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Office Depot Inc  (NASDAQ:ODP)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 9:00 a.m. ET


Prepared Remarks:


Good morning and welcome to Office Depot's Fourth Quarter and Full Year 2018 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.

Timothy J. Perrott -- Vice President, Investor Relations

Good morning and thank you for joining us for Office Depot's fourth quarter 2018 earnings conference call. This is Tim Perrott. 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 of the noteworthy achievements for the year and progress toward our transformation. Joe will then review the company's financial results for Q4 and full year including our divisional performance and guidance for 2019. 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 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 within 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 accompanies today's comments and reconciliations of the non-GAAP financial measures to their most directly comparable GAAP financial measures, are 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 P. Smith -- Chief Executive Officer

Thank you, Tim, and good morning to everyone joining our call today. It's a great pleasure to be here with you this morning to discuss our accomplishments for 2018. A year that I would describe as the pivot year for Office Depot and outline our priorities for 2019. The progress we made last year in transforming our business provides tangible evidence that we are well on our way to enhancing our position as a leading integrated business-to-business distribution platform, providing business services and supplies, products and technology solutions for our customers.

In 2017, we embarked on a multiyear strategy, rooted in strengthening our business, developing more predictable revenue streams, leveraging our asset base to drive long-term profitable growth and developing cash generation engine. The primary focus in 2018 was to recapture revenue growth, generate strong cash flow, strengthen our balance sheet and invest to build a stronger engine to drive long-term profitable growth.

Our accomplishments in 2018 clearly show that we are on the right path. For the year, we grew our business, recapturing top line sale growth, driven by the CompuCom acquisition, strong results in our BSD division and improving trends in retail. We grew our high-margin services business delivering double-digit sales increases across our BSD and retail segments. In addition to the benefit from the CompuCom acquisition, we also invested in several areas of our business including expanding our distribution network capabilities, enhancing our e-commerce platform and embracing new technology to increase automation in our operations.

Importantly, we've generated significant cash flow for the year, further strengthening our balance sheet, while returning value to shareholders through investor-friendly activities, including our dividend payouts and share buybacks. Overall, the investments that we have made throughout the year, along with our team's solid execution, have positioned us for both continued growth and greater profitability in the future.

Beginning on slide 4, I would like to highlight some of the specifics of our results and accomplishments in 2018, beginning with sales growth. We recaptured top line growth, generating revenue of $11 billion, an 8% increase versus last year. Achieving positive revenue growth was a very significant milestone for our company as this result reverse the declining sales trends from previous years. While the acquisition of CompuCom clearly played a major role in our year-over-year growth, we are very pleased to see improving trends in our BSD and retail segments.

In our BSD division, we grew revenue 3% over last year, driven by acquisitions in our adjacency categories. In our Retail Division, although, sale did decline in 2018, the year-over-year trends improved by 500 basis points. Much of the trend improvement was driven by increases in our buy online, pick up in store offering, which was up 24% over last year.

While we are encouraged by these positive trends in our Retail Division, we recognize that we have much more work to do to return this component of our business to positive growth. CompuCom also contributed to our overall revenue growth with sales up 1% when compared -- over last year on a comparable basis. Importantly, this represents a reversal in year-over-year sales declines before acquisition and reflects the initial cross-selling benefits of our combination.

Another primary focus and key element of our growth strategy is creating a powerful business services company. I am pleased to report that services revenue nearly doubled from last year and represents 16% of our total revenues. While much of the increase came from the CompuCom acquisition, it is important to note that services revenue across the BSD and retail divisions combined grew 30% over last year.

Our operational results were solid for 2018 and exceeded our initial guidance. This is notable when considering the significant investment we made in our business and the challenges faced at CompuCom in the second half of the year. We invested in enhancing our services capabilities and platform, making it easier for our customers to access our services with ease and confidence. We invested in store refreshes and layouts to improve customer experience, including new more energy-efficient LED lighting, technology upgrades, and point-of-sale improvements in our stores.

We also deployed new technology in our supply chain network and distribution centers, allowing for greater visibility into the network to improve product flow and efficiency. Additionally, we upgraded our e-commerce platform to better serve our customers. We also invested in stimulating demand generation for our new services online. With these investments in mind, we generated an operating income of $254 million and adjusted operating income of $360 million, reaching our revised higher goal for the year.

