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Edited Transcript of ODP earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Office Depot Inc Earnings Call

BOCA RATON Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Office Depot Inc earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerry P. Smith

Office Depot, Inc. - CEO & Director

* John Mick Slattery

Office Depot, Inc. - President of CompuCom Division

* Joseph T. Lower

Office Depot, Inc. - Executive VP & CFO

* Timothy J. Perrott

Office Depot, Inc. - VP of IR

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Conference Call Participants

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* Christopher Jerome Sullivan

JP Morgan Chase & Co, Research Division - Analyst

* Elizabeth Lane Suzuki

BofA Merrill Lynch, Research Division - VP

* Mark David Carden

UBS Investment Bank, Research Division - Associate Director and Associate Analyst

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Presentation

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Operator [1]

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Good morning. And welcome to the Office Depot's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) At the request of Office Depot, today's call is being recorded.

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

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Timothy J. Perrott, Office Depot, Inc. - VP of IR [2]

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Good morning. And thank you for joining us for Office Depot's Third Quarter 2019 Earnings Conference Call. This is Tim Perrott, and I'm here with Gerry Smith, our CEO; and Joe Lower, our Executive Vice President and CFO. Also joining us for the call today, we have Mick Slattery, President of our CompuCom division.

On today's call, Gerry will provide an update on the business, including highlights of some noteworthy achievements for the quarter and progress towards our transformation. Mick will share his insights on CompuCom and its refocused strategy to capture future growth. And Joe will then review the company's financial results for Q3 including our division performance.

Following Joe's comments, Gerry will have some closing remarks, and then we will open up the line for your questions.

Before we begin, I need to inform you that certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the U.S. Securities and Exchange Commission.

During the call, we 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.officedepot.com.

Today's call and slide presentation is being simulcast on our website and will be archived there for at least 1 year.

I will now turn the call over to Office Depot's CEO, Gerry Smith. Gerry?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [3]

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Thank you, Tim, and good morning to everyone joining our call today. It's a pleasure to be with you this morning to discuss our performance for the third quarter of 2019 and the progress we are making in our transformation to enhance our position as a leading B2B provider of business, products and services.

Our results this quarter again reflect our continued focus on profitability as we delivered improved operating results and continue to enhance our platform for future growth. I will cover the key milestones in the quarter and additional detail within our business units, and Joe will address the specific financial results in our business units.

As Tim mentioned, we're thrilled to have Mick Slattery on the call today. Mick joined recently as a President of our CompuCom division and will share with you his strategy to drive growth and profitability and is a very important component of our B2B platform.

As shown on Slide 4, I'd like to start out with an overview of the primary drivers and accomplishments in the third quarter. Our focus again this quarter was to continue making enhancements to our B2B platform, including our distribution and supply chain capabilities, strengthening our business model and driving increases in profitability across our business.

Our results show that we made significant progress driving another quarter of improving operating results and strong free cash flow generation. Profit margin were up across all 3 of our divisions as we continue to execute upon our Business Acceleration Program.

As a reminder, our Business Acceleration Program, or BAP, as we referred to it, is a multiyear effort designed to create a more competitive enterprise, driving cost efficiencies that provide additional sources of capital to improve customer satisfaction and importantly, fuel future growth.

As we previously announced, this program is expected to deliver cost savings of at least $40 million this year and over $100 million at full run rate thereafter. The positive impact of these efforts is clearly evident in the strong results we delivered in the quarter.

Next, we continue to make progress enhancing our B2B platform and generate future profitable growth. Under strong leadership in both our Business Solutions division and CompuCom division, we are taking specific actions to build a stronger, more profitable pipeline for future growth. These actions involve refining our value proposition, improving our sales operations and refocusing our strategy at CompuCom. These efforts, combined along with the BAP, are resulting in significant improvements in profitability and are positioning us to compete more effectively going forward.

Lastly, we continue to strengthen our balance sheet and generate strong cash flow results during the quarter. As we previously announced, we took steps to align the maturity dates of the timber notes and associated receivable, which will result in a net cash inflow of over $80 million in January of 2020. Also, as an ongoing commitment to driving the shareholder value, as we announced this morning, we have increased the authorization of our existing stock repurchase program and extended its duration.

