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spk01: Welcome to the Xerox Holdings Corporation first quarter 2022 earnings release conference call. After the presentation, there will be a question and answer session. To ask the question at that 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 would like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.
spk00: Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation first quarter 2022 earnings release conference call hosted by John Byzantine, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and 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 and 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. Byzantine. Mr. Byzantine, you may begin.
spk07: Good morning and thank you for joining our Q1 2022 earnings call. I hope everyone is safe and healthy. Before I get to the results, I want to start by acknowledging the humanitarian tragedy taking place in Ukraine. Our thoughts are with all those who have been affected. As the situation began to unfold in late February, we took swift and decisive actions to ensure the safety and security of our people. We suspended all but emergency support operations in Ukraine and provided emergency cash grants to the Ukrainian employees through our employee relief fund. Shipments to Russia were halted as soon as the conflict started. We continue to evaluate the situation in this region and will adapt our response, hoping for the restoration of peace as soon as possible. In total, the percentage of our revenue exposed to the Eurasian region is in low single digits. The operating environment was once again challenged in Q1 and will remain fluid in Q2. At the beginning of Q1, the Omicron variant resulted in office closures in our largest markets, affecting page volumes in January and February. Supply chains are still disrupted by COVID-related factory closures in parts of Asia. Inflationary pressure is building across our cost base, including costs of goods sold, labor, and logistics. At this point, we continue to expect supply chain conditions to ease beginning in the second half of the year, albeit at a slower pace than originally anticipated. Return-to-office trends are improving. As the Omicron variant receded, page volumes increased, resulting in March being one of the highest months of post-sale revenue since the beginning of the pandemic. The continued correlation between in-office work and print activity and strong demand for equipment and consumables confirms that employees are using our equipment and services when they return to the office. Third-party data points to momentum and increasing office attendance, and we continue to expect a gradual return of workers to the office in Q2, with momentum building in the second half of the year, barring another variant outbreak. Summarizing results for the quarter, revenue of $1.67 billion declined 2.5% in actual currency and 0.7% in constant currency. Adjusted EPS was negative 12 cents, 34 cents lower year over year. Free cash flow was $50 million compared to $100 million in Q1 last year. An adjusted operating margin of negative 0.2% was lower year-over-year by 540 basis points. Revenue was in line with our expectations. Equipment revenue declined 17.6% or 16.1% at constant currency, as expected, with supply chain disruptions limiting our ability to fulfill demand. Total backlog grew 21% sequentially to $422 million as demand for our equipment continued to outpace supply. Post-sale revenue grew 1.9% or 3.7% in constant currency, reflecting improvements in print activity. Our IT services business grew double digits on an organic basis, and we expanded its reach with the acquisition of Powerland, a Canadian IT services provider. Operating costs in the quarter were higher than expected, resulting in a small adjusted operating loss and negative earnings per share. Going into the quarter, we knew supply chain constraints and investments in new businesses would weigh on our margins. What was unexpected was the magnitude and intensity of inflationary pressure across our cost base and the growth in supply chain costs. We expect the margin-dilutive effects of supply chain costs and new business investments to subside as constraints ease and our new businesses scale. The effect of inflationary pressure is more difficult to predict. but we plan to offset most inflation-related cost growth with price adjustments and additional project owner savings. Price adjustments are being implemented, but it will take time to realize, given most of our revenue is contractual. Despite the challenges we face, some of which are new since issuing our 2022 guidance, we are maintaining our revenue and free cash flow targets for the year, subject to our return to office and supply chain assumptions. Xavier will provide more color on guidance. We continue to focus on the same four strategic initiatives that guided us over the years. Optimize operations, drive revenue, monetize innovation, and focus on cash flow. Project Own It has become institutionalized and ingrained in our culture, driving each employee to pursue operational efficiencies and excellence in everything we do to help stabilize our profitability and maintain our free cash flow targets. amidst inflationary pressures