Adjusted EBITDA results for the year were $567 million. Notwithstanding these results, I would point out that we did experience margin pressure at the end of 2018 related to a number of areas. And we're taking specific actions to address as I will highlight later on the call. This leads us to cash flow generation. We drove very strong cash flow results for the year through our continued operational discipline and focus on working capital. We generated $616 million of operating cash flow for the year and a total of $429 million in free cash flow. This is a significant accomplishment particularly when considering the higher level of investment we made in our business in 2018.

Lastly, we significantly improved our balance sheet, refinancing our term loan and paying down debt. We also returned value to shareholders in addition to the dividend by repurchasing almost $40 million of stock throughout the year and authorizing another $100 million for future share repurchases. Despite the higher operating and capital investments, we ended the year with a higher cash balance than last year. Let me repeat that again. We ended the year with a higher cash balance than last year.

Joe will highlight our balanced approach to capital deployment later in his remarks. I will now elaborate on a few additional highlights in the quarter that support key elements of our strategy and the pivot we are making as a company.

Slide 5 is an illustration of the transformation that is taking place at the company. When I arrived at Office Depot back at early 2017, a majority of our revenue came from the Retail division. Over the past few years, we invested in new capabilities to enable us to grow revenue and service business customers. During that time, we have successfully diversified our business so that our B2B business which is our BSD and CompuCom businesses is now the largest portion of our revenue and as I mentioned earlier it is growing.

We're also finding that our customer rates in the BSD and CompuCom divisions are very similar which is leading to an increasing pipeline of cross-selling opportunities. Together, these two businesses represent approximately 60% of total sales and we see this continuing to grow in the coming years.

When you add the percentage of business customers utilizing our retail stores, we estimate businesses represent more than 70% of our total revenue. Also as I mentioned earlier, services revenue has grown to approximately 16% of total sales, nearly doubling over the past year.

I'd now like to focus my remarks on highlighting some of the initiatives we have under way in our business and the progress we are making to redefine the experience and attract and retain high-value business customers.

Throughout the year, we have strengthened our business and the best evidence of this can be found in the strong performance in our BSD division as shown on Slide 6. Our BSD division reversed the trends of the previous years and delivered its best yearly performance in over a decade.

BSD grew 3% in 2018, representing 800-basis point improvement over last year and we will continue to focus on growing this business aggressively in the future.

One of the key growth drivers is our adjacency product category within BSD. This includes categories such as cleaning and breakroom, copy and print, furniture and technology products. All adjacency categories grew in the fourth quarter and they now account for approximately 37% of total BSD sales.

We began aggressively pursuing this strategy over the last year and had built capabilities across the organization to support this growth opportunity. Overall, our adjacency business grew 10% for the year and I believe we are still in the early stages of capitalizing on this growth opportunity.

Another driver is our stated strategy of selectively acquiring leading players in localized markets to expand our distribution reach and increase our customer base. These acquisitions have been a success and we're leveraging our scale while offering an expanded assortment of both products and services.

There are several other factors underpinning our success in strengthening this business. First, the investments we are making are beginning to pay returns. We invested in demand generation activities resulting in increased sales of both business products and services. The shift we made late in 2017 toward digital marketing is enabling us to be more efficient and effective while engaging with customers. We also invested in enhancing our e-commerce and services platforms improving the customer experience and positioning us to deliver an enhanced portfolio of services.

Second, we carried our customer-focused mentality into reorganization of selling resources, leading to improved customer acquisition and retention trends. These efforts have increased our customer satisfaction scores and helped build a stronger pipeline of new business.

Third, we are capturing additional growth through many cross-selling opportunities with CompuCom. Overall, it was a very strong year for our BSD division and I'm very proud of the team and their success in dramatically changing the trajectory of this critical piece of our business.

That said, we need to continue to deliver a broader set of products and services to capture a greater share of wallet and expand our customer base and continue to grow this business aggressively in the future.

Turning to Slide 7, I would like to spend a few minutes discussing our retail business, an extremely important access point for our customers. We drove year-over-year sales trend improvements in our Retail division despite the continued traffic challenges faced not only by us, but also by most in the entire industry.

We invested to improve the in-store experience, enhanced our services platform and capabilities, and continue to evaluate additional means to drive value from our retail footprint. The investments we made in demand generation and improving the in-store experience along with a slower pace of store closures helped drive an improvement in reported retail sales trends compared to where we were one year ago.

