The ODP Corporation (NASDAQ:ODP) Q2 2023 Earnings Call Transcript

The ODP Corporation (NASDAQ:ODP) Q2 2023 Earnings Call Transcript August 9, 2023

The ODP Corporation beats earnings expectations. Reported EPS is $0.99, expectations were $0.75.

Operator: Good morning, and welcome to The ODP Corporation’s Second Quarter 2023 Earnings Conference Call. All lines will be on a listen-only mode for today’s call. [Operator Instructions] At the request of the ODP Corporation, today’s call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations and Treasurer. Mr. Perrott, you may now begin.

Tim Perrott: Good morning, and thank you for joining us for The ODP Corporation’s Second Quarter 2023 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. During today’s call, Gerry will provide an update on the business, focusing much of his commentary on our accomplishments for the second quarter of 2023, including our operational performance and the progress we are making on all of our initiatives to drive shareholder value. After Gerry’s commentary, Anthony will then review the details of the company’s second quarter results, including highlights of our divisional performance. Following Anthony’s comments, we will open up the line for your questions.

Before we begin, I’d like 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 US 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 Gerry Smith. Gerry?

Gerry Smith: Thank you, Tim, and good morning, everyone. We really appreciate you joining our call today, and we’re excited to be here with you this morning to discuss our second quarter 2023 results. As you can see in the release that we issued this morning, we continue to drive solid operating results in an increasingly mixed demand environment, as we continue to leverage our new four business unit structure and execute upon our capital allocation plan. As highlighted on slide four of our presentation, we remain committed to operational excellence and our low-cost model approach, two anchor tenants of our disciplined strategy. For our team, operational excellence is not just a catch phrase, it’s a cultural mindset that is ingrained into the fabric in how we run our business and how we create shareholder value.

Using this approach, along with the strength and flexibility of our four business unit model, we again delivered strong operating results against an increasingly challenging macroeconomic backdrop and somewhat sluggish consumer activity. We delivered these results and continued our capital allocation program, making progress towards our long-term goal of returning $1 billion of shareholder capital. We also maintain a strong liquidity position and balance sheet. And I would like to thank our entire team for remaining focus on delivering these solid results, which is a true testament to our team’s unwavering commitment to operational excellence and dedication to driving shareholder value. Therefore, before I cover the highlights of our Q2 results, I wanted to reemphasize our realigned forward business unit model and our strategy to unlock its potential.

This is shown on slide 5. It’s only been about nine months since we launched our realigned four business unit structure, and we’re really excited and encouraged about the more dynamic and capable company it has helped us create. Our new structure allows us to more fully utilize our assets, provide greater transparency into the value of each of our businesses and positions us to pursue new avenues for growth. This structure has truly created a new ODP and our B2B and B2C businesses place us on a path to unlock our potential and create even more value for shareholders over time. One early shine example of how this structure is helping us unlock our growth potential can be found at Veyer. Veyer is our supply chain and logistics business that we have developed over the past three decades that was previously embedded as a primary support cost function for our business.

We have separated Veyer as its own operating segment to pursue future growth by leveraging its world-class capabilities to bring its strong value proposition to continue to serve its internal customers ODP Business Solutions and Office Depot, as well as serving as existing and new external third-party customers. Veyer’s strong and competitive value proposition includes nationwide coverage capabilities, next-day delivery capability to about 98.5% of the ZIP codes in the US, including desktop delivery and can provide services such as just-in-time logistics, as well as leverage its proprietary analytic tools, provide greater insight to drive efficiencies for both internal and external customers. The investments we have made over many years has enabled us to create a network that we feel a few supply chain operators possess today.

Currently, Veyer is utilizing existing capacity and capabilities to deliver a variety of services to third parties, including leveraging nine million square feet of distribution center space over a network of 55 distribution centers through a large private fleet, enabling us to deliver tailored solutions and full end-to-end supply chain services. In its first year of operating as its own segment, Veyer is also executing long and modernization road map, developing proprietary capabilities and leveraging technologies that are often Gartner Magic Quadrant leaders to improve capabilities in warehouse management, transportation and inventory routing and visibility in planning tools. From a cost center to a profit center with significant runway to generate long-term profitable growth, Veyer is off to a great start, a well in its way of delivering meaningful incremental enterprise EBITDA.