Beginning on Slide 5, I'd like to share with you some of the specific highlights for our accomplishments in third quarter, beginning with our sale results.

Total revenue in the third quarter was $2.8 billion, a 4% decrease compared to last year. Our B2B business, which consists of our BSD and CompuCom divisions continue to generate approximately 60% of our total revenue. The decrease in revenue compared to last year was largely driven by a 6% decrease in sales in our retail division, a result of lower same-store sales combined with fewer stores and service and a 6% decline in revenue in our CompuCom division. Retail same-store sales of minus 3.6% was an improvement over last year, and we continue to drive increase in our buy online-pick up in store sales, which partially mitigated the impact of the decline in retail traffic.

Revenue in BSD declined 1% relative to the same period last year, partially driven by our efforts to eliminate certain unprofitable sales activities, which had a negative impact to revenues.

Our operating performance improved significantly in the third quarter as evidenced by increases in the operating income and strong free cash flow generation. Profit margins were up across all 3 of our divisions versus last year driven by solid execution of our operating plan and efficiencies delivered from the Business Acceleration Program.

We generated $137 million in adjusted operating income in the quarter, up 14% over last year and $191 million in adjusted EBITDA, up 11% over last year. These results represent a substantial year-over-year improvement and underscore our focus on profitability. Solid operational performance in our B2B divisions were complemented by strong execution in our retail division, which showed a 20% increase in operating income over last year. This result was particularly impressive as it was achieved during the highly competitive back-to-school season.

Our BSD division continued to deliver strong profitability, driving a 6% increase in operating income over the same period last year and an increase in profit margins as well.

In addition to our cost efficiency efforts in BSD, gross margins improved, distribution costs were more efficient and our efforts to mitigate certain product costs increases are paying off. CompuCom also drove improvements in operating income relative to last year and relative to the first 2 quarters of this year as our Business Acceleration Program continued to deliver cost efficiencies.

The foundation of our transformation initiatives continue to make positive progress. Our new leadership in our B2B businesses are building a stronger and more efficient platform to drive future growth and profitability. We are driving efficiency gains in our supply chain through use of robotics and automation and better leverage of our distribution network. We are continuing to grow our supply chain as a service business and working on additional collaboration efforts with several companies.

Services revenue grew again in our retail business up 10% on a same-store basis, driven largely by Copy & Print and subscription-based services. Total service sales remain at 15% of consolidated revenue despite the year-over-year revenue decline in services at CompuCom. We expect our services revenue percentage to grow in the future, particularly as CompuCom returns to growth and more services are implemented within our business units. And finally, as I mentioned, our balance sheet remains strong with low leverage and significant available liquidity.

Moving to Slide 6. Let me now turn our attention to highlights within our business segments in the third quarter, beginning with our BSD division. For the quarter, in BSD, revenue was down 1% compared to last year, however, our focus on profitability resulted in an increase in operating income, slightly higher year-over-year sales in our core contract channel, which included the additive effect of the high-quality customer tuck-in acquisitions were offset by targeted actions to improve profitability. These actions included eliminating certain unprofitable sales activities in our e-commerce and contract channels. While these actions had a negative near-term impact to revenue, they improve our competitive agility and position us for greater profitable growth in the future. Our adjacency categories grew and account for approximately 37% of total BSD sales.

Adjacency categories include Cleaning & Breakroom, Copy & Print, Furniture and Technology products. Cleaning & Breakroom was a standout among these categories, up nearly 10% year-over-year in the quarter.

Our Cleaning & Breakroom category alone is about 40% of total adjacencies. As this category is a $26 billion growing industry, we are still in the early stages of capitalizing on this attractive growth opportunity.

Turning to profitability. Margins in our BSD division improved significantly, driving a 6% year-over-year increase in operating income. Stronger gross margins, cost efficiencies related to the BAP and more effective and efficient distribution costs drove these impressive results.

Additionally, the mitigation strategies we put in place to address the rise in production cost for certain product categories also contributed to our performance. Overall, BSD delivered strong operational results, and I'd like to take a moment to discuss what we're doing to build upon our platform to drive the next phase of growth in BSD.

