent quarter. Your CapEx is running less than 1% of sales.

How long do you think you can maintain those types of run rates without it having some impact or detrimental impact on your sales performance?.

I think we covered the SG&A piece in the fact that, we've been able to take costs out both on a structural level, support costs as well as looking at the retail model. And I think there's opportunities continue to be there as we continue to execute Maximize B2B.

On the CapEx, we continue to invest in our B2B platform and we look forward to sharing more about the details at our Investor Day, but that's a core component of our growth in the future. So, I wouldn't look at the CapEx trends in the near term and extrapolate that in the future. .

Thank you, very much and good luck..

Thank you, Michael..

Your next question will come from the line of Chris Horvers. Please state your company name and then proceed with your question..

Thanks. Good morning. So maybe obviously, you talked about some positive cadence commentaries around the business.

Can you give us a little sense of, how the different divisions trended? How you're thinking about? What the exit rate here is into the fourth quarter just as we try to calibrate the models?.

Yes. I think, it's hard to -- and that's one of the reasons why we're not giving guidance is its still unknowns in the quarter. I think the trend that you saw coming out of Q2 and what we've been able to accomplish in Q3 should be similar trends as we execute the balance of this year.

We are looking forward to back to work as normal that will help our contract channel. But if you saw the diverse nature of our business model and the multichannel approach, I think you're going to see continued execution for the balance of this year..

So, when you say, I guess continued trends, you're sort of expecting, does that mean sort of BSD down, but not as bad and retail continuing to grow?.

That's correct. So we're looking at sequential improvements, through the remainder of this year, similar to what you saw Q2 to Q3, Q3 potentially to Q4, but again, a lot of variables in the last few weeks of the quarter that we're looking for..

All right. So it's the sequential, not per se, year-over-year. Okay. Well okay. I just want to make sure. And then just a bigger picture question, right? So, in the COVID world, it's helped certain parts of your business the PPP -- PPE adjacencies, home office, learn from home and so forth. But then you have the -- this big contract business.

60% of operating profits is BSD. And that's hurt as we all work from our basements or a lot of us.

So I guess, I want to get your thoughts on, on a net basis, do you think COVID actually helps you, on an overall perspective, or do you think, actually COVID is more of a net headwind? Because as we think about 2021 it was, go back to whatever is normal, you're going to have to give back some of the things like, home office versus work from work.

So just trying to think about, how you think about, whether a, COVID is in that benefit, or b, and b, how we project forward from here?.

Well, I'll let Anthony, you go through the details. But at a high level obviously, COVID is not good for us from a structural perspective. But I will say that it's made us better as a company, because we accelerated our adjacency penetration. We're up to 47% adjacencies.

And that's always been an area that I really wanted to push on, because I think again, we're going to be a B2B platform, not just an office supply company. And so I think our, our focus we've had over the last three or four years, on cash and low-cost model has been accelerated as well. So we're coming out of this stronger.

We're in a great liquidity position from a balance sheet perspective. We're selling a lot more diverse set of products. And I think at Investor Day you're going to see us, talk more about what that next evolution is. And to be honest with you, we've accelerated that through the pandemic. We haven't talked about it publicly.

But we're really excited for Investor Day to walk through, so that next evolution which is an extension of exactly where we want to go, from our strategy as a company. So it's been painful. But I think our team's great leadership across and support from our associates. And we're focused on, making sure we take care of our customers.

But I think we're -- we've learned a ton. And we're much broader. And I think, it's the ecosystem that we have that's been -- and again, I want to mention the supply chain. Our supply chain team has done an incredible job. It's a huge asset for u, and so many people under look that asset of the company.

And I think you're going to see a lot more of that in the future, especially at Investor Day of how we're going to leverage that going forward. Anthony, I'll let you jump in as well..

Yeah. Christopher, I think Gerry covered most of the topics, around the power of the ecosystem. Obviously mix shift has occurred during this period. We're seeing strength in retail, strength in e-commerce, as more of the work from home took hold in Q2 and Q3 and continues to be the case now.

But as we look into the future state, and as business begin to reopen, and it becomes back to hopefully normal, in the near-term we're expecting to improve our business activity as that ramps up and improve performance in the contract channel specifically..

Okay.

One quick last one, similar question on, I guess from a margin perspective, shift out of contract and into retail, is that an overall net sort of margin rate in benefit? So you have -- whether it's the merch margin and leverage and a higher fixed cost, retail rent model, or does the mix of tech and some of the other COVID categories offset this? So how has COVID impacted sort of the profitability, from a margin perspective?.

Yeah. So I think you hit it. Retail has that fixed cost nature. So as more volume goes through there, there's a leverage effect. And retail also has lower distribution cost, because you're drop shipping versus having distributed work from home, which is occurring in the BSD channel through e-commerce.

So there is a definite benefit from having that fixed cost model in retail, as volume comes back that we saw in the quarter and we saw year-to-date..

Understood. Thanks very much. Best of luck..

Thanks, Chris..

Thank you so much..

Our final question will come from the line of William Kafoure. Please state your company name and then proceed with your question..

Hi. This is Will Kafoure from Elevation. Nice execution, in the quarter. It's good to see. I guess my question is around on retail.

As you execute on the cost-savings target that, you laid out, and you are closing stores, are you targeting kind of the least profitable stores first to close? Is there any sort of methodology there as you execute on that?.

Yeah. Obviously, there's a lot of factors that are taken into consideration. But we're looking at profitability the four-wall profitability of each of the stores, as their lease terms come up for renewal. And how they'd performed historically, and how we expect them to perform going forward.

So it's obviously the least profitable stores are highest on the list, in terms of taking action. But it's an evolving model, because there are demand shifts that come into consideration. But our model is well tested and a lot of history there.

So we feel really confident about how that's being executed not only for the quarter, but to go forward as well..

Got it. Thank you..

I'll now turn the conference back over for, any concluding remarks..

I just wanted to thank all -- everyone for joining the call today. We look forward to discussing our results next year in the Q4. And we look forward to our Investor Day. And we're really excited about, our next steps we're going to -- we'll talk about to at our Investor Day as well as a community and our associates as well.

But we'll see you in Investor Day hopefully, in the late January or early February or early 2021. Have a great day. And thank you again for joining..

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