Xerox Holdings Corporation

Good morning and welcome to the Xerox Holdings Corporation fourth quarter 2020 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, 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 one at any time during this call. You can withdraw your question by pressing the pound key. During this conference 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 be.

Good morning, and thank you for joining the call. I hope everyone is safe and healthy. Times of adversity require working in unison, and I couldn't be prouder of the way our team came together. We put our strategy to the test in 2020, demonstrating we can deliver positive earnings per share and free cash flow while protecting our people, returning capital to shareholders, and continuing to invest in our future. The team's discipline allowed us to turn on a dime tightly controlling expenses while steadfastly supporting clients. To summarize the full year results, GAAP EPS from continuing operations totaled 84 cents, down $1.94 from 2019, and adjusted EPS was $1.41, down $2.14 from 2019. Operating cash flow from continuing operations was $548 million, down 696 million year-over-year, and free cash flow was 474 million, down 705 million year-over-year. Adjusted operating margin was 6.6 percent, down 650 basis points year-over-year. We generated $450 million in gross cost savings, meeting our target for the year. Over the last two and a half years, Project Own It has generated $1.4 billion in savings, freeing up cash to reinvest in our operations, targeted adjacencies, and innovation. We returned 112% of free cash flow to the shareholders in 2019. And we accomplished all of this while revenue declined to approximately $7 billion, a decrease of 22.7% in constant currency from the prior year. as a result of office closures in practically every geography in which we operate. The impact of the pandemic continues. We're optimistic about the vaccine distribution and advances in testing and treatment, though the pace of the economic recovery and office reopens remains fluid. While we saw sequential improvement over the last two quarters, we don't expect a return to growth in the first quarter. In 2021, we expect revenue to be at least $7.2 billion in constant currency, operating cash flow from continuing operations to be at least $600 million, and free cash flow to be at least $500 million. We believe this is achievable even in the unlikely scenario businesses don't start reopening in a meaningful way in the first half. The benefit of a solid strategy is it's flexible in its application, yet strong in its foundations. Our four strategic initiatives, optimize operations for simplicity, drive revenue, re-energize the innovation engine, and focus on cash flow and increasing capital returns, remain at the center of what we do to deliver results for all stakeholders. Let me walk through the changes we are making to the business to drive organic growth. Project Own It has been critical to fund investments by generating savings, and there is more to do here. We plan to save $375 million as a result of Project Own It in 2021. Through robotic process automation, we have streamlined routine tasks, including managing service tickets, updating asset data, and processing customer billing and vendor invoicing. In the fourth quarter, bots processed more than 1.8 million transactions, up over 300% year-over-year. RPA's potential to deliver savings and efficiencies is now part of our go-to-market strategy. We are piloting our RPA services with clients, supporting loan application processing, targeted mail campaigns, document management for legal clients, and more. There is opportunity to offer this capability to small and medium-sized businesses to help increase their efficiency and reduce costs by automating operations. By unlocking the opportunity within existing and new businesses, we will increase the breadth of our offerings, reach new customers, and drive organic growth. Our printing business is second to none. IT services delivered organic growth in 2020 and is gaining traction with small to mid-sized businesses. Within the next 12 to 18 months, we plan to stand up three separate businesses, Software, Financing, and Innovations. as we continue to invest in them to support clients. The software business will bring together our expanding capabilities to support clients' digital needs and will report to Steve Bandersack, our President and Chief Operations Officer. Late last year, we acquired CareAR, an enterprise augmented reality business that offers live virtual assistance technology. CareAR's initial technology is focused on modernizing field service customer support, and other IT services. Today, ServiceNow is collaborating with Deloitte to integrate the CareAR platform for ServiceNow into the operations, service systems, and support workflows for joint clients. The software business will also include DocuShare, our cloud-based content management system, XMPie, our multi-channel marketing software, and other software offerings such as the Xerox Content Hub we launched late last year. This new offering integrates XMPy and turns Xerox multifunction printers into content creation stations. SMBs are seeking enterprise-level content management systems that allow easy access to documents no matter where a person is working. Our newest release, DocuShare