Under its new leadership, we're taking specific actions designed to improve and prepare our platform to drive sustained and sales growth and greater profitability in the future. These actions are centered around improving sales efficiency, repositioning our value proposition, utilizing data analytics to improve sales and expanding adjacency categories to pursue greater share-of-wallet opportunities. We are continuing to execute upon our plan of selectively acquiring leading players in market where we have little to no presence, expanding our distribution reach and increasing our customer base. We're also focused on capturing the numerous cross-selling opportunities between BSD and CompuCom.

Additionally, the actions we've taken to reduce unprofitable sales activities in certain retailer channels and online categories improve our focus and place us in a stronger position to deliver sustained, profitable growth in future. Just as we did 3 years ago when we turned around the trajectory of BSD from a business that was declining over 6% per year and into a growing and profitable business, we are preparing our foundation for our next phase of growth.

We are already seeing early signs of success as our sales productivity is increasing. Our total pipeline of new and potential business is increasing, and our adjacency categories are growing. We are excited about the early progress we are seeing as we start to implement these improvements.

I would now like to take some time to discuss our progress of CompuCom. CompuCom is important part of our B2B business and a key asset for us in developing our services business. With a tenured history and a brand name that stands for quality, there are world-class offering and large field force of highly trained technicians differentiate us from the competition and position us for opportunities that we cannot pursue without them. After a challenging start to the year, CompuCom has continued to make progress, stabilized in its business, driving higher operating income and increasing the pipeline of its new business.

Most importantly, we've hired a highly experienced leader at CompuCom, Mick Slattery, who is refreshing CompuCom's vision and bringing new energy to accelerate profitable growth. Mick choices from leadership positions at several technology companies, bringing a wealth of experience in developing and growing leading technology-led service businesses. We welcome Mick to the team, and I will turn over to him for a discussion on CompuCom's refined strategic focus and its plans for the future.

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John Mick Slattery, Office Depot, Inc. - President of CompuCom Division [4]

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Thank you, Gerry, and thanks to all on the call who have joined us this morning. I'm Mick Slattery, President of CompuCom. I joined CompuCom 4 months ago because I'm extremely excited about the potential to grow this business. CompuCom has a history of market leadership, supporting end users and distributed technology, a market which is rapidly evolving. This evolving digital market place is being shaped by technology evolution, new ways of working, and most importantly, employee demands for a better experience. I'm confident that our rich capabilities and market reputation, coupled with the power of Office Depot, position us well to propel this business forward.

I've been in the technology services industry for nearly 30 years, building, growing and running technology-based businesses in a variety of industries. I'm deeply familiar with the challenges business face in empowering their employees with the technologies they need to be productive. CompuCom has a compelling opportunity to enable our customers with a digital workplace services necessary to support their businesses aspirations.

Slide 8 provides further context on CompuCom. At its core, CompuCom is a technology services provider, focused on supporting the distributed technology needs of enterprise customers. You'll see we serve the enterprises in North America across a myriad of industries. The top banks, the top retailers, half of the top 10 Fortune 500 companies, they all rely on the expertise of our 8,000-plus employees and our reputation for quality to support their end users and distributed locations. Independent assessments verify that our customers think highly of our services. We are recognized as a North American market leader by industry analysts such as the Gartner group through our repeated positioning in our Magic Quadrant for managed workplace services.

We also recognized as one of the top providers when compared to our peers in areas like end-user device managed services. Our team has much to be proud of.

I believe the evolution of the digital workplace market plays to CompuCom's strength as highlighted on Slide 9. Much has been written about the changing workforce dynamics, created by our workforce spanning 5 generations. Employees have diverse preferences and ways of working with technology that employers must support in order to make their employees productive. At the same time, the very nature of work is changing. The long-time model of working 9 to 5 at an assigned location with a desktop computer is giving way to flexible hours, remote employees and virtual workforces, demanding anytime, anywhere access from a variety of company and personal device. These changes are fundamentally altering the way we need to support workers. Coupled that with the need to implement and leverage new digital technologies, while also managing increasingly sophisticated security threats and privacy regulations and the support challenges become further complex. Solving and seamlessly supporting these complex relationships for our customers is what we do. And we do it well.

Our ability to manage technology devices from laptops to tablets, smartphones to servers and the edge-networking devices have been enabled them coupled with our multichannel end-user support offerings, remote monitoring and automation enable us to create a compelling experience for our customers and their employees.

