earnings conference call third quarter...

Earnings Conference CallThird Quarter 2007

November 20, 2007

2

Safe Harbor Statement

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides protection from liability in private lawsuits for “forward-looking” statements made by public companies under certain circumstances, provided that the public company discloses with specificity the risk factors that may impact its future results. We want to take advantage of the “safe harbor” provisions of the Act. Certain statements made during this presentation are ‘forward-looking’ statements under the Act. Except for historical financial and business performance information, statements made during this presentation should be considered ‘forward-looking’ as referred to in the Act. Much of the information that looks towards future performance of our company is based on various factors and important assumptions about future events that may or may not actually come true. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements made during this presentation. Certain risks and uncertainties are detailed from time to time in our filings with the United States Securities and Exchange Commission (“SEC”). You are strongly urged to review all such filings for a more detailed discussion of such risks and uncertainties. During portions of today’s presentation, we may refer to results which are not GAAP numbers. A reconciliation of non-GAAP numbers to GAAP results is available on our web site at www.officedepot.com.

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Third Quarter 2007 Summary

• Total company sales grew 2% versus the third quarter of 2006

• Reported GAAP and adjusted diluted earnings per share of $0.43

• Third quarter 2007 adjusted earnings per share down 9% versus same period one year ago

• Benefited by low adjusted effective tax rate

• Operating earnings impacted by weak late quarter performance in North American Retail and International

• Reducing costs and discretionary spending across the entire organization

• Continued focus on targeting profitable growth

4

Company Action Plan

• In North American Retail, we’re improving our offering to the small business customer and moderating capital spending– Reducing new store openings – moving to about 70 in 2007 with

a new target of about 75 for 2008

– Continuing with M2 store remodels – a critical investment in our future

• In North American Business Solutions, we’re refocusing our efforts on winning the profitable small and mid-sized customers

• In International, we’re focused on the United Kingdom

• Increasing private brand penetration a key initiative

• Share repurchases as a good use of excess cash

• Continuing to review our overall capital structure

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North American Retail – Results

-190 bps6.4%4.5%Division Operating Margin

-30%$ 114$ 80Division Operating Profit

3%-5%Comparable Sales

0%$ 1,768$ 1,772Sales

B/WQ3 06Q3 07in millions, except ratios and statistics

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North American Retail - Results

• Sales in our North American Retail Division flat, comparable store sales down 5% for the quarter

• Operating profit of $80M, down 30% for the quarter after 14 quarters of growth– Highly promotional with disappointing sales and margin impacts

• Competitive Back-to-School season• Inventory clearance activities• Sales mix shift to lower margin technology from furniture and

supplies– Vendor program support was less than expected due to

challenging business environment– De-leveraging property costs with negative comparable sales– Offset partially by managing variable costs aggressively while

improving customer service scores in our stores

• All comparable sales decline due to reduced store traffic

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• 1,212 total stores at the end of the third quarter– 28 opened, 2 closed

• Reducing the number of new stores – About 70 stores to open in

2007– Targeting about 75 stores

in 2008• M2 format store remodels

– 31 remodels completed in the third quarter

– Remodels should be substantially completed in the next few years

0

20

40

60

80

100

120

140

2005 2006 2007F 2008E0

100

200

300

400

500

600

700

800

900

New Stores M2 Format Stores

North American Retail – Store Growth

New Stores Opened

M2 Format Stores

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1) Expand private brand– Increasing penetration in

major product categories– Customer service program for

private branded products2) Emphasize loyalty program

– Relaunch Worklife Rewards– Best loyalty program in the

industry for our small business customers

3) Enhance Design, Print and Ship offering– Growing at a rapid pace – Xerox Certified Print

Specialists

North American Retail – Action Plan

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North American Retail – Action Plan (cont’d)

4) Refine assortment to offer better value proposition for very small business customers– Greater options for smaller pack sizes, entry price points, bonus

packs in Supplies5) Expand exclusive offerings to address small business

customer needs– Includes Tech Depot service offering and small business

financing6) Increase store productivity by further reducing and simplifying

store operational tasks– Reinforced with guaranteed low-price value proposition

7) Manage marketing spend to target most valuable customers through the highest returning vehicles– Increasing direct mail and e-mail

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North American Business Solutions – Results



-3%$ 1,208$ 1,168Sales

B/WQ3 06Q3 07in millions, except ratios and statistics

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North American Business Solutions - Results