Also off to a great start under our new structure is ODP Business Solutions. ODP Business Solutions is a large and growing B2B distribution business with over $4 billion in annual revenue, servicing enterprise-level companies, as well as medium and small businesses. It serves over half the Fortune 100 and provides customers with a highly curated procurement solution, delivering core business products on a growing categories and adjacency products such as Jan/San, Cleaning & Breakroom, Tech, Workspaces and Furniture, Copy & Print products and services. As I stated on our last call, our Jan/San and Cleaning & Breakroom businesses alone generates about $700 million on an annual basis, making us one of the larger distributors of Jan/San and Breakroom related products in the US.

With a clear objective to grow net new customers and broaden its value proposition through expanding and set of product and service offerings, ODP Business Solutions is focused on growing its business, while expanding its margin profile objectives over the long-term. Next up is Office Depot, a brand name remarkably familiar to consumers and now a true omnichannel consumer business, with a profitable retail footprint and award-winning e-commerce platform. Office Depot continues to be a key cash generation engine for ODP. And with our focus on driving risk-adjusted positive contribution margin, we’ll generate strong, consistent EBITDA and cash flow while also improving the customer experience, including through our industry-leading 20-minute pickup guarantee and expanded sovereign offering, resulting in one of the highest NPS scores in the industry.

And finally, Varis. Varis is an early stage, transformative B2B procurement platform business that just launched late last year. Varis is a category creator and focus on transforming the complete procurement ecosystem for buying organizations and the suppliers who serve them aligned for a more modern, frictionless consumer-like experience for B2B buyers and suppliers. The market opportunity for Varis is very large with over $4 trillion in gross indirect transaction volume within our target markets. While we are still in the early stages and as with all new start-ups refining this approach, Varis continues to make progress, enhancing its capabilities and adding customers to its platform. Our new operating structure is creating opportunities for our business as we execute upon what I have termed as ODP’s Three Horizon Strategy.

This strategy puts into perspective how we will drive our business units in order to unlock the underlying fundamentals, pursue long-term sustainable growth and maximize shareholder value. Briefly highlighting our approach. Our first horizon focuses on continuing to drive Office Depot’s performance, excellent customer service and Net Promoter Scores and most importantly, our relentless focus on maximizing EBITDA and cash conversion. Office Depot is a cash generation engine, and this horizon continues that focus getting the most out of this engine. Next, our second horizon is focused on continuing to drive ODP business solutions, delivering growth, margin expansion and cash flow. As you can see in our release this morning, we are moving well along the margin expansion path we set.

We believe that as we execute our plan, the market will begin to recognize the value of what we believe is a higher multiple business, and this should be reflected in ODP’s overall value. Our third horizon is building value and pursuing higher long-term growth opportunities through Veyer and Varis. Both of these businesses represent significant long-term growth and multiple expansion opportunities for ODP. Veyer as a world-class logistics and supply chain business with growing services to third-party customers and Varis is a high-growth transformative digital procurement platform business in a very large target market. So overall, our Three Horizon Strategy will help us continue to drive our near-term cash flow engines while allowing us to continue to pursue both midterm and long-term growth in higher multiple businesses which we believe will create significant value for our shareholders.

This is all anchored by our operational excellence and our focus on our low-cost business model while prudently managing our balance sheet and deploying capital to the benefit of our shareholders and, of course, continuing to live our 5C culture. Now turning to the highlights of our key accomplishments for the second quarter as shown on Slide 6 through 11. First, on a consolidated basis, we drove strong overall operating performance in the second quarter despite a more challenging macroeconomic environment. While overall revenue was down due to fewer stores and service and sluggish consumer demand, our disciplined approach helped drive adjusted operating income and EBITDA results that were consistent with last year. And combining our solid performance with our share repurchase activity, we drove a 25% increase in adjusted earnings per share versus last year, a meaningful accomplishment.

