Good morning and welcome to the Conduent Q2 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. Now I would like to turn the conference over to Alan Katz, Conduent's Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Conduent's second quarter 2018 earnings call. Joining me on today's call is Ashok Vemuri, Conduent's CEO; and Brian Walsh, Conduent's CFO. Following our prepared remarks, we will take your questions. This call is also being webcast. A copy of the slides used during this call was filed with the SEC this morning and is available for download on the Investor Relations section of the Conduent Web site. We will also post the transcript later this week. During this call, Conduent executives may make comments that contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 that by their nature address matters that are in the future and are uncertain. These statements reflect management's current beliefs, assumptions and expectations as of today, August 8th, 2018, and are subject to a number of factors that may cause actual results to differ materially from those statements. Information concerning these factors is included in Conduent's Annual Report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with U.S. GAAP. For more information regarding the definitions of our non-GAAP measures and how we use them, as well as limitations as to their usefulness for comparative purposes, please see our press release which was issued this morning and was furnished to the SEC on Form 8-K. With that, I will turn the call over to Ashok for his prepared remarks. Ashok?

Good morning, everyone, and thank you for joining our second quarter 2018 earnings call. Brian and I will cover our financial and operational performance and the progress we are making towards creating a market-leading digital interactions company. We will then take your questions following our presentations. Before turning to the highlights of our second quarter, I want to address a matter that has been in the press recently around our performance on a tolling contract with the state government agency. Confidentiality agreements prevent us from going into the specifics. However, I will note that issues tend to arise in the implementation phase of the start-up and ramp of a new tolling system, particularly one that involves transitioning multiple legacy systems to a new and updated integrated statewide system. We have the capability to efficiently resolve these issues and are dedicating all necessary resources to meet our contractual commitments. We are an industry-leader in the automated tolling space across the United States with a strong performance track record, and are confident in our ability to address this issue and are making good progress towards our mutually agreed upon timelines. Turning now to our second quarter results, let's begin on slide three with an overview of our performance for the second quarter. Similar to last quarter, I will be comparing our results adjusting for the impact of the new accounting standards and our 2017 divestitures. We continued our strong performance in the second quarter. We remain focused on investing in and selling our digital interactions and platform-based offerings. And so progress on both the top and bottom lines. In terms of quarterly highlights, I will focus on several noteworthy achievements. Adjusted for the strategic actions we have taken, total company revenue for the quarter was again flat compared to last year, demonstrating…

Thank you, Ashok. As I reminded everyone last quarter, and at our Analyst Day, our 2018 financials will have several factors that will impact year-over-year comparables. As such, throughout this presentation and in the exhibits in the appendix, we will provide those GAAP numbers as well our year-over-year results after adjusting for the divestitures that we completed in Q3 2017 and the adoption of the 606 revenue recognition accounting standard. This accounting standard change primarily impacts how we recognize pass-through revenue for postage and deferred revenue. We have not adjusted these results for divestitures of the commercial vehicle operations business, and off-street parking business which we completed on June 28 and July 10 respectively. We expect to move the historical financials of these businesses into our other segment starting with the third quarter reported results. Now let's begin on slide eight with an overview of the second quarter financial results and a walk-through the P&L. Revenue of approximately $1.4 billion for the quarter was down by about 7.3% year-over-year as reported, and down 7.6% on a constant currency basis. Adjusting Q2 2017 for the impact of our 2017 divestitures and the 606 accounting standard adoption, revenue would have been down about 3% year-over-year. We still expect that after adjusting for the impact of divestitures and 606, we will be able to show organic revenue growth in the fourth quarter of this year. As Ashok mentioned in his remarks, further adjusting for the impact of strategic decisions, year-over-year revenue in the quarter would have been flat. Gross margin was 18.9%, an improvement of 270 basis points. This improving gross margin reflects continued progress on our transformational initiative and increased pricing from remediate contracts. SG&A declined year-over-year, while adjusted operating margin improved. Adjusted EBITDA in the quarter was $166 million, an increase…

