ODP Corp

NASDAQ:ODP

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and welcome to the Office Depot’s Second Quarter 2019 Earnings Conference Call. All lines will be on a listen-only mode for today’s call. After which instructions will be given in order to ask a question. At the request of Office Depot, today’s call is being recorded.

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

[Tim Perrott, Vice President-Investor Relations]

Good morning, and thank you for joining us for Office Depot’s second 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.

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. Joe will then review the Company’s financial results for Q2, including our divisional performance. Following Joe’s comments, Gerry will have some closing remarks and then we’ll 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 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 one year.

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

[Gerry Smith, Chief Executive Officer]

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 second quarter of 2019 and the progress we’re making to enhance our position as a leading B2B provider of business products and services. Our results this quarter represent a compelling demonstration how we’re implementing our strategy and utilizing our valuable platform to serve business customers.

In the quarter, we drove meaningful improvements that our business delivering stronger operating results compared to last year and sequentially compared to the first quarter of this year. As shown on Slide 4 in our presentation, our B2B business, which consists of our BSD and CompuCom divisions, drove our performance in the quarter.

In our BSD division, we drove top line revenue growth and significantly higher profitability while expanding our distribution network and winning new customer accounts. In our CompuCom division, we delivered revenue growth and a dramatic operational turnaround when compared to the first quarter of 2019.

Growing our B2B business has been a strategic focus for us. And in the second quarter, our B2B business generated over 60% of our total company revenue and at the divisional level drove over 90% of our operating income for the company. This represents a significant shift in our business and clearly demonstrates that we are a B2B driven company providing business products and services delivered through an integrated distribution platform with a world class supply chain.

A key driver of our performance in the quarter was our intense focus on profitability enabled by our Business Acceleration Program or BAP for short. This is a multiyear program designed to create leaner and more competitive enterprise driving cost efficiencies that provide additional sources of capital to improve customer satisfaction and fuel growth.

As we announced last quarter, this program is expected to deliver significant cost savings of at least $40 million this year and over $100 million at full run rate thereafter. We initiated this program in the second quarter and as already delivering cost efficiencies in our business contributing to our improved margins.

Beginning on Slide 5, I like to share with you some of the specifics of our second quarter highlights beginning with our sales results. Total revenues in the second quarter were $2.6 billion, a 2% decrease compared to last year. The decrease in revenue compared to last year was largely driven by a 5% decrease in sales in our retail division, primarily a result of lower same-store sales combined with fewer stores and service and a 7% decline in revenue in our CompuCom division.

Retail same-store sales performance in minus 3.6% improved slightly on a sequential basis as a greater number of our stores comped positive as compared to the first quarter of 2019. We also saw continued increases in our Buy Online-Pickup in Store sales referred to as BOPIS, which partially mitigated the impact of the decline in retail traffic.

In terms of CompuCom’s revenue performance, I would point out that while revenue did decline over last year on a sequential basis relative to the first quarter, CompuCom’s revenue increased about 4% driven by a stronger product sales. The total company revenue declined as partially offset by stronger sales performance in our BSD division. Consistent with our B2B focused sales in our BSD division increased by 2% driven by solid performance and our core contract business channel and the additive impact from our strategy of pursuing high quality tuck-in acquisitions. We’re winning net new business in our contract channel and continue to show growth in our adjacency product categories.

Turning to operating performance in the second quarter, we drove significant improvements as our disciplined focus on profitability delivered results. We generated $71 million in adjusted operating income in a quarter, up 13% over last year and $125 million in adjusted EBITDA, up 9% over last year. These results represent a substantial improvement compared to our performance last year and in the first quarter of this year.

Strong operational performance in our BSD division as well as the cost efficiency benefits from the business acceleration program drove these impressive results. Our BSD division delivered a 28% increase in operating income over the same period last year and relative to the first quarter of 2019 operating income was up 87%. It’s also worth noting the dramatic operational turnaround at CompuCom generating significantly improved results as compared to the first quarter of 2019.

