Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation third quarter 2021 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question at this time, please press star 1 at any time during this call. You can withdraw your question by pressing the pound key. At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation third quarter 2021 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. 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. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com slash investor, and 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'd like to turn the meeting over to Mr. Vizitiz. Mr. Vizentine, you may begin.

Good morning, and thank you for joining our Q3 2021 earnings call. I hope everyone is safe and healthy. Revenue this quarter of $1.76 billion was essentially flat with the prior year's third quarter, despite a challenging operating environment. Adjusted EPS of $0.48 was flat year over year, and we generated free cash flow of $81 million down slightly from $88 million in the prior year. Adjusted operating margin of 4.2% was lower year-over-year by 320 basis points. This quarter's results were negatively affected by two significant secular challenges, a deterioration of global supply chain conditions and the Delta variant. As the third quarter progressed, the challenging supply chain conditions we highlighted on our Q2 earnings call deteriorated further. Specifically, raw material and component shortages limited the availability of certain of our products and supplies, particularly our A3 devices. Transportation constraints extended delivery times by weeks and drove unit shipping costs multiples higher than normal levels. And when our products arrived, labor shortages further delayed delivery times. These challenges accounted for two-thirds of the year-over-year decline in this quarter's gross margin and caused equipment revenue to fall short of our expectations. Demand for our product remained strong, resulting in further growth of our backlog of equipment and third-party hardware to $265 million, which is approximately 90% higher year-over-year and more than 20% higher than the prior quarter. Our backlog also has a larger proportion of high-margin A3 devices relative to the previous periods. Post-sale revenue grew 1.7% year-over-year but fell below our expectations as the Delta variant disrupted many companies' plans to return workers to the office. We expect vaccination rates will improve as governments encourage companies to implement vaccination mandates. And we continue to see a strong correlation between vaccination rates, a return of employees to the workplace, page volumes, and importantly, post-sale revenue, which carries a higher margin than equipment revenue. And we are seeing improvements across each of these metrics. For example, September was the second highest month since the pandemic began in terms of page volumes and services and outsourcing revenues. which are two of the largest components of post-sale revenue and the components that are most closely tied to page volumes. Based on what we know today, we expect supply chain challenges to continue during the fourth quarter and through the first half of 2022. We continue to expect the return of workers to the workplace, but our expectations for a broader return have been pushed from Q4 into 2022. For these reasons, we are reducing our revenue guidance for the year to $7.1 billion in actual currency or $7 billion in constant currency. Importantly, we are reaffirming our guidance for free cash flow of at least $500 million. Our focus on cash generation gives us the confidence to maintain cash flow guidance in spite of the top-line headwinds we face, all while continuing to invest in our strategic growth initiatives. Throughout these challenges, we have been guided by our four strategic initiatives, optimize operations, drive revenue, invest in and monetize innovation, and focus on cash flow. In Q3, we made progress across each of these initiatives. Project Own It has made our organization more agile and efficient. That agility was demonstrated this quarter as our operational team responded to unprecedented levels of disruption and uncertainty across our global supply chain. Our team responded quickly and is working diligently to mitigate the adverse effects of the supply chain disruptions on our business. For example, we are working to accommodate a wider array of products and materials, pre-purchase components and freight, and selectively increase pricing to offset higher costs. and we are doing everything we can to minimize disruptions to our clients' operations. We cannot control the pace of supply chain normalization or office reopenings, but we are driving revenue growth in areas we can control. In our core print business, we gained share of total print devices again in Q2, per the most recent report from IDC, marking the fourth consecutive quarter of annualized market share gains. Growth in market share is a key pillar of our strategy in print, and it's being driven by the quality of our product and our ability to provide secure, connected workflow solutions that our clients need across their multifunction printer fleets. Complementing our leading position in equipment, our suite of digital solutions is resonating with clients who are increasingly digitizing document workflows and adapting to a hybrid work environment. Global signings for our capture and content services which help clients extract, categorize, and automate document routing, such as our digital mailroom offerings, increased 67% year-over-year in Q3. Our subscription-based workflow central platform allows clients to manage document workflow from any device, including PCs, tablets, and smartphones, with the enhanced security and functionality clients expect from our leading multifunction printers. Our products and solutions are evolving to enable productivity from wherever our clients' employees choose to work. Our IT services business grew double digits this quarter, despite a year-over-year increase in our backlog of third-party equipment. Within IT services, RPA continues to gain traction. We now have 500 internal bots performing 4 million transactions per quarter. These transactions create a platform and set of use cases for us to deploy externally, and in the third quarter, we deployed bots to support our Lexmark managed services integration and enable document classification and posting for our SMB clients. We continue to invest in the expansion of our IT services footprint to deliver a wider set of services to new and future SMB clients. Earlier this month, we acquired Competitive Computing, or C2, a leading IT services business based in Vermont. C2 provides us with access to a broader set of clients and capabilities that we can leverage throughout our IT services business. A key strategic focus in 2021 has been the standing up of the three new businesses, software, innovation, and XFS. This quarter, we made progress towards our goal of standing up these businesses and monetizing our investments in innovation. In early September, we announced the formation of our software business, CareAR, a Xerox company. CareAR is the industry's first service experience management platform, and we believe it will transform service and customer experiences with live, visual augmented reality and artificial intelligence-driven interactions, instructions, and insights. CARRIR solves a number of critical secular challenges facing field service management, including a systematic loss of institutionalized knowledge due to the accelerated workplace retirement and the need to be more eco-friendly. CARRIR solves both challenges by enabling field workers with access to live and eventually AI-driven expertise, and it reduces field service visits by more frequently fixing problems the first time around. We estimate the total addressable market for Carrier will grow to $80 billion by 2028. We also announced that ServiceNow, a leader in digital workflows, invested $10 million in Carrier at a post-money valuation of $700 million. This investment serves as an endorsement of Carrier's technology and will support its growth, as Carrier is a leading certified and integrated AR solution within ServiceNow's field service and customer service management platform. In the third quarter, we expanded the go-to-market reach for CARE-AR by adding 15 resellers and forming a partnership with L&T Technology Services or LTTS, a leading industrial manufacturing and engineering services company. With LTTS, we will develop joint solutions across a range of industries, including discrete manufacturing, truck and off-highway vehicle maintenance, and oil and gas. Momentum in new client signings and pipeline growth gives us the confidence to reaffirm our expectation of Carrier generating at least $40 million of revenue in 2021 and at least $70 million of revenue in 2022. At PARC, we made advancements across our three primary innovation pillars, Internet of Things, 3D Print, and Cleantech. In IoT, we continue to deploy LOQ's bridge sensor technology in Australia. The data being gathered by these sensors allows asset owners and operators to monitor the health of critical infrastructure assets in real time, which is particularly useful after the events such as the recent 5.9 magnitude earthquake that hit Melbourne and Australia in late September. Our technology deployed in Longwood, Victoria, allowed immediate assessment of the strain caused by the earthquake, resulting in a decision that the bridge was safe to operate without needing to wait for manual inspection. Our technology helps bridge operators optimize maintenance schedules, limiting expensive field service visits, and ultimately lowering the carbon footprint associated with infrastructure maintenance activities. We estimate the total addressable market of LOQ's technology offering is $9 billion, and we are currently in conversation with multiple transportation authorities around the world about deploying our technology. In 3D print, early feedback of our liquid metal printer LMX has been positive, resulting in a healthy pipeline in our target verticals of manufacturing and defense. We are working to add additional materials which will expand our addressable use cases. In clean tech, we are optimizing the performance of the alpha prototype for our energy efficient air conditioning technology. This will inform the design of our beta prototype, which we plan to complete by the end of 2022. This technology can help reduce energy consumption in air conditioners by up to 80%. We look forward to sharing more about this groundbreaking technology in the coming quarters. Our work in cleantech is just one example of how we are working to reduce our impact on the environment. In our recently published 2021 Global Corporate Social Responsibility Report, we announced a roadmap to reach net zero by 2040. At XFS, originations grew approximately 10% year over year. We further expanded XFS penetration within XPS and began offering leasing solutions for IT services. the quality of our book of loans remains high, with lost provisions below 1.5% despite the ongoing pandemic. During the quarter, we generated $81 million of free cash flow, only a slight decline from the prior year levels despite the effects of supply chain constraints on our operating profit. Our focus on free cash flow has served us well, and we have delivered positive free cash flow every quarter during the pandemic, And that focus gives us the confidence to reaffirm our guidance of at least $500 million of free cash flow this year, despite the reduction to our revenue outlook and while continuing to invest in our strategic growth initiatives. That focus, along with our strong balance sheet, also gave us the confidence to request that our board authorize a new $500 million share repurchase program. We will opportunistically buy back shares and remain committed to returning at least 50 percent of free cash flow to investors, while continuing to invest in innovation and pursue value-accretive M&A. Before I hand it over to Xavier, I would like to emphasize a few points. The third quarter presented us with an unprecedented level of supply chain disruption and further delays in companies' plans to reopen offices. I would like to commend our team for its resiliency while facing these challenges. Revenue and margins have fallen below our expectations for the year, but demand for our products and services remains strong, our backlog is growing, and our new business remains on track to deliver future growth and a strategic optionality for Xerox. Through it all, our focus on delivering cash flow has not changed, and the buyback authorization allows us to deploy that cash in a highly accretive manner. We also continue to look at M&A transactions, both small and large, that are accretive to our business. I will now hand it over to Xavier to cover our financial results and details.