Our cash flow results were also impressive as we significantly reduced cash flow usage relative to last year even as we built inventory for the upcoming back-to-school season. Our continued commitment to operational excellence in our low-cost model approach, combined with the balanced go-to-market strategies, helped drive these strong results against ongoing challenging macroeconomic backdrop, hampered by high inflation and slowing consumer activity. I can’t say enough about our team’s continued focus and discipline and achieving these strong results in the quarter. Thank you, team. Anthony will provide more of the details on the drivers in his prepared remarks later on the call. Next, we continue to execute upon our $1 billion share repurchase authorization that our Board of Directors put in place in November of last year.

We believe that buying back our stock at these levels one of the best investments we can make to create additional shareholder value. During the quarter, we repurchased approximately 725,000 shares for about $31 million. And since the beginning of the authorization, we have repurchased approximately 8.3 million shares in total for approximately $385 million. Putting this activity into context, since November of last year, we bought back over 20% of the market value of the company. Moving forward, we will continue to be disciplined, monitoring market economic conditions, and continue to prioritize capital allocation, while prudently managing our forward business unit model. Now, moving on to our business unit performance in the quarter, starting with ODP Business Solutions.

ODP Business Solutions, our large and growing B2B distribution business delivered strong operating performance in the quarter, generating nearly a 30% increase in adjusted operating income on a consistent revenue result year-over-year. This is impressive given some of the macroeconomic headwinds that some of our customers are facing that are resulting in corporate layoffs and reductions in force. EBITDA margins increased significantly and are rapidly approaching pre-pandemic levels and our long-term goals. Adjacency penetration remained at 44% of the total division revenue and overall revenue retention rate remained near its historic highs. We are continuing to win net new business with key new customer wins that we expect to be onboarded later in the year, and our pipeline of new business has never been higher.

Our team’s performance was impressive given some of our corporate customers are enacting reductions in force and other activities given broader macroeconomic conditions that impacts our core business. This is another reason why our assortment strategy and reorganized routes to market are so key to our long-term success. As we head into the second half of the year and beyond, our foundation remains strong to continue to drive profitable growth. While we expect to continue facing some of the macroeconomic headwinds, we’re continuing to raise the bar, evaluating new ways to serve customers and pursue growth. As a strategic initiative over the last few quarters, Dave Centrella and team have been analyzing the marketplace and taking time to listen to customers and gather feedback as well as reevaluating the market segment landscape and new approaches to meet customers’ needs.

Based on this work, we’ve improved upon how we segment our customer base and we’ve enhanced our go-to-market strategy. Aligning with this approach, we have redeployed our sales resources to better address our customer-specific requirements, providing tailored solutions and continue to deliver a superior customer experience. We’re excited about what this realignment means for our go-to-market strategy and our ability to further enhance customer experience and drive future growth. Next up is Office Depot. Our omnichannel consumer business, which includes a profitable retail footprint and award-winning e-commerce platform, providing a strong value proposition to education, home office and small business customers. The division continues to provide a positive shopping experience for its customers, leading to continued strong Net Promoter Scores above 70% among the best in the industry.

Office Depot had a more challenging quarter and experienced weaker top line performance, largely driven by fewer stores and service compared to last year related to planned store closures, as well as from lower in-store and online traffic demand, categories previously and strong demand last year, primarily home office furniture and technology fall significantly lower demand in the quarter. Additionally, as I mentioned in our previous calls, and as we’ve seen in the press nearly every day, the weaker economic environment is having a negative flow-through affect market-wide and consumer-related activity, resulting in lower demand across many industry segments. We believe the lack of seamless in the overall weaker macro environment contributed to lower demand in our consumer business in the quarter, as traffic trends in same-store comps were lower than anticipated.

The good news is we are seeing improving trends over the past few weeks to start the quarter. Operationally, while our team continues to drive a low-cost model, revenue headwinds had a flow-through effect, resulting in lower margins during the quarter. That said, we are well positioned to address these challenges in the second half, with a strong operating model, as we head into the higher demand back-to-school season upcoming in the third quarter. Additionally, we are selectively adding new category of service, including our dorm room offering targeted at colleges, as well as celebrations in party assortment categories. Although early, the customer feedback has been positive, we’re also realigning our digital marketing efforts designed to drive greater traffic and conversion, including adding a highly experienced member to lead our e-commerce efforts.

