Good morning and welcome to the Conduent Third Quarter 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. I would now like to turn the conference over to Alan Katz, Vice President of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Conduent's third 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. Those slides as well as the detailed financial metric sheet are available for download on the Investor Relations section of the Conduent Web site. We will also post a transcript later this week. During this call, Conduent executives may make comments that contain 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, November 7, 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 developments or events 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 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 third quarter 2018 earnings call. Brian and I will cover our financial and operational performance, and our progress towards becoming a market-leading digital interactions company. We will then take your questions. Before I turn to our performance, I'd like to provide a quick update on our Texas litigation. As you may have seen in our press release, we increased the reserve associated with this litigation. While we can't comment much on pending litigation, in October we had discussions with the state to determine if a mutually acceptable settlement might be reached. Those discussions were not productive. In the wake of those discussions, we have recorded an additional $72 million reserve, increasing the total reserve to $110 million. We continue to vigorously defend ourselves in this matter. Let's begin on slide three with an overview of our performance for the third quarter. As I have done throughout this year, I will be comparing our results adjusting for the impact of new accounting standards and our 2017 and 2018 divestitures. For the third consecutive quarter our adjusted revenue, which excludes strategic actions and the impact of divestitures, was flat year-over-year. New business ramp and price increases were offset by contract losses from prior years. In constant currency terms excluding strategic actions revenue grew 1% this quarter, a meaningful demonstration of the progress we are making in the core business. Excluding the impact of divestitures adjusted EPS increased 180% year-over-year, while reported adjusted diluted EPS was up over 27% year-over-year. This was driven by both operational improvements and lower interest expense due to tendering of our high yield notes in July. We also continue to show margin expansion in the third quarter while continuing to make aggressive investments in our digital interactions and platform-based…

Thank you, Ashