Xerox Holdings Corporation

Good morning and welcome to the Xerox Holdings Corporation first quarter 2021 earnings release conference call hosted by John Vizentin, 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 the 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 Q1 2021 earnings call. I hope everyone is safe and healthy. Our first quarter results were in line with our expectations. Revenue totaled $1.71 billion, down 8.1% year-over-year or 10.4% in constant currency. Free cash flow was $100 million, down $50 million from last year. Adjusted earnings per share totaled $0.22, up $0.01 year-over-year. And adjusted operating margin was 5.2%, up 50 basis points year-over-year. In the first quarter, in an environment where many offices remained closed, we grew equipment sales and IT services revenue year over year. I am proud of how our employees have continued to deliver for our customers during the pandemic. With small and medium-sized businesses and enterprise clients planning to return more employees to the office, our differentiated offerings are well-positioned to serve their growing needs. The strength of our performance portfolio and strategy gives us confidence we will return Xerox to growth in 2021. The team remains laser focused on our four strategic initiatives. Optimize operations, drive revenue, re-energize the innovation engine, and focus on cash flow and increasing capital returns. We made progress across each of these initiatives during the quarter. Continuing to optimize operations for simplicity, improve our cost structure, and expand margins must be balanced against investing in growth. Project Own It helps us strike the right balance, as does our focus on cash. Project Own It is on track to deliver $375 million of gross cost savings this year. Part of these savings are funding investments in growth areas and transformational initiatives, such as our effort to reimagine the service experience from supply chain logistics to customer care. Our investments in artificial intelligence, augmented reality, predictive analytics, robotics, and workflow automation are reducing our costs and making it easier to work with Xerox. We have now integrated these technologies to create software solutions that can transform how service teams support customers. We deployed these software solutions within our technical service organization. Our differentiated capabilities paired with our experience have allowed us to commercialize both the software solutions and a technical services offering, creating new revenue streams for Xerox. In fact, we recently signed our first competitive OEM customer for technical service. This OEM will outsource parts of their field service operations to Xerox. Our solution will help them gain efficiencies and provide quality service to their customers. We plan to introduce this offering to other OEMs and companies outside of our industry as well. We have observed a positive correlation between vaccination distribution, people returning to the workplace, and page volumes from our equipment. For the quarter, volumes on the whole remained relatively flat versus Q4. As vaccination distribution progressed, we saw volumes in certain geographies start to increase modestly in late March. For example, in Israel, where more than half the population is vaccinated, the highest vaccination rate in the world, work from home transitioned to more of a hybrid work environment, and page volumes returned to near pre-COVID levels. The return to the office and accelerating vaccine distribution combined with strong demand for our equipment during the first quarter are leading indicators that the improvement in our revenue trend will continue throughout the year. Investments in our workplace A3 and A4 and production portfolios have allowed us to grow equipment sales revenue in every category year over year, and take share in our territory, according to the most recent IDC data. New capabilities in workflow automation and enhanced security are driving increased interest in our workplace products and earning Xerox industry recognitions. Corsica recently recognized the strength of our hardware and security, as well as our cloud software and delivery capabilities, by naming Xerox the leader in its worldwide managed print services market report. Our IT service business grew for the third consecutive quarter. The team is winning increasingly sizable and comprehensive deals to manage the full IT stack for SMB customers. In the quarter, we expanded our IT services portfolio by launching robotic process automation as a service, leveraging our own experience deploying this technology internally across all of Xerox. The pandemic has challenged SMBs to find sustainable cost reductions while maintaining productivity. Our offerings to automate routine tasks such as deal pricing, order processing, payroll, and resource management have already gained traction with customers. In software, the team started to integrate Carrier, an enterprise augmented reality company we acquired in late 2020, both operationally and from a portfolio perspective. Carrier makes any user an expert capable of solving issues remotely through live visual interactions, self-guided instructions, and contextual data for greater insight. This technology provides many benefits, from reducing costs and downtime to improving the customer experience and eliminating many on-site visits. Carrier is at the center of our software solutions, which integrates Park's artificial intelligence