In all, while it was a challenging quarter for our consumer business, we’re cautiously optimistic about the second half of the year, and we’re managing prudently and believe we are well positioned to improve our performance. Next up is Veyer. Veyer is a world-class supply chain services and sourcing provider with core competencies in distribution, fulfillment, transportation, global sourcing and purchasing, which also includes our global sourcing operations in Asia. Veyer may continued significant progress in the quarter, adding new external customer logos to its slated business and continue to drive EBITDA from third-party customers. In fact, third-party EBITDA in the quarter doubled relative to last year and Veyer remains slightly ahead of plan to double EBITDA from external customers this year.

Veyer profit from backhaul is up over 40% versus last year and nearly 30% year-to-date. Also, vendor additions to its vendor consolidation program, providing supply chain service to its vendor partners is already greater than all of 2022. It is becoming clear that Veyer’s compelling value proposition is beginning to resonate with customers. Veyer continue to improve upon service level metrics, while driving efficiencies throughout its network, utilizing route management tools to optimize the network, driving more capacity to our own private fleet and balancing capacity among our 3PL carrier partners. We also continue to make progress on our tech stack deployment and capabilities, improving our position to serve external third-party customers and improve internal operations.

Now turning to Varis. Varis is still in the early innings of this platform launch. The companies continue to track and onboard new customers, gather customer feedback and work to ramp new customers on its recently launched platform. While Varis is making good progress, the team has taken the time to prove the onboarding process and other capabilities of the platform for the benefit of its customers. While customer feedback adoption has been positive, with many testimonials on the value proposition that the platform delivers, we need to manage through some additional technical capabilities to truly enable us to scale. We have redirected and reprioritized resources to address this, and while I’m not satisfied with where things stand financially.

Copyright: smileus / 123RF Stock Photo

I could not be more excited about the growth potential of this platform and its value proposition in the market. Anthony will provide further information on the financial expectations for the balance of the year. As I wrap-up my comments, I want to say, just how proud I am of our entire team for all of these accomplishments in the first half of the year. When I look at our performance in Q2, the lens of navigating the economic challenges, it points to the balanced nature and resilience of our business model as well as the culture of excellence that we have created ODP. And through our operational excellence approach and disciplined capital allocation focus, we delivered strong performance in the quarter, driving EBITDA, strong free cash flow and a significant increase in earnings per share.

Looking forward, I expect to continue facing ongoing macroeconomic headwinds, we remain cautiously optimistic for all of our routes to market as we move into the second half of 2023. We will remain acutely focused on our formula of success, driving our operational excellence approach, building our winning 5C culture and staying committed to our capital allocation focus driving shareholder value. With that, I will turn it over to Anthony for his remarks regarding the specifics of our financial results.

Anthony Scaglione: Thank you, Gerry, and good morning to everyone joining the call today. It’s great to be here today to provide more details on our financial results for the second quarter. Before I begin, I’d like to thank our entire team for remaining focused and delivering solid performance. The operational foundation of our business remains strong. As you heard from Gerry, and as we have mentioned over our last few earnings calls, the macroeconomic environment remains challenging and not just for us but for most businesses in nearly all industries, record high inflation, which is outpacing wage increases, and higher interest rates have led to an overall slowing of demand. This environment has been negatively impacting not only the level of consumer activity, but also business activity as evidenced by some of the larger and well-publicized corporate layoffs and reductions in force.

I would also point out that, while the input costs to our business or our cost of goods sold, which include product, shipping and other costs continue to be higher on an absolute basis, we have seen some cost deceleration as evidenced by container costs returning back to historical norms, lower fuel costs and fewer supply chain disruptions compared to last year. Despite these challenges, I’m still proud of our team for remaining focused on the factors that we can control and continue to drive our low-cost model with an eye toward continued cash generation, capital returns and earnings per share growth. In the quarter, we again delivered strong operating income and EBITDA results and significantly improved cash flow versus the prior year. And when combining our solid operational performance with our capital allocation priorities, we drove a 25% increase in adjusted earnings per share.