Thank you, John, and good morning, everyone. As John noted, significant disruption to global supply chains and delays in the returns of workers to the workplace negatively affected our financial results in Q3. Despite these challenges, our revenues were essentially flat year over year, as gradual improvements in paid volumes on IT services, growth in post-sales revenue, and offset lower equipment sales, which were negatively affected by components shortages on logistic constraints that affected both cost and capacity. However, underlying demand for our equipment remains strong, as evidenced by our growing backlog, which is almost two times higher than normal levels. Higher supply chain costs, a less profitable mix of equipment sales, and lower margins on post-sales revenue drove our profitability lower year over year. Gross margin declined 440 basis points. Around 290 basis points of this decline is attributable to supply chain costs and capacity restrictions, including significantly higher freight and shipping costs on constrained availability of higher margin equipment. 60 basis points of the declines relate to investment to support future growth. The remainder of the decline reflects lower government subsidies, net of project-owned savings, and lower royalty from Fujifilm business innovation. We expect supply chain-related pressure on growth margin to dissipate over time as supply chain normalize. but this pressure will likely continue to wait on growth margin in Q4 and into the first half of 2022. Adjusting operating margin of 4.2% decreased 320 basis points year over year, reflecting lower growth profit, lower government subsidies on higher R&D investment to support our targeted growth area. Indeed, we maintain this investment despite the unfavorable operating environment. These headwinds were partially offset by lower bad debt expense on savings from project on it. SAG expense of $413 million decreased $31 million year-over-year, primarily driven by savings from project on it, lower bad debt expenses, which include a $14 million finance receivables reserve reduction, and lower sales on marketing expenses. Savings were partially offset by lower government subsidies, investment in new businesses, and prior year 401k match reversal on negative effect from translation currency. RD&E was 82 million in the quarter, or 4.7% of revenue, which was an increase of 40 basis points as percentage of revenue year over year. This reflects increased investment in park innovation towers, on a 401k match reversal in the third quarter last year. Other expenses net was $18 million lower year over year, primarily driven by higher gain on asset sales, a reduction in non-service retirement-related costs, and lower net interest expense. Third quarter adjusted tax rate was negative 3.5% compared to 21.1% last year. The 24.6% year-over-year decrease reflects a non-recurring change to our tax positions on re-measurement of deferred tax assets. Adjusted EPS of 48 cents in the third quarter was flat compared to the same quarter last year. The year-over-year reduction in pre-tax income was offset by lower taxes on a reduced share count. Gap EPS of 48 cents was $0.07 higher year-over-year due to a decrease in adjusted items, including lower year-over-year non-service retirement-related costs and lower restructuring charges. Turning to revenue, supply chain disruption obscured underlying strengths in our business, as evidenced by our growing backlog on post-sales revenue, both of which grew sequentially on year-over-year. Demand for our equipment remains strong, but in the time since our Q2 earnings call, a challenging supply chain environment deteriorated further, causing shortages in product and logistic delays on cost. As a result, our backlog expanded in the quarter to 265 million, almost two times normal level. Equipment sales of $387 million in Q3 decreased 7.6% year-over-year, or 8.4% in constant currency, grew primarily to supply chain disruption, specifically component shortages on logistic capacity constraints, which affected the Americas region more than EMEA. In EMEA, equipment sales grew year-over-year, led by our interactional and developing market. At the product level, supply chain constraint most negatively affected installation of our higher-priced color equipment in both the mid-range and high-end, causing a negative mix effect on equipment revenue on margin. The negative mix effect was partially offset by lower installation of A4 black-and-white equipment, which faced difficult comparison against last year's work-from-home demand. Post-sales revenue of 1.4 billion increased 1.7% year-over-year, or 0.5% in constant currency. We continue to see strong correlations between vaccination rate, workplace attendance, and page volume. Page volume increased sequentially this quarter, but at a slower pace than we expected due to the Delta variant. Nonetheless, we are seeing a pickup in paid volume as workplace gradually reopened on school welcome back students. As John mentioned, September was the second highest month for paid volume since the beginning of the pandemic. Additionally, paid volume are correlated well to service on outsourcing revenue, both of which are key component of our post-sales revenues. We continue to expect gradual improvement in post-sales revenue as employees return to the workplace. Post sales revenue also included unbundled supplies, which grew significantly due