technology, Alto AI, our content management system, DocuShare, and XMPIE's personalization software. These solutions focus on three main areas. digital platform as a service, content creation and management, and automated workflows and intelligence, and have several industry-specific applications. Use cases include training retail associates, virtually processing claims, helping with facility-related issues, and troubleshooting data center operations. Within a few months' time, we launched pilots with several global businesses in hospitality, high-tech and IT services. We also signed up major partners, including ServiceNow, Deloitte, and HCL. These partnerships are already helping us reach new prospective clients and build a strong and growing pipeline. Regarding Xerox Financial Services, we signed our first OEM partner. Our strategy focuses on adding other OEMs and customers outside of our industry while increasing penetration rates of Xerox accounts, all of which should enable us to grow their portfolio. Park Innovation has continued to make progress across our focus areas, including 3D printing, industrial IoT, and cleantech. In additive manufacturing, our solutions are designed to integrate into manufacturing operations to reduce risk in the supply chain. Global supply chains that rely on just-in-time model are becoming increasingly more vulnerable. The recently launched Xerox LMX3D liquid metal printer can help alleviate some of that vulnerability. This printer provides advantages over powder-based metal 3D printing, which is predominantly deployed technology today. The LMX printer is safer, more cost-effective, and faster. At the end of last year, we established a product development collaboration with U.S. Naval Postgraduate School. This collaboration will aid NPS in pushing the adoption of 3D printing throughout the U.S. Navy. The military supply chain is among the most complex in the world, and NPS understands firsthand the challenges manufacturers must address. Their feedback is helping us refine the LMX's roadmap which includes incorporating additional metal alloys, more complex geometries, and larger build volumes of production parts. In IoT, we are preparing to commercialize solutions that monitor the health and critical infrastructure, such as bridges and roads. Aging infrastructure is a global challenge. We recently completed a pilot with Victrack, a state-owned enterprise in Victoria, Australia, to monitor various infrastructure assets for structural degradation and prioritize maintenance. Public-private partnerships will be critical in solving the infrastructure challenges there and throughout the world. Xerox has a long history of inventing technologies that make the world more sustainable, and we are now carrying forward our legacy with our clean technologies. The team continues to make progress on engineering an air conditioning solution that significantly reduces greenhouse gas emissions through greater energy efficiencies. Other research projects include batteries, green hydrogen, and environmental sensing and monitoring. These innovations will open the doors to new partnerships for park innovation and can potentially have major impact on the world. Given the progress we've made, We are accelerating our plans to stand up XFS, Xerox software, and PARC innovation as separate businesses, which will provide greater focus, visibility, and flexibility for each business. And now we expect to complete this in 2021 and will provide more information on each business, including financial metrics and relevant KPIs, such as loan originations for XFS. Balancing investments in new and existing businesses while generating cash continues to remain a focus for this team. Our free cash flow in the first quarter was in line with our expectations. The first quarter is seasonally our smallest quarter, and the business continued to experience headwinds from the impacts of COVID-19, though we kept investing because we are managing the company to deliver long-term, sustainable growth. We closed the quarter with $2.5 billion of cash, cash equivalents, and restricted cash on hand. In the quarter, we purchased 162 million of shares, demonstrating our confidence in the company's long-term trajectory. We remain committed to our shareholders' return policy, including our current dividend rate, and plan to return at least 50% of annual free cash flow. Before turning it over to Xavier, Let me address some of the frequently asked questions we receive. We expect the improvement in our revenue trend to continue. More employees returning to offices, the acceleration of vaccine distribution, and increased demand for our equipment during the first quarter give us confidence that we will meet our full-year guidance. We are managing modest supply constraints. The investments we have made in our portfolio of offerings are starting to pay off. IT services grew organically for a third consecutive quarter. Expanding this portfolio to include robotic process automation as a service will further enhance our momentum. We are seeing increased interest in our differentiated software solutions, which have the potential to transform the service experience across many industries. We will continue to invest in our future while managing our expense profile. We are accelerating our plans to stand up XFS, Xerox software and PARC innovation, positioning Xerox to return to growth and unlock value sooner. Now I'd like to hand it over to Xavier to cover our financial results in detail.