and a challenging operating environment, we plan to increase our targeted savings of $300 million for 2022 by 50%. These efficiencies will catalyze operating margin improvements as our business recovers from the pandemic and recent supply chain disruptions. Moving beyond the supply-constrained environment, we are confident in our ability to grow the print and services business. Growth will be driven by factors largely within our control, including market share gains and a greater strategic emphasis on secular growth verticals, such as IT and digital services. For the full year of 2021, we gained approximately 200 basis points of equipment sales market share and achieved the number one share in our markets. These share gains reflect our differentiated go-to-market strategy and broad suite of product and services offerings. Our services offerings include our leading managed print services business, integrated workflow solutions, and a growing portfolio of IT and digital services. We continue to deliver innovation relevant for our customers, most recently refreshing our low-end A4 desktop cloud-connected models and A3 entry models with significant improvement in productivity and enhanced security with McAfee Embedded Security, all of which supports our award-winning Workflow Central platform. Yesterday, it was announced that our management services business was the sole winner of the Buyer's Lab 2022-2023 Pacesetter Award in Comprehensive MPS Programs from Keypoint Intelligence. This award reflects the breadth of our MPS offering, as well as our cloud-first development path pivot to at-home workers and inclusion of dealer channel partners. IT and digital services will become a more significant part of our print and services business over time. IT services is a natural adjacency for Xerox, given the expansive direct sales force deployed through XPS, our units serving small and medium-sized businesses. The SMB IT services market is attractive as it is growing mid-single digits, and competition is highly fragmented, and our IT services business scales efficiently. In Q1, IT services grew more than 20% on an organic basis, and we expanded our geographic reach by acquiring PowerLand, a leading IT services provider in Canada. Our IT services business is experiencing strong interest in some of the newest offerings, such as robotic process automation, RPA, data solutions, and managed security. We launched our commercial RPA business only recently, and are already seeing repeat business from customers wanting to add bots to improve operational efficiency. Our bots help customers with invoice processing, order entry, financial reporting, and document classification, and the pipeline of use cases continues to expand. In Q2, we will offer an AI solution that automates data extraction from high volumes of unstructured documents for our legal clients. Xerox Digital Services offerings are resonating with new and existing managed print services clients. These offerings help clients navigate their digital documentation transformation by providing intelligent document processing and personalized customer communication. For capture and content, which includes digital mailroom, data extraction, and processing services, signings grew 72% in the quarter, with new business signings growing more than 100%. We continue to invest in Fiddle, CareAR, and Park. In Q1, Fiddle increased its focus on providing financing solutions that extend beyond Xerox equipment and services. This quarter, Fiddle added 24 dealers and grew indirect origination 7%, including a doubling of non-Xerox products. This growth was offset by a 22% decline in Xerox direct originations for the quarter due to an equipment shortage. Fiddle remains on track to achieve the financial targets provided at our investor day. As the new business within Xerox, we expect KRAR to make consistent progress on KPIs that will drive strong revenue growth for the year. In Q1, KRAR grew its pipeline 22 million, or 34% sequentially. It added three system integrator partners, 47 new customers, and expanded ACV at another 60 customers. Carrier AR now serves clients across 13 industries and added solutions for banking, education, oil and gas, and pharmaceutical clients during the quarter. Carrier AR also announced the launch of Carrier Instruct, its second major product offering and a key competitive differentiator. Instruct expands on its flagship assist product, to incorporate self-solve capabilities for service agents and end users of complex devices. INSTRUCT utilizes a full range of Carrier's IP, including AI, AR, document storage, and content creation, to provide critical insights. At PARC, LOQ, LM, Additive Manufacturing, and Noviti target significant market opportunities and each continued to gain traction within their respective markets this quarter. In Q1, LM announced partnerships with Vertex, Oak Ridge National Laboratory, and Siemens. These partners are using our 3D printers and working with LM to expand its industrial use cases. LOQ plans to triple the number of bridges deployed in Australia during the first half of the year. It's also making headway in negotiations with several U.S. states and European countries. Navity is a newly launched company that will use Park's