Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation's fourth quarter 2023 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation fourth quarter 2023 earnings release conference call hosted by Steve Banderjack, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer, and 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 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. Banerjeeck.

Good morning, and thank you for joining our Q4 2023 earnings call. I'd like to start by commending the Xerox team for delivering strong growth in full year adjusted operating income, EPS, and free cash flow amid a challenging and uneven macroeconomic environment. We achieved 2023 adjusted operating income margin and free cash flow guidance despite slightly weaker than expected macro conditions in the second half of the year. Our ability to overcome top-line headwinds and meet full-year profit and cash flow targets is a testament to this company's culture of operating discipline, which has been forged and strengthened in recent years through operational and macroeconomic challenges. Summarizing results for the year, revenue of $6.89 billion declined 3.1% in actual currency and 3.3% in constant currency. Our core print digital and IT services businesses performed much better than this top line result would suggest, however. As Xavier will describe later in the call, revenue declined less than 1% in 2023 after adjusting for the effects of backlog reductions in the current and prior year, structural simplification efforts, and the intentional de-emphasis of certain non-strategic businesses. Adjusted EPS was $1.82, 70 cents higher year over year. Free cash flow was $649 million, an increase of $547 million over 2022, and adjusted operating margin of 5.6% was higher year-over-year by 170 basis points within our guidance range. 2023 was a pivotal year for Xerox and marked the first full year of a multi-year strategy to reposition our business's for long-term sustainable growth in revenue and profits, which we call our reinvention. We took structural and foundational actions to improve our core business and simplify operations, resulting in greater operational focus and a clear path for more transformative reinvention actions this year and beyond. All the while, we delivered key accomplishments towards the strategic priorities set out at the beginning of 2023, which provided momentum for our reinvention in 2024. Starting with client success. Client success is and always will be a point of competitive differentiation for Xerox and is foundational to maintaining a strong and stable print business. Since accepting the CEO position in August of 2022, I directed my team to put more emphasis on client outcomes and solutions-based products and services that address the productivity challenges of a hybrid workplace. A rigorous focus on positive client outcomes solidifies our position as a trusted advisor as clients build workplace technology solutions for the future. It improves the predictability and repeatability of our business and expands total addressable market by ensuring we remain responsive to and take advantage of evolving market trends. Last year, we took actions to enable complete operational focus on the delivery of positive client outcomes in our core print, digital, and IT service businesses. We divested PARC, Xerox Research Centre of Canada, and Ellum, our 3D printing business. We signed partnerships with Peak Solution, an affiliate of HPS Investment Partners, allowing Fiddle to focus exclusively on financial solutions that support the sales of Xerox equipment and services. We also reduced our presence in certain non-strategic markets with lower levels of profitability, such as paper and certain types of IT hardware. In 2023, an enhanced focus on client success delivered the intended results, proving client centricity can drive revenue stability, even in secularly challenged industries like print. Xerox Net Promoter Score improved. We grew our share of equipment sales in the markets in which we compete, and we achieved revenue renewal rates above 100% across large account contract renewals evidencing our ability to sell new print and digital services that more than offset reduction in traditional print spend. Moving to profitability. Transformation of the scope and scale contemplated by our reinvention requires a strong base of profits and margin profile from which to build. In 2023, we improved adjusted operating profit by more than 100 million and adjusted profit margin by 170 basis points year over year. Improvements stem from structural cost reduction efforts, pricing discipline, and ongoing operational efficiencies and deliberate reduction in non-strategic revenue with low levels of profitability. These actions and the restructuring announced earlier this month put us firmly on the path to returning Xerox to double-digit profitability by 2026, while improving our capacity for tactical reinvestment in growth areas. Finally, shareholder returns. It is important to our board and management team that investors are rewarded while accompanying Xerox on its reinventions. In 2023, we achieved our shareholder return policy while reducing total debt. More than $600 million of free cash flow, when combined with excess cash on our balance sheet, was used to pay our $1 per share dividend, lower our debt balance by approximately $450 million, and reduce our share count by more than 20%. We will build on these achievements as our priorities evolved in 2024 year two of our reinvention. Our first priority of 2024 is the continued strengthening of our core print digital and IT service businesses. These businesses form the bedrock of our strategic repositioning from which new capabilities and our client-centric mindset will be leveraged to drive incremental service opportunities and revenue diversification. Earlier this month, we announced a significant reorganization of our businesses, including the adoption of a business unit rather than a geographic-led operating model, along with the greater focus on a partner-led distribution. These changes are expected to both strengthen our core business and position us to capture new ancillary revenue opportunities over time. John Bruno, our President and COO, will provide more details on the operating changes. In short, a business unit-led operating model sharpens our client-centric mentality by more closely aligning Xerox products and services with the economic buyers of today's hybrid workplace. And with the establishment of a global partner ecosystem, we will pursue new partner relationships to expand the reach of our core businesses. Stronger end-market alignment and partner reach is expected to further improve equipment market share and print digital and IT service penetration rates with existing and prospective clients, resulting in new client wins and higher rates of revenue as contracts renew. Our second priority is a successful implementation of structural cost improvements associated with our reorganization. which build on efficiencies and improvements put in place in 2023 and are expected to drive profits meaningfully higher again in 2024. We announced last quarter that reinvention is expected to deliver $300 million of net adjusted operating income improvements above the 2023 levels through 2026. We expect to achieve more than one-third of that improvement in 2024, due in large part to organizational cost savings associated with the reorganization announcement earlier this month. A newly formed Global Business Service Organization, or GBS, which John will further describe, will catalyze these expected organizational savings in 2024. Beyond 2024, we expect GBS to be an engine for continuous cost improvement and improve client satisfaction as this group works to embed advanced technologies like machine learning and AI into key internal processes, making it easier to do business with and within Xerox. This year, we also began a more comprehensive optimization of our geographic footprint and product offerings. the savings of which are expected to further augment those associated with the recently announced restructuring program. Finally, capital allocations. As I mentioned, management and the Xerox Board of Directors believe it is important to directly reward shareholders as we execute our reinvention. In 2024, free cash flow is expected to be used to pay our $1 per share dividend and reduce leverage. Excess free cash flow is expected to be used to tactically invest in projects or acquisitions with high rates of expected returns on invested capital. Each of these three priorities puts us on the path towards achieving our long-term reinvention goals. I'll now hand the call over to John Bruno to provide more details on our recent organization announcements and our reinvention roadmap.