Xerox Holdings Corporation

Welcome to the Xerox Holdings Corporation second quarter 2026 earnings release conference call. After the presentation, there will be a question and answer session. To ask your questions at that time, please press star 1 1 at any time during this call. You can withdraw your question by pressing star 1 1 again. At this time, I would like to turn the meeting over to Mr. Greg Stein, Senior Vice President and Head of Investor Relations.

Good morning, everyone. I'm Greg Stein, Senior Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2026 earnings release conference call hosted by Louis Pastor, Chief Executive Officer. He's joined by Chuck Butler, 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. Pastor.

Good morning, and thank you for joining our Q2 2026 earnings call. Before I get into the quarter and some of our recent initiatives, I'd like to step back and share how I think about the business and our current priorities because context matters as much as the numbers. As I've spoken with employees, met with investors, and engaged with clients, partners, and vendors from this seat, I've used an analogy to bring our priorities to life, particularly in the context of our capital structure. The analogy has resonated well, so I thought it was worth repeating during today's call. We are running a race. The race has three hurdles. The hurdles are our 2028 debt maturities, our 2029 debt maturities, and our 2030 debt maturities. Our first priority, stabilizing revenue, is about how fast we run. Our second priority, increasing profitability, is about how high we jump. And our third priority, reducing leverage, is about lowering the height of the hurdles. Every action we take, every decision we make, is now framed by these three priorities because this is how we win the race. If an initiative doesn't advance one of these three priorities, then we don't pursue it. Period. On balance, we made real progress against each of our three priorities in Q2. Revenue of $1.92 billion increased 22%, reflecting the inorganic benefits of the Lexmark acquisition. On a pro forma basis, revenue declined nearly 7%. This looks like a deceleration from Q1, but it's not. Adjusting for Q1's currency benefit and the supplies pull forward we flagged last quarter, our revenue trajectory modestly improved on a year-over-year basis in Q2. Adjusted operating margin rose again to 10.6%, up 690 basis points year-over-year on a reported basis. Excluding the benefit of tariff receivables, which Chuck will discuss in detail, adjusted operating margin would have been 5.1%, up 140 basis points year-over-year. Importantly, pro forma gross margins expanded year over year, a trend we expect to continue, helped by Lexmark synergies. Finally, in Q2, we reduced our total debt by $223 million and improved both our current gross and net leverage ratios, as well as our year-end leverage targets. Collectively, Q2 results gave us the confidence to raise our full year 2026 revenue guidance by approximately $100 million on higher expectations for print and other. We're also raising our adjusted operating income guidance. The increase reflects both the one-time tariff recovery, Chuck will cover in detail, and real growing confidence in the plan itself. Two quarters in with the first half delivered and our synergy target now at $350 million, we're holding the operational line The quarter had real positives, but two areas aren't yet where we need them to be, and I want to address both directly. I want to talk about what happened, what we're doing about it, and why I'm confident we'll see improvements as the year progresses and into next year. First, equipment sales. Pro-forma revenue declined in the quarter, mainly driven by softer mid-range and lower OEM sales. but demand signals remain encouraging. Our overall print pipeline continues to track ahead of last year. The macro picture outside of the Middle East remains stable and we continue to see growth opportunities in both our entry and production segments. Specific to entry, demand in the quarter ran ahead of our Q2 forecast and we couldn't fully supply it, pushing installs and revenue into later quarters and creating a backlog we expect to work down over the second half of the year. In June, we launched our first hardware under the unified Xerox brand, a new entry color printer and MSP lineup targeting the small workgroup segment, one of the fastest growing areas in print. These products bring the combined capabilities of Xerox and Lexmark to market for the first time and sharpen our competitiveness. Entry color installs rose in the quarter, even though the products had only been available for a few weeks. I also want to speak about the 9 Series. A product I believe will drive our mid-range success over the next several years. Historically, Xerox sourced all mid-range equipment from a third party. This limited our ability to manage cost, working capital, availability, and ultimately our competitiveness. The 9 Series changes that. This is a platform we built ourselves as a direct result