Xerox Holdings Corporation

Good morning and welcome to the Xerox Holdings Corporation third quarter 2020 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Interim Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com forward slash investor. At the request of Xerox Holdings Corporation, Today's conference call is being recorded. Other recording and or rebroadcasting of this call are prohibited without the express permission of Xerox. After the presentation, there will be a question and answer session. To ask your questions at that time, please press star 1 at any time during this call. You can withdraw your question by pressing the pound key. During this call, if there are questions at that time, please press star 1 at any time during this call. You can withdraw your question by pressing the pound key. During this call, Xerox executives will make comments that contain forward-looking statements, which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein. At this time, I would like to turn the meeting over to Mr. Byzantine. Mr. Byzantine, you may begin.

Good morning, and thank you for joining our Q3 2020 earnings call. I hope everyone is safe and healthy. For the third quarter, revenue totaled $1.77 billion, down 19.7% in constant currency year over year, and up $302 million from last quarter. Free cash flow was $88 million, down $243 million year over year, and up $73 million from the second quarter. Adjusted earnings per share totaled 48 cents. down 32 cents year-over-year, and up 33 cents from the second quarter. Adjusted operating margin was 7.4%, down 460 basis points year-over-year, and up 320 basis points from the second quarter. I couldn't be more proud of our team. With all this year has thrown at us, the team has remained steadfast and determined to provide exceptional support to our clients while driving our transformation forward. The third quarter results reflect the agility of our business and the team's laser focus on Xerox's four strategic initiatives, optimize operations, drive revenue, re-energize the innovation engine, and our focus on cash flow and increasing capital returns. Let's walk through each area. Project Own It has instilled a strong sense of discipline and responsibility throughout the company, Employees at all levels understand the need to make smart decisions that drive continuous operational improvements while preserving cash. That's been especially true during the pandemic. This foundation enabled us to react quickly to the business impacts while continuing to invest in the future. Project Own It provides a framework to strike that balance while positioning us to deliver at least $450 million in gross savings this year. We have taken and will continue to take actions focused on discretionary spending as needed. The company's flexible cost structure gives us confidence we are well positioned to manage the business through the pandemic's uncertainty. We're investing in a number of areas that are making us more efficient and better able to serve our clients, including supply chain, robotic process automation, and analytics. For instance, we use predictive analytics to anticipate customers' future print needs and ensure devices and services are optimally positioned. In the third quarter, our robotic process automation team oversaw 1.5 million transactions. That's up 300% year over year. We expect to see a similar increase over the next 18 months. The pandemic has spurred new opportunities for growth across our portfolio as businesses balance their workforce needs. While companies plan to return many of their employees to a workplace once it's safe, they are adopting more flexible work policies and the technologies to support them. The office has never been a stagnant place. It has evolved over the decades and will continue to do so in the future. And Xerox will remain an important partner in that evolution, focused on providing security, collaboration, and productivity for businesses big to small. Highlights from this quarter included, as more businesses reopened in Q3, we saw print volumes and demand for printing devices increase compared to Q2. Assigned pre-pandemic behaviors resumed as people returned to the workplace. This uptick helped drive the improvement in our rate of revenue decline compared to the last quarter. In the Americas, we maintained overall market share leadership for equipment sales revenue according to the most recent IDC data. In production, we grew market share in the area Xerox serves. Our Baltoro inkjet press remains unmatched in the marketplace. Demand for this press is strong with installs up year over year. Demand by customers who provide essential services such as the government, healthcare, organizations, and schools remains strong. IT services grew year over year in the third quarter, demonstrated the increased need of SMBs to protect their infrastructure and customers' critical data. Within our service portfolio, we grew new business signings and renewals year over year. Digital hub and cloud print and capture and content are key drivers of this growth as they allow clients to manage content no matter where they are working. There's a strong pipeline for these services for the remainder of the year. Security and investments in new technology are helping drive demand for Xerox products and services as companies support remote workers and business increasingly is conducted online. Cyber criminals are seeking to exploit security gaps at enterprises and small and medium-sized businesses during the pandemic. For employees working remotely and using their own personal devices, companies often don't know what is being printed and whether that device is secure. Xerox devices add an additional level of security as they are armed to help detect and prevent malicious attacks, the proliferation of malware, and misuse of unauthorized access to printers. By expanding our intelligent workplace services to the home, we are providing existing clients with the protection they need. Similarly, investments in software such as DocuShare Go are bridging the home and office. Go is a new cloud-based content management platform that uses artificial intelligence and machine learning to organize content, allows users to collaborate on files, and optimize workflows. With enterprise-grade security, It's designed with the small business user in mind. It uses a simple SaaS pay-as-you-go model and can be set up within minutes. Enhancements to the DocuShare portfolio have earned Xerox industry recognition. Most recently, DocuShare received a gold award in the enterprise content management category from Infotech Research Group. This award is determined based on end-user feedback on the software's features and service, and innovation, among other things. We expect to build momentum within our software portfolio as companies increasingly need tools to support a hybrid work environment. Monetizing innovation remains a key focus, and the team continues to make progress across the innovation pillars with 3D printing, IoT sensors and solutions, and cleantech. In 3D, we are on track to launch the first version of the liquid metal 3D printer. This product will print aluminum 4008, which is an alloy used in multiple industries, and will produce prototyping, pre-production, and specific end-use parts. Our roadmap includes expanding the range of metal alloys that we can print, enabling us to meet the needs of a broader set of applications and parts over time. We are making progress in IoT and have been awarded contracts for external pilots with select customers. For example, we are working with the Defense Advanced Research Projects Agency, known as DARPA, on the Ocean of Things, a project to expand what scientists know about the seas. DARPA is deploying small, low-cost drifters in the Southern California Bight and Gulf of Mexico to collect data on the environment and human impact. HARC built drifters for the first phase of the project and will deliver up to 10,000 more that are more compact and cost-effective for the next phase. Data gained in this round will help further optimize the final design, at which point DARPA expects to deploy large volumes of these drifters. In cleantech, the team is on track to complete the prototype in 2021 that has the potential to cut energy consumption of air conditioners by up to 80%, reduce greenhouse gas emissions, and improve indoor air quality in the buildings. This is all while reducing energy bills for businesses and individuals. In healthcare, we accept the demand for hand sanitizer, disinfectant solutions, and ventilators on a quarterly basis. All require little capex. As we said at the onset of the health crisis, these initiatives are about helping save lives, and we will keep doing this as long as there's a need. While investments in our innovation pillars are longer-term plays, the revenue and client engagements are promising. In the third quarter, we strengthened the company's liquidity, ending the quarter with approximately $3.3 billion of cash, cash equivalent and restricted cash, and a $1.8 billion undrawn revolver. In the quarter, we refinanced all of our outstanding 2020 debt maturities, and in October, we prepaid a portion of our 2021 debt. We did this using proceeds from issuing $1.5 billion of new senior unsecured bonds and a receivable securitization. As a result, the company has only modest debt coming due for the next two years. We continue to evaluate acquisition targets, large and small, using our established M&A playbook that focuses on ROI and IRR, among other things. We completed $150 million of share repurchases in the third quarter and plan to complete at least another $150 million in the fourth quarter. We remain committed to our shareholders' return policy of returning at least 50% of annual free cash flows to shareholders, and maintaining the company's current dividend rate. I covered many of these frequently asked questions in my earlier comments, but I will recap a few key points. Our financial results improved sequentially. While this isn't a measure we generally use, it is another data point to understand how we are managing through the pandemic and its impact. While we can't reliably predict what happens next, we have modeled numerous scenarios. The company's flexible cost structure and discipline allow us to manage the business smartly through this crisis. Strategic investments in Xerox's core adjacent and new areas are focused on addressing client needs today and tomorrow. These and other actions position Xerox to emerge from this time in a position of strength. I want to spend a moment on corporate social responsibility. While managing the effects of the pandemic, we raised the bar on ourselves to contribute to a better, more sustainable future. Xerox has long been recognized as a leader in diversity and inclusion. Knowing there's more all of us can do, we created a new diversity and inclusion roadmap to increase our impact both within Xerox and our communities. Another area we committed to do more was on greenhouse gas emissions. Having reached our 2025 goal six years early in 2019, we plan to achieve carbon neutrality no later than 2040 and reduce emissions by at least 60% by 2030. The team's work earned Xerox the title one of the most sustainably managed companies in the world by the Wall Street Journal. Additional information is available on Xerox's recently published CSR report on xerox.com. Before asking Xavier to review the financials, let me share some details on his background. The veteran of Xerox, he's held a number of leadership positions in finance, business transformation, and sales. In fact, before his promotion to president of EMEA operations, Xavier served as our corporate controller and CFO of the Americas operations. Xavier worked closely with Bill and served as an executive committee member. He is well-positioned to lead us through this transition. Xavier?

Thank you for the introduction, John. Also, our business continues to be impacted by COVID-19. Revenue improved compared to the second quarter in all regions as businesses began to gradually reopen and employees returned to the workplace, resulting in more of a hybrid work environment. Its increased activity enabled higher equipment installations and contributed to a lower rate of decline in prepaid volume sequential cost savings from our project-only transformation program, as well as savings from dedicated actions to preserve cash that focused on discretionary spent items in response to the pandemic. We generated $88 million of free cash flow in the quarter, on 253 million year to date, and we maintain our commitment to shareholder with 150 million of share repurchases on 61 million in dividend paid in quarter three. We ended the quarter with 3.3 billion of cash, cash equivalent on restricted cash. We also strengthened our balance sheet on improved liquidity in the quarter by refinancing approximately $1 billion of debt that matured in 2020, and in October, we prepaid $750 million of a $1.1 billion bond that matures in May 2021. Our $1.8 billion revolver that matured in August 2022 remains undrawn. Looking at our third quarter financial results, Total revenue of approximately $1.77 billion in the quarter declined 19.7% at constant currency year over year, and $302 million above second quarter. The $412 million decline in revenue year over year reflects the impact of COVID-19, which has resulted in business closure and has limited the number of people returning to the workplace. The decline in revenue has moderated compared to the second quarter, which I will speak about in more detail shortly. Looking at profitability, the year-over-year ratios on measures presented here continue to be impacted by the decline in revenue resulting from COVID-19. Adjusted operating margin of 7.4% was 460 basis points lower year-over-year and 320 basis points above second quarter. We continue to partially mitigate the impact of revenue decline with cost reduction from projects on it and from other actions implemented as a result of the pandemic, which include cost relief from temporary government assistance programs that were available to us in Q3. Growth margin was 36.8%, a decrease of 320 basis points year over year. The decline reflects lower revenue, price promotion investment, transaction currency, on tariffs that were partially offset by benefit from project on it, government assistance program on additional cost action. SAG as a percentage of revenue increased 170 basis points year over year as accelerated revenue declines from the pandemic more than offset the productivity benefit from project on it on other discretionary expense reductions. Bad debt expense increased by $3 million in the quarter compared to third quarter 2019. Current bad debt reserves for our trade and finance receivables are in line with our models. RD&E as a percentage of revenue was 30 basis points lower year over year. RD&E cost reduction included savings from actions taken to simplify our core technology portfolio, benefit from temporary cost reduction actions, on the favorable timing of investment. These savings were partially offset by higher investment in our focused innovation area where we continue to make progress. Other expenses net was a credit of $15 million, which was $14 million better than prior year, primarily due to a gain from an asset sales as well as lower non-service retirement-related costs, reflecting lower discount rates on a decrease in pension settlements. Our third quarter adjusted tax rate was 21.1% compared to 27.3% in the prior year, primarily due to the geographic mix of profit as well as the impact of discrete items on lower pre-tax income. Adjusted EPS of 48 cents was 32 cents lower than the same quarter last year, driven by the impact of COVID-19, which more than offset the benefit from cost reductions, a lower tax rate on lower shares. This was a $0.33 increase compared to second quarter. Gap EPS of $0.41 per share was $0.27 lower year-over-year, including the $0.32 decline in adjusted EPS on the year-over-year decline in non-gap adjusted items. Non-GAT adjusted to EPS include restructuring and related costs, the amortization of intangible assets, non-service retirement related costs, on-transaction and related costs, net, as well as the income tax on those adjustments. In quarter three, we recorded $20 million of restructuring and related costs compared to $27 million in the third quarter last year. Next, I will discuss cash flow. In the third quarter, we generated $106 million of operating cash flow from continuing operation, which was down $242 million from prior year and up $72 million from the second quarter. The year-over-year decline is primarily driven by lower net income on the use of cash from working capital, which was partially offset by an increase in cash from lower finance assets. Cash from working capital was $143 million lower than prior year due to the lower cash from accounts receivable on inventory that was partially offset by an increase in cash from accounts payable. The change in cash from accounts receivable is primarily a result of higher quarter-over-quarter revenue compared to last year, while the change in cash from inventory reflects lower sales volumes, delayed equipment installation, on lower purchases from indirect channel partners who continue to manage their liquidity as they work through