Go, is designed for the SMB. Its multi-tenant infrastructure offers automatic capabilities and a SaaS pay-as-you-go model for single or multiple users. Also launched was a new version for enterprises, offering more capability for on-premise users and addressing their need for increased controls and security. Xerox Financial Services, or XFS, will become a global payment solutions business with a new leader, Nicole Taracco, reporting to me. XFS previously provided financing mostly for Xerox equipment to support our sales team. Looking ahead, it will offer financing for technology, office equipment, and more for third parties as well. Fully utilized, XFS will expand our customer base, create potential cross-selling opportunities, and position us to support SMB. We've previously shared our focus on DSMB, a large and growing part of the business community whose needs for IT services increased with the shift to remote and hybrid working environments. Our IT services business, now operational in the U.S., U.K., and Canada, delivered organic revenue growth in 2020. We see increased opportunity here as we enhance offerings with new security and automation capabilities and leverage new and existing partnerships. including expanded partnerships with Dell and Lenovo, allowing us to grow our geographical coverage and IT services offerings. Despite global office closure and widespread economic impact of the virus, Xerox regained the top spot in total equipment sales revenue market share in our territory, held the number one position in both mid and production segments, and took share in entries. Demand within government accounts has been a key driver, resulting in year-over-year equipment sales growth in the U.S. enterprise business. We believe the capability, security, and broad selection of apps on Xerox devices puts them ahead of competitors, providing clients with a seamless experience that increases their efficiency. In the fourth quarter, the production portfolio had major updates across all segments, addressing professional print shops' needs to extend their business to new customers and enhance productivity. One example is the Baltoro's new color accelerator add-on that allows for more applications while saving ink. The Baltoro holds the top market share in the cut sheet production inkjet class. Digital print enhancements increase profitability, providing clients with higher margins through increased offerings. Our suite of production products offers the widest range of colors and embellishments. and we're making it easier to take advantage of this opportunity with a new A3 device, the C8000W, introduced late last year that represents the most affordable entry point into this lucrative print market. In 2021, we are continuing to innovate in this portfolio, adding workflow automation, machine learning, artificial intelligence, and remote services to make our clients' employees more efficient while maintaining security. For example, machine learning will enable devices to recognize individual patterns and make time-saving recommendations. In innovation, we have made some strong progress over the last two years, developing disruptive technology that we are beginning to commercialize. That gives us the confidence to stand up a separate innovation business that will be named Polo Alto. This new business will include the innovation teams in Polo Alto, California, Webster, New York, Cary, North Carolina, and Toronto, Ontario. The park business will be led by our Chief Technology Officer, Naresh Shankar. Our 3D metal printer is a breakthrough technology. Localized 3D printing can improve resiliency, flexibility, and responsiveness of supply chains by enabling localized production of end-use parts. And our liquid metal technology uses off-the-shelf wire, which is safer, more cost-effective, and requires less post-processing than metal powders. In December, we reached an important milestone with the first installation of our Xerox Element X 3D liquid metal printer at the Naval Postgraduate School in Monterey, California. The Xerox solution will be a key component of the school's efforts to use additive manufacturing to sustain the Navy's mission readiness agility, and reach across its sea, land, and air operations. This is a strategic partnership for NPS, which is looking to lead large-scale adoption of additive manufacturing throughout the U.S. Navy. Similarly, with industrial IoT, the combination of low-cost sensors, cloud computing, and data analytics software has the potential to advance sustainable practices, limit equipment downtime, improve safety through predictive maintenance, and provide increased situational awareness. These are the areas where PARCC developed fiber optic sensors and solutions are gaining traction. PARCC has worked with Victrack, a state-owned enterprise in Victoria, Australia, to pilot a new technology that remotely monitors the structural health of critical infrastructure, such as bridges, in real time. The initial trial of our solution proved successful, and Xerox is planning broad commercialization given the increasing risk profile and safety issue caused by aging infrastructure across the globe. Other IoT sensors built by PARC are part of a groundbreaking project by the U.S. Defense Advanced Research Project Agency to study the oceans. In Cleantech, the team is developing a solution that has the potential to cut energy consumption of air conditioners by up to 80%, reducing greenhouse gas emissions and improving indoor air quality. At the end of 2020, the team completed a proof of concept prototype and validated its operational principle. Now, we are working to build the first alpha unit by the end of 2021. serving as a sample for potential partners to assess and provide product requirements for our beta units to be completed by the end of 2022. Technologies such as AI, augmented reality, and virtual reality developed at PARC also will be rolled into CARE-AR's product roadmaps and other parts of our portfolio. To enhance our innovation ecosystem and further capitalize on the deep knowledge of experts at PARC, we are establishing a $250 million corporate venture capital fund. This fund will invest in startups and early and mid-stage growth companies aligned with our innovation towers and targeted adjacencies such as IT services, software, and AI. The corporate venture capital fund will act as a bridge between internal and external innovation and commercialization efforts, building an ecosystem that drives growth through investments, commercial partnerships, and co-development of new technologies. Our strong cash position provides flexibility to explore a wide range of M&A opportunities, invest in existing business, and return capital to shareholders. Over the last three years, we returned 89% of cumulative free cash flow to shareholders, exceeding a commitment to return at least 50% annually. The majority of returns came through share repurchases, In 2020, we returned over 100% of free cash flow to the shareholders. We view share repurchase as an investment in the business. We have a $500 million repurchase authorization for 2021 and plan to be opportunistic in how we use it. We shared a lot with you today, so let me take a moment to sum it all up. Like many others, the pandemic hit us hard. We got up. dusted ourselves, and got to work transforming Xerox for the future. We're taking market share, investing in existing and new technologies, and regularly sourcing and evaluating M&A opportunities. Our three-year plan and four-trick initiatives remain our roadmap. Our strategy and hard work over the last few years are paying off. We delivered positive EPS and cash flow and returned capital to shareholders. We are positioned to return to growth in 2021 and expand into new markets. We plan to stand up three separate businesses, software, financing, and innovation, by 2022 to provide greater focus, flexibility, and visibility. We plan to identify the right long-term structure for each of these unique businesses, which may include utilizing the holding company structure. We bolstered our software offerings with the acquisition of CareARC. We are integrating existing capabilities to offer a broader suite and expand beyond existing clients. Our RPA technology has moved from optimizing our business to doing the same for clients. Our investments are aimed at technologies targeted for double-digit growth in coming years. These actions, along with the Corporate Venture Capital Fund, demonstrate the priority we are placing on building a strong future. We are confident in our strategy and our team, whose tireless commitment to Xerox and its growth will always be the key to our success. Now let me hand it over to Xavier to cover the financial results in more detail.

Thank you, John, and good morning, everyone. As John mentioned, we are making changes to our business to drive organic growth, and after I review our Q4 financial results, I will expand on our plan for our financing business, XFS, on our innovation business, PARC. In Q4, we sequentially grew revenue, adjusted EPS and cash flow versus Q3, consistent with the slightly improved economic condition we observed. But the year-over-year comparison shows that our financial results continue to be impacted by business closure resulting from COVID-19. We reported 1.93 billion of revenue this past quarter, a year-over-year decline in constant currency of 19.8%, when excluding the OEM licensing fee of 77 million that was paid to us by Fuji Xerox in Q4 2019, or 22.3% with it. Adjusted operating margin of 9.5% in the quarter represents sequential improvement of 210 basis points over Q3 on a year-over-year decline of 460 basis points, excluding the 270 basis point impact of the one-time OEM fee from Pudic Xerox. The year-over-year decline in operating margin was caused by lower revenue resulting from pandemic-related business closures which was partially offset by savings from Project Own It on participation in government assistance programs, the impact of which was significantly less than in prior quarter. Growth margin was 36.2% in the quarter, which is down 350 basis points year over year, excluding the one-time OEM fee from Fujixerox, or down 540 basis points with it. The year-over-year decline in gross margin was caused by lower revenue coupled with less profitable revenue reflected lower post sales and supplies on higher equipment sales on IT services revenue, which were partially offset by benefit from project on it. SAG expense of 440 million decreased 72 million year-over-year and was in line with quarter three SAG expense of 444 million. The year-over-year improvement reflects benefits from cost savings and restructuring associated with projects on it. Bad debt expense of $13 million was $5 million higher than prior year and $3 million lower than Q3. Current bad debt reserves for our trade and finance receivables are in line with our projections. ARD&E as a percentage of revenue was 10 basis points higher year-over-year on lower revenue. We continue to increase investment in our innovation focus areas while reducing spend on our print technology by simplifying our portfolio. Other expenses net of 30 million was 22 million higher year over year as a result of action we took to improve our long term liquidity position in quarter three and quarter four. whereby we used proceeds from new debt financing to prepaid 1.1 billion of bonds that would have matured in May 2021. The repayment resulted in a net loss of 26 million, but it satisfied virtually all our near-term bond maturities. Our fourth quarter adjusted tax rate was 29.8% compared to 25% in the prior year. The 480 basis points year-over-year increase in adjusted tax rates results primarily from a change in the geographical mix of our earnings. Adjusted EPS increased sequentially 10 cents over Q3 and was 75 cents lower than the same quarter last year. Gap EPS of 36 cents was 81 cents lower year-over-year. Non-gap adjustment included an increase in the amortization of intangible assets reflecting new acquisition in early 2020 and the loss of early extinguishment of debt that I referred to a moment ago. These increases were partially offset by lower restructuring on related costs. In Q4, we recorded 29 million of restructuring on related costs compared to 53 million in the four quarters last year. Our focus on expense control on working capital drove positive earnings on cash flow in the fourth quarter. We generated $235 million of operating cash flow from continuing operation in the quarter, which was $129 million above quarter three and down $163 million from prior year, primarily driven by lower net income. For the year, we generated $548 million of operating cash, Cash from working capital of $123 million was $118 million higher than prior year due to inventory management and strong collection that were only partially offset by an increase in accounts payable, primarily due to the timing of payment to vendor. CapEx was $14 million in the quarter and $74 million for full year, which was slightly higher than prior year reflecting spending in IT infrastructure on strategic revenue initiative. For 2021, we expect capex of 100 million supporting our strategic growth program on continued investment in our IT infrastructure. We spent 203 million of cash on acquisition in 2020, including our quarter four acquisition of Care Air. For 2021, we are modeling span of 100 million for tucking acquisition, primarily focused on further penetrating the SMB space on our target agencies. We also continue to evaluate larger M&A opportunities that can accelerate growth, diversify our revenue base, and expand our capabilities. Within financing cash flow and in line with strategic action we took to improve our long-term liquidity, we prepaid 1.1 billion of bonds that would have matured in May 2021. We proceed from a combination of senior unsecured bond issued in quarter three on a new 500 million private securitization of US finance assets that closed in December. We have no bond maturing in 2021 on only 300 million of bonds maturing in 2022. We repurchase 150 million of share in the quarter which completed the 300 million of share repurchase that we guided to for the full year. We also paid 54 million in dividend in quarter four and 230 million in dividend full year. We generated 221 million of free cash flow in the quarter and 474 million for the full year. We are confident in our ability to generate cash and we have a strong balance sheet that supported shareholder return of $530 million in 2020, which was 112% of our total free cash flow for the year. We ended the year with $2.7 billion in cash, cash equivalent on restricted cash on our $1.8 billion revolving credit agreement is on loan. Turning to quarter for revenue, equipment sales of $510 million declined 18.8% in constant currency. While COVID-19 was still impacting our equipment sales and installs in the quarter, activity in government account in both the U.S. and EMEA was strong. Our U.S. enterprise business had another quarter of year-over-year equipment sales growth to government customers who have sustained strong demand into 2021. Also in the U.S., equipment sales to graphic communication customers grew sequentially. reflecting strong demand for our Baltoro cut-sheet inkjet system. In EMEA, large government deals and our directional improved sequentially and we saw higher install of entry mono devices as well as strong demand for our recently launched Primelink light production mono devices. However, SMB channel in the US and in EMEA were more challenging in quarter four compared to quarter three due to increased restrictions caused by the pandemic. Post sales revenue of 1.42 billion in quarter four declined 20.1% in constant currency, adjusting for the OEM fee impact, which was in line with quarter three trend. Including the OEM fee in the prior year, post sales was down 23.5% in constant currency. Our post sales revenue is largely contractual. Most of our contracts include a minimum fixed charge and a variable charge based upon print volume. Post sales also includes unbundled