We continued to invest in our business and made progress on our transformation efforts in the quarter. We again expanded our distribution footprint through high quality tuck-in acquisitions that are accretive to our business and our customer base. We’ve upgraded our logistics and supply chain software, providing greater visibility to improve the efficiency of our delivery network.

We’ve made improvements to our e-commerce platform along ease of access and better customer experience. We were also busy in the quarter preparing for the upcoming back-to-school season and invested in building inventory to satisfy the demand that we expect to materialize in the third quarter. As a component of our transformation efforts, service revenue on a comparable basis in our core business grew up 12% in our retail division and up 5% in our BSD division.

Copy and print subscriptions and tech services all grew in the quarter. We’re also entering into new partnerships to expand our service offerings and are launching new stores in the store opportunities of retail. While the total amount of services revenue was down due to CompuCom, services revenue as a percentage of our total revenue remained at 16%. And finally, despite the investments we made to prepare from back-to-school activities, implementation of the Business Acceleration Program and investing in our future, our balance sheet remains strong with low leverage and significant available liquidity.

Moving to Slide 6. Let me turn our attention to highlights within our business segments in the second quarter. Beginning with our BSD division, we continued to strengthen our core business by driving profitable growth through our B2B business platform. As evidenced the largest component of this platform, our BSD division again drove year-over-year increases and significant improvements in profitability.

Revenues were up 2% over last year, driven by solid results in our contract channel plus additive effect from our strategy pursuing high quality tuck-in acquisitions. Sales were slightly offset by targeted actions to improve profitability in certain product categories, sold primarily online which had a negative impact of sales. We’re winning net new business in our contract channel and continued to grow adjacency product categories.

Adjacency categories include cleaning and breakroom, copy and print, furniture and technology products. Cleaning and breakroom was a standout among these categories up 10% year-over-year in the quarter. Adjacencies account for approximately 36% of total BSD sales and we are evaluating additional product categories to add to our portfolio.

I believe we are still in the early stages of capitalizing on this attractive growth opportunity. For example, the cleaning and breakroom industry alone is a $26 billion highly fragmented growing industry. We’re only at the very beginning of this opportunity. One of the growth drivers for BSD is our strategies selectively acquiring leading players in local markets to expand our distribution reach and increase our customer base. We have completed 11 transactions since the inception of the strategy and we’ve done so in markets where we had a little to no presence.

These markets have attracted customers across all of our segments including a high number of small and medium size businesses. This strategy is proving to be a success and we’re leveraging our scale, while offering expanded assortment of both products and services to enable additional growth.

Turning to profitability, margins in our BSD division improves significantly up 28% year-over-year and 87% sequentially as compared to the first quarter. Stronger gross margins, cost efficiencies related to the BAP and improved margin performance in our e-commerce channel drove these impressive results. The mitigation strategies that we put in place to address the rise in paper production costs also contributed to improve margins in our BSD business.

Looking ahead for BSD in the second half of the year, we will continue to leverage the investments we’ve made capturing new customers through a more robust pipeline of business we’ve built and through the numerous cross-selling opportunities identified with CompuCom. We will continue to drive stronger demand through our enhanced online experience and continued to drive growth and evaluate expansion opportunities in our adjacency categories.

To this end, we are excited to have Stephen Mohan, highly experienced and proven leader now leading our BSD division. Stephen joins us from XPO Logistics where he lead sales and marketing for North America, helping XPO become one of the fastest growing logistics companies in the world. Stephen brings the level of leadership, management and strategic vision necessary to grow our business from within and beyond our existing customer base. He has already had a positive impact on the organization is driving a more aggressive sales culture.

I’d now like take some time to discuss our progress with CompuCom on Slide 7. As an important part of our B2B business, the acquisition of CompuCom is a key step in our transformation and an important asset for us in developing our services business. They’re world-class offerings provided by over 5,000 highly trained technicians, differentiate us from the competition and position us for opportunities and partnerships that we could not pursue without them.