Thank you, Brian. Over the past few quarters and during our first Analyst Day, I have shared with you our view on how Conduent creates value for its clients and how we think about the work we perform. At its core, Conduent is a technology-led company managing essential aspects of our clients operations while interacting with and supporting the wide range of people they serve. A key dimension of our core business model is our reliance on technology as the basis for service delivery and differentiation. Our service offerings are building on digital business platforms that enable personalized experiences drive scalability and standardization and honest both interaction and operational data for greater knowledge and insights. Increasingly our clients are requiring solutions build around these three dimensions, individualized immediate and intelligent. These have become our model for framing client needs and developing technology solutions. We are leveraging our people, process and technology to achieve best-in-class service and are bringing offerings to the market that are digital platform-based solutions. This allows us to take advantage of our incumbency scale and domain specific process know-how to implement solutions quickly and with minimal risk of disruption. I will now elaborate on a few of the recent wins that I have shared earl on this call to further illustrate this. First is our win at a large hospitality client that will significantly enhance the experience of its customers through digital engagement. By introducing the range of new technologies across our existing customer experience offering, we have transitioned this engagement into a digitally enabled solution supported by alliance ecosystem. We have combined automation, artificial intelligence and human understanding to modernize Omni-channel support while delivering a best in class experience and enabling speed and scalability in our client's operations. Our client was facing higher per unit cost…

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Bryan Bergin with Cowen.

Hi guys. Good morning. Thank you. I wanted to ask on the cost restructuring, how far through the program are now, in 2018? And can you talk about areas that may service as potential areas of outperformance? And as far your stranded costs, an update on the expected timing that you're going to remove those by?

Sure. Good morning, Bryan. So the $700 million program is on track to be completed at the end of this year. $225 million is incremental for this year, and about 50% of that has been achieved for the first two quarters, so we're tracking to complete it by year-end. I say inside of that, real estate continues to outperform, and we're getting more out of real estate than we initially anticipated. IT is a big contributor, and both those areas will contribute beyond this year, and we'll continue to focus on them beyond this year. In terms of the stranded overhead costs, we expect six months post closing to be able to address the stranded overhead costs. So, roughly, by the end of this year $30 million will be out, and then the rest of it will be out by the end of the first-half next year based on our expected timelines. And so we expect to have $20 million to $25 million of a stranded overhead problem in the first-half of next year, and then that goes away.

Okay, I appreciate that. And then my follow-up, I understand that you may be somewhat limited here on what you can say, but can you provide any update on the litigation. We received a lot of questions regarding how the accrual is determined, how insurance may factor in? And then as far as that public tolling contract, does the increased resources to complete the work imply somewhat pressured margins there versus expectations? Just trying to understand the implications here and the financials from both?

Yes, so first on the Texas lawsuit, the original $38 million accrual was done in 2015 based on the fast five [ph] analysis done at that time. We continue to review it every quarter as required by GAAP. I would encourage everyone to read the full disclosure in our 10-Q regarding this litigation. And as Ashok mentioned in his prepared remarks, we'll update our disclosures when there's material on the information. In terms of the tolling contract, we typically don't comment on the financials around one specific contract. We're obviously working to remediate the situation. But what I will say, as we just confirmed our guidance on revenue, free cash flow, and adjusted EBTIDA. So at this time we don't anticipate it having an impact on our ability to meet our guidance.

Okay, thank you.

Thank you. And the next question comes from Mayank Tandon with Needham.

Thank you, good morning. Brian, just to be clear on the guidance, I want to make sure we understand this. The updated guidance, or in other words, you didn't change guidance, but does that actually only include the closed divestitures but not the signed ones, and would that…

No, it includes both the signed and closed divestitures. And so even though the HR consulting divestiture is delayed, the closing is delayed and we're picking up an extra month or so of revenue in EBITDA, because we've now signed the local government divestiture and we expect that to close some time in Q3, those things offset each other. And if when we actually close there is a difference and a change is required we'll update guidance then.

