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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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.
Good morning and thank you for joining us for Office Depot's Fourth Quarter 2018 Earnings Conference Call. This is Tim Perrott. I am 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 during the quarter and our progress towards 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'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 US Securities and Exchange Commission. During the call, we will use some non-GAAP financial measures as we describe the business performance.
The SEC filings, as well as the earnings press release, presentation slides that accompanying 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 for at least one year.
I will now turn the call over to Office Depot's CEO, Gerry Smith.
Thank you, Tim, and good morning to everyone joining our call today. It is great pleasure to be here with you this morning to discuss our accomplishments for 2018. A year 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 provide 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 supply 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 develop a 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 sales 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 digits sales increases across our BSD and retail segments. In addition to the benefits 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 generated significant cash flow for the year further strengthening our balance sheet while returning value to shareholders through investor friendly activities including our dividend payout and share buybacks.
Overall, the investments that we've 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'd 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 and 8% increase versus last year. Achieving positive revenue growth was a very significant milestone for company as this result reverses the declining sales trends from previous year.
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 and our adjacencies categories. In our retail division, although sales 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 pickup-in store offering which was up 24% over last year. While we are encouraged by these positive trends in our retail division, we recognized we have much more work to do to return this component of our business to positive growth.
CompuCom also contributed to overall revenue growth with sales up 1% when compared to over last year on comparable basis. Importantly, this represents a reversal in year-over-year sales decline 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 represent 16% of our total revenues. While much of the increase came from the CompuCom acquisition, it is important to note that services revenue across BSD and Retail divisions combined grew 13% 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 challenges faced at CompuCom in the second half of the year. We invested enhancing our service and capabilities and platform, making it easier for our customers to access our services with ease and confidence. We invested in store refreshes and layout to improve customer experience, including new more energy efficient LED lighting, technology upgrade 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 have 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 operating income of $254 million and adjusted operating income of $360 million reaching our revised higher goals for the year. Adjusted EBITDA results for the year were $567 million. Not withstanding these results, I'll point that we did experience margin pressure at the end of 2018 relating to a number of areas and we are taking specific actions to address as I will highlight later in 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 significant accomplishment particular when considering the higher level of investments 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 higher cash balance than last year. Let me repeat that again. We ended the year with higher cash balance than last year. Joe highlight our balanced our 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 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 are also finding that our customer base in the BSD and CompuCom division 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 continue to grow in the coming years. When you add a 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 underway in our business and the progress we are making to redefine experience and attract and retain high value business customers. Throughout the year, we've strengthened our businesses and 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 year and delivered its best yearly performance in over a decade. BSD grew 3% in 2018 representing 800 basis point improvements 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 adjacencies product category within BSD. This includes categories such as cleaning and breakroom and copy and print, furniture and technology products.
All adjacencies categories grew in the fourth quarter and they are now accounting 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 adjacencies 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 player in localized markets to spend our distribution reach and increase our customer base. These acquisitions have been success and we are leveraging our scale while offering an expanded assortment of both product and services. There are several other factors unpinning 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 product and services.
The shift we made in late 2017 for 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 platform, improving the customer experience and positioning us delivering enhanced portfolio of services.
Second, we carried our customer focus 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 am very proud of the team and their success and 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 improved 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 improve 500 basis points and 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 are 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 it 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 the human interaction that most of our customers prefer. We have nearly 6 million small and medium business customers that are 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 omni-channel approach can be seen in the continued increase in sales and our buy online and pick up in 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 derive increased traffic and designing our stores to make it easier for our SMB customers to access our technical expertise and buy our services.
We remain particularly excited about the co-working opportunities and the positive trends we are seeing. At our first co-working store in Los Gatos, California demand for the service has been very strong and customer feedback has been terrific. We are excited about this opportunity and our plans 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 and 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 is driven in all major categories, copy and print services which include print marketing services, documents and finishing and pack and ship grew over last year. We also won key new business contracts for print services and our BSD division which group 5% year-over-year. In our Tech Services category which includes device and managed services, 24x7 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. I say that again, one million subscriptions in 2018 and we look to continue to grow this aggressively. Last, we also invest in the rollout of our 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 achieve this by being the most accessible and most comprehensive business service solution 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 and 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 position 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 make great progress throughout the year integrating CompuCom offerings into our 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 deploy 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 one 1% despite lower sales for one of its largest customers which is currently experience a significant reorganization of its business.
That said, CompuCom operating results for the year were clearly disappointing to us and we have taken several actions to address. These actions include a complete realignment of the 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 re-incentivize 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 remains strong and we've successfully pursued several cross -selling opportunities, capturing nearly $100 million in contract value in 2018. We're 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 recognize 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 now like to discuss the investments we have 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 US population and has a unique capability to deliver directly to our customers desktop. This places us in a unique category as only a few of the supply chain networks in the US have this capability on 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 9 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 positions us to pursue other commercial opportunities and partnerships.
We invest in several areas of our network this year to further enhance our capabilities and 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 and allows greater insight to supply chain cost, providing the ability to make more informed decisions and improve profitability.