After a very poor start to the year, w are very pleased to report that CompuCom’s performance in the second quarter improved dramatically as compared to Q1 as initiatives that we put in place begin to drive improved results. Relative to the first quarter of 2019, revenues increased largely driven by product sales in the corporate sector and operating income grew to $1 million versus a loss of $15 million in the first quarter.

The incentives we put in place last year resulted in a lift in hardware sales and related margins. The operational sales organization realignment coupled with cost efficiencies associated with our Business Acceleration Program contributed to this improvement. We continue to win new contracts in the quarter with 34 new logo customer wins and our late stage sales pipeline up over 100% versus a year ago has improved in terms of quality, scope and timing.

Furthermore, we’re refocusing our resources to capture a larger number of cross-selling opportunities at an accelerated rate. We’re only at the beginning of exploiting this opportunity and expect our cross-selling success to see continued performance improvements in the second half of 2019 and beyond.

While these improved results are encouraging, we have a lot more work to do. Our revenues need to grow and profitability needs to dramatically improve for this high value services business. We will continue to take actions to further improve our operating performance by refining our service portfolio to better support our clients, accelerate our services sales and go-to-market activities and increase our efficiency through technology and automation.

We are very encouraged by our recent performance and thrilled to have Mick Slattery, a highly experienced and proven industry veteran to lead CompuCom into the future. Mick joins us from Conduit Transportation, a technology driven business services company. During his tenure as CEO, Mick created a vision and executed innovative strategies driving profitable growth for the company. Under Mick’s leadership, we will refocus on our strengths, placing greater emphasis on our core offerings and continue to expand our value proposition beyond the traditional outsourcing services. I’m excited to have Mick join our team. I’m confident his track record of successfully growing technology based businesses will help position CompuCom for success in the future.

Turning to Slide 8, I’d now like to spend a few minutes in our Retail division and initiatives underway to strengthen this area of our business. The investments we made in demand generation and improving the in-store experience help offset some of the traffic challenges that the industry is facing. In the quarter, we saw increases in the conversion rate and sales per customer as well as a continued increase on our Buy Online-Pickup in Store offerings, which is up 17% in the quarter.

Services revenue, which were up over 12% on a comparable basis also contributed to our results in the quarter. These positive trends help drive sequential improvements in same-store sales, which were down 3.6% representing an 80 basis point improvement over the first quarter of 2019. Our efforts to revolutionize retail into a client centered selling culture focused on achieving sales growth to greater customer engagement, personalized solutions and community connections help to drive a 70% increase, and a number of our stores are comping positive.

Our engagement efforts are also leading to a more loyal customer base as the number of customers in our rewards program grew substantially in the quarter. As I’ve mentioned in the past, we continually evaluate the profitability as strategic value of each of our retail locations to ensure we optimize our footprint. As we indicated at the beginning of the year, we expect to further refine our retail footprint, which will result in a higher number of store closures this year versus last year.

We did close a number of unprofitable and non-strategic stores during the quarter, which resulted in lower revenue and operating income for the quarter. However, we expect these actions will help improve the overall profitability of our retail base in the future. That said, our retail footprint continues to be a complimentary component of our overall distribution platform and a key differentiator versus online competitors.

Most of our customers prefer human interaction and we have millions of small and medium size business customers that I was in close proximity of our stores. Nearly 30% of customers that shop with us through our retail channels are business-orientated customers. To help drive traffic, we are employing a grassroots effort and empowering our general managers to utilize store locations as community connection points for businesses and schools. We have a growing number of partnerships with small business associations and chambers of commerce that utilize our space for events to connect community, fuel innovation and nurture business relationships. These efforts are beginning to drive increases in customer satisfaction and incremental sales growth.

To that end, we continue to think about our retail space differently and are pursuing digital ways to drive value from our footprint and increase store traffic. This includes evaluating and launching store-within-a-store opportunities and new partnerships to deliver additional high value services, targeted businesses and consumers alike.

We recently launched our first store-within-a-store opportunity for Lenovo in Florida and Arizona, and the early feedback is encouraging. Our Lenovo store-within-a-store provides customers a fresh experience and encourages greater exploration of products in a modern environment provides us more flexibility in pricing and promotion.

On the services front, we have partnered with Telos ID, an FBI certified background check and biometric services company to provide identity verification services in support of government programs and commercial clients. We have completed initial rollout of these services in over 200 of our stores to date and contemplate rolling out this service to 500 or more locations over the balance of the year.

We expect this new service to generate a positive income stream and drive additional traffic in our stores. We’re also continuing to evaluate that economic co-working opportunity with nine locations now open. We have seen sales lift in each location and the customer feedback has been terrific. We will continue to assess our progress and evaluate the business model for future store opportunities.

Lastly, we are in the early weeks of the back-to-school season and our roll out and planning were built upon learnings from last year and early results are encouraging. Before I turn over to Joe, I like to emphasize a few points on Slide 9 about our business and our progress to date that supports what I believe is a very different story than I think many perceive of Office Depot.

As you heard multiple times today, we’re leading integrated distribution company, primarily serving businesses through our B2B platform. We offer our business customers a full compliment of services and supplies, products and technology solutions delivered through a unique distribution system. Our asset base is extremely valuable and includes over 200,000 enterprise customers, including over half of the Fortune 500 and nearly 10 million business customers served by one of the largest distribution networks and supply chains in the country.

What is most unique about our supply chain that most people do not appreciate is that, it can deliver next day to effectively the entire country and do so directly to a desktop and not just to the loading dock. There’s very few supply chains that have this capability today.

Our transformation network undergoing that reduces the reliance on retail and places much more emphasis on distribution to our B2B relationships along for a broader offerings of products and services. Our recent performance clearly supports our direction with a strong performance of our BSD division and improving performance at CompuCom.

Our balance sheet remains strong with low leverage, a strong long-term cash flow profile. And finally, we’re executing our business acceleration program. We launched this program earlier this year looking across the enterprise by function and by discipline to determine how we can more efficiently operate the business and better serve our customers.

This program is expected to drive significant cost efficiencies and provide additional sources of capital to drive future growth. We believe that we offer a compelling value proposition for all of our stakeholders.

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

[Joe Lower]

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

Turning to Slide 11, total company sales for the quarter were nearly $2.6 billion, a 2% decline compared to the prior year period, despite a 2% increase in sales in our BSD division. Revenues were lower, primarily driven by 5% decline in sales in our Retail division and weaker sales at CompuCom, down 7%, offsetting the positive performance in BSD.

GAAP operating loss in the quarter was $15 million, down from operating income of $48 million last year. Negatively impacting our reported results this quarter were charges of $86 million, comprised of $64 million in BAP related and restructuring charges, $16 million in asset impairments, primarily related to the impairment of operating lease, right-of-use assets recognized as part of our adoption of the new lease accounting standard and $5 million in merger, acquisition and integration-related expenses.

Excluding these and other items, our adjusted operating income for the first quarter of 2019 was $71 million, up 13% from $63 million in the prior year period. Unallocated corporate expenses were $26 million in the quarter compared to $33 million in the prior year. Adjusted EBITDA was $125 million for the quarter compared to $115 million in the prior year. This includes depreciation and amortization expense of $51 million and $47 million in the second quarter of 2019 and 2018 respectively.

Excluding the after tax impact from the items mentioned earlier, net income from continuing operations for the first quarter of 2019 was $37 million or $0.07 per share compared to $30 million or $0.05 per share in the prior year. For the quarter, cash used by operating activities of continuing operations was $58 million, which included $25 million related to the FTC settlement and $30 million related to the Business Acceleration Program.

Capital expenditures in the quarter were $45 million compared to $37 million in the prior year period, reflecting increased investments in our services platform, distribution network and e-commerce capabilities. Reported free cash flow was a use of $103 million, adjusting for the FTC payment and the BAP related charges, free cash flow in the quarter was a use of $48 million. The primary driver of the increase in cash used in the quarter was related to planned inventory purchases, which I will address later in my comments coupled with higher capital expenditures.

Let’s now turn to Slide 12, which highlights the performance of our BSD division. As a reminder, BSD is our B2B integrated distribution business serving customers from the Fortune 500 to small and medium-sized businesses. Reported sales in the second quarter for BSD were $1.3 billion, an increase of 2% compared to the prior year period. The year-over-year increase was driven by acquisitions and strong performance in our contracts channel, offset by targeted actions to improve profitability in certain categories sold primarily online, which had a negative impact to sales in our e-commerce channel.

Service revenue increased 5% and product sales increased 2% versus the prior year. We continue to see strength in our adjacency categories, which were up year-over-year and represent 36% of total BSD revenue. The BSD division reported operating income of $86 million in the second quarter, a 28% increase compared to $67 million in the prior year period. The increase versus the prior year was driven by a combination of higher gross margins and lower SG&A from cost efficiencies associated with the business acceleration program.

The mitigation strategies we implemented to address our increases in paper costs contributed to the increase in gross margins. Also included in our operating results, our continued investments in demand generation upgrades to our e-commerce platform and enhancements to our service delivery capabilities, which will position us for future growth.

Looking at Slide 13, we highlight the performance of the CompuCom division. In general, while down compared to last year, CompuCom’s results recovered significantly from its slow start in the first quarter of 2019. Sales in the second quarter for CompuCom were $258 million down 7% versus the prior year period. A large driver of the decrease reflects lower sales from project related revenue within existing accounts.

This impact was partially offset by a 34% increase in product related sales versus last year. On a sequential basis, relative to the first quarter of 2019, revenue increased by approximately 4%, driven by the increase in product sales. The CompuCom division reported operating income of $1 million in the second quarter of 2019 compared to operating income of $6 million in the prior year period.

The year-over-year decrease in operating income was related to lower sales volume, including lower project related revenue from existing customer accounts and ongoing expenditures to develop and market additional service offerings.

On a sequential basis, operating income increased substantially from the operating loss of $15 million in the first quarter of 2019. This comparative increase in operating income was related to higher sales and the impact of BAP related cost efficiency efforts. As Gerry said earlier, we made significant progress in improving CompuCom’s performance relative to the first quarter. However, we have a long way to go and realizing its full potential.

Turning to Slide 14, reported total sales in the second quarter for our Retail division declined 5% to $1 billion. The decline in sales was largely related to lower traffic and volume, as well as the impact of store closures over the past 12 months as we had 54 fewer stores compared to a year ago. These impacts were partially offset by increases in conversion rates and average sales per customer.

Same-store sales decreased 3.6%, despite our Buy Online-Pickup in Store sales being up 17% over the same period last year. While same-store sales are down versus last year. This metric improved slightly versus the first quarter of 2019. Product sales were down 7% in the quarter, while service revenue on a comparable basis increased 12% as compared to the prior year period. Copy and print, technology services and subscriptions all increased year-over-year.

The Retail division reported operating income of $9 million in the second quarter of 2019 versus $22 million in the prior year period. The decrease in operating income was largely related to the flow through impact of lower sales and lower product margins, which are further impacted by the deleveraging effect related to store closures. These impacts were partially offset by improvements in distribution and inventory management costs, lower operating lease costs recognized as a result of the new lease accounting standard, and lower SG&A related to various cost savings initiatives associated with our business acceleration program.

The Retail divisions operating income results also include the impact of investments in additional service delivery capabilities, sales training and other customer oriented initiatives. During the second quarter of 2019, the company closed 39 stores and ended the quarter with a total of 1,320 stores in the Retail division.

Before I move on to the balance sheet, I would like to take a few moments to address our progress with our business acceleration program or BAP. As we mentioned throughout our comments today, we initiated this program in the second quarter and it is already having a positive impact to our business.