Although retail sales did decline in 2018 versus prior year, we have shown improving trends on a year-over-year basis. Retail sales trends improved 500 basis points as sales were down 6% in 2018 compared to down 11% during the same period for 2017.

Same-store sales were down 4% year-over-year also adjusted for the new revenue recognition standard. While we're obviously not satisfied with this performance, we do believe that this investment we are making in our services platform in demand generation and in customer experience has us on the right path to drive further trend improvements.

As I've stated in the past, we view our retail footprint as an integral component of our overall distribution platform and a key differentiator versus online competitors. It allows us to deliver an increasing spectrum of services with a human interaction that most of our customers prefer.

We have nearly six million small and medium business customers that within a three-mile radius of our stores. As evidence of the importance of our retail footprint to our SMB customers, nearly 30% of customers that shop with us through our retail channel are business-orientated customers.

Additionally, the importance of our omnichannel approach can be seen in the continued increase in sales at our buy online and pick up in the store offering which is up 24% compared to last year. That's a great increase.

Also as I mentioned on our last quarterly call, we're continuing to think about our retail space differently and are pursuing additional ways to drive value from our footprint. This includes evaluating store within the store opportunities to drive increased traffic and design our stores to make it easier for our SMB customers to access our technical expertise and buyer services.

We remain particularly excited about the co-working opportunity and the positive trends we are seeing. At our first co-working store in Los Gatos, California demand for this service has been very strong and customer feedback has been terrific. We are excited about this opportunity and are planning to roll out several additional locations this year for further evaluation. In fact, we plan to open two new locations one in Dallas and one in Chicago by the end of March.

I would like to spend a few moments on our progress in growing our service offerings as shown on Slide 8. We grew services revenue in BSD and retail divisions 20% and 18% respectively over last year. These amounts exclude the impact of the adoption of the new revenue recognition standard which reduced reported revenues in 2018.

Importantly, you will note that the average gross margins in our service offerings are approximately 1,000 basis points higher than that of our product margins. Services growth was driven in all major categories copy and print which includes print marketing services, documents and finishing, and pack and ship grew over last year. We also won key new business contracts for print services in our BSD division which grew 5% year-over-year.

In our tech services category which includes device managed services, 24/7 tech support and device protection among others also exhibited growth in the quarter. We are also launching new services and capabilities including IT-as-a-service and software-as-a-service as well as our storage and shredding services which are already showing strong signs of demand.

We're also working to build recurring relationships with our customers by offering the convenience of subscription-based services. These services include a wide array of products such as office supplies, breakroom supplies, and software licenses among many others.

We have continued to gain traction as evidenced by our subscription growth crossing a critical milestone of now exceeding one million subscriptions in 2018. Let me say that again one million subscriptions in 2018 and we look to continue to grow this aggressively.

Last, we also invested in the rollover brand for our expanded SMB service offerings, Workonomy. Workonomy will drive sustainable, profitable revenue growth by propelling Office Depot's share of business services and by driving recurring revenue streams.

We achieved this by being the most accessible and most comprehensive business service solutions for SMBs through our retail stores, online and by appointment in our customers' location. The investments we made in our services platform throughout the year positions us to address a very large market opportunity. Our improving capabilities put us in an excellent position to exploit this opportunity and drive significant growth in services in the future.

I would now like to take some time to discuss our progress with CompuCom. As shown on slide 9, the CompuCom acquisition was a key step in our transformation strategy and an important strategic asset for us in developing our services business. Their world class service offerings differentiate us from the competition and positions us for opportunities and partnerships that we cannot pursue without them.

We are leveraging our combined capabilities across our entire platform that has access to millions of customers. We made great progress throughout the year integrating CompuCom's offerings into a broader set portfolio allowing us to grow our services business and to attract new business-orientated customers and valuable distribution partners.

We have scaled our tech services to be more relevant to small and medium business including launching our device-managed services contracts for small business and a new IT as a service offering. We deployed tech services across our retail chain and have device managed service contracts live in all our retail stores as well as online.

CompuCom grew its top line revenue results for the year by 1% despite lower sales from one of its largest customers, which is currently experiencing a significant reorganization of its business.

That said CompuCom's operating results for the year were clearly disappointing to us and we've taken several actions to address. These actions include a complete realignment of CompuCom operating structure and improvements in the service delivery process to better align and meet customer needs. We've also brought in a new highly experienced sales leader and realigned and reincentivized our entire sales organization. We are also increasing the use of technology and automation in our processes. The actions have shown signs of success in the quarter and we expect year-over-year improvements in the future.

Demand for our services remain strong and we've successfully pursued several cross-selling opportunities capturing nearly $100 million in contract value in 2018. We are only at the beginning of this opportunity and expect our cross-selling success to continue to ramp in 2019 and beyond.

New service contracts were up compared to last year and we are happy to report that CompuCom was once again recognized as a Gartner Magic Quadrant leader for the 16th year in a row an exceptionally strong external endorsement of the quality of our services.

Turning to slide 10, I'd now like to discuss the investments we've made in our supply chain and distribution network and how we are leveraging this very valuable asset to further differentiate us in the market.

Our supply chain network one of the backbones of our business is approximately the 20th largest in North America with the ability to provide next-day delivery services to nearly 99% of the U.S. population and has the unique capability to deliver directly to our customer's desktop. This places us in a unique category as only a few of the supply chain networks in the U.S. have this capability of national scale. This is truly a strategic asset.

Our supply chain ecosystem includes approximately 50 strategically located distribution centers, cross docks, and combination facilities representing over nine million square feet of space. This is supported by a dedicated fleet of over 1,000 transportation vehicles servicing Office Depot and affiliates and last mile infrastructure to ensure seamless service for our customers.

This network is a critical differentiator for us both in terms of supporting our business operations as well as positioning us to pursue other commercial opportunities and partnerships.

We invest in several areas of our network this year to further enhance our capabilities and to increase efficiency and lower cost. We grew our private fleet and made upgrades to our facilities with new automated technology and robotics. We implemented new logistics and supply chain software to gain better visibility into our system and to improve performance. We also installed new software that optimizes our network that allows greater insight to supply chain costs providing the ability to make more informed decisions and improve profitability.

Additionally, during the year we expanded the reach of our distribution network by identifying and acquiring profitable regional distribution companies in geographic areas that were previously underserved by our network. This has allowed for an effective and accretive means to expand our distribution reach and target new business customers.

We are excited by all these investments and the operational benefits provided. This also positions us to pursue opportunities beyond our traditional business such as utilizing our supply chain as a service for third parties in the future.

Overall I'm very pleased with our total company accomplishments and performance in 2018. That said, we did experience margin pressure late in the year related to a combination of investments to drive growth and certain pressures in various areas of the business including higher relative costs in areas of distribution, procurement and labor and additional costs incurred associated with customer migrations. We are taking actions to address these challenges and to drive improved profitability while continuing to grow our top line revenue.

In addition to leveraging the investments we made in our business the actions we are taking to drive greater profitability include first realigning our merchandising organization and initiatives to more fully and effectively capture market opportunities; second, pursuing opportunities for cost efficiencies throughout our entire organization including organizational improvements and leveraging the use of technology and automation in our facilities and offices; third, leveraging our asset base in traditional and non-traditional means to create additional value for shareholders and improve margins; and lastly driving enhanced customer penetration increasing sales across our channel, driving greater share of wallet, and improving profitability. These actions will help ensure that we continue the significant progress and strategy achievements into 2019 and beyond.

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

Joseph T. Lower -- Executive Vice President and Chief Financial Officer

Thank you, Gerry, and good morning, everyone. I'm happy to be here today to discuss with you our results for the fourth quarter and full year 2018. Consistent with previous quarters, we have provided our results on both a GAAP basis and adjusted basis from continuing operations. My comments will primarily address the performance from our continued operations on an adjusted basis. Also please keep in mind that the company's reported financials include the results for the CompuCom division for the fourth quarter and full year 2018 but only from November eight for the fourth quarter and full year results presented for 2017.

Turning to slide 12 we have highlighted some key performance measures for the full year 2018. For the year, we grew our top line revenue, made significant investments in our platform for future growth, generated significant free cash flow, paid down debt and returned capital to shareholders.

Total company sales for the year totaled $11 billion, compared to $10.2 billion in 2017. The increase of 8% was driven by the addition of CompuCom's results for the year as well as continued growth in our B2B businesses, which more than offset a decline in sales within our retails segment.

Underlying the improving sales trends service based revenue grew across our businesses with BSD and retail generating a combined 13% year-over-year growth rate, excluding the impact of the CompuCom acquisition and the adoption of the new revenue recognition standard. On a reported basis, service revenues grew 84%, driven primarily by the CompuCom acquisition.

Full year GAAP operating income was $254 million, down from $327 million last year. This amount included a $25 million legal expense accrual related to a proposed settlement with the Federal Trade Commission, associated with the company's prior use of third-party software product. This matter was previously described in both our second quarter and third quarter financial reports.

Including this reserve, during the year the company incurred approximately $106 million in operating expenses related to merger integration, acquisition related and other restructuring activities and the aforementioned legal accrual.

Excluding these and other items, our adjusted operating income for 2018 was $360 million, exceeding our original guidance for the year, however, down from $432 million for the prior year. Adjusted EBITDA was $567 million for the year compared to $603 million in the prior year.

Excluding the after-tax impact from the items mentioned earlier, 2018 adjusted net income from continuing operations was $199 million or $0.35 per share compared to $241 million or $0.45 per share in the prior year.

Finally, for the year, cash provided by operating activities of continuing operations was $616 million with free cash flow of $429 million, far exceeding our original goal for the year. Our companywide focus on working capital improvements contributed to this outstanding cash flow result.

Let's now move to slide 13, where we have summarized our results for the fourth quarter. Total revenue for the fourth quarter 2018 was $2.7 billion compared to $2.6 billion for the prior-year period.

The 3% increase was driven by the partial inclusion of CompuCom results for the quarter, growth in our B2B business and a 19% increase in combined service revenue from BSD and Retail, as compared to the same period last year.

GAAP operating income for the fourth quarter was $24 million, versus $56 million in the prior-year period. Our operating income results include the previously mentioned $25 million in legal expense accruals related to the proposed FTC settlement, as well as the costs associated with investments we made in our business platform to support future growth.

During the quarter, the company incurred a total of $60 million of operating expenses related to merger integration, acquisition-related costs and other restructuring activities, including the aforementioned legal expense accrual. Excluding these and other items, our adjusted operating income for the fourth quarter was $84 million, down from $92 million for the prior-year period.

Unallocated corporate expenses decreased to $3 million in the quarter compared to $24 million in the same period last year. This was related to a release of incentive-based compensation accruals, a reduction in professional fees and other cost efficiencies. We aligned our incentive compensation plans to operating metrics to drive performance.

Although, these incentive accruals were reduced for the year, we did achieve over a 60% increase in short-term incentive compensation for the year as compared to 2017. Adjusted EBITDA was $138 million for the year, flat with the same period last year.

Excluding the after-tax impact from the items mentioned earlier, the fourth quarter 2018 adjusted net income from continuing operations was $52 million or $0.09 a share, up from the comparable $45 million or $0.08 per share in the prior year.

For the quarter, we used approximately $5 million in cash compared to generating $10 million in the same period last year. The primary driver of cash used in the quarter was related to accelerated investments we made to enhance our business platform, technology and services, with capital expenditures up $17 million year-over-year.

As Gerry mentioned, we did experience lower margins in the second half of the year, related to certain cost pressures related to paper, the customer migration and distribution expenses. We are focused on addressing these challenges and implementing mitigation strategies and cost efficiency measures across the entire organization.

Let's now turn to slide 14, which highlights the performance of the BSD division. Reported sales in the fourth quarter for BSD were $1.29 billion, an increase of 3% compared to the prior year. The year-over-year increase reflects flat organic results with the balance of the growth related to our stated strategy of selectively acquiring leading players in localized markets to expand our distribution reach and increase our customer base.

Service revenue increased 20%, reflecting heightened selling focus on the strategic priority and product sales increased 2% versus the prior year. We continue to see strength in our adjacency categories, which were up 10% over the prior year and represent 37% of total BSD revenues.

The BSD division reported operating income of $54 million in the fourth quarter compared to $68 million in the prior year period. The decrease in operating income versus the prior year was primarily driven by increased investments in several areas of our business and certain cost increases incurred during the quarter.

We invested in demand generation, upgrades to our e-commerce platform and services offering which will position us for future growth. Cost impacts in the quarter included post-merger platform migration costs, as well as costs to migrate the final set of OfficeMax customers to the Office Depot platform, which will save on future systems costs.

Additionally, paper cost increases before mitigating actions took place had a negative impact to margins. We are taking actions to address these cost challenges, as Gerry addressed earlier. That said, I'm very pleased with our performance in driving growth in our BSD division throughout the year.

Turning to slide 15, reported total sales in the fourth quarter for the Retail Division declined 6% to $1.09 billion compared to $1.16 billion in the prior-year period. On a comparable basis, after adjusting for the impact of the new revenue recognition standard, total sales were down 5%. The decline in reported sales was partly due to the impact to store closures over the past 12 months, as well as a negative impact to revenue of approximately $10 million resulting from the adoption of a new revenue recognition standard.

These impacts were partially offset by increases in average order volumes. Comparable store sales decreased 4% versus full year 2017, primarily driven by fewer transactions. Importantly, on a year-over-year basis our retail revenue trends improved 500 basis points compared to last year. This improvement is a result of a more stable footprint, improved conversion and accelerated growth of our Buy Online and Pickup in Store offerings which were up 24% in 2018.

Product sales in the fourth quarter decreased 8%, while service revenue increased 18% compared to the prior year period, excluding the impact of the revenue recognition standard. Copy and print, technology services and subscriptions all increased year-over-year. We are encouraged by the growth in services both in terms of enabling a stronger more sustainable connection with our customers and in generating higher margins on average.

The Retail Division reported operating income of $28 million in the fourth quarter of 2018 versus $40 million in the prior year period. This year-over-year decrease was largely due to deleveraging with labor, occupancy and depreciation increasing as a percentage of sales and lower volume coupled with investments in our services platform, technology improvements and in-store experience. During the quarter we closed 13 stores, opened one and replaced one, bringing our total store count to 1,361 stores in the Retail Division.

Looking now at slide 16, we highlight the performance of the CompuCom division. CompuCom's results are included in total company results since the acquisition of CompuCom on November 8, 2017. Including the company's reported fourth quarter results were revenues of $156 million and operating income of $8 million from the CompuCom division. Unaudited adjusted historical results for the entire fourth quarter of 2017 had been presented in our earnings release for reference and comparability.

Reported sales in the fourth quarter for CompuCom were $283 million, up 4% versus historical sales of $271 million in the prior year period. As Gerry addressed earlier, this growth was particularly impressive given lower revenue related to a decline in sales from one of CompuCom's largest enterprise customers as that client is going through a significant restructuring with an associated reduction in demand for CompuCom's services.

CompuCom gained momentum in new service orders with service order wins up for the year. This bodes well for future revenue as these contracts are operationalized over the next six to 12 months. The CompuCom division reported operating income of $5 million in the fourth quarter of 2018, compared to $11 million in the adjusted historical results for the prior year period.

The decline in the quarter was partially due to the operational impact from the previously mentioned reorganization occurring at one of its largest customers, coupled with unfavorable product mix, investments to support growth initiatives and cost associated with onboarding new customers. These impacts more than offset lower selling, general, and administrative expense as a result of combination synergies producing targeted cost reduction initiatives and administrative efficiencies.

Although we did see improving sales and margin trends sequentially in the fourth quarter, overall results for CompuCom in the second half of the year were disappointing.

We recently made several structural changes to improve our alignment with customer needs and flattened the operations to improve customer fulfillment and order flow. With these and other changes we made in the business, we should continue to show gradual improvement and profitability in the coming year.

Turning to the balance sheet and cash flow highlights on Slide 17, we ended 2018 with total liquidity of $1.6 billion consisting of $658 million in cash and cash equivalents and $947 million of availability under our asset-based lending facility.

During the fourth quarter, we reduced the rate on our term loan by 175 basis points, saving an estimated $21 million in net interest expense for 2019. As part of this repricing, we also paid down nearly $200 million of the loans balance.

Total debt at the end of the quarter was $785 million excluding $754 million in non-recourse debt related to the timber notes. It is very important to note that these timber notes have an associated $842 million receivable on our balance sheet. We intend to use the built-in extension in the notes to align with the January 2020 receivable and expect a net cash inflow at expiration. Our net debt at the end of the year stood at $127 million.

For 2018, cash provided by operating activities of continuing operations was $616 million, the strong performance included outflows of approximately $22 million in OfficeMax merger costs, $47 million in acquisition and integration related costs, and $18 million in restructuring costs.

Capital expenditures were $66 million in the fourth quarter of 2018 versus $49 million in the same period last year. For the year, CapEx was $187 million versus $141 million in the prior year. The $17 million increase in the fourth quarter and the $46 million increased year-over-year reflected our commitment to continue to strengthen our operations, invest in automation, and enhance our service offerings.

Our increased investments during the quarter resulted in cash use of $5 million. Incorporating capital expenditures for the year, we generated very significant free cash flow totaling $429 million, well in excess of our initial guidance for the year. Contributing to the significant free cash flow generation was over $200 million in year-over-year improvements to working capital.

On Slide 18, we highlight our balanced approach to capital allocation. Our priorities are focused on investing in our business, servicing dividends, paying down debt, expanding our distribution network via selective acquisitions, and selectively executing share buybacks.

During 2018, we generated $616 million in operating cash flow. Additionally, as we previously announced, we completed the sale of our businesses in Australia and New Zealand, generating a total of $113 million in cash.

After considering the $187 million in capital investments related to strengthening our platform for future growth, we had $542 million in cash year-to-date available to deploy against our priorities.

Looking at our capital allocation for the year, we paid $55 million in dividends we repaid $299 million of our debt of which nearly $200 million of this amount was paid down as part of the refinancing during the fourth quarter.

We invested $98 million in acquisitions to expand our distribution network and bought back $39 million of our shares since reinitiating our share buyback program earlier this year.

After investing in our business paying down debt returning a significant amount of capital to shareholders our cash balance was $658 million, $32 million higher than our balance at the end of 2017. Going forward, we plan to continue a balanced approach addressing our business shareholders and lenders.

I would now like to discuss our guidance for 2019 as shown on Slide 19. We made excellent progress throughout 2018 on our efforts to reverse historic trends and regain traction in sales growth.

For 2019, we are focusing on continuing to drive topline growth and improving profitability by implementing the measures that Gerry highlighted earlier in his remarks.

Our 2019 guidance is issued during our third quarter earnings call in November of last year is as follows. We expect sales to be up approximately 1% year-over-year to approximately $11.1 billion, adjusted EBITDA of approximately $575 million, adjusted operating income of approximately $375 million, and free cash flow of approximately $350 million.

This guidance reflects positive sales trends across all of our businesses. It also reflects successfully addressing the target initiatives aimed at addressing supplier distribution and labor cost pressures, with a continued focus on free cash flow generation.

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

Gerry P. Smith -- Chief Executive Officer

Overall, I'm very pleased with our numerous accomplishments in 2018 supporting our transformation and strengthening our foundation for sustainable profitable growth. Our focus for the year ahead will not only be on continuing to grow our business, but also to drive greater profitability.

Our 2019 focus priorities include the following. First, grow our business and drive profitable growth by leveraging investments we have made in 2018, driving our higher margin services businesses and successfully implementing the cost-reduction and efficiency measures I outlined earlier.

A good example of these is driving higher margins from the investments we made on our supply chain visibility and optimization software to drive down distribution costs. Additionally, driving higher growth in our high margin private label brands, as well as executing mitigation strategies to help offset paper costs increases are additional examples of driving higher profitability.

Second leveraging our asset base in traditional and non-traditional means to drive additional value for shareholders and improving margins. We have an extremely valuable asset base, including a leading supply chain and distribution network, a large customer base, a dedicated sales force and a marketing presence. We will continue to pursue various means, in which we continue to unlock the hidden value of these assets.

Third, continue to invest in our business in areas that would drive the greatest value for our shareholders. These include further investments in our distribution network, sales capabilities, demand generation and e-commerce platforms. This will involve further investments in automation, technology and people. And finally, to remain focused on returning value to shareholders through maintaining a balanced approach to capital allocation.

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

Questions and Answers:


Certainly. (Operator Instructions) And your first question comes from the line of Michael Lasser. Michael, your line is open. Please state your company name.

Mark Carden -- UBS -- Analyst

Good morning. It's actually Mark Carden on for Michael today. The firm is UBS. Thanks a lot for taking the question. So your guidance implies that sales will increase by about $100 million in 2019. How will that breakdown by division? And is it realistic to expect BSD to continue to grow in the mid-single-digit range, even as the economy slows? And what's the assumption for bolt-on acquisitions embedded in the guidance? Thanks.

Joseph T. Lower -- Executive Vice President and Chief Financial Officer

Sure. Let me try to address that. We have not given segment level guidance, but let me give you some direction. If you look at Q4, in general, the trends will continue, right. So you do have modest growth at BSD. We see stabilizing growth at CompuCom and we see an improvement -- marginal improvement on a relative basis in the Retail business if you kind of roll that up, you'll get to our approximate guidance. And we have assumed very modest levels of acquisition in the BSD results.

Mark Carden -- UBS -- Analyst

Great. Thanks. And then as a follow up, how does the merger of a couple of your big competitors impact your outlook in 2019? Do you expect the market to get more competitive in light of this?

Gerry P. Smith -- Chief Executive Officer

Well, first, this is Gerry, and thanks for the questions today. I mean, first, we do not comment on competition or competitors, but we're focused on continuing our strategy. We got the sales engine going over the last two years. We saw a tremendous cash engine success, the services engines we've invested in our business.

We're going to stick to our strategy. We think we have a winning strategy and we're going to continue to drive profitability in 2019. So we prove we can grow in BSD. That was something that people didn't believe before. We've done that and we're going to continue to improve all parts of our business and investment platform. But we're optimistic we're going to be successful.

Mark Carden -- UBS -- Analyst

All right. Thank you very much.

Gerry P. Smith -- Chief Executive Officer

Thank you.


Your next question comes from the line of Liz Suzuki. Liz, your line is open, please state your company name.

Jason Haas -- Bank of America -- Analyst

Hi. This is Jason Haas on for Liz Suzuki from Bank of America. Thanks for taking our question. So it sounds like you're not totally satisfied with CompuCom's performance. I'm just curious to know what you think the issue has been.

And then just also wanted to ask in terms of the large customer that you had called out, just curious if you had started to get back some of those sales in this quarter? Thanks.

Gerry P. Smith -- Chief Executive Officer

This is Gerry. From a CompuCom perspective, overall, we're very pleased with the asset we have in the business. 16 straight years now Gartner Magic Quadrant. But what we have to do is accelerate growth in the business. And we'll point out that for the first time pre-acquisition and post-acquisition, we had year-over-year growth and in many years, we're pleased with that.

Our number one focus right now is to drive operational efficiency and most importantly drive cross-selling opportunities across the business. We achieved almost $100 million in contract value I believe that can be a much higher number. And both the Office Depot and CompuCom teams are very focused on partnering to make go ensure that happens which will drive share of wallet for us.

It will drive margin expansion for us across both companies and really leverage the acquisition of the long-term vision of building a marketplace and platform across our business. Joe want to add some comments?

Joseph T. Lower -- Executive Vice President and Chief Financial Officer

No, I think Gerry you hit it. I mean we've been pretty I think candid in saying we believe this can be a more profitable business. We've put in place initiatives to drive a stronger customer focus and improve our operational efficiency and despite some significant synergies that have been realized, our expectations are and will continue to improve over the long-term.

Jason Haas -- Bank of America -- Analyst

Great. Thanks. And then as a follow-up, I wanted to ask with regards to services. It sounds like they're generally performing well across the business. Could you maybe speak -- you guys have a lot of offerings out there, could you maybe speak to which one seems to be resonating across the divisions? That you seem to be outperforming around the TI one? Thanks.

Joseph T. Lower -- Executive Vice President and Chief Financial Officer

Yes. Sure. I think when we talked about it a little bit earlier which is we're seeing continued strength in and copy and print. We're seeing strength in subscriptions. We're seeing some strength in some of our emerging technology offerings. So, we're relatively pleased with the breadth of services we're now offering and that all are starting to take traction. High expectations that they'll continue to grow.

Jason Haas -- Bank of America -- Analyst

Thank you for taking the question.

Gerry P. Smith -- Chief Executive Officer

Just to add to that I think it's -- I think if you look at the quarter in copy and print, tech services, the cross-selling with CompuCom, all those are core fundamental services that we will and continue to grow at an aggressive pace.

Jason Haas -- Bank of America -- Analyst

Great. Thanks.

Gerry P. Smith -- Chief Executive Officer

Thanks for the question.


(Operator Instructions)

Gerry P. Smith -- Chief Executive Officer

Any final questions?


I'm not showing any further questions.

Gerry P. Smith -- Chief Executive Officer

I'd thank you operator for everyone that called in. Thank you very much and we look forward to talking to you in May and we're going to continue our focus on driving success at Office Depot. Have a great morning I appreciate it. Thank you.


Thank you everyone for your participation. You may now disconnect.

Duration: 54  minutes

Call participants:

Timothy J. Perrott -- Vice President, Investor Relations

Gerry P. Smith -- Chief Executive Officer

Joseph T. Lower -- Executive Vice President and Chief Financial Officer

Mark Carden -- UBS -- Analyst

Jason Haas -- Bank of America -- Analyst

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