This powerful combination of driving solid operating results, while buying back shares is a formula that we expect to continue to enhance value for our shareholders into the future and is the algorithm, I outlined at Investor Day. We continue to prioritize our capital returns, resulting in buying back approximately $31 million of stock in the quarter. And adding to this, our previous activity, we’ve repurchased approximately $390 million of our stock since putting the new plan in place back in November of last year. This equates to over 20% of our market value in the last nine months. Overall, our disciplined capital allocation and solid operational performance in the quarter continues to underscore our team’s unwavering commitment to operational excellence and continues to be a testament of our winning 5C Culture.

We’re also encouraged by our four business unit structure and what this means for the future of our business, allowing us to more fully utilize our assets and positioning us to pursue greater opportunities for long-term growth. We continue to make good progress in our business. ODP Business Solutions expanded its margin profile in the quarter, moving closer to its long-term goals. And there continues to add new logos and is well on its way to more than doubling its third-party EBITDA this year. Despite top-line softness, Office Depot continues to leverage its omnichannel capabilities to meet customer needs and drive strong cash generation. And despite a slower start, Varis continues to have a strong value proposition and we are working to enhance the platform’s capabilities along with onboarding new customers.

Our realigned structure with these four business units pursuing growth independently and working in concert will help us to continue to drive shareholder value over time. Now turning to the highlights of our financial results, as shown on slide 12. Consistent with previous quarters, we have provided our results on both a GAAP and adjusted basis. We generated total revenue of $1.9 billion in the second quarter, down 6% versus Q2 of last year as weaker macro conditions slowed consumer activity, creating top-line headwinds at Office Depot. Lower sales at Office Depot were due to 68 fewer stores in service compared to last year as well as lower retail and online consumer traffic and transactions. This was partially offset by stable sales in ODP Business Solutions.

As return to office trends helped to offset some of the macro headwinds and higher-than-anticipated corporate reductions in force that have recently made headlines. GAAP operating income in the quarter was $46 million, up 60% from Q2 of last year. Also included in operating income was a net $4 million of charges associated with non-cash asset impairments primarily related to the right-of-use assets associated with our store locations. Adjusted operating income for Q2 was $53 million, flat with last year and included unallocated corporate expenses of $19 million. Adjusted EBITDA was $86 million for the quarter compared to $91 million in the same period last year. This includes depreciation and amortization expense of $29 million and $34 million in the second quarter of 2023 and 2022, respectively.

Excluding the after-tax impact from the items mentioned earlier, adjusted net income for the second quarter was $39 million or $0.99 per diluted share, representing a 25% increase in adjusted EPS and driven by consistent net income and strong execution under our share repurchase program. Turning to cash generation. In the quarter, we significantly improved cash flow compared to last year. Operating cash used in the quarter was $8 million, an improvement of over $106 million versus cash use of $114 million last year. Capital expenditures in the quarter were $23 million compared to $21 million in the prior year period. Adjusted free cash outflow in the quarter was $30 million, a significant improvement versus the $121 million outflow in Q2 of last year.

This is a particularly impressive result considering that Q2 is a quarter that we build up inventory in advance of our back-to-school season. I want to thank our entire team for being laser-focused on managing our working capital particularly inventory and focusing on cash conversion, resulting in the strong year-over-year cash flow results. Taken together, these results reflect our relentless focus on driving operational excellence, even in light of the aforementioned top-line pressure. Now I’d like to cover our business unit performance, starting with our ODP Business Solutions division on slide 13. Notwithstanding the macro headwinds Jerry mentioned earlier, ODP business solutions continued to deliver strong operating performance, expanding its margins on stable revenue results year-over-year.

Revenue was approximately $1 billion in Q2 and up slightly with the same period last year. Back to office trends, while continuing in a positive direction were somewhat muted by other macro factors impacting certain customer spend. Our Federation companies, our regional tuck-in M&A entities continued to show solid growth in the quarter. We’ve been successfully executing this strategy in growing this business, which now generates well over $500 million in revenue on an annual basis. This market continues to be highly fragmented and our disciplined approach gives us tremendous runway to keep growing our platform strategically over time. From a product and services standpoint, we saw continued demand across core supplies as well as increasing sales in certain adjacency categories, including cleaning and breakroom and copy and print.

Sales of technology products, which were in high demand last year during the supply chain constraints were lower in the quarter. Our adjacency product categories as a percentage of total revenue remained at 44%. As a notable KPI for ODP Business Solutions, this percentage may fluctuate from quarter-to-quarter, but our long-term objective is to consistently grow adjacencies and both on an absolute dollar and percentage basis as we expand our value proposition and continue to leverage our strength in core categories. For 2023, we expect this percentage to be flat to slightly up over last year as back-to-office trends drive core supplies growth. From an operating perspective, ODP Business Solutions is on path to drive its EBITDA margins back to pre-COVID levels with an opportunity to expand long-term margins beyond this level by staying true to our low-cost model.

We made great progress on this goal during the quarter, generating operating income of $45 million, a 25% increase relative to last year. This represents a 100-basis point margin improvement as a percentage of sales. EBITDA was $50 million in the quarter, up over 20% from last year and representing nearly a 5% EBITDA margin. This strong operating performance is a true testament to our low-cost model. While we expect the macro environment to remain challenging in the second half, we’re seeing some of the best sales pipeline and opportunities ahead of us, and we are excited about the modifications we have made to our go-to-market strategy and how this will drive sales growth and future efficiencies in our operating model going forward. Now turning to our consumer division results, as shown on Slide 14.

Our Office Depot Consumer division continued to provide excellent service and a compelling value proposition to our customers as demonstrated by NPS scores remaining above 70% and some of the highest scores in any consumer business. However, from a top line perspective, the quarter presented its challenges, as the slowing economy had the effect of moderating the level of consumer spending and overall activity in the U.S. We have seen this reported in the press and by other large consumer businesses over the recent quarters. referencing how the lack of stimulus and overall weak economy is hampering the level of consumer activity. Along with most other consumer businesses, this environment is creating some top line headwinds in our business as well.

Reported revenues in the quarter were approximately $900 million, down 13% and driven by 68 fewer retail stores in service this year versus last year related to planned store closures as well as lower traffic and transactions in both our retail and e-commerce channels. On a shifted basis, same-store sales were down approximately 6%. Store traffic and demand relative to last year were negatively impacted by weaker economic activity and higher unemployment as well as the recovery from the pandemic as a greater percentage of consumers return to the office. From a product perspective, stronger sales of copy and print were more than offset by lower sales in core supplies and in other categories previously in stronger demand during the later stages of the pandemic, including technology, cleaning and breakroom and furniture.

Sales per shopper was down mostly due to lower average order volumes, partially offset by higher conversion rates. From an operating perspective, operating income was $35 million in the quarter, down compared to $49 million last year. Lower operating income compared to last year was primarily driven by the flow-through impact from lower sales and higher input costs related to inflation. While we expect the macro environment to remain challenging in the second half of the year, we continue to drive our low-cost model approach, creating a strong operational foundation as we head into the higher demand back-to-school season over the next few weeks. We also remain excited about the feedback we are receiving regarding the new category assortments we’ve selectively launched, including our dorm room offering as well as celebrations and party assortment categories.

From an e-commerce perspective, we’ve hired a new leader who is realigning our digital marketing efforts designed to drive greater traffic and conversion. So overall, while it was a challenging quarter for our consumer business, we’re focused on driving the components of our business that we can control, and believe we are well positioned to continue to drive this cash engine of our business. Now turning to Slide 15. I wanted to highlight Bayer’s financial results and provide insights into their operations. We’re very excited about the continued progress Bayer has made during the quarter, driving efficient services for its internal customers and gaining traction with third parties. As Jerry mentioned earlier, Bayer specializes in B2B and consumer business service delivery with core competencies in distribution, fulfillment, transportation and procurement.

And this also includes our global sourcing operation in Asia. They serve the needs of its primary internal customers, Office Depot and ODP Business Solutions, as well as for other third parties through our procurement and supply chain business. And as a reminder, from an internal perspective, a key component of Bayer mission is to be an efficient supply chain provider to Office Depot and ODP Business Solutions, which in turn drives the best results upon consolidation for our entire ODP enterprise. Therefore, as I mentioned previously, as Bayer undertake actions to drive efficiencies and effectively serve its internal customers, the intercompany revenue and corresponding allocated profit to their could fluctuate over time. Simply put, through our intercompany agreements as Bayer drives greater efficiency for its internal customers, much of this benefit is captured through ODP Business Solutions and Office Depot, benefiting the entire enterprise rather than being reflected only in Bayer’s results.