of the Xerox and Lexmark combination, and it gives us something we've never had in this segment. Control. Here is what that means in practice. The 9 Series costs us less to build with stronger economics across the platform. For our clients, our internal analysis shows a total cost of ownership advantage that becomes increasingly compelling at faster print speeds across equipment, service, and supplies. Better economics for Xerox, better economics for our clients. To our channel partners and to anyone weighing a mid-range refresh, Now is the time to take a hard look at the 9 Series. We built it, we stand behind it, and we'll put it up against any competitor's product. The other area I want to address is IT solutions. Billings grew again in the quarter, and the pipeline is building. New business, though, faced near-term pressure, and part of that is deliberate. We're rebuilding the sales force here, ramping seller productivity, adding technical sales engagement, and sharpening our cross-sell motions. Newer sellers take time to reach full stride, so the transition is weighed on both near-term signings and short-term operating profit. We knew it would. There's also some friction from our current credit profile, which we expect to ease as we reduce leverage. We expect Q4 billings ahead of Q3 year-over-year and a better finish to the year as newer sellers build their books and deal conversion improves. And revenue should begin tracking more closely with billings as we move into next year. The long-term prospects for IT solutions remain strong, and the market opportunity is large and growing. Bringing this back to our first priority, stabilized revenue, our higher full-year 2026 revenue guidance assumes year-over-year trends for both equipment and IT solutions improve in the second half of the year. Turning to increased profitability. We've raised our Lexmark integration synergy guidance to at least $350 million, A $50 million increase from our prior target, primarily driven by incremental IT efficiencies, expanded sourcing and logistics benefits, and the migration of selected service delivery activities into lower cost shared service operations. We expect half of these synergies to be realized in 2026, with the remainder flowing through in 2027 and 2028. This, along with higher revenue, has allowed us to offset a large portion of the additional memory and oil price headwinds we've endured since we first provided guidance six months ago. Finally, reduced leverage. In addition to paying back our $125 million bridge loan at the end of June, we retired $99 million of our debt in the open market in Q2, mainly through the repurchase of our 2028 notes. Over the past two quarters, we've reduced the 2028 maturity wall by nearly $200 million. Or, to revisit my analogy, we've lowered the height of the first hurdle in our race by more than 25% during the first half of this year. At the end of Q1, our gross and net leverage ratios were seven times and six times, respectively. At the end of Q2, our gross and net leverage ratios fell to 5.9 times and 5.1 times, respectively. Based on our current guidance, we now expect our year-end gross and net leverage ratios to fall by more than two turns versus Q1, better than our prior forecast of one and a half turns, to less than five times and four times, respectively. To the extent we have excess liquidity operating the business, we'll continue to take advantage of the dislocation in our bond prices to further lower the hurdles in front of us. As we think about the future of this business, our priorities are clear. Gain share in entry and production, protect our mid-range base, and expand our addressable market in IT solutions and digital services. We're deliberate about how we do it, retaining and strengthening the base, reducing avoidable account loss, improving renewal quality and breadth, and growing wallet share with existing clients. With the Xerox and Lexmark sales forces recently coming together and the coverage, incentives, and Process Design now more firmly in place, we are being more proactive in pursuing new logos, market expansion and partner motions. It'll take time, but the motto is set. Now it's about execution. Before I hand the call over to Chuck, I want to put in a plug for our production business. When we retired three legacy products in 2024, some of our competitors tried to spin it as Xerox exiting production. That narrative is wrong We're investing in production and reshaping the portfolio, moving into higher growth segments and bringing new technology to market. We've already launched the IJP 900 and the Proficio PX 300 and PX 500. And over the coming quarters, you'll see the rest of the portfolio we've been building come to market. Q3 brings new product announcements and more segment expansion. I'm proud of how far this team has come, and I can't wait for these products to hit the market. If you're attending Printing United in September, come by. I think you'll leave with a very different view of where Xerox production is headed. With that, Chuck, over to you.