Got it, thank you. And then for Ashok; Ashok, obviously great to hear some of these deal wins. Could you just talk a little bit more about the sales productivity? You've obviously been investing in sales and marketing, how that is progressing? And ultimately when do we start to see some of the new business wins start to show up in the bookings numbers? Right now, of course, it's still down year-over-year. When does that tide actually start to turn?

Yes, so the investments in sales, both in the hunters and in the farmers or the mining client engagement people continues to happen. I think early signs of their productivity is reflected in the new business pipeline, it's reflected in the renewal rate, and the pivot that we are successfully making into digital interactions using our platforms. And I think the large deal that we just signed is the testimony to the fact that, both for smaller deals as well as for large deals, we have the talent and the team, and the expertise to showcase our capabilities to our client. Now, obviously the proof of the pudding will be if we are able to institutionalize this and generate more such kind of deals, which is work in progress. But the good news here is that we're beginning to see the sign. The pipeline has increased, as you know. Once we get the sales team on the first step is to get a pipeline going, that has increased. And the pipeline gets converted into signings, and then the signings into revenue. I think we have a few quarters more as attraction builds for this conversion to happen into revenue. But the direction is right, the signs are encouraging, and all the clients that I meet when I go with my team, the feedback has clearly changed in terms of being more positive. The conversations are more driven towards outcomes. And the audience that we have has definitely changed from the usual people we used to meet in the past.

That's helpful. And if I can just squeeze one more in, Brian, on the debt; I think your guidance now implies about $23 million in interest expense in the quarters three and four. Should we be using that as sort of the benchmark for next year as well, or do you expect to be able de-lever further as the cash comes in from these divestitures?

So, we've spent $570 million through the tender and the premium we paid on the tender. And with the signed and closed divestitures, we expect $600 million of proceeds, so there's only about $30 million unaccounted for. We're also right at our leverage target, a little below. We said two turns is our net leverage target, and we're at 1.9 turns. So I wouldn't anticipate too much more de-leveraging. Right now, when we look at the forecast for interest next year, $88 million is our forecast. That assumes two more rate hikes this year, and two rate hikes next year. And so that's what we're looking at in terms of interest for 2019.

Great. Thank you.

Thank you. And the next question comes from Shannon Cross with Cross Capital.

Hi. It's Shannon Cross from Cross Research. Just wanted to ask about the 99% renewal rate, I'm going in to the sales productivity question as well, but now that's clearly a high rate. And I'm sure it can vary over quarters. But I'm curious what specific things you put in place to try to increase the renewal rate, what you think is driving it if there are any changes? And then I have a follow-up. Thanks.

Yes, so renewal rate of 99% is clearly industry-leading. I think there are a few factors that go into this. One is being proactively getting in front of the client way before the renewal is sort of -- renewal timelines are put in place, stronger delivery, the ability to bundle more capabilities and drive a more comprehensive solution. I think the fact that we have a lot more subject matter experts that we are positioning into our existing client base. So a combination of this is resulting in our ability to continue to sustain these high renewal rates.

Okay, great. And then in terms of acquisitions, you talk about it's obviously, I think $300 million still targeted there. And you've made good traction and obviously your divestitures. But what are you seeing in terms of the market pricing opportunities? And how quickly do you think you'll move when you sort of work through the divestitures?

So with regard to acquisitions, we have said this before, we are looking to bridge the capability gap that we have. We're definitely looking for technology and IP assets. We're not interested in buying a set of contracts because they are not sustainable. So we are actually in the process of due diligence in some of those interesting assets that are out there. Clearly, if you look at technology-related assets, some of the valuations, I find it hard to sometimes comprehend why they are where they are. But we are going to be extremely pragmatic and practical in order to make the appropriate investments in a way that is accretive both for our financials, as well as is a good use of the money that we have.

So you'll only look at accretive, I assume, at this point?

We look at it from multiple lenses, clearly accretiveness is one, capability gap is the other. The pivot where the market is going, if I look at the digital interaction space and how quickly we're sort of beginning to get traction in the marketplace, clearly we will have to make best with regard to where this buck could go to. But having said that, we don't also want to be in a situation where we become victims to valuations for software companies which I really think is non-sustainable, and which I have no intention of paying for.