Thank you, John, and good morning, everyone. As John mentioned, we are pleased with quarter one performance. For revenue, we delivered a strong improvement compared to the trend over the last three quarters. Both equipment and post sales revenue improved in March, consistent with the progress of vaccinations on the gradual reopening of workplaces. Equipment revenue growth was stronger than higher margin post-sales revenue, driving the 260 basis point growth margin erosion year over year. I will provide more details on revenue in the next slide. Adjusted operating margin of 5.2% in the first quarter increased 50 basis point year over year, The 50 basis point improvement in margins reflects a favorable impact from lower bad debt expense, savings from project on it, and discretionary spend action partially offset by the impact of lower post sales gross profit. SAG expense of $448 million decreased $93 million year over year, reflecting a continuous focus on cost. The improvement includes the impact of an incremental $60 million bad debt reserve, Taken in the first quarter of 2020, lower selling expense, cost savings associated with project only, and temporary cost reduction measure. RDNA investments were maintained to protect innovation in future revenue streams. Investments focused on existing on new product and solution in the print business, as well as adjacencies on innovation power. Quarter one RDNA as a percent of revenue was 4.3%. 20 basis points lower year-over-year, reflecting continuous optimization of the print portfolio. Other expenses, net of $4 million, was $19 million lower year-over-year, primarily driven by a reduction in non-service retirement-related costs, partially offset by higher net interest expense. First quarter, adjusted tax rate was 27.7%. compared to 29.4% last year. The 170 basis point year-over-year decrease results primarily from a change in the geographical mix of earnings. Adjusted EPS of 22 cents compared to 21 cents in the same quarter last year, reflecting a slightly lower adjusted net income impacted by 10 million higher net non-financing interest expense, which was more than offset by a reduced share count. Gap EPS of $0.18 was $0.21 higher year-over-year due to lower year-over-year restructuring on rated costs, non-service retirement-related costs, and transaction-unrated costs. Turning to revenue, trend improved across all geographies. In EMEA, the rate of revenue declined moderated more significantly than in the U.S. in part due to the earlier onset of COVID-19 in EMEA last year, and partly due to a higher proportion of SMB customers in the region. SMB customers have been returning to workplaces more rapidly than large enterprises, who are slower to return to large office buildings. Equipment sales of $381 million increased 17.2% year-over-year, or 14.2% in constant currency. Sales increased across entry, mid-range, on high-end product, and in both North America and in EMEA. We are encouraged by the increased activity, indicating customers' confidence in returning to the workplace. Indirect channel sales in EMEA and the U.S. remain strong in entry mono. Channel sales of mid-range product, including low-end color on black and white devices, as well as as the recently launched Primelink light production devices grew significantly. Resellers continue to manage inventory below pre-pandemic levels, but are modestly increasing inventory based upon firming demand. In the Americas, sales in North America were in line with expectations. In the U.S., federal government sales remain strong and education is starting to recover. as schools prepare to reopen. Post-sales revenue of 1.3 billion in Q1 declined 13.4% year-over-year, or 15.6% in constant currency. However, secondarily, the rate of decline in post-sales revenue improved by 7.9% in constant currency. Post-sales revenue is largely contractual, and most of our contracts include a minimum fixed charge on a variable charge based upon print volume. Print volumes remain below 2019 levels, e.g. pre-COVID-19, in the quarter, primarily as a result of COVID-19-related business closures. However, we saw a modest sequential increase in page volume as the quarter progressed, consistent with the rollout of vaccination on more employees returning to offices. Post sales also include unbundled supplies, paper on other sales, which are largely sold through indirect channels and are more transactional. The rate of decline of unbundled supplies improves sequentially across all geographies, reflecting higher equipment sales on increasing page volume in the quarter. IT services sales for the quarter, which are included in other sales, grew organically, in XBS in the U.S., and grew in the U.K. and Canada as a result of prior year acquisitions. We are pleased with the traction in IT services, and we are continuing to expand the coverage of these offerings to SMB customers. While the environment remains uncertain, we are encouraged by the quarter performance, the strength of the