to rising page volume, and to a lesser extent, channel rebuilds. IT services sales, which are included in other sales, also grew this quarter. Last, new business signings for our services business grew in the quarter, as did our renewal win rate on services revenue in the SMB space year-over-year. Next, turning to cash flow. We generated 81 million of free cash flow in Q3, down from 88 million in the prior year. Our strong focus on cash flow resulted in only a mild decline year-over-year, despite lower gross profit on an increase in investments in targeted revenue growth areas. We generated $100 million of operating cash flow in the quarter compared to $106 million in the prior year as working capital improvements offset lower profit. Working capital was a source of cash this quarter of $46 million, which was $101 million better than the prior year. This reflects year-over-year improvement in inventory, accounts payables, and accounts receivable. Investing activities were a source of cash of $18 million due to an asset sales of $38 million, partially offset by CapEx of $19 million. CapEx primarily supports our strategic growth program on investment in IT infrastructure. Financing activities consumed $46 million of cash. Net proceeds from additional debt contributed 76 million of cash on reflected new securitization proceeds of 175 million, partially offset by securitization runoff. We expect to complete additional securitization in support of XFS in Q4. Net proceeds from debt were offset by 87 million of share repurchase and 49 million in dividends, resulting in a total return of cash to shareholders this quarter of 136 million, circa 170% of Q3 free cash flow. The 87 million of share repurchase in the quarter completed our remaining share repurchase authorization of 500 million. As a result, a new share repurchase authorization of 500 million was requested, and approved by our board and will be used to opportunistically repurchase shares. Next, looking at profitability. On our Q2 earnings call, we expected supply chain disruption to continue into Q3, but the magnitude of the impact on our business was greater than anticipated. A further deterioration in supply chain conditions and delays in the return of workers to the workplace accounted for nearly the entirety of the year-over-year decline in adjusted operating income margin. Lower royalty revenue and savings from government assistance programs were largely offset by lower bad debt expenses on savings from projects on it. We are actively working to mitigate the incremental costs associated with supply chain disruption, but we do expect these costs to weight on profitability again in Q4 and into the first half of 2022. The ultimate duration of supply chain cost and capacity constraint on the period of time for which it will affect our profitability remains uncertain. However, cost efficiencies associated with project on it, improvements in page volume, the clearing of our backlog on growth of our newer businesses are expected to positively contribute to operating profit going forward. Turning to Xerox Financial Services, XFS grew origination almost 10% year over year, driven by growth in origination at XBS. We are also actively offering these solutions for our IT services businesses. However, global finance assets of 3.3 billion in Q3 were down slightly compared to Q2 due to equipment availability constraints which reduce equipment sales on associated new lease origination on loan repayment. Next, I will comment on our capital structure. We ended September with a net core cash position of around $900 million, slightly below Q2 levels. $2.9 billion of the $4.3 billion of our outstanding debt is allocated to and supports the XFS lease portfolio. The remaining debt of around $1.4 billion is attributable to the core business. Debt mainly consists of senior unsecured bonds and finance asset securitizations. We have a balanced bond maturity ladder with no bond maturing in 2021 and $300 million maturing in 2022. Year-to-date, we have returned circa $650 million of cash back to shareholders or around 170% of free cash flow, which contributed to the 400 million decrease in net core cash since the end of 2020. Finally, I will address revised guidance. Quarter three presented our business with a number of unexpected challenges, including a rapidly deteriorating global supply chain and the prolonged impact of the Delta variant. Product shortage, shipment delays, on cost increases and the delay in the return of workers to the workplace resulted in a lower level of Q3 revenue than we expected just one quarter ago. Given the continued uncertainty associated with global supply chains and the delay in many companies' plans to return to workplaces until 2022, we are lowering our revenue guidance to circa 7.1 billion in actual currency or 7 billion in constant currency. However, our focus on cash give us confidence to reaffirm our free cash flow guidance of at least 500 million while continuing to invest in our targeted growth initiative. We have also decided to postpone our investor day to February of next year. At which point, will be in a better position to provide 2022 guidance along with our long-term financial projection. We also look forward to sharing additional financial detail about our new businesses at that time, which we believe will be more meaningful within the context of our 2022 guidance. I will now hand over to John.