IoT expertise to commercialize a predictive maintenance platform for process manufacturing. Navity has a healthy pipeline of companies in the manufacturing and oil and gas industries and has signed two customers, including a pilot at Pensy Supply, one of the leading manufacturers of building materials in the U.S. We continue to fund investments in innovation and launch new products and businesses. Going forward, we will increasingly look to monetize investments in innovation through strategic transactions. These transactions can take the form of minority investments, sales, partnerships, or mergers of our businesses. We expect these transactions to create shareholder value by providing our newer businesses access to additional capital and domain expertise. We delivered positive free cash flow this quarter of $50 million based on improved working capital discipline and returned $159 million of cash to shareholders through dividends and buybacks. Notwithstanding an increasingly challenged operating environment, we expect to deliver at least $400 million of free cash flow this year while continuing to invest in new businesses. We will return at least 50% of free cash flow generated to shareholders Additionally, cash may be used for value-accretive M&A and debt reduction. To recap, our backlog remains strong and page volumes are moving in the right direction as offices reopen. Supply chain challenges and broad-based inflationary pressures will challenge us to be smarter and more productive as we remain committed to the guidance issued at the beginning of the year. With that, I'll hand it over to Xavier.
spk05: Thank you, John, and good morning, everyone. As John mentioned, operational challenges persisted this quarter. We continue to face constraints on our ability to deliver on install order, and the cost of fulfilling those orders has increased. Additionally, we halted shipment to Russia, a market that comprised a low single-digit percentage of our revenue and profit in 2021, and we are seeing inflationary pressure across our cost base. On the other hand, revenue was in line with our expectation, and demand for our product and services remained strong, as evidenced by another increase in our backlog to $422 million in Q1, which is close to three times higher than prior year levels. Post sales grew in actual and constant currency due to growth in IT services and growth in sole supplies on paper, which reflects higher printed pages. We also benefited from growth in our paid-volume-driven contractual business, which continued to correlate with the return of workers to the office. Turning to profitability, similar to recent quarters, lower equipment sales, a less profitable mix of equipment installed, higher supply chain costs, lower margin on post sales revenue, and incremental costs associated with new businesses drove our profitability lower year over year. In addition, we are seeing the effect of higher inflation across our cost base. Growth margin declined 390 basis points in the first quarter. 280 basis points of this decline is attributable to supply chain cost and capacity restriction, including higher freight and shipping costs and constrained availability of higher margin A3 devices. 110 basis points of the decline relate to investment to support future growth, lower royalty revenue from Fujifilm business innovation, and lower government subsidies. We continue to expect supply chain headwinds to moderate beginning the second half of the year. Adjusting operating margin of minus 0.2% decreased 540 basis points year over year, reflecting lower gross profit, higher bad debt expense, prior year benefit from temporary government subsidies on furlough measures, on investment associated with our new businesses. These end wins were partially offset by lower selling expenses, resulting from lower sales volume on project-owned savings. SAG expense of $455 million increased $7 million year-over-year. The increase was primarily driven by investment in new businesses, prior year benefit from temporary government subsidies, on furlough measure, higher bad debt provision, resulting from the geopolitical environment in Eurasia on acquisition. These increases were partially offset by savings from project on it, lower sales on marketing expenses on currency. RD&E was 78 million in the quarter, or 4.7% of revenue, which was an increase of 40 by this point as a percentage of revenue year over year. The increase was driven primarily by continued investment in our new businesses this quarter, specifically Care Air on 3D, Cleantech on IoT businesses at PARC. Other expenses net was $53 million higher year over year. The increase was primarily driven by a $33 million charge associated with the termination of a product supply agreement. The chart reflects the payment of a contractual cancellation fee plus interest on related legal fee, which we expect to more than make up for over time via lower supply costs. Additionally, 13 million of the increase relate to higher non-service retirement related interest costs due to an increase in interest costs associated with higher discount rates on higher settlement losses. and $5 million relate to increasing non-financing interest expenses, reflecting a higher allocation of interest