Add to those capabilities, our focused on facilitating end-user collaboration and our unique ability to dispatch field technicians to customer locations across the U.S. and Canada from retail outlets to branch banks to distributed offices, and we possess the capabilities required to deliver a compelling digital workplace experience. And better yet, the market is large and growing. We estimate the current addressable market for the managed device workplace and infrastructure services in North America to be in excess of $130 billion. The market is highly fragmented, and despite our growth over 32 years, we've only captured a small portion of this market. As the market evolves and our focus intensifies, we have significant potential for growth.

Evaluating opportunity to join CompuCom, I've an outside-in perspective, defined by business with slowing growth and profitability pressure. But my knowledge of the market and CompuCom's long-standing market leadership painted a truly compelling picture. Since joining, I spent time talking to our customers and our employees, analyzing CompuCom's strategic positioning, assessing our strengths, reviewing our offerings and understanding the evolving needs of our customers. As I reflect on my first 100 days at CompuCom, it's clear I've joined a team dedicated to serving a marquee enterprise customer base with a rich set of capabilities serving a very compelling and growing market. From my perspective, our fundamental business challenge has been focus. As the market evolved, we diluted our focus in an attempt to capitalize on multiple trends; digital transformation, cloud computing, IoT. At the core, CompuCom is an organization that enables enterprise employees to be productive, and we're getting back to and refocusing on that core mission. Working with my leadership team, we've refreshed our strategy and are instilling a renewed sense of focus across the organization.

Slide 10 highlights our renewed focus. We connect people, technology and the edge with a seamless experience. Let me expand on our vision a bit.

We are the bridge that connects employees in distributed locations to the technology they need to be productive. We don't write the applications people use. We make sure that when associates need to process a retail transaction, look up a customer account in a bank, view medical record, analyze the sales dashboard, join a videoconference or simply read an e-mail, we make sure that the employee can get to the services they need to be productive.

Our renewed vision is framed by 4 ambitions that serve as guidepost as we invest in creating our future. At the core, we want to deliver a ready-now experience for digital workplace users, enabling seamless, uninterrupted, secure access to the technology resources required to be productive. When employees need assistance or have questions, we will provide an always-there concierge outcome to provide support, advice and resolve issues to drive digital worker productivity.

We also want to strive for a 0 dispatch edge, delivering solutions which minimize the need for on-site engineering or field support to remote monitoring, automation, configuration and self-healing technology.

Lastly, we strongly believe we can be advocates for supporting our customers' aspirations to live green by enabling more flexible and virtual ways of working, while also efficiently managing the full lifecycle of our customers' technology footprint, including environmentally correct disposal of devices.

In conjunction with our aspirations and vision, we've mapped out the transformation program with a number of strategic imperatives to accelerate growth, including reinventing the CompuCom customer experience, elevating our brand in the market, reinventing our core, expanding our multichannel go-to-market efforts and energizing our teams. One of the key elements of this strategy is unlocking the synergies with Office Depot. Specifically, we are working very closely with the BSD team, in particular, to shape a series of standardized powered by CompuCom digital workplace services, which can be targeted towards mid-market enterprises. We believe this is an underserved market, which faces the same challenges as the larger enterprise market. This is a market that the BSD team services today and we believe represent significant future growth potential.

In summary, I'm extremely excited to be at CompuCom and to be part of Gerry's team. I believe the digital workplace market will evolve significantly over the next few years, and CompuCom is well positioned to capitalize on this opportunity. We have work to do to accelerate growth and optimize our business results, but we have a shared vision, our plan and the right level of urgency to make this happen.

With that, thank you for your time, and let me turn it back over to Gerry.

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [5]

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Thank you, Mick. We are energized and excited about the path for CompuCom. We are already beginning to see improving results with new bookings in the quarter, topping $300 million in contract value. We're excited about this result and look forward to the continued leadership you are providing the team.

On the following slide, I'd now like to spend a few minutes on our retail division's performance and initiatives underway to maximize value in this area of our business. We made good progress in the quarter and improved our operational metrics, helping us offset some of the traffic challenges that industry is facing. We created a better in-store experience, utilized local playbooks, incentivized our store managers and executed creative promotion strategies to improve performance. As a result, we drove increases in the conversion rate, average order volume and sales per shopper. In fact, sales dollar per shopper was at its highest level it has been all year. Demand increased for our buy online-pick up in-store offering, services revenue grew 10% on a comparable basis and customer in a rewards program increased dramatically.