Thank you.

Thank you. And the next question comes from Keith Bachman with Bank of Montreal.

Hi, thanks very much. I actually wanted to start on the signing. And Ashok, my question is can you grow with the current backdrop of signings. And what I mean by that is, you had very good renewal signings, but your new business signings, frankly, are still pretty weak. And when you talk about growth and, call it, calendar year '19, are the renewals strong enough that given this backdrop you could grow Cal '19 or do you need your new business signings pick up? I thought the disclosure on page 20 was interesting, your slide deck where you talked about the annual recurring revenue signings and non-reoccurring signings were both down quite meaningfully. So just wanted to see, do you need the new business signings to pick up before you can really think about growth?

Yes, you do need new business signings in order to drive overall growth, but an important component is renewals. And this level of strong renewals gives us the opportunity to cross and up-sell in our installed base. So there are two elements to this. Unless and until I have strong renewals and a sustenance and continuation of business in my installed base I don't have the opportunity to cross or up-sell in that particular portfolio, which in my particular case is very rich, having said that, we also need to drive new business growth. And given the traction that we have, and there are stages for the new business signings. So number one is you have to have a pipeline. A pipeline that is reflective of the kind of deals that we want, it is real, it does not have transactions which are long tenure or are in parts of the world that we don't do business or don't want to do business, et cetera. So the pipeline quality is good. It's real. These are manageable transactions. They are at a risk level that I believe are manageable, they are well mitigated. So the conversion now of this pipeline into signings, and from signings into revenue is what our focus is on. And given the current rate at which we're able to do that, given the fact that we have two quarters of flat revenue growth finally after many quarters, after many years in fact, gives me the confidence that in the back-half of this year, which is why we are staying with the guidance that we have given, as Brian mentioned. As well as the pivot to growth that we expect in '19 is on sound footing. So short answer to your question is, yes, new business growth is important, renewals are as important. And renewals track record is very, very strong. New business signings, we will begin to see as the traction off the pipeline converting into signings and from signings into revenue begins to happen.

Okay, thank you for that answer. I have a related follow-up as a related question, when you talk about strategic decisions and growth normalized for the strategic decisions, is that specifically the businesses that you intend to sell and therefore you try to normalize for those growth rates because clearly IT services companies everyday face choices about whether to chase business or not. And there's lot of deals cognizant and others walk away from during the course of any business cycle, so I'm just trying to understand a little bit more when you normalized growth for those strategic decisions. If that's implicitly within those businesses that you still tend to sell or is there something else and that's it for me. Thank you.

And so when we talk about strategic decisions there are long tale clients that we excited it's a very small clients that we can monetize and we excited and their own profitable contracts where we try to remediate them and we can remediate them, we decided to access not renew that's what we refer to a strategic decisions and when we adjust for those and divestures in 606 we get the flat, when we talk about returning to growth in Q4 this year on an organic basis by that point we lap a lot of our strategic decisions and excluding 606, excluding all the divestitures we expect to be at 1% growth.

Okay. And therefore, Brian, just a follow-up for CY 19 there won't be any, you won't the strategic decisions won't be part of the narrative because everything will be overlapped and so the growth will be on a normalized basis or on an actual basis rather?

Correct, in on the core business that we presented at our Analyst Day and then the 2.5% to 4% growth is off of that we said for 2019 we'd be at the lower end of that range part of that comes through M&A and part of that comes from organic.

Many thanks, cheers.

Thank you. And the next question comes from Jim Suva with Citi.

Thank you very much. I believe a shock in your prepared comments you mentioned did you say about $500 million of contracts yet to off get rid of off of your company and if so would those then be adjusted to your full-year sales and EBITDA guidance?

So driven the investments to the $500 million is our standalone customer care business, just sort of correct back to you and then handed over to Brian.

And we have not taken that out of our guidance yet because we don't have a sign deal and so as we signed a deal that's when we would adjust our guidance for that business keep in mind on an, from an EBITDA perspective once during the costs are taken out it loses money historically but we have not adjusted yet for that business.

Okay, great thanks so much for the clarification.

Thank you. And the next question from Frank Atkins of SunTrust.

Thanks for taking my questions. First question I wanted to ask if I could get an update on the global delivery platform, can you give us a sense of where headcount is and kind of where the mix of delivery talent is and what are you seeing and doing out there to retain and attract talent?

Yes, so our global delivery platform is center on four distinct hubs starting with the Philippines, India, Guatemala and Jamaica and we have other centers like Romania et cetera, which cater to a particular drug or a field or a particular skill effect and the way we're doing this is as be increase our actually shoring percentage as it begins to find traction with our clients. We are hiring people who have technology and process capabilities in these centers are to support our business across the world. As we're moving more towards digital interactions and more of the mobility or analytic capability that is a capability that we find increasingly more in the markets that we serve. So for example we have set up the innovation center in North Carolina, where we expect to hire a lot of people from the neighboring university because that's a talents that we believe will be more effective if they are both client facing as well as they are in the ecosystem in which these ideas are being developed. From our retention perspective clearly we are making those investments both from investing in our technology, investing in training and development as well as investing to bring business into it, so that there is a cycle of perpetuating the good and capable set of talent that we can bring to the table. So, I think we have to model down right. The model is beginning to grow. If I look at the talent acquisition in my global delivery centers, it's actually higher at this point time as I move some of the work that used to actually be done in high cost locations has moved there. But in the clearly in the high cost locations, I have to hire people who will generate a higher value for the company both in terms of pricing and margin and capabilities.

Okay, great. That was helpful. And then can you talk a little bit about revenue opportunity set outside the United States? And secondarily where you see opportunities to implement additional layers of analytics or digital capabilities?

So outside the U.S., our focus is on Western Europe as I have said before, essentially four countries here. We are working in U.K. We are working in France, Germany, and the Netherlands. We have an installed base of clients there. We think that between these four countries in Europe and the United States we are probably covering as much as of the economic technology and process dollars as is possible to do. We clearly see opportunities across the board whether it's with the amount of monies that are being spent in the government sector, the amount of monies from a technology and process perspective. Everybody is looking for insights, everybody is looking for intelligence. I mean if you look at us, we are probably the conduit or the pipe of some much data that flows in. And hitherto we have not necessarily mined that for insights and intelligence. And as we evident from the deals and the conversations we are having with our clients, most of the conversation is about I know there is data. How can I extract intelligence and insight into this? Whether it's an auto manufacturer, whether it is a bank, whether it is a card -- credit card company, whether it's a transit agency, whether it's a state and local government. So the opportunities for this are very, very large. The headroom for us is very, very large. We've gotten into this in a fairly -- the traction is actually very, very strong for us. And we will continue to invest to mine this. At the time, common processes or the generic processes that most companies rely and their operations rely on, the opportunity for automating that, the opportunity for extracting more productivity and efficiency out of the repetitive cost which can be automated and thereby by putting on a technology stacks, drive more insight, intelligence, immediacy and is much higher. So as overall the ecosystem is very large. There are a few players that do this on an end-to-end basis the way that we do. And I think from the perspective just the headroom for me in this particular -- with this particular capability is very, very high.

Okay, great. And if I can squeeze in more, can you touch just briefly on the recent leadership appointments in couple areas and what that brings to the table? Thank you very much.

Yes, so we have -- Conduent Transportation LLC is a very strong business of ours. Good growth, very strong margins. We definitely have done well for ourselves in being able to hire a CEO for that business. He brings a significant amount of technology capability, has run a large organizations and business. And as we pivot our transportation business to be inclusive beyond just the transit or the tolling or public safety, we think he is the right person. And that allows us to shine a spotlight, if you will, on a business that is definitely a very strong and healthy business for us; the same situation with government. We are very fortunate to have Marcus join us in -- as a group chief executive for our government business; another great area of focus for us. We have not necessarily being as competitive in the federal government space. We think -- again shining a light on this will highlight both the investment opportunity, the growth opportunity and attract the right talent for a business that is definitely got a ton of leg under it to grow.