Through this effort, we are driving significant cost efficiencies and improving our effectiveness across the entire enterprise. We are delivering cost reductions across our business and after adjusting for store closures are realizing year-over-year decreases in areas of labor, IT, marketing, transportation, utilities, travel and professional fees. We will continue to drive this effort to more efficiently operate our business and service our customers. As a reminder, we expect to generate at least $40 million in cost savings this year and over $100 million in annual cost savings once at full run rate.

Turning to the balance sheet and cash flow highlights on Slide 15. We ended the first quarter of 2019 with total liquidity of $1.4 billion, consisting of $444 million in cash and cash equivalents and $1 billion of availability under our asset based lending facility. Total debt at the end of the quarter was $712 million, excluding $743 million in non-recourse debt related to the Timber notes.

It is very important to note that these Timber notes have an associated $831 million receivable on our balance sheet, and as such we expect a net cash inflow at the ultimate expiration in January of 2020. Taking into account our significant cash balance, our net debt at the end of the quarter stood at $268 million.

Moving to cash. Generally, the second quarter is the weakest quarter of the year in terms of cash generation, primarily due to the inventory build up for the back-to-school season, which takes place in Q3.

In addition, we made additional purchases of high demand SKUs, which enabled us to reduce distribution expenses, as well as made additional purchases in advance of anticipated price increases. These actions coupled with the significant working capital improvements in Q2 of 2018 that were not expected to be repeated in 2019, where the primary drivers behind the year-over-year variance.

For the second quarter of 2019, cash used by operating activities of continuing operations was $58 million, which includes the $25 million FTC settlement and $30 million related to the execution of our Business Acceleration Program.

Cash results include the impact of approximately $33 million in restructuring costs and $4 million in acquisition and integration related costs. Capital expenditures were $45 million in the second quarter of 2019, an $8 million increase versus the same period last year, reflecting increased investments in our services platform, distribution network and e-commerce capabilities. Adjusting for the FTC settlement and the BAP related charges, adjusted free cash flow for the quarter was a use of $48 million.

On Slide 16, 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, paying down debt and expanding our distribution network.

During the quarter after the $45 million in capital investments, we paid $13 million in dividends, we paid $19 million of debt, invested $18 million in acquisitions to expand our distribution platform and invested $30 million to execute our Business Acceleration Program. Going forward, we plan to continue a balanced approach addressing our business, shareholders and lenders.

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

[Gerry Smith, Chief Executive Officer]

Thank you, Joe. I’ll provide a brief wrap up comment then turn it over for your questions. Our performance in the second quarter represents a solid improvement from where we were earlier in the year, validating our transformation and highlights the strength of our B2B business. Our efforts through our Business Acceleration Program are continuing to improve our efficiency and allowing us to further improve our service to customers.

Our transformation is showing that we are clearly a B2B driven company with extremely valuable assets, providing our customers with critical business products and services through our integrated distribution platform. Through our large and growing business customer base, market and sales presence, diversified product and services, all supported by one of the top supply chains and distribution networks in the country, we are well positioned to deliver growth and profitability into the future.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Elizabeth Suzuki. Please state your company name, then proceed with your question.

[Elizabeth Suzuki, Bank of America]

Great. Hi, guys. Liz Suzuki, Bank of America. So you closed 39 stores this quarter, which was I think a little bit more than we were expecting given that your latest 10-Q had mentioned a plan to close about 59 retail stores for the year. And in prior years, I think more of that store closure activity took place in the fourth quarter. So is the plan still to close 59 stores or should we expect another wave of closures in 4Q similar to prior years?

[Joe Lower]

Liz, it’s Joe. Thanks for calling in. We accelerated the timing of many of the closures. So the prior guidance we gave associated with the business acceleration program remains our current outlook.