supplies, paper, and other sales, which are largely sold through our indirect channels on our more transactional. Strong year-over-year growth in IT services in our XBS channel in the U.S. on sales from recently acquired dealers outside the U.S. enable a 13.6% year-over-year revenue decline in constant currency in supplies, paper, and other sales, compared to a 20.2% decline in Q3. The growth in IT services sales was driven by demand for remote working learning solution, as well as IT security reinforced requirement. Xerox services revenue in Q4 declined 19.4% year-over-year in constant currency, compared to a 21.3% decline last quarter. While activity remained challenged as a result of COVID-19, our new business signings and our renewal win rate grew year over year in the quarter. On a full year basis, global enterprise signings were higher, which provides confidence in our business recovery post-COVID-19. Looking at our profitability trend clearly shows the impact of the pandemic on our business, particularly in the first half when revenue declined 24.4%, as a result of the widespread global lockdown on business closure. Nonetheless, we generated positive cash flow on earnings in every quarter due to the speed with which we were able to react to the impact of the pandemic. Our ability to react quickly come from Project Own It, which has created a more flexible cost structure on discipline expense management, allowing us to identify temporary cost savings measures To help manage through the pandemic under project on it, we have achieved approximately 1.4 billion of gross cost savings since late 2018 including 450 million in 2020 we expect 375 million of gross cost savings from project on it in 2021. The progression of improvement in the second half of the year is indicative of the modest global economic recovery, particularly in quarter three. Quarter four is typically our largest quarter, and it was again this year. However, our business was impacted by the resumption of lockdown later in the quarter as a result of COVID-19. Now on to capital structure. Our pension funded status is updated annually on as of December 31st, 2020. Our net unfunded pension liability was 905 million, which include 851 million of unfunded pension liability for plans that by design are not funded. So 307 million year over year reduction in our net unfunded pension liability reflect contribution on strong asset return that were partially offset by decreased discount rate. In 2020, we contributed 139 million to worldwide pension plan and expect 2021 contribution to be in line with 2020. As our debt primarily support our financing business, XFS, I will take a few minutes to discuss some of the structural announcement John spoke to earlier. which includes standing up XFS on innovation as separated businesses. Xerox has a long history of providing financing to our customers. Supported by our strong balance sheet, this is a key business enabler, providing customers a one-stop shopping experience and allowing us to maintain long-standing customer relationships. Customer financing also provides additional post-sales revenue, such as secondary market equipment sales on evergreen payment that extends beyond the initial lease term and carries strong margin. We will now expand XFS activity beyond financing only Xerox equipment. To provide more context on XFS, as of year end 2020, XFS balance sheet asset consisted of 3.5 billion of finance receivable on equipment on operating lease. We leveraged this asset at a 7 to 1 debt to equity ratio today. Therefore, $3 billion of the $4.4 billion of our total reported debt was allocated to XFS. The remaining debt balance, which we call core debt, was $1.4 billion. After netting the $2.7 billion of cash, cash equivalent on restricted cash on our balance sheet at year-end, our 2020 ending net cash position was $1.3 billion. In order to more strategically and economically fund XFS financing activity, we raised 840 million in securitization of U.S. finance assets in 2020, which provide much funding at attractive all-in rates. With respect to innovation, we are encouraged by the progress we have made in developing new technology within our focus area that will result in PARC becoming not only a world-class research center, but a growth engine for Xerox. We expanded our investment in innovation in 2020 and will continue to do so in 2021. Also, as John mentioned, we are allocating 250 million of our excess cash to create a corporate venture capital fund. We expect to deploy those funds over the next five years to further enhance Park's innovation ecosystem. We are advancing innovation, and although we are expecting modest revenue from PARC in 2021, this disruptive innovation has significant long-term revenue growth potential for Xerox. We expect to begin providing investors with additional financial information on both XFS and innovation within the next 12 to 18 months. I will wrap up by addressing our guidance. As John mentioned, we are guiding to at least $7.2 billion in revenue in 2021 and to free cash flow of at least $500 million. In our modeling, we expect a modest recovery throughout the year, but we also expect quarter one to remain challenged due to the COVID-19 lockdown and business closure we are seeing today. We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders. Thank you. And now back to John.