These positive trends, along with our client-centered selling culture is creating better customer engagement, resulting in improvements in same-store sales trends. Same-store sales were down 3.6%, representing over 100 basis points improvement over the same period last year. Also, our back-to-school season performance delivered solid results. We realized many operational improvements from the prior year and are already incorporating those best practices into our 2020 planning. Back-to-school will continue to be an important opportunity as we expand our educational-related offerings. These efforts, combined with our refined promotional strategies and cost-efficiency measures, drove a 20% increase in operating income and higher margins.

As I have mentioned in the past, we continually evaluate the profitability and strategic value at each of our retail locations to ensure we optimize our footprint. We have been refining our retail footprint this year, resulting in a higher number of store closures versus last year. While this had a negative impact to our revenue, these actions are improving the vitality of our network and contributing to the overall profitability of our retail business now and in the future.

That said, our retail footprint continue to be a complementary component of our overall distribution platform and a key differentiator versus online competitors.

To that end, we continue to think about our retail space differently and are pursuing additional ways to drive value from our footprint and increase store traffic. We have launched stores in the stores opportunities with Lenovo and established new partnerships with companies like Telos ID in order to deliver additional high-value services targeted business and consumers alike.

With that, I will turn the call over to our CFO, Joe Lower, for more details on our financial results.

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Joseph T. Lower, Office Depot, Inc. - Executive VP & CFO [6]

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Thank you, Gerry, and good morning, everyone. I'm happy to be here today to discuss with you our financial results for the third quarter of 2019. Consistent with the previous quarters, we have provided our results on both the GAAP basis and adjusted basis from continuing operations. My comments will primarily address the performance from our continuing operations on an adjusted basis.

Total revenue of $2.8 billion in the third quarter was down 4% largely driven by lower sales in our retail and CompuCom divisions. GAAP operating income in the quarter was $108 million, up from operating income of $105 million last year. Included in operating income was $22 million in merger and restructuring charges, comprised of $16 million associated with our Business Acceleration Program, $5 million in asset impairments and $6 million in the integration expenses. Excluding these and other items, our adjusted operating income for the third quarter was $137 million, up 14% from $120 million in the prior year.

Unallocated corporate expenses were $23 million in the quarter compared to $18 million in the prior year, reflecting a tax incentive received in the third quarter of last year that was not repeated in the current period.

Adjusted EBITDA was $191 million for the quarter, up 11% compared to $172 million in the prior year. This includes depreciation and amortization expense of $51 million and $48 million in the third quarter of 2019 and 2018, respectively.

Excluding the after-tax impact from the items mentioned earlier, adjusted net income from continuing operations for the third quarter of 2019 was $84 million or $0.15 per share compared to $71 million or $0.13 per share in the prior year.

For the quarter, cash generated by operating activities was $212 million, which included $29 million of cash expenditures related to the businesses acceleration program. Capital expenditures in the quarter were $32 million compared to $47 million in the prior year period, reflecting lower investment in our retail operations, while continuing investments in our services platform, distribution network and e-commerce capabilities.

Reported free cash flow was $180 million. Adjusting for the $29 million and cash expenditures related to the Business Acceleration Program, adjusted free cash flow in the quarter was $209 million.

Let's now turn to Slide 14, which highlights the performance of our BSD division. As a reminder, BSD is the largest component of our B2B integrated distribution business, serving customers from the Fortune 500 to small- and medium-sized businesses. Reported sales in the third quarter for BSD were $1.35 billion, a decrease of 1% compared to the prior year period. The year-over-year comparison reflects lower volume in traditional office product categories mitigated by the positive impact of customer tuck-in acquisitions and growth in certain adjacency categories. Adjacency sales represent 37% of our total BSD revenue.

Targeted actions to improve profitability in certain areas of our contract and e-commerce channels contributed to the year-over-year decrease in revenue. As Gerry mentioned earlier, these actions include eliminating certain nonprofitable sales activities within these channels. While we believe these actions had a temporary negative impact to revenue, we believe that they are necessary to strengthen our platform and improve our position to generate future growth.