[Elizabeth Suzuki, Bank of America]

Okay, great. Thanks. That’s very helpful. And a quick one on tariffs. Just curious how much, if any, exposure you have as a percentage of sales? And how much exposure you had to list one through three? Because I think my impression was that Office Depot’s exposure to list one through three was pretty immaterial, so I’m wondering if that changed at all with list four that will be put in place in September?

[Joe Lower]

Yes. So let me try to answer a big question. Obviously, everyone is kind of seeing and assessing the impact both businesses and consumers. Breaking it down, as you know, our direct procurement, which is less than 10% of our COGS is the stuff that we can have a direct impact from an implementation of mitigation, be it alternative sources, currency, negotiations with suppliers. I would tell you kind of in general, we saw a less than $10 million of impact from a cost perspective in Q2, which you can see from our results in Q2, we’ve pretty successfully mitigated.

Kind of given the latest outlook, we expect the exposure absent changes to be less than $20 million in the second half, which, again, we believe we can mitigate a substantial portion of that. So that kind of gives you a perspective on how we’re approaching it and kind of our direct exposure. And as I think you can appreciate, everyone is assessing how the supply base and how the customers will accept kind of the various changes.

[Elizabeth Suzuki, Bank of America]

Okay. And do you have an estimate on indirect exposure as well?

[Joe Lower]

We really don’t, and that is obviously much more negotiated because you’re talking with each and every supplier about what they’re willing to do frankly, what host countries are effectively doing and ultimately then what customers will do. So we really don’t have a direct number of on that.

[Elizabeth Suzuki, Bank of America]

Okay, thank you. Go ahead.

[Joe Lower]

Go ahead Liz.

[Elizabeth Suzuki, Bank of America]

No, I was done. Thank you.

[Joe Lower]

Thank you.

[Operator]

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

[Atul Maherwari, UBS]

Good morning. This is Atul Maherwari for Michael Lasser, company name is UBS. Thanks a lot for taking my questions. First on the BSD division, and I apologize if I missed this earlier, but can you let us know how the BSD division trended ex the acquisitions? And then with the regard to the acquisitions, are they proving to be synergistic? And what are you seeing from an end-market perspective?

[Gerry Smith, Chief Executive Officer]

Absent acquisitions – let me take that first. First one, the acquisition is performing well, and we’ll continue with our strategy. And we’re seeing the cost synergies and other things to be very, very effective. I’ll let Joe take the first one.

[Joe Lower]

Yes. If you look at BSD absent acquisition that was modestly down. Acquisitions contributed a couple of points of growth. And as Gerry stated, from a performance standpoint, extremely pleased with both strategically and operationally how they’re performing.

[Gerry Smith, Chief Executive Officer]

At a high level, Joe and I were both very pleased with strategy. I mean it’s working, it’s what we’re growing. And you saw the operating income performance in Q2 was outstanding in our B2B business.

[Atul Maherwari, UBS]

Understood. That’s very helpful. Just another follow-up for me, and this is related to CompuCom. So on year-over-year basis, revenue declines accelerated in the second quarter relative to the first quarter. And I think you mentioned that revenues from existing accounts were down year-over-year. So what steps are you taking to reverse these declines? And what have you baked in for CompuCom in your back half guide? Thank you.

[Gerry Smith, Chief Executive Officer]

Well, first, we have a very proven new leader, Mick Slattery, which were exceptionally – has exceptional history of growing technology services company. He’s joined us. I’m extremely pleased with that addition and his leadership. And again, he’s proven it at the – his last two ventures over 18, 19 years of experience. Second, Mike Zimmer and his sales team have increased, as we said before, our backlog substantially on a year-over-year basis. Third, driving hard on product sales with improved margins. And fourth is getting into the accounts and getting very a focused core product offering, services strategy efforts.

And lastly, we’re very pleased with the operational focus we had in the quarter. So we’re very optimistic that we’ve turned a corner. I think this $16 million quarter-over-quarter improvement is indicative of our – the potential, and now it’s continuing to execute on all the sales plans, the focused core offerings and using Mick’s efforts and experience of driving our strategy and execution a very concise and consistent strategy.