the pandemic. While our indirect partners increased their level of purchases compared to last quarter to meet their demand, they are managing inventory levels closely. The increase in cash from accounts payable is primarily due to the timing of payments to vendors. Restructuring payment of $11 million were $6 million lower than prior year. CapEx was $18 million in the quarter, and free cash flow was $88 million. We expect CapEx to be in line with prior guidance for full year 2020, supporting our strategic growth program, including continued investment in our IT infrastructure. There were no acquisitions in the quarter. However, we continue to assess our pipeline of token acquisition and strategic M&A. As a reminder, we spent $193 million in Q1 to expand our SMB strategy internationally, and we expect full year spend for token M&A will be in line with prior guidance. Within financing cash flow, we issued $1.5 billion of unsecured bonds in August and closed a $340 million securitization of finance assets in July. Proceeds from the bonds on securitization were used to refinance our 2020 debt maturities of approximately $1 billion. We returned $211 million to shareholders in the quarter, including $61 million in dividends and $150 million in share repurchases, and we will repurchase at least $300 million of shares this year. We ended the quarter with $3.3 billion of cash, cash equivalent on restricted cash, which includes $750 million of cash proceeds from our August bond insurance, which was used in October to prepay a portion of a 1.1 billion bonds that mature in May 2021. Turning to slide eight, I will review revenue in more detail. Third quarter revenue declined 19.7% at constant currency. The impact of COVID-19 on our business is still sizable, but less profound compared to Q2. Total revenue was approximately 300 million higher sequentially with improvement in the rate of decline in equipment sales and post-sales revenue in both the Americas and EMEA. This is consistent with a gradual reopening of business and employees returning to the workplace that enable equipment sales and installation and drove an increase in print volumes sequentially. In addition, we had a 52% increase in install of our low-end black-and-white entry A4 MFP devices, which is partly driven by print demand in the hybrid work environment. In EMEA, which has a larger indirect channel compared to the U.S., we saw an increase in purchases from channel partners. However, they continue to monitor their liquidity on our closely managing inventory levels. In North America, we also saw sequential improvement within XBS in indirect partners, and performance remained strong in government customers within large enterprises. Equipment sales revenue was down 16.1% in constant currency compared to a decline of 38% last quarter. Improvement in EMEA reflects increased demand of entry products on sales of mid-range office products, including inorganic revenue from the UK-based dealers acquired in the first quarter this year. In the U.S., there was a softening in the decline in revenue within our XBS and indirect channel due to the opening of more business in the quarter compared to last quarter. While large enterprises continue to see year-over-year growth in sales to federal government customers, we have been less impacted by the pandemic compared to commercial customers. Within the Americas, Latin America continues to suffer as lockdown persists more broadly. Looking at product categories, activity improves in all segments compared to second quarter. Mid-range products are mostly used in shared workplaces and therefore were most impacted by office closures in quarter two and in quarter three. However, in quarter three, we did see strong demand for our recently launched Primelink devices on our new generation AltaLink ConnectKey devices on higher sales to government customers in the U.S. in this category. In the high end, COVID-19 continues to impact demand for our production color product, including the Versant Entry production color system on Iridesse production press where installs decline year over year. These declines were partially offset by continued strength in demand for our cut-sheet in-jet system, Baltoro, which is doing well in EMEA and the Americas. In entry, we saw strong demand for our A4 black and white devices in both EMEA and the Americas, which is in part a result of the hybrid work environment. Post-sales revenue declined 20.7% in constant currency in the quarter compared to 33.6% last quarter, reflecting the pandemic's impact on business opening on employees gradually returning to the workplace. Our post-sales revenue is largely contractual, and most of our contracts include a minimum fixed charge on a viable charge based upon print volume. We saw a sequential improvement in the rate of decline in post sales from Q2, which is in part due to a moderation in the rate of decline in page volume as more business reopened. Post sales also include unbundled supplies, paper, and other sales, which are largely sold through our indirect channel. Sales of unbundled supplies, paper, and other declined 20.2% in the quarter compared to a decline of approximately 48% last quarter, when inventory purchase from indirect channel were greatly reduced in response to lower demand as a result of the pandemic. We expect channel partner will continue to closely monitor their purchase until there is a stable recovery in page volume. Revenue from IT services are