Thank you, Xavier. Operator, can you please open the lines for questions?

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1. Our first question comes from the line of Katie Huberti from Morgan Stanley. Your question, please.

Yes, thanks. Good morning. How much of the $200 million lower revenue guide at constant currency is a function of the backlog build versus the slower recovery in page volumes? And just connected to that, how much do you expect backlog to build in the fourth quarter? Then I'm going to follow up.

Hi, Katie. Good morning. This is Xavier here. So regarding backlog and, you know, the 200 million revised guidance, the vast majority of this is related to equipment backlog that we face here. As we quoted here, we ended with 265 million of backlog, which is close to 60%, 59% of, you know, the total revenue of quarter three. We expect this backlog to grow based on the supply outlooks that we have for quarter four at this stage.

Okay. So backlog grew about 50 million sequentially in the September quarter. If most of that 200 million guide down is related to backlog build, that would imply that you would expect even more backlog build in the fourth quarter? Is that the way to think about it?

This is correct, Katie.

Okay. And then I know it's really early, but do you have any initial thoughts as to, you know, how you're contemplating fiscal 22 as it relates to the increased supply chain costs and revenue impact that carry into the first half of the year? Does that set up for potentially, you know, or even pressure on EPS and free cash flow relative to 2021, or is it too early to tell?