to the non-financing or court debt. First quarter, adjusted tax rate was 52.9% compared to 27.7% last year. Since we generated a pre-tax loss, a higher tax rate reduced our tax obligation. This reduction was driven by benefit from additional tax incentives on a lower indefinite reinvestment tax liability due to recent acquisition. Adjusted EPS of minus 12 cents in the first quarter was 34 cents lower than in the prior year. This decline was primarily driven by a year-over-year reduction in adjusted income. Gap EPS of minus 38 cents was 56 cents lower year-over-year due to lower gap net income. Turning to revenue, total revenue was in line with our expectation, albeit with a less favorable product mix, with equipment sales decline offset by modest improvement in poor sales revenue. The underlying fundamental of our business remains strong. Equipment orders, once again, outpace supplies, resulting in a cumulative backlog this quarter of equipment and IT hardware of 422 million, a 21% increase over quarter four on close to three times higher than prior year level. For context, our backlog is now larger than a full quarter's worth of equipment on hardware sales. Despite continuous growth in our backlog, the quality of our backlog remains high. Close to half of our backlog is less than 60 days old. We have seen minimal cancellation of orders thus far, as customers are often willing to extend their existing leases while waiting for new equipment. Further, we saw an uptick in paid-volume and paid-volume-driven post-sales revenue in March as employees returned to office following the Omicron variant. The continued correlation between paid-volume and workplace attendance and strong growth in usage-based post-sales revenue, such as paper and supplies, suggest workers are printing as they return to the office as we expected. Equipment sales of $314 million in Q1 declined roughly 18% year-over-year or 16% in concerned currency. The decline was primarily driven by continued supply chain disruption, which limited our ability to fulfill demand. Installation worked down year-over-year across all product types, and high-margin mid-range products continued to be the most impacted by supply chain issues. Post-sales revenue of 1.35 billion grew 1.9% year-over-year, or 3.7% in constant currency. Growth was driven by IT services, which increased more than 20% year-over-year, excluding two months of revenue from our recent acquisition of PowerLand, as well as higher sole supplies on paper revenues, which fluctuate with printing volume. We saw modest growth in pendulum-driven contractual revenue, corresponding with growth in printed pages. Post sales revenue growth was partially offset by lower Fujifilm business innovation royalties and lower HBS financing commission. In services, new businesses signing grew roughly 10% year over year, led by strong double-digit growth in signing of our capture and content digital services. We generated free cash flow of 50 million in Q1, down from 100 million in the prior year. Lower cash earnings, which include investment in our new businesses, and lower royalty payments were offset by working capital improvement and lower restructuring payment. We generated $66 million of operating cash flow in the quarter, compared to $117 million in the prior year. Working capital was a source of cash of $93 million this quarter, $50 million higher than the prior year, mainly driven by accounts payable. Investing activity were use of cash of 75 million compared to a use of 17 million in the prior year due to an increase in cash use for acquisition on venture investment. CapEx of 16 million was slightly lower year over year. CapEx primarily support our strategic growth program on investment in IT infrastructure. Financing activity consumed 149 million of cash. During the quarter, we utilized the remaining $113 million of our buyback authorization on paid dividend totaling $46 million. We also repaid $300 million of maturing senior notes with $322 million of net securitization proceeds. For the year, we remain committed to returning at least 50% of our free cash flow to shareholders. Next, looking at profitability. As noted earlier, adjusted operating income was negatively affected this quarter by incremental costs associated with supply constraints, inflation on investment in our new businesses, which had a negative impact to adjusted operating income margin of 470 basis points. We expect supply chain on new business costs to normalize as supply chain conditions improve on our new business scale. Pressure may persist for some time, but we expect to pass on most of the effect of inflation through pricing action, albeit by a delayed basis. Further, offsetting this cost pressure will be additional savings generated through projects on it. Last quarter, we announced $300 million of targeting growth savings in 2022, which we will use to offset planned cost increases as well as investment in innovation across our offerings. Due to incremental inflation across our cost base, we are now planning a 50% increase in our targeted savings amount for the year. We are expecting quarterly sequential margin improvements throughout the year, but the realization of this improvement will largely depend on macroeconomic