Looking at ways to continue to optimize its network and drive the low-cost model, not only helps its internal customers, but also provides a strong value proposition for new external customers. Regarding its financial results for Q2, Bayer drove sales of $1.3 billion, predominantly supporting the purchasing and supply chain operations of OTT Business Solutions and Office Depot, which are effectively eliminated upon consolidation. Excluding intercompany sales, Bayer continuing to drive services to its third-party customers and win new business with some great market-leading logos. In the quarter, Bayer drove approximately $10 million in sales to external parties up over 50% compared to the same period last year, highlighting continued strong traction in providing services to third-party customers.

But as we discussed at Investor Day, external sales is not the only metric for Bayer. From a bottom line perspective, Bayer’s total operating income for Q2 was $6 million compared to $8 million last year, primarily due to the aforementioned intercompany transactions, mix and third-party activity. From an external customer perspective, we continue to see solid early traction in EBITDA generation. In the quarter, we generated about $3 million in EBITDA from third-party customers, a 140% increase over Q2 last year, positioning us well on our way to more than double EBITDA from third-party customers in 2023. Now turning briefly to Varis on Slide 16. As a reminder, Varis is our digitally native B2B procurement platform. While recently launched Varis has been working to add customers and suppliers to its network, addressing customer feedback and making tech stack updates, while adding new features to the platform.

As Varis continues to fine-tune its network and features, they are working to smooth out onboarding customers, ensuring the right level of services delivered and available for its new customers at the right time, all with a long-term goal of ramping up gross transaction volume through the network. While Varis is off to a slower start to its revenue ramp this year than what we anticipated, it continues to add new customers and suppliers. Keeping in mind that the platform only recently launched and ramping customer’s activity takes time, which from a results perspective, led to lower sales momentum than what we expected at the start of the year. During the quarter, Varis generated about $2 million in revenue, primarily from subscription derived from existing customers.

Overall, Varis generated an operating loss of $14 million, down from an operating loss of $16 million in Q2 of last year, driven primarily from lower employee-related costs. Now briefly turning to our balance sheet highlights, as shown on Slide 17. We ended the quarter with total liquidity of $1.1 billion, consisting of $335 million in cash and cash equivalents, which includes cash held internationally of approximately $100 million and $811 million in availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $181 million. As Gerry previously mentioned, we have been buying back shares under our $1 billion share authorization. In Q2, we repurchased 724,000 shares for approximately $31 million.

Adding this to our activity since the program began, we retired about 8.3 million shares for approximately $385 million. We continue to be disciplined and focused on maintaining a strong balance sheet, allowing continued flexibility to invest in our business and repurchase shares. And as we announced previously, during the quarter, we successfully completed the sale and partial leaseback of our headquarters building. We sold the building for approximately $104 million and expect an additional $10 million of cash tax benefits once our federal returns are finalized. We continue to be a valued tenant in the space and with our smaller footprint, the sale helps us lower our annual operating expense, while better meeting our team’s workplace needs through consolidation and collaboration.

Now turning to our 2023 guidance as shown on Slide 18. Our performance in the first half of the year was solid, and we remain in a strong capital position with our low-cost model and strong balance sheet. While we’re cautious on the state of the consumer and general macroeconomic conditions, our continued focus on operational excellence has us well positioned to continue to drive solid operating results for the balance of the year. As we look to the second half, we’re laser-focused on managing the levers in our business that we can control, and continuing to drive our profitable growth initiatives across our four business units. Considering our first half performance, current macroeconomic conditions and expectations for revenue trends in the second half of the year, we updated our revenue guidance to a target at approximately the low end of our previous guidance range or approximately $8 billion, while reaffirming our guidance for other operating metrics, including adjusted operating income, EBITDA, free cash flow and CapEx. Also, given our strong performance to-date, we are announcing that we are increasing our adjusted earnings per share guidance to a revised range of $5 to $5.30, up from our previous range of $4.50 to $5.10.