[Atul Maherwari, UBS]

Thank you. Good luck with the rest of the year.

[Gerry Smith, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] And your next question will come from the line of Christopher Horvers. Please state your company name, then proceed with your question.

[Christopher Horvers, JPMorgan]

Thanks, good morning.

[Gerry Smith, Chief Executive Officer]

Good morning.

[Christopher Horvers, JPMorgan]

So looking at the BSD operating profit, I mean there was substantial improvement here in the second quarter. Can you help us think about how we should model that sort of going forward given pretty seasonal business. So was there any catch-up in 2Q related to 1Q maybe on the paper pricing front? And should we look at the business from a trend perspective from the 2Q operating profit dollars or from the first half operating profit dollars?

[Gerry Smith, Chief Executive Officer]

Yes. So let me try to tackle that one. I think three things if you kind of look at, you start with the gross margin improvements. And as you cited, we clearly did benefit from some of the mitigation strategies that we’ve been talking about. That will continue. We benefited and I referenced this from, frankly, lower relative distribution costs and part due to a stocking strategy that’s proven to be pretty effective and then a very deliberate approach on our e-com channel. I think those will continue to generate benefits.

And then from an SG&A standpoint, we’ve referenced the business acceleration program, and we are having a lot of visibility to some of the potential success. So we do anticipate margins will remain, what I call, relatively positive. I think likelihood, we’re likely to hit something kind of closer to year-to-date – kind of year-to-date and the second quarter, just because of some of the seasonal nature of it, but that’s generally where we anticipate margins for the remainder of the year.

[Christopher Horvers, JPMorgan]

Okay. Understood. And then in terms of the SG&A dollars, again, strong performance there. They were down $60 million sequentially. If you look at the past two years, they were down sort of average like $45 million, and that was the majority operating profit be in the quarter. So can you maybe provide a bucket of how would you bucket maybe that shift? I know you mentioned the drivers, but any further quantification? And then on the gross profit dollars, they are down for the third consecutive quarter. Given your revenue strategies, when do you anticipate gross profit dollar growth again year-over-year?

[Joe Lower]

Well, the latter one is pretty easy, and that’s really tied to revenue growth. I think anticipating significant greater improvement in gross margin is frankly challenging. So that is going to be tied to, ultimately, revenue growth. And then as it relates to – I’m not going to break down the components, but I really have, I think, articulated the various drivers of both the gross profit changes. And then within BSD specifically, we have a continuing emphasis on increasing the efficiency of the organization including the selling force. Then more broadly, one of the factors obviously contributing to the changes in the cost structure is store closures. So recognize as you think about total cost structure, that is a component that is contributing to the decline in addition to the efforts through the Business Acceleration Program and other things we’re doing to improve gross profit.

[Christopher Horvers, JPMorgan]

Got it. And then one quick follow-up, just on the tariff. Can you – I understand you don’t know the indirect, but could you maybe provide at the enterprise level what the exposure is to electronics, PCs, laptop and printer? Because they would suspect that’s probably the biggest at risk from an indirect perspective, the mix percentage.

[Joe Lower]

Yes. I’m not going to get into the details, but generally, the categories are not some of our larger selling categories that are having the biggest impact of some of the tariffs. So that is not as big an exposure for us on a relative basis versus from others.

[Christopher Horvers, JPMorgan]

Got it. Thank you very much.

[Joe Lower]

Thank you.

[Operator]

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.

[Gerry Smith, Chief Executive Officer]

Thank you, operator. Thank you for all who joined the call today and the webcast. I’d like – I really want to thank our entire team on their dedication and commitment. We have very strong quarter. I’m very proud of the team. We’re excited by our recent performance, and we look forward to the second half of the year. As I said before, we remain focused on our B2B business. We think it’s an incredibly valuable asset, and we want to serve our business customers. We’re going to continue to focus on customer experience and drive demand across our retail business as well and look forward to talking to everyone – speaking again in November. Thanks and have a great day.

[Operator]

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