factor. Turning to segment, we are now providing segment-level operating detail from print and author on financing or feed-out. We provide this information to help investors understand the print-on-order business, excluding financing, as well as FITL financing business, which in the future is expected to become less dependent on Xerox for origination growth. FITL revenue declined 12.2% in Q1, primarily due to a reduction in financing income on operating lease revenue, which reflects lower equipment installed. Segment profit was lower by 1 million of 5.6% as higher gross profit were offset by incremental costs associated with standing up the business. Segment margin of 11% was higher than our full year estimate of 8 to 9%. We expect fitter margin to normalize as volume pickup driving increases in commission. In Q1, Fetal finance assets were down slightly quarter over quarter, as portfolio runoff outpaced origination. Fetal origination volume declined 10% year over year, due primarily to a decline in Xerox product origination of 22%, which were negatively affected by product availability constraints. Indirect origination, which includes third-party dealers and non-Xerox vendors, grew 7% year-over-year due to growth in new dealer relationship on non-Xerox originations volume. Print and other revenue declined 2% in Q1, primarily due to equipment sales partially offset by modest improvement in post-sales revenue as previously discussed. This segment generated a loss due to lower equipment sales, a less profitable mix of equipment installed, higher supply chain costs, lower margin on post-sales revenue, and incremental costs associated with new business. Regarding capital structure, we ended Q1 with a net core cash position of around $400 million. $2.9 billion of the $4.3 billion of our outstanding debt is allocated to and supports the FITL lease portfolio. The remaining debt of around $1.4 billion is attributable to the core business. Debt primarily consists of senior unsecured bonds on finance asset securitization. We have a balanced bond maturity ladder on no unsecured maturities for the remainder of the year. In the first quarter, we return $159 million of cash back to shareholders, which along with acquisition and investment comprise the majority of the $200 million quarter-over-quarter decrease in net core cash. Finally, I will address guidance. We are maintaining our guidance of at least 7.1 billion of revenue at actual currency and free cash flow of at least 400 million. Our free cash flow guidance excludes cash costs associated with this quarter product supplies termination charge, as it is a one-time in nature and obscure the true cash generation potential of our operation. Our business face significant challenges that present a degree of risk to our outlook, But we continue to expect supply chain improvement on the broader return of employees to offices in the second half of the year. Additionally, we are implementing counteractive measure in response to geopolitical uncertainty on inflationary pressure, including a relocation of equipment and supplies from Russia to market facing significant backlogs on additional project on it saving to offset inflationary pressure. We will now open the line for Q&A.
spk01: Thank you. And ladies and gentlemen, if you have a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. First question comes from Ananda Barua with Loose Capital. Your line is open.
spk03: Hey, good morning, guys. Thanks for taking the question. And good to see the revenue is continuing to trend as expected as well. I have just a few for me if I could. Xavier, how should we anticipate, like, the pacing of the margin recovery as we move through the year? And maybe for both gross margin and operating margin and OPEX.
spk05: Yeah, so hi, Anand. Good morning. So as you have seen it, we face, you know, some inflationary cost pressure during quarter one. And as we mentioned it, the macroeconomics environment, we are expecting them to improve over time. This is driven by two drivers. Number one would be the back-to-office. In quarter one, January and February, activity was impacted by Omicron in some of the geographies. But we saw March recovering. So we're expecting a gradual recovery on back-to-office. This is as well signaled by external data points showing that employees are going back to the office. March was a good data point, and we're expecting this to continue in quarter two and gradually improve in quarter three, quarter four as well. So that's regarding back to office on print volume. We're getting supply chain. We are monitoring this very closely. As we mentioned it in our call in Q4 during Investor Day, we were expecting to have a gradual improvement during the second half of the year. And we are still monitoring, see some improvement in the situation. But this has impacted strongly our equipment gross margin because a mix of products that we have recognized or installed during this quarter was not the traditional high mix, high margin mix of products that we could have installed. So in summary, we expect gradual improvement in margin. Quarter two will be an improvement over quarter one, but we are expecting that the second half will be better than the total half, the first half.