Additionally, during the year we expand the reach of our distribution network by identifying and acquiring profitable, regional distribution companies and geographic areas that were previously underserved by our network. This is 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 distributions, procurement and labor and additional cost incurred associated with customer migrations. We are taking actions to address these challenges and to drive improve profitability, while continuing to grow our top-line revenue.
In addition to leverage 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 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 and traditional and non-traditional means to create additional value for shareholders and improve margins. And lastly, driving to enhance customer penetration, increasing sales across our channel, driving greater share of wallet and improving profitability. These actions will help ensure that we continue to see 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.
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 continuing operations on an adjusted basis. Also please keep in mind that the companies reported financials include the results for the CompuCom division for the fourth quarter and full year 2018.
But only from November 8th 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 return capital to shareholders.
Total company sales for the year totaled $1billion, compared to $10.2 billion in 2017. The increase of 8% was driven by the addition of CompuCom results for the year, as well as continued growth in our B2B businesses which more than offset a decline in sales with our retail 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 a 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 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 company-wide 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 90% increase in combined services 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 restriction 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 align our incentive compensation plans to operating metrics to drive performance. Although, these incentive accruals were reduced for the year, we did achieve over 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 impacts from the items mentioned earlier, the fourth-quarter 2018 adjusted net income from continuing operations was $52 million or $0.09, 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 use 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, 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 gross 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 a strategic priority and product sales increased 2% versus the prior year. We continued 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 cost to migrate the final set of Office Max 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 am 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 declines 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 of store closures over the past 12 months, as well as a negative impact to revenue of approximately $10 million resulting from the adoption of the 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 the result of a more stable footprint, improved conversion and accelerated growth of our buy -online pick up 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 and 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 de-leveraging with labor, occupancy and depreciation increasing as a percentage of sales on lower volume, coupled with investments in our services platform, technology improvements and in-store experience.
During the quarter, we closed 13 stores, open 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 results are included in total company results since the acquisition of CompuCom on November 8, 2017. Including the companies reported fourth quarter results were revenues of $156 million and operating income of $8 million from CompuCom division.
Unaudited adjusted historical results for the entire fourth quarter of 2017 have 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 $271million 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 services.
CompuCom gained momentum in new service orders with service order win up for the year. This bodes well for future revenue as these contracts are operationalized over the next 6 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 costs associated with onboarding new customers.
These impacts more than offset lower selling, general and administrative expenses 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 was 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 loans 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 increase 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 improvement 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 we initiated 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 and sales growth. For 2019, we are focusing on continuing to drive top-line 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 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?
Overall, I'm very pleased with our numerous accomplishments in 2018 supporting our transformation and strengthen 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 the 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 our supply chain visibility and optimization software to drive down distribution costs. Additionally, driving a higher growth and high margin private label brands, as well as executing mitigation strategies to help offset paper cost 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 to 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.
[Operator Instructions]
And your first question comes from the line of Michael Lasser. Michael, your line is open; please state your company name.
Good morning, it's actually a 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 $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 if the economy slows and what's the assumption for bolt-on acquisitions embedded in the guidance? Thanks.
Sure, let me 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 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.
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?
Well, first this is Gerry and thanks for the questions today. I mean first we did not comment on competition or competitors, but we were focused on continuing our strategy. We got the sales engine going over the last two years. And we saw a tremendous cash engine success, the services engine 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 proved we could grow in BSD that was a something that people didn't believe before we've done.
And we're going to continue to improve all parts of our business and invest in the platform. So we're optimistic we're going to be successful.
Your next question comes from a line of Liz Suzuki. Liz, your line is open. Please state your company name.
Hi, this is Jason Hass on for Liz Suzuki from Bank of America. Thanks for taking our question. So it sounds like you're not totally satisfied with CompuCom performance. I am just curious to know what you think the issues been? And then just also wanted to ask in terms of the large customer that you had called out. I was curious if you had started to get back some of those sales in this quarter. Thanks.
This is Gerry. From CompuCom perspective, overall, we're very pleased with the assets we have in the business, 16 straight years now for Gartner Magic Quadrant, but what we have to do is accelerate growth in the business. I will point out that for the first time pre acquisition and post acquisition, we had year-over-year growth 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 would add some comments.
I think Gerry hit it I mean we've been pretty candid and 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 it will continue to improve over the long term.
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 ones seem to be resonating across the divisions that just seemed to be outperforming relative to the other one. Thanks.
Yes. Sure. I think when we talked about a little bit earlier which is we're seeing continued strength in 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 all are starting to take tractions. High expectations that they'll continue to grow. [Multiple speakers] just to add to that I think it's-- I think if you look at the core of copy and print, tech services, they cross -selling with CompuCom and all those are core fundamental services that we will and continue to grow at an aggressive pace. Thanks for the questions. Any final question?
End of Q&A
I'm not sure if there are any further questions.
I like to thank you operator for everyone who 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. Appreciate it. Thank you.
Thank you, everyone for your participation. You may now disconnect.