The BSD division reported operating income of $71 million in the third quarter, a 6% increase compared to $67 million in the prior year period, that's nearly a 40 basis point improvement in profit margin. The increase versus the prior year was driven by a combination of lower SG&A from cost efficiencies associated with the Business Acceleration Program, improved gross margins from our efforts to mitigate certain product cost increase, including tariffs and more efficient distribution costs. Included in our operating results were continued investments in demand generation, upgrades to our e-commerce platform and enhancements to our service-delivery capabilities.

Looking at Slide 15, we highlight the performance of the CompuCom division. In general, while revenue was down compared to last year, CompuCom's operating results have continued to recover from a slow start at the beginning of the year. Sales in the third quarter for CompuCom were $252 million, down 6% versus the prior year period. The largest driver of the decrease was associated with lower sales from project-related revenue within existing accounts. This impact was partially offset by an increase in product-related sales versus last year.

The CompuCom division reported operating income of $3 million in the third quarter of 2019 compared to an operating income of $1 million in the prior year and a sequential improvement over the $1 million in operating income generated in the second quarter of 2019. The year-over-year increase was largely related to Business Acceleration Program-related cost efficiency efforts.

As Mick addressed earlier, we continue to take actions to improve future operating performance, including a refocused strategy, increased use of automation to further improve service efficiency, simplifying the operating structure to improve service velocity and aligning sales efforts to better serve customers and accelerate cost-saving opportunities.

Turning to Slide 16. Reported total sales in the quarter for our retail division declined 6% to $1.2 billion. The decline in sales was largely related to lower traffic and volume as well as the impact of store closures over the last 12 months as we had 55 fewer stores compared to a year ago. These impacts were partially offset by increases in conversion rates, average sales per customer and in buy online-pick up in store sales, which were up 6% over the same period last year.

Same-store sales declined 3.6%, however, this metric improved over a 100 basis points versus the trend 1 year ago.

Product sales were down 8% in the quarter, while service revenue on a comparable basis increased 10% compared to the prior year period.

Copy & Print and subscriptions drove the sales increase in services during the quarter.

The retail division reported operating income of $84 million in the third quarter, up 20% over the same period last year. As a percentage of sales, this represents a 150 basis point in margins. The increase in operating income versus the prior year reflects higher gross margins, lower SG&A from cost-efficiency measures, higher services sales and an improvement in distribution and inventory management costs.

The retail division's operating income results also include the impact of investment and additional service delivery capabilities, sales trading and other customer-oriented initiatives.

Turning to the balance sheet and cash flow highlights on Slide 17. We ended the third quarter of 2019 with total liquidity of over $1.5 billion, consisting of $588 million in cash and cash equivalents and $962 million of availability under our asset-based lending facility.

Total debt at the end of the quarter was approximately $700 million, resulting in net debt of $110 million when offset against cash. Total debt excludes $737 million in nonrecourse debt related to the timber notes. As we recently announced, we secured a 3-month $735 million bridge loan facility, the proceeds of which were used to refinance the existing nonrecourse debt obligation, allowing us to cost effectively align the notes maturity date with the associated $817 million timber note receivable due January 29, 2020. Upon final maturity of both instruments in January of 2020, the company expects to receive pretax net cash payment of approximately $82 million.

Moving to cash flow. For the third quarter, cash provided by operating activities was $212 million, which included $30 million in restructuring costs, largely associated with the Business Acceleration Program and $3 million in acquisition and integration-related costs. This compares to that cash provided by operating activities of $304 million in the third quarter of the prior year.

Capital expenditures in the quarter were $32 million versus $47 million in the prior year, reflecting lower investment in retail operations, while continuing investments in our service platform, distribution network and e-commerce capabilities. The cash charges associated with our Business Acceleration Program in the quarter were $29 million. Accordingly, adjusted free cash flow from continuing operations was $209 million in the third quarter of 2019.

On Slide 18, we highlight our continued balanced approach to capital allocation in the quarter. Our priorities were focused on investing in our business, including our Business Acceleration Program, servicing dividends and paying down debt. During the quarter, after the $32 million in capital investments, we paid $14 million in dividends, repaid $19 million of debt and invested $29 million as we execute on Business Acceleration Program. Going forward, we plan to continue a balanced approach addressing our business, shareholders and lenders.