Our guidance assumes some stabilization in overall economic trends in the second half. Looking forward, we believe that we have good line of sight to our revenue guidance of approximately $8 billion. However, we are being disciplined on cost and price with an eye toward maintaining our focus on cash and EPS growth. Additionally, baked into our revised guidance, we expect operating loss in Varis to be slightly higher in the range of $60 million to $70 million for 2023 with no anticipated change in their CapEx range. Looking at this from a cash use perspective, we expect cash use in Varis to approximately be $65 million to $70 million for the full year, down from a cash use in 2022 of approximately $100 million. So overall, despite the challenging macroeconomic conditions and solve their top line, we remain in a solid operating position, driving cash flow and with our continued focus on delivering capital returns to shareholders, significant earnings per share growth.

With that, operator, we will turn the call over for questions.

See also 10 Best Semiconductor Penny Stocks to Buy and 20 Biggest Health Insurance Companies in the US.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jeff Lick with B. Riley.

Jeff Lick: Good morning, guys. Can you hear me?

Gerry Smith: Yeah. Good morning, Jeff.

Anthony Scaglione: Good morning, Jeff.

Gerry Smith: Sure. Go ahead.

Jeff Lick: Congrats on a great quarter. Just starting with Business Solutions, Obviously, there’s a lot of factors going back and forth. You’ve got the commercial office situation, and there’s the back-to-work narrative. And you mentioned the pipeline heating up, and you didn’t talk about Federated strategy. I’m just curious, as you look to the back half of the year, how do you see all those factors kind of playing out? And I don’t know if you gave an implied guidance, do you expect business solutions to show a little growth in the back half?

Gerry Smith: Yes, we do. This is Gerry. And thanks for the comments, Jeff. But we do have a lot of pipeline. We have a number of new customer acquisitions that should be ramping in Q3 and Q4 and again, we’re super excited by the largest backlog we’ve had in a long time. Obviously, some headwinds from returning the office, but we see good growth in the Federation. And we see good performance across a number of segments. Education, for example, is coming back. And so I think we have a very balanced approach and our expectation is we’re going to have growth in Q3 and Q4. And as you saw from an operating margin perspective, fantastic operating margins compared to last year, as we talked about. We started that process 1.5 years ago, driving the low-cost model to your business.

And [indiscernible] and his team have done a fantastic job of doing that. And we feel like we’re very well positioned. We took a bunch of costs out of the business where both from a COGS as well as SG&A perspective that was in the second half as well as 24 were set up nicely. Anthony?

Anthony Scaglione: Yeah. The only thing I would add, Jeff, is as you think about the levers that we can control, and I think that’s a really important one. We’re managing through a relatively choppy macro environment, staying vigilant on costs, staying vigilant from a cash conversion perspective. Looking at how we can continue to provide that value proposition to our customers without chasing any bad deals. And that’s the key here, driving what’s going to make us successful in the long-term, leaning in on our private brand driving this assortment expansion, things that we can control and really drive that value to our customers at the end of the day.

Jeff Lick: And then with respect to the Office Depot division, you’ve referenced the sluggish economy. I’m just curious, if you could highlight things that were was more sluggishness or maybe less. And then as we get into Q3 and Q4, if you could talk about the opportunities in dorm room back-to-school celebration and any other adjacent categories where despite the challenging economic backdrop, maybe there’s, some areas for some gains.

Anthony Scaglione: Yes. We – back-to-school really launches here. We’ve had by week school flights and the big ones are this week, next week and the following week. And so too early to call, but early preliminary is we like the trend that we’re seeing. Clear softness from a consumer perspective. We have consumer. We have small business, and we have hybrid work from homes or three segments we focus on. I think primarily the consumer is the driver of that. But I will say, laser-focused on labor cost, laser-focused on low-cost model. Our COGS initiatives are on track and ahead of schedule. And so we’re very confident that – let’s be clear, this is a great cash engine. Kevin knows that very, very clearly. And I’m super proud of the operating cash flow we drove for the quarter.

Our inventory is in the best position we’ve been a long time. We’re setting the stores, we’re doing a really good job of focusing on COGS, cash inventory and obviously, driving growth as well. Anthony?