service contract pipeline and installed backlog, which provide confidence that businesses are ready to reopen and resume investing. Turning to cash, we closely manage cash at every level of the organization. Also, COVID-19 headwinds continue to impact quarter one result. We generated 117 million of cash from operation. So continued focus on working capital management resulted in a 43 million source of cash in the quarter, down 48 million year over year, with strong year over year improvement in cash from inventory, partially offset by lower cash from accounts receivable on accounts payable. Cash from accounts receivable was impacted by a lower sequential decrease in revenue as compared to the prior year. For accounts payable, cash was impacted by the timing of payment as well as lower purchase in Q1 2021 due to inventory reduction effort on lower expenses. CAPEX was $17 million in the quarter, supporting the strategic growth program on continued investment in IT infrastructure. We continue to expect CAPEX of $100 million for the full year. Within financing cash flow, we repaid $94 million of debt from securitizations. This debt amortized monthly, and we expect to refinance it with new securitizations in support of XFS, the global payment solution business. We also repurchased $162 million of shares in the quarter and paid $54 million in dividends. We expect to repurchase shares opportunistically and had $338 million of repurchase authority remaining as of March 31st. Free cash flow for the quarter was $100 million, with a maniacal focus on cash. we remain confident in the guidance of generating at least 500 million of free cash flow in 2021. Regarding profitability, we are relentless in the effort to optimize operations to drive profit on cash. Since its inception in late 2018, we have taken 1.4 billion of gross costs out of operations through the project-owned cost transformation program. Another $375 million of gross cost savings is targeted in 2021. We generated positive cash flow on adjusted earnings in every quarter impacted by the pandemic due to a flexible cost structure on discipline expense management. Not only do we expect margin on cash flow to improve in 2021 as the economy recovers, but through continuous focus action, we expect margin to improve beyond this year. Let's focus on XFS now. In January, we discussed plans to stand up three businesses, XFS, software, and park innovation. Looking at XFS, Xerox has provided leasing options to customers for decades. XFS product enables customers to purchase the newest technology on office equipment while managing their cash flow. XFS growth strategy includes expanding leasing options beyond print, to adjacencies like IT services and software. We have also expanded leasing beyond Xerox product and solution through OEM partners such as Lexmark, which we announced will be partnering with Xerox to provide financing for managed print services engagement. We know and understand leasing in this space. Today, XFS manages over 700,000 equipment leases across a diverse portfolio of customer and geographies. we employ a proprietary and disciplined credit approval process that drives low annualized loss rate while allowing for a wide credit window. XFS list origination increased in the quarter as compared to Q1 2020 due to an increased level of XBS origination in line with the strategy. At the end of March, XFS has 3.4 billion of finance asset consisting of finance receivable on equipment on operating lease. We leverage finance asset at a 7 to 1 debt to equity ratio today. Therefore, 2.9 billion of total debt support XFS assets. XFS debt includes senior unsecured bond on securitization, and we plan to increase the amount of securitization which provide cost-effective funding. Looking at capital structure, net core cash was $1 billion at the end of the first quarter on $4.4 billion of debt outstanding, the majority of which, $2.9 billion, support XFS. The remaining debt of around $1.5 billion supports the core business. Debt primarily consists of senior, unsecured bonds, unsecured decisions, and there are no bonds maturing in 2021. We had 2.5 billion of cash, cash equivalent on restricted cash at the end of the quarter, which, when netted again core debt, result in a net core cash position of 1 billion. The decline in cash from year-end primarily reflects the initiation of opportunistic share repurchase, given the confidence in our strategy. Now, to wrap up. We are pleased with the gradual recovery during the first quarter given the evolution of the pandemic. The pace of global rollout of the vaccinations should result in more employees returning to the workplace in the coming weeks and months. Therefore, we expect a recovery in the business throughout the year, especially in the second half. This, along with first quarter results, provide us confidence in delivering full-year revenue of at least $7.2 billion and generating at least $500 million of free cash flows in 2021. Thank you, and now back to John.