Thank you. And the next question comes from Brian Essex with Morgan Stanley.

Hi, good afternoon or good morning, and thank you for taking my question. Ashok, I was wondering if you could follow-up on the sales force movement. At this point, I think we have spoken before on your little bit north of the 300 sales force headcount going to 360 or maybe 330 on a 360? Where does that stand now and what is the maturity of that sales force like? And when might you anticipate maybe little better contribution on the new business side?

Yes, so it's around 315 - 320 now, Brian. So it's -- and from a maturity perspective, most of these folks have been around for at least six to eight months, which basically means that they are now ready to drive a higher number or demonstrate better performance. And we've been on this hiring bandwagon right from, let's say, the summer of '17. So the growth in pipeline, which is the first step towards seeing whether the sales team is effective, that is growing. So that tells me that we have the right people, they're doing the right things. We probably need a lot more of these people as they finish their six months tenure, they should be kicking in. So I feel confident about where my sales team is. As you know, a sales team is as good as its previous quarter. So it is a job where you just have to keep churning things out and pounding the pavement. The other good news is that when we move to a vertical organization and delineate its sales from client partners, those people are actually generating a great amount of traction. We've hired subject matter expertise. We've hired people from the industry. As I've said before, it's always important to hire people who can sit across the client and the client can relate to that person and say, okay, I've done this compliance work, I know what this means, I have the scars on my back to show where this will go right and where this will go wrong. And I think that is a key reason why our renewals are so high. The fact that we are -- in our delivery, the investments that we've made in delivery technology -- still a lot to make, but still the ones that we have made are beginning to yield the results. So I feel as compared to the summer of last year, at this point in time, I feel better, but you know, sales as I've always said is you're as good as your last quarter. So we have to keep our sales engine churning all the time.

Right. That's super helpful, so thank you for that. And maybe you would just make a follow-up on the customer care contracts. Any indication you can give us in terms of how many customers that represents and how many maybe bulk sales of these contracts that you might be able to find a home for is this going to be more of a longer trickle out of your platform as they may be able to be -- or may have to be kind of carved up a little bit more to find the right home?

So the $500 million is probably made up of 15 contracts. We are trying to find a buyer for the full portfolio. If we have to look at other options we will, but our preference is to find a buyer for the whole portfolio.

Very helpful, thank you.

Thank you. And the next question comes from Puneet Jain with JPMorgan.

Yes, hi, thanks for taking my question. Is there a way to quantify impact of higher margin cutoff over focus on platform-based businesses on new business signings; is that a material driver of your revenue [ph] decline in your investments?

If you look at our signings and if you look at our business, once the divestitures are done, 80% of what we do will be platform-based. So the signings are healthier, they time the revenue faster, they are meeting our margin guidelines, and for the most part, they're platform-based.

Got it. But the cutoff rate like, for margins or for the type of work you are looking for, is higher now than what it was last year.

Yes, our margin cutoff drives towards the long-term targets for the company. So we want to be over 15%, 15.5%, 16% adjusted EBITDA margins. And so when we look at deals, those are the margin targets we look at.

Got it. And it seems like you are going to wind down student loan business in 3Q, what will be the wind down expenses associated with that and is that going to be included in free cash flow or adjusted EPS numbers?

We expect for Q3 and Q4 about $3 million to $4 million of wind down costs in each quarter. And then if it goes into Q1, it would be a lower amount, $1 million to $2 million and we're going to be out of the business, not servicing the loans anymore, but we'll have wind down activities we have to complete. The plan is to take that out of segment profit, adjusted EBITDA, report debt and other net expense. So it would be included in free cash flow. But it would be adjusted out of adjusted earnings and it would be out of adjusted EBITDA.

Got it, thank you.

Thank you. This concludes the conference call. Please feel free to reach out to the company directly for any follow-ups. Thanks for participating. You may now disconnect your lines.