It's, Katie, as we indicated during the call here, we expect the supply chain impact to carry on and have some impact during the first half. During quarter three, we have been surprised by the size of this supply chain. As we commented here, it is mainly related to some material shortages, but also the fact that the chips on the processor are becoming, you know, we have positive, we are facing positive of this year. We've put in place, you know, a lot of action, including, you know, redesigning, you know, some of the ways some boards are currently implemented on our product. But this will take time to recover. The second point as well is not only the scarcity of certain components here, it's also the overall supply chain. You have heard, it should not be new news here, the challenges that a lot of companies are currently facing with container shipment, but also up to the last point, up to the delivery to the end customer. So we expect some of it to stay into the first half of 2022. And clearly, our backlog is a strong evidence that our customers are still renewing the equipment. Also, as we mentioned it during our comment, we grew market share. So we are still growing market share. We did it in quarter one. We did it in quarter two as well. And clearly, the orders that we are receiving from our customers are the evidence that there is still a strong demand here. So we will manage this. It's a little bit early to provide, you know, your guidance on the – as we mentioned it, we will, you know, hold on the – manage, we hope, the face-to-face, you know, investor day in February where we'll be able to provide you more information.

Thank you.

Thank you. Our next question comes from the line of Ananda Varaha from Loop Capital. Your question, please.

Hey, thanks, guys, for taking the question. I apologize if this has been addressed. I have a couple calls and an event going on this morning. But just to what you guys are seeing sort of demand-wise, revenue-wise, and, you know, any sort of incremental feedback you've gotten from your enterprise customers as you move through the quarter that might be different from what you have been communicating to us over the last couple of quarters or so. Thanks.

Yeah, Ananda, what we've been seeing is demand is strong. And the other thing that we've noticed is return to the office has slowed down from what we anticipated. So we're anticipating more early next year, being full back to the office. Because of the Delta variant, a lot of the corporations we've spoken to have delayed their openings or slowed them down. But demand for our product is strong. And again, with the supply chain constraints, that's become an issue for us.

I appreciate the context, John. And then let me just ask a follow-up in that regard. Any – because you guys are pretty deep in the weeds with your conversations with your enterprise customers. Strategically, from their perspective, have you seen anything change in terms of long-term intention for sort of how they're thinking about you know, kind of back to the office or the use of your products in the context of those strategies?

No, we haven't seen a change from what we've expressed in the past. They're focused on bringing their employees back to the office in a safe manner, and they're using our products more for product, both for productivity and for security, and in some cases with our software to utilize a hybrid environment in which when their employees do work from home, but not really much of a change there. I think what slowed that down was the Delta variant, and everybody's being careful in getting their employees back safely to the office.

Very good.

Sounds great.

I appreciate it. Absolutely. We have seen as well on our global document solution businesses, some good traction on offerings, enabling, you know, to work from home and work in the office here. As an example, in capture and content services here, we've seen significant double-digit growth of signings, which show that the enterprise are, you know, supporting this type of offerings, but also willing to enable this environment.

That's helpful. Thank you, guys. I appreciate it.

Thank you. Our next question comes from the line. Samik Chatterjee from JP Morgan, your question, please.

Hi, good morning. This is Angela Jin on EarthSonic Strategy. Thanks for taking my question. The first question I have was, so HP at their investor day said that they expect a low to mid single-digit decline in supplies next year, which we thought was interesting. Are you seeing similar trends there, given that you're also forecasting greater return to office in 2022? And then I have a follow-up.

Yes, so good morning. So as you know, our business model is slightly different from the one that HP had. We are less dependent on what we call a turn-out or consumable-out model. Our model is based on subscription, and we do not see this trend. Our trend is mainly related, you know, to page volume on how customers are using our equipment, but not only to print, but also to drive the workflows you know that our equipment are much more than a device on support workflows that the customers are using here. So we, if you want, you know, like a data point, a proof point of what we face, we saw, you know, some increase in quarter three of, you know, what we call the sole supplies revenue. And, you know, we are positive of seeing a gradual recovery of paid volume over the time.

Great, thank you. And then for my follow-up, just thinking about your product mix on A3 versus A4 printers, it seems like for the industry view is that A4 will become more popular over time as offices migrate towards smaller printers spread out more evenly. Are you seeing a shift in strategy towards A4 printers? And if so, will that result in a structural margin decline?