spk03: Okay, got it. That's helpful. And just on supply chain, was it tougher than I know with increased fuel costs, that was certainly incremental. But just in general, sort of excluding the fuel costs and maybe sort of transportation as was impacted by that, how is supply chain availability relative to your expectations as you went through the quarter?
spk05: So the supply chain is two elements. One element is capacity. The second element is cost. So from a capacity point of view, we were impacted in quarter one. As I mentioned it on you, so that the equipment revenue was done year over year. And we have not received a mix of equipment. I was at high margin, A3 product equipment that we were expecting. You saw the strength of the backlog as well. Our backlog is still growing, 22% quarter over quarter, close to now more than a quarter of revenue that we have here. So we are quite confident in our ability, you know, to get orders from customers and having this backlog being installed over time. So quality of the backlog is also strong. We are currently monitoring, you know, how long it takes in average, you know, to install a product. And I would say close to 50% of our backlog is less than 60 days old. So we turn it. But at the end of the day, we don't have the equipment we are expecting in order to close the gap in equipment revenue. So high-touch capacity relating cost, we have had during the first half, it started, you know, last year, as you know, but during the first half, you know, cost pressure, infrastructure pressure on specifically container cost, but also in-country, it could be, I would say, freight, truck, train cost pressure here. We are expecting this to ease. You read, as we read as well, you know, some information regarding that consumer demand could decrease in the second half of the year. It should give more capacity on potentially price reduction for the type of demand or container costs that we're expecting.
spk03: That's really helpful. I'll see you before there. Thanks so much. Thank you, Ananda.
spk01: Your next question comes from Eric Woodring with Morgan Stanley. Your line is open.
spk06: Hey, good morning, guys. Thank you for taking my questions. I have two here as well. Maybe just to start, maybe, John, this would be for you. You know, in the FAQ part of your earnings deck, and you alluded to it here in the prepared remarks, I felt like there was a bit of a tone shift in your comments on monetizing or realizing shareholder value from some of your investments in innovation. just talking about increasingly looking to do strategic reaction. So am I correct in saying that? And maybe can you just parse that out maybe one level further just in terms of what that could actually mean in terms of potential actions you could take or timing or anything along those lines? And then I have a follow-up.
spk07: Yeah, Eric, if there was a shift, I apologize. I don't think there's a shift. We're continuing to fund the investments in innovation. We know it's margin-dilutive in the quarter. We're launching new products and businesses. We've spoken about what we're doing at LOQ and LM and at Noviti, Noviti being the latest one in predictive maintenance, where we have already two clients and we have a pilot going with Penzi Supply. Going forward, we're going to continue to look at monetizing these investments, like we said, through strategic transactions. And it could take form of a minority investment, a sale, a partnership, a merger of our businesses, we stated that we want these transactions to create shareholder value by providing our new businesses access to capital and speed, you know, a little bit what we see you and I spoke about also at the analyst day.
spk06: Okay, great. That's really helpful. And then maybe Xavier, one for you, and just to follow up on Ananda's question, you know, I appreciate the color that operating margins or margins in general should improve sequentially through the year, second half better than first half. But we're now starting, obviously, off of a lower base in 1Q than was expected. So is it possible that operating margins could be down year over year? I know you guided them to grow last quarter. So just any color that you can share on how we should maybe think about the year over year change in margins, realizing that there are some macro factors that could impact that. And that's it for me. Thank you.