also recorded in post sales and grew during the quarter. in both our XBS channel in the US and from recently acquired dealer outside the US. Xerox services revenue declined 21.3% year over year in constant currency compared to a 28.2% decline last quarter. COVID-19 continued to impact the timing of customer purchasing decision, but we are seeing positive sign in our services business, including an increase in new business signing on an increase in our renewal win rate in quarter three, specifically for digital hub on cloud print services on content management. Our new business pipeline remains strong on this up in Boise, America on EMEA, which continues to give us confidence that our business will continue to improve as the economy rebounds. Next, turn to slide nine on our profitability on earnings. Adjusted operating margin was 7.4% in the quarter, which was 460 basis points lower year over year, but improved 320 basis points from the second quarter. So sequential improvement reflects a moderation in the rate of decline in revenue, as well as continued focus on cost reduction through our Project ONIT program on cash preservation action focused on discretionary items that are helping to mitigate the impact of COVID-19. We expect Project Own It will deliver at least $450 million of gross cost savings this year, in addition to around $1 billion of gross cost savings since its inception in mid-2018. The actions developed and executed under Project Own It have helped to transform our business to be in a position to react quickly to this year's events, which contributed to delivering positive earnings. In addition to Project ONIT, we are continuing actions focused on discretionary spend, which includes the use of certain temporary government programs to provide cost relief while minimizing the impact on our employees. We will continue to utilize assistance as available in the fourth quarter. Adjusted EPS of 48 cents declined 32 cents year over year, a sequential 33 cent improvement from last quarter as a result of the impact of COVID-19 on our operation, which more than offset the benefit from cost reduction, a lower tax rate, and lower share. Let's turn to slide 10 on a review of our capital structure. In the third quarter, we took actions that significantly increased our liquidity position. We refinanced approximately $1 billion of 2020 debt maturities with new five- and eight-year senior unsecured bonds on the $340 million private securitization of our U.S. finance receivable. Our bond issuance was very well received, and we raised $1.5 billion In October, we used the remaining bond proceeds to prepay $750 million of a $1.1 billion bond that matures in May 2021. Following this prepayment, our debt balance remained $4.3 billion, flat from year end, and we now have only around $300 million of senior unsecured debt maturing in 2021 on modest debt maturities through 2022. Three billion of our total debt support customer financing activities, and therefore, we break down our debt between financing debt and core debt. Financing debt is allocating by applying a 7 to 1 leverage to our finance receivables on equipment on operating lease, which together comprise our total finance asset. The remaining debt is our core debt, which was around $2.1 billion at that time of the quarter, and we ended the quarter with around $3.3 billion of cash, cash equivalent on restricted cash, which put us in a net cash position of around $1.2 billion when netting cash against core debt. Our pension funding status is updated annually as of December 31, 2019. Our net unfunded pension liability was $1.2 billion, which includes around $815 million of unfunded pension liabilities for plans that by design are not funded. In 2019, we contributed $141 million to worldwide pension plans and expect 2020 contributions will be in line with prior guidance. We have a 1.8 billion bank revolver, which is fully available to us. And as I just mentioned, we ended the quarter with approximately 3.3 billion of cash, cash equivalents on restricted cash. Last, turning to slide 11, I will wrap up. We expected a slow, gradual recovery in the second half under our base scenario. While our business improved quarter over quarter, we remain cautious, modeling multiple scenarios given the uncertainty around the pandemic on its recent surges around the globe. We do not anticipate a recovery in our revenue to pre-COVID-19 levels this year. Having said that, we have identified levers that can be actioned to manage through an elongated recovery if required. Under the numerous recovery scenarios we have modeled, we expect to deliver positive free cash flow on earnings in the fourth quarter. But given the level of uncertainty around the pandemic, we are not providing more specific financial guidance for 2020. Regarding capital allocation, we strengthened our balance sheet in the quarter and improved our liquidity by refinancing near-term debt, resulting in modest debt maturing in 2021 and 2022. Our cash position supports our shareholder return policy to return at least 50% of annual free cash flow to shareholders, including dividends on share repurchases. And we plan to repurchase at least $150 million of shares in the fourth quarter, in addition to the $150 million repurchased in the third quarter. These times are unprecedented. The entire Xerox management team is focused on cash and cost management in order to anticipate scenarios that may develop. I will now turn it back to John.