• Sales in our North American Business Solutions Division were down 3% for the quarter– Small to mid-size customer loss

– Partially offset by 8% sales growth with national account Contract customers and double-digit growth in sales to public sector

• Operating profit of $69M, down 29% for the quarter– Greater large Contract customer mix negatively impacted

margins

– Growth in private brand, lower performance-based variable pay and contract pricing management were offset by continued impacts of cost increases, including paper-related products

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Jan Feb March April May June July Aug Sep

Sale

s pe

r Bus

ines

s D

evel

opm

ent M

anag

erNorth American Business Solutions – Initiatives

New Contract sales force additions are on track

2007

2006

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North American Business Solutions – Issues

1) Direct channel - losing sales in small-sized customer base

2) Allied customer and key sales people recovery continues

3) Largest but lowest margin customers have been growing at the fastest rate

4) Coverage and retention issues exist with small to medium-sized customers

5) Existing incentive system limits accountability and P&L responsibility

6) Strong focus on acquiring new customers but not enough emphasis on growing positions with existing customers

7) Sales organization is often engaged in non-productive activities

8) Need more effective marketing

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North American Business Solutions – Action Plan

1) Restore growth to the small to mid-sized customer base– Reorganizing mix of Business Development Managers and

Account Managers to increase coverage– Developing a detailed behavior-based contact strategy

2) Partnering with vendors– Creating specific account and coverage plans, new catalog and

internet layouts, and new solution-based programs3) Developing comprehensive behavior-based segmentation

program for every customer segment – The right contact strategy (catalog, direct mail, e-mails)

4) Implemented Northeast turnaround strategy – Focuses on continued rejuvenation of the former Allied

business

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North American Business Solutions – Action Plan (cont’d)

5) Launching new strategy for telephone account managers to reenergize small customer growth – New hiring standards and key performance metrics, revised

training programs, and comprehensive marketing support6) Minimizing Contract sales organization’s engagement in non-

productive administrative activities – Launching three initiatives to limit Contract sales organization’s

time spent on non-customer-facing activities7) Launching a revised marketing, merchandising, field sales

and inside sales operational structure – New marketing structure/leadership will own and drive

accountability for overall product, segment and business strategy

– Testing incremental customer contact strategy in fourth quarter

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International – Results



9%5%Change in Local Currency Sales

13%$ 882$ 995Sales

B/WQ3 06Q3 07In millions, except ratios and statistics

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International – Results

• Sales in our International Division were up 13% for the quarter– Local currency sales were +5%

– Local currency organic sales were +2%

• Operating profit was down 14% for the quarter– Weak U.K. performance driven by slowing economy and

transition issues

– Previous strategic investments and acquisitions compressed operating profit margin

– Offset partially by lower performance-based variable pay

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International – Action Plan

1) Instituted an action plan to improve the financial performance of our U.K. business– Prospect small customers– Service levels in our call centers and in our supply chain

2) Curtailing discretionary operating investments, reducing capital spending and acquisitions, and aggressively managing support costs– Include freezing the hiring of new sales staff and the opening of

new stores 3) Maintaining a sharp focus on execution and to get

significantly more productivity out of our existing businesses– Stopped the growth in the Contract sales force

4) Increasing penetration of private brand and expansion of direct import into Europe – Leverage Asian sourcing office

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Vendor Program Funds Review

• The Company has amended its Form 10-K for the fiscal year 2006 and first and second quarters of 2007, those documents were filed today

• Restatements reduced previously reported Company gross profit of approximately $29 million in total for those periods

• Approximately $4 million of vendor program funds in the quarter ended September 29, 2007 will also be deferred as a result of this review

• The aggregate deferrals will be recognized in decreasing amounts through 2010, with approximately $12 million expected to be recognized in the quarter ending December 29, 2007 and $15 million in fiscal year 2008

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2007 Private BrandDirect Import

Centralization Supply ChainProcurement

IT Conversion MarginCompression

2012

+150bps

+120bps+60bps

+40bps -70bps

Global Margin Improvement Initiative (2007 – 2012)

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-50 bps0%25.7%$ 99025.2%$ 992Operating Expense1

-80 bps--14.7%--13.9%ROIC1

---9%$ 0.47--$ 0.43EPS1

---4%$ 0.45--$ 0.43EPS – GAAP

---4%284.9--274.4Diluted Shares

-30 bps-9%3.3%$ 1293.0%$ 117Net Earnings - GAAP

-50 bps-13%3.5%$ 1343.0%$ 117Net Earnings1

-180 bps-35%5.1%$ 1973.3%$ 128EBIT1

--2%$ 3,857--$ 3,935Sales

bps%% SalesAmount% SalesAmount

B/WQ3 06Q3 07in millions, except ratios, returns and per share data

1Non-GAAP numbers. A reconciliation of GAAP to non-GAAP numbers can be found on the Office Depot web site at www.officedepot.com.

