Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation's second quarter 2024 earnings release conference call. After the presentation, there will be a question and answer session. To ask a question at that time, please press star 11 at any time during this call. You can withdraw your question simply by pressing star 11 again. At this time, I'd like to turn the program over to Mr. David Beckel, Vice President and Head 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's second quarter 2024 earnings release conference call hosted by Steve Bandrzak, 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 the 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. Bandershek.

Good morning, and thank you for joining our Q2 2024 earnings call. Sequential improvements in adjusted operating income margin, cash flow, and revenue validate the comprehensive and strategic organizational changes implemented in Q1. Reinvention is a multi-year strategy to simplify operations and reposition Xerox towards market opportunities in print, digital, and IT services with the highest rates of underlying growth. With transformational changes of this magnitude, progress may not always unfold in a linear fashion. We experienced a short period of disruption in the first quarter during implementation of the redesigned operating model, but continued to execute reinvention according to plan. Notable improvements in operating processes and financial results since the reorganization further out confidence in the strategy's ability to deliver a targeted $300 million improvement in adjusted operating income above 2023 levels by the end of 2026. Summarizing results for the quarter, revenue of 1.6 billion decreased 10% in actual and constant currency. Excluding the impact of year-over-year fluctuations in backlog and reduction in non-strategic revenue associated with the reinvention, core business revenue declined only modestly. Adjusted EPS was 29 cents, 15 cents lower year-over-year, primarily reflecting higher taxes and interest. Free cash flow was $115 million, an increase of $27 million compared to Q2 of last year. An adjusted operating margin of 5.4% was lower year-over-year by 70 basis points due to lower revenue offset by operating cost reductions. With the disruption in Q1 firmly behind us, the benefits of streamlined organizations with improved operating focus are materializing in the financial results. Q2 revenue was largely in line with expectations, marking an improvement in trajectory from Q1. Adjusted operating income margin improved more than 300 basis points on a sequential basis, and free cash flow grew sequentially and year over year. Momentum in equipment orders and pipeline, new product launches, and improved sales processes are expected to drive stronger revenue growth in the second half of the year than originally expected. Despite an improved outlook in the back half of the year, we lowered full-year revenue, adjusted operating income, and free cash flow guidance. The reduction in full-year guidance primarily reflects the impact of incremental reinvention actions, including geographic and offering simplification, the savings of which are now expected to be realized predominantly in 2025. Other impacts to margin, including higher freight and product costs, are also expected to be mitigated over time. Accordingly, the reduction in 2024 guidance has no bearing on our confidence in the three-year, $300 million adjusted operating income improvement target. In fact, our confidence in the three-year outlook has grown over the past quarter due to progress in the identification and estimation of reinvention cost reduction initiatives, now totaling more than $700 million between 2023 and 2026. and the quality and rigor behind the management infrastructure recently put in place to execute those initiatives. John and Xavier will discuss the timing and consistency of future operating cost reductions in more detail. I'll now turn to our strategic priorities, which continue to guide our decision framework as we execute the reinvention. Starting with a stronger core, The change to the business unit-led operating model in Q1 and related changes to the sales organization were designed to catalyze market share growth by bringing sales and operations in closer alignment with the economic buyer of Xerox offering while improving sales efficiency. We are seeing early evidence of the success of both fronts now that our sales team has settled into the new operating model. The sales, marketing, and pricing teams are working more collaboratively to design offerings and marketing strategies specific to client segments and routes to market. Sales efficiency has improved through enhanced intelligence, better planning tools, and optimized sales coverage models. And work continues to reduce administrative burden given the sales team more time to focus on the highest quality opportunities and target new accounts. These improvements are bearing out across top-line key performance indicators. Equipment order momentum continued in Q2, with orders and pipeline both higher year over year. Supplies revenue also grew in the second quarter and the first half of the year. Services KPIs are similarly strong. Revenue renewal rates for large accounts remained above 100% in Q2 and for the last 12 months, and across both print and digital services. New business signings are higher year-to-date with renewal rates ahead of internal targets. The benefit of improved sales operations will be augmented in the second half with a refreshed A3 product lineup, our largest and most successful product category. The lineup features what we believe is the world's first AI-assisted multifunctional printers. The devices come with adaptive learning modules which save clients time by suggesting new and optimized workflows using AI-based algorithms to analyze device use patterns and user preferences. Also included are preloaded AI applications that enable users to summarize, convert handwritten notes, and automatically auto-redact any scanned documents. More importantly, these AI-enabled devices serve as a platform for a broader range of AI-assisted workflows, including intelligent document processing currently deployed by Xerox as a digital service. The updated platform combined with cloud-hosted AI applications and integration opens the door for innovative new use cases. The change to the business unit operating model has also brought increased focus on expanding digital and IT service penetration across our client base. Stronger alignment between product development, solutioning, and sales teams is driving differentiated digital workflow solutions for traditional print clients who are increasingly looking to partners like Xerox to improve their most critical document workflow processes. Our strategy of expanding total addressable market with every print client is progressing accordingly. In Q2, we signed a deal with an existing print client in the European telecom space to provide an end-to-end customer acquisition solution for the client's new home broadband service. With the help of a strategic partner, we sourced unique customer data and applied proprietary intelligence to identify an optimum set of customer targets. We designed and executed an omnichannel marketing campaign across both digital and print media and are using the response data from the campaign to recalibrate the targeting strategy, improving marketing effectiveness for the client over time. This solution demonstrates our ability to integrate print with advanced digital capabilities to provide incremental value to our clients. Increasingly, we are utilizing artificial intelligence to optimize our digital solutions. This past quarter, we signed a deal with an existing print client in the insurance industry to provide a digital workflow solution leveraging AI and machine learning, which assists in the prevention of money laundering and financing of terrorism. This unique solution automates processes involved in the screening and detecting of fraud and other noncompliant activities, greatly reducing the need for manual processes and client risk. The ability to sell advanced digital solutions such as intelligent document processing by leveraging print customer relationships is a key competitive advantage as we expand our digital services business. The new business signing for digital services are up double digits year to date, and we expect increased demand for solutions utilizing AI to provide a tailwind to growth for our digital services businesses in 2025. Moving to cost improvements. In Q2, operating expense decreased nearly 50 million year-over-year, reflecting the benefits of the strategic actions taken in the prior year, the use of AI to optimize internal processes, and the planned reduction in headcount associated with the structural reorganization. With headcount reduction largely behind us, our focus this quarter turned to identifying future cost reduction initiatives and developing the systems and processes required to ensure the successful delivery of those initiatives. Our Global Business Service Organization, or GBS, is the key to the delivery of future savings as it enables continuous operating efficiencies through shared capabilities and platforms. Louis Pasteur, our Chief Administration Officer, leads the GBS organization. He is also our Chief Transformation Officer, putting control of both the design and implementation of the end-to-end structural changes in the hands of one leader. I am pleased with the progress his team has made to identify more than $700 million of gross cost savings through reinvention from 2023 to 2026. Finally, balanced capital allocation. This quarter, we delivered year-over-year growth in free cash flow despite lower operating income and lower sales of finance receivables. We are in advanced talks to expand our forward flow agreement outside the U.S., which will enhance the company's free cash flow profile by reducing capital required to fund future lease originations in other regions. Balance sheet health and liquidity improved this quarter through the reduction of $300 million of debt and expansion of the ABL facility by $125 million. We expect free cash flow in future periods to be sufficient to both fund value accretive growth in digital and IT services and reduce debt. Through reinvention, we intend to reduce leverage below three times EBITDA by the end of 2026. The payment of our $1 per share dividend remains a key priority. Our dividend yield is well above that of our peers, but we fully expect our yield to return to more normalized levels as we execute our reinvention. I will now hand the call over to John to provide an update on specific reinvention initiatives.