If we look at our third quarter, our backlog for A3 went up from Q2. We're gaining market share in it. We're seeing a strong demand in the A3, and we've also gained market share in the A4 market.

Great. Thank you so much.

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star then 1. Our next question comes from the line of Shannon Cross from Cross Research.

Thank you very much. I was wondering about the pricing environment, both in the short and long term for hardware as well as pages. Obviously, given all the supply chain challenges, certain other industries have been able to raise prices. I know inkjet printers, for instance, there's less promotion. So I'm curious what you're doing there. And then we talked to Canon and they're thinking long term they're going to see some price pressure on pages. So I'm Just kind of curious how you think that this plays out both, you know, in the next few quarters and then maybe long term. And then I have a follow-up. Thank you.

Thank you, Shannon. Good morning, Shannon. Yes, a good question here. What we see on the pricing environment, mainly related to the supply-demand dynamic here, is, you know, the ability of raising prices. And this is something that we started executing. We started executing already in quarter two on our plan in order to reflect some of the costs that we are facing here, specifically on supply chain and some of the raw material costs that we have here. Regarding page volume and the price per page here, this is, I would call that the usual business as usual negotiation. We have not seen an increased competitive environment on this. As you know, we are quite stringent in managing the pricing and also protecting with minimums our annuity volumes.

Okay. And then SG&A is at the lowest level that I have in my model even after incorporating the $14 million. It's going back split and then I'm assuming pre-split because Xerox was a bigger company back then. How much further can you cut SG&A? What did you take down? How much of SG&A is one time versus recurring in nature. Just trying to understand, given the gross margin pressure you're facing, how much flex you have in some of your other expense lines. Thank you.

Yes, Shannon. So on SG&A, we quoted the only, I would say, one of that I highlighted here is related to the bad debt release that we have, which is, by the way, good news, which shows that the business is recovering in light of last year or two years ago, starting the impact of COVID-19 here. For the rest, you know that we have project on it in place. And project on it is much more than a pure cost-cutting type of activity. It's also ingrained in the DNA of the company on how we adjust our cost base based on, I would say, the environment here. So flexibility, you know, exists within the cost base. And we will ensure that we can reflect some of the gross profit decline and gross margin decline that we have in our fixed cost base as well.

Do you think you can get down below $400 million?

It's a little bit early here, Shannon, because we are going through the planning cycle here. But clearly, ONIT, as I mentioned, ONIT is not only SG&A, ONIT is the entire cost base of the company, and we look at any opportunity we can have here. You know that we have had the benefit of last year, and we call it, you know, the amount on this year as well. So we had the benefit of government subsidies. These government subsidies are extinguishing, and you can see that in our cost base, specifically in G&A, we are able to offset this via cost actions that we are taking to flexibilize the cost base.

Okay. Thank you.

Thank you, Shannon. Thank you. Our next question comes from the line of Jim Suva from Citi. Your question, please.

Thank you. Thank you for being so open and transparent about taking the outlook down a little bit. Can you help us understand, do you fully believe or can you know, is this supply chain issue driven? Or I know, of course, going back to the office has been delayed. Or is it actually structurally related? people are printing less, and how should we think about that, if it's the case or not the case, or how do we actually know? Thank you.

Jim, we've seen a strong demand for our product, and in fact, you saw in third quarter that our backlog increased again to record levels. So we are seeing the demand. We're increasing market share. Even in September, there's a direct correlation with vaccination and going back to the office and volumes, and we saw an uptick in September. So our belief is that going back to the office is a question of when, not if, and the delays have happened for, again, safety of employees, but that's how we're seeing it right now.

Great. Thank you so much for the details.

Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back over to John Vicente for any further remarks.

Okay, thank you. Look, we cannot predict with precision when supply chains will return to normal, but we expect they will normalize over time. We also believe a broader return of employees to the workplace is a matter of when, not if. And in-office work will be different, but we are prepared to meet workers' evolving print and document management needs. Be safe and be well. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Good day.