Consolidated Financials - Third Quarter 2007

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$ 271$ 14 $ 6$ 251$ 2$ 4Non-Cash

$ 190$ 60 $ 11$ 119$ 3$ (3)Cash

Cash Flow Impact

$ 461$ 74$ 17$ 370$ 5$ 1Income Statement Charges

Total2008Q4 2007Program to Date20062007

Q3in millions

Charges

During the third quarter of 2005, we announced a number of material charges relating to asset impairments, exit costs and other operating decisions (the “Charges”). This announcement followed a wide-ranging assessment of assets and commitments which began in the second quarter of 2005. We indicated that these actions would continue to impact our results for several years, and expenses associated with future activities would be recognized as the individual plans are implemented and the applicable accounting recognition criteria are met. As with any estimate, the amounts may change when expenses are incurred. From inception through the end of the third quarter of 2007, we have recorded $370 million of Charges.

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Cash Flow Highlights

-79%$ 575$ 121Free Cash Flow (Before Share Repurchases)

-77%$ 871$ 200Share Repurchases

53%$ 218 $ 334CAPEX

-76%$ 200$ 48Acquisitions

-6%$ 773$ 726EBITDA1

1%$ 205$ 206Depreciation & Amortization

-43%$ 792$ 455Net Cash Provided by Operating Activities

% ChangeQ3 YTD 06Q3 YTD 07in millions


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Balance Sheet Highlights

-80 bps14.7%13.9%Return on Invested Capital, Adjusted3

50 bps2.1%2.6%Working Capital as a % of Sales2

60 bps19.7%20.3%Return on Equity, Adjusted3

7%2.93.1Adjusted Debt/EBITDAR3

-2%$ 591$ 581Long-Term Debt, Net

166%$ 219$ 584Working Capital1

14%$ 1,408$ 1,609Inventories, Net

-1%$ 0.923$ 0.916Inventory Per Store (end of period)% ChangeQ3 YTD 06Q3 YTD 07in millions, except ratios and returns

1 WC = (current assets – cash and short-term investments) – (current liabilities – current maturities of long-term debt)2 WC as % of Sales = ((WC Q3 current year + WC Q3 prior year) / 2) / Trailing four quarter sales3 Non-GAAP numbers. A reconciliation of GAAP to non-GAAP numbers can be found on the Office Depot web site at www.officedepot.com.

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Strategic Priorities

• Economic environment remains uncertain so we’re focusing on things we can control– Reducing capital spending

– Moderating discretionary spending

– Driving cash flow generation

• North American Retail – Improving store productivity

• North American Business Solutions– Profitably growing market share with small to medium size

customers

• International– Improving cost structure and profitably grow market share

• Reviewing capital structure options

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Outlook

• Fourth quarter outlook– Sales to date in North America have been softer than third quarter

– Continued margin decline versus a year ago

– No tax benefit anticipated

– More significant earnings per share decline likely

• Longer term, business model can deliver improved results– Mid-single digit top-line growth

– Mid-teens earnings per share growth, with some margin growth however

– Total Margin expansion possible of up to 300 basis points

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Q & A

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Appendix

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-80 bps--13.9%ROIC1

60 bps----20.3%ROE1

--11%--$ 1.95EPS1

---6%--277.7Diluted Shares

0 bps4%3.5%$ 541Net Earnings1

-40 bps-5%4.8%$ 746EBIT1

--4%--$ 15,504Sales

bps%% SalesAmount

B/W(Previous)

Trailing Four Quarters (Ending Q3’07)

in millions, except ratios, returns and per share data


Consolidated Financials – Trailing Four Quarters

Earnings Conference CallThird Quarter 2007

November 20, 2007

earnings conference call third quarter...

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