spk05: Yeah, so that's a good point, Tom. Eric here, which is, okay, macroeconomics environment is something that we are monitoring very closely. So far, the leading indicator we have on the page volume are positive based on what we have seen. The key point for us would be, you know, to address, you know, the supply chain challenges that we are facing quarter one and being able, you know, to address the cost pressure. As you have certainly noted it, we have increased our internal, I would say, goal around Project ONIT. We have Project ONIT as a goal of $300 million of gross cost savings this year. We have increased it by 50%. So if you remember, Project ONIT is much more than a cost-cutting type of program. This is more the DNA on how the company is addressing the cost base on some of the challenges when we face them. and ensuring that we can still deliver the guidance on revenue and on free cash flow. So, so far, assuming, you know, the macroeconomics environment trend, Ukraine, we did not comment too much, had a limited impact here, and we will also be able to redirect some of the product, you know, outside of Ukraine and Russia towards our geographies. So I would say assuming this economic environment on macroeconomic trend are aligned with what we're commenting here, we should see the gross margin improvement on the ability to achieve or being close to the goals that we have for this year.
spk06: Great. Thank you, Xavier.
spk01: Thank you, Eric. Your next question comes from Samik Chatterjee with JP Morgan. Your line is open.
spk02: Hi, thanks for taking my question and good morning. I guess if I can just follow up on the last question there. You talked about the additional savings coming from project owner. It really is a difficult time, particularly where inflation is, to drive additional savings. So maybe if you can give us a bit more color, are these sort of projects that were sort of far away from commercialization that you're trying to pull back on? Like what is the source of these additional savings that you're targeting, particularly at a time where it does look a bit more tougher of an environment to drive those savings? And have a follow-up. Thank you.
spk05: Yes, good morning, Samik. So we will look at the entire scope of the cost base, but a specific focus on what we call infrastructure costs and also the ability to negotiate some or renegotiate some of the costs. I mentioned the freight costs and the ability to see versus the costs we see today if these costs will decrease during the second half of the year, but also another item that I did not touch around there. It's You have projects only addressing the cost point, but some of the inflation that we are seeing here, as you know it, we pass that back to customers. So we have done last year some price increases. What we are doing currently as well is to plan on certain products, on the services that we have here, additional price points, so we can offset some of the inflationary cost pressure to customers as well. But the project on it is not, you know, specifically directed to, I would say, areas one by one. We look at the entire cost base. We scrub it on the, as I mentioned, infrastructure cost currently is the focus plus rate cost.
spk02: Got it. And for my follow-up, I think at the analyst, you had mentioned that your target in terms of where page volumes can get to – sort of in the recovery is like an 80% number, and you talked about improvement here in post-sale driven by some of the return to work. So maybe if you can ballpark where you are in terms of page volumes relative to the 80% target today. And the follow-up there is you also have a big backlog on the equipment side. Are you able to get a sense of how that mix is or whether equipment demand is coming in higher end or lower end compared to pre-pandemic through your backlog?
spk05: Yep, so two good questions, Samick. So, February, we are seeing the gradual improvement. Just as a data point, March was one of the highest months that we have had since the pandemic. So we still see, remember, we monitor very strongly or very directly the correlation between vaccination rate or the presence of COVID, vaccination rate present in the office on paid volume. These correlations still stick, and clearly after Omicron wave in January, February was over, We saw people going back to the office. We saw direction of manager and CEO asking employees to be back to the office. We see that day-to-day with customers, and we are monitoring this and see positive trend in this direction. So as I mentioned, we are expecting quarter two to improve gradually, moderately, and then the second half has work there. So that's, you know, for the page volume. At the same time as, you know, we are also gaining market share, which means our MIF for presence here is also increasing, which gives also, you know, additional revenue coming from the market share gains that we have. Commenting on the backlog, just to share with you, so the data point is 422 million, more than 20% increase quarter over quarter. close to, I would say, two to three times the usual backlog. And I would say good sanity, good quality of the backlog, with a little bit less than 50% of the backlog being less than 60 years old. So that means we are installing it quite quickly. Regarding the mix of the backlog and the profitability, this was one of the key drivers of the gross margin erosion. Usually we have around 50% of the backlog being on our A3 product. We are here much higher. So this is one of the reasons the mix and the margin mix that we have been able to generate on install have been impacted in the quarter one. So, again, very fluid situation. Main driver of the backlog is still, you know, the shortage of some component on specifically certain chips that we are waiting for. Great. Thank you. Thank you for taking my questions. Thank you, Sanik.
spk01: Thank you. And your next question comes from Jim Suva with Citigroup. Your line is open.
spk04: Thank you. Both of you mentioned additional actions under Project Own It. You know, this program has been quite successful. So can you maybe explain to us or give some examples of what some of these additional actions are? Because I just kind of want to get a grasp for understanding what the new actions are for Project Own It because it's been closely accessible in the past. I'm just kind of wondering where else did you find some more savings?
spk07: Yeah, Jim, I wouldn't use a term where we find more savings. You're right, we've been very successful, and usually we've beat our project-owned targets every year. And it's a philosophy where we promote continual process improvements. And what we plan to do is this additional $150 million in gross cost savings. And where it comes through is flow-through of our in-flight initiatives. Is there more we can do there? Is there more information? Is there more investments in IT that we can do to go get it? Cross-functional operational efficiency projects. These are all things that are in flight that we're going to and we're looking at growing and we're looking at going faster. Of course, there could be some labor actions that are involved, overhead infrastructure, and then investments in our products and our services and even internally. And we look at them and say, are there things that we can hold off as supply chain eases as it gets better going forward? But... The plans are in place to go after it, and definitely, you know, you'll be seeing some of it in the second half of the year. But we don't look at it as something new. It's always continuous improvement.
spk04: Okay. And then a follow-up maybe for Javier. Javier, can you talk a little bit about the change in interest rate environment? You know, Xerox is a very big and complicated company, whether it be – debt obligations, your financing business, or even your company pension accruals. I know those rules have all changed a lot, but how should we think about a raising or higher interest rate environment to impact on that, on your company or cash flows? Thank you.
spk05: Thank you, Jim. So good question. So we're getting interest rate on the pressure on our environment. I would say it is quite simple. The first thing is, as you know, we have a debt. The vast majority of the debt Xerox has is related to the financing business to Fetal. And this debt is associated to the leasing contract or financing contract with this customer. For the vast majority, as you know it, we are now securitizing this debt. which means that the debt will be aligned or the cost of the capital will be aligned with the market cost, but we have also as well the ability to pass the price back to customers. So when rate costs are increasing, we are able as well to pass the cost up. Regarding the core debt, so the remaining part of the debt, We have, as you have seen it in our debt ladder, no obligation for this year. So, we cover our $300 million debt obligation in quarter one. And for the second part of the year, we have $1 billion. And we have, at this stage, no concern on how we will be able to fund and drive the debt here. So I would say it's not my prime concern currently interested here, mainly driven by the fact that via FITOL, we can pass some of the cost increase back to customers.
spk04: Okay, and the pension, any impact of pension?
spk05: Yeah, you have an impact, but at the same time, that means when interest rates are increasing, you know, you have the double effect. You have one effect where you have your obligations that could grow. At the same time, the return on your investment is also growing. The vast majority of our pension are, I would say, aligned or connected with a derivative instrument, instruments that manage or have a way to de-risk the environment, specifically from an interest point of view. So I don't see this as an immediate cost pressure as well or driver cash pressure and debt pressure on Xerox. Thank you so much for the detail. Thank you.
spk01: Thank you. And ladies and gentlemen, this does conclude the Q&A session. I would now like to turn the call over to John Byzantine for any closing remarks.
spk07: Thank you, and thank you for being on the call. Our focus remains on executing the strategic roadmap that we presented on Investor Day, including a return of print and services to growth and monetization of our investments innovation. Be safe and be well.
spk01: Well, ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
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