Additionally, as we announced earlier today, our Board of Directors approved a feasibility review of a holding company reorganization that, if implemented, would create a new holding company called the ODP Corporation. The intent of this reorganization is to simplify our legal entity and tax structure, more closely align our operating assets with our respective operating channels and increase our operational flexibility. If implemented, existing shares of Office Depot would convert on a one-to-one basis into shares of the ODB Corporation. The feasibility review intended to be completed by the end of first quarter 2020 would also include confirmation that the anticipated reorganization would be as a tax-free transaction for U.S. income tax purposes for Office Depot shareholders.

Also, we announced today as part of our ongoing commitment to drive shareholder value, our Board of Directors approved an increase in the authorization of our existing stock repurchase program. We are increasing the authorization to $200 million and extending the program until the end of 2021. The new authorization includes the remaining authorized amount under the previous stock repurchase program. Accordingly, the company will now have approximately $190 million available for share repurchases. We intend to resume opportunistic share repurchases under this program in future quarters.

Overall, we delivered another quarter of strong operating results, and our team remains committed to unlocking the value of our asset base and building upon our B2B platform. Considering our performance year-to-date, today, we are reaffirming our 2019 guidance.

With that, I'll turn the call back over to Gerry for his closing comments. Gerry?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [7]

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Thank you, Joe. I'll provide a brief wrap-up comment then turn it over for your questions.

Our recent performance validates the progress we are making towards our transformation that represents another quarter of improving operating results. The addition of strong leadership of both BSD and CompuCom have already and will continue to enhance our B2B platform by fine-tuning our go-to-market strategy, improving our value proposition, expanding our offerings and refining our focus. We are excited about the refresh strategy that Mick outlined in his comments today. Clearly, his leadership and approach has CompuCom on the right path to capture growth in the large and expanding digital workforce marketplace. The initiatives underway in BSD will strengthen our platform and position us for the next phase of growth. These efforts are supported by one of the largest and most unique supply chain and distribution networks in the country. All the while, while we are operating our retail franchise to optimize profitability and cash flow. Collectively, we are taking the necessary steps to execute the transformation that we started when I arrive 3 years ago. Our competitive position is improving, our balance sheet remains strong, and we remain committed to creating value for all of our stakeholders.

I will now turn the call back over to the operator, and we can take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Lasser.

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Mark David Carden, UBS Investment Bank, Research Division - Associate Director and Associate Analyst [2]

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It's Mark Carden on for Michael Lasser. Company is UBS. Within your BSD unit, there's a slight decline in overall sales, how did performance look on an organic basis?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [3]

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Michael, this is Gerry -- Mark, sorry. Overall, we have about -- we -- say differently, we have readjusted our operating model in the sales. We shifted a big portion of the team from outside to inside. We had a slight impact in the quarter. Our federation strategies continue to important that added about 3% of the growth. That is a customer acquisition engine for us. We are really -- I view it the same as you acquire enterprise account, you acquire customers from a federation perspective. I think longer term, if you look back historically, that was a rapidly declining business, we've got that to certain level. It was important. We made this model adjustment, and I think you'll see a little bit impact in Q3 and Q4 and some potentially in Q4. But going forward, we think it's a right approach long term for the company. So we are also focusing on improving sales force effectiveness and efficiency. And there's a lot of transformation efforts to make sure sales people are spending more time selling, less time doing sales administrative type of task, and there's a number of transformation efforts around that.

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Mark David Carden, UBS Investment Bank, Research Division - Associate Director and Associate Analyst [4]

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Okay. And then in the retail business. There were some underlying improvement in the gross margin. You noted the cost mitigation efforts helped. Were there any underlying changes in the competitive environment as well? And would you expect to see this line stabilizing over time?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [5]

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I'll answer first, and let Joe add a few comments. We're really focused on driving efficiency and effectiveness distribution. Our promotional strategy, we refined and went deeper, I'll say, more narrow. And I think it's just a lot of good work by Kevin's team, John Gannfors' team and our marketing teams of -- ensuring we have the right promotions, the right value proposition, the right strategies. And we saw -- obviously, saw a lot of margin improvements and really proud of the team and their efforts for that. So we're going to continue the same focus going forward.

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Joseph T. Lower, Office Depot, Inc. - Executive VP & CFO [6]

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Yes, I would echo what Gerry said. I think it really was a reflection of a very cooperative, collaborative effort, driving sales, improving the efficiency of promotion and really refining the operating model more than I think of it as a competitive dynamic.

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Operator [7]

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Your next question comes from the line of Liz Suzuki.

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Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [8]

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Company is Bank of America. Just looking at the strength in retail service revenue, can you break down the categories within services that were particularly strong? I think you guys mentioned Copy & Print and subscriptions. I'm just wondering, how much of the services mix those categories represent? And then if there were any other particular categories within the services that did very well?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [9]

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Yes, Liz, this is Gerry. The majority of the services are Copy & Print. That's -- I'll say that, by far, the largest. We also have some tech services we sell in the space, and we've grown that business pretty well. And I think the other piece is -- there are some other adjacency types of services. But I'd say primarily Copy & Print is the focus. We spend a lot of time both on e-commerce as well as in the store, focusing on growing that piece of the business, and we're really pleased with that activity.

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Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [10]

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Great. And then was that growth in services primarily what drove the improvement in operating margin? Just thinking about how sustainable that improvement is if the retail comps remain negative? And then any sense of the magnitude of the positives that you guys called out in the press release, including a merch margin, cost savings, et cetera?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [11]

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I think that's a smaller contributor. I think the biggest contributor was a daily focus by our merchant and retail teams to really drive the right promotional strategy and the right value proposition. We spend a lot of time and effort in refining that model. I think that's what we're pleased with. I think that gives us some traction going forward as well. The services did an impact, but it's really operational improvement from the model. Joe, anything else to add?

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Joseph T. Lower, Office Depot, Inc. - Executive VP & CFO [12]

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I think you summed it up correctly. The services clearly do have a benefit, but if you look at the performance and the magnitude of the improvement, it was far greater than services. And it did, in fact, encapsulates, the improvement in the operations, improvements in distributions, the improvements in payrolls. So all those contributed to the overall performance.

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Elizabeth Lane Suzuki, BofA Merrill Lynch, Research Division - VP [13]

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Okay. So the product margin also improved, not just the mix?

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Joseph T. Lower, Office Depot, Inc. - Executive VP & CFO [14]

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Yes.

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Operator [15]

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We have one additional question from the line of Chris Horvers.

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Christopher Jerome Sullivan, JP Morgan Chase & Co, Research Division - Analyst [16]

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This is Jerry Sullivan from JPMorgan on for Chris. So could you describe some of the benefits of the potential new holding company structure? And is this relight may be a signal that you might potentially spin-off one of your divisions in the near future?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [17]

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Yes, I don't want people to jump to conclusions. What we've announced is the feasibility study to do this. And really, this is a very common public holding company structure that you frankly have seen many other companies like Google and Xerox implement, which effectively creates a public holding company that then allows us to have separate operating entities below that and better align the assets. Frankly, this simplifies the legal entities, it simplifies the tax structure, it improves our alignment and creates flexibility. So I don't want anyone to kind of jump to conclusions. This is something that we've been looking at. We have come to a point that we feel it's necessary to do, arguably, should have been done back at the time of the Depot/Max merger and something that will be evaluating over the course of next several months with an intent or an expectation that we would implement by the end of the first quarter of 2020.

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Christopher Jerome Sullivan, JP Morgan Chase & Co, Research Division - Analyst [18]

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Got it. And then just one more on the tariffs. What was the tariffs impact to gross margin in the quarter? And how should we be thinking about tariff pressure in 4Q?

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [19]

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Yes, we've talked about in the past. I mean, obviously, we were pretty successful in mitigating tariff impact given the margin performance. As we've indicated on the direct procurement, our tariff exposure less than $15 million, anticipate to be about the same in Q4, which we anticipate we will be able to mitigate in much the same way we did in Q3.

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Operator [20]

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That concludes the Q&A session for today. I will now turn the call back over to Office Depot's CEO, Gerry Smith, for any closing remarks.

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Gerry P. Smith, Office Depot, Inc. - CEO & Director [21]

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Thank you all for joining our call today. We look forward to our next call, and we look forward to continuing to grow and transform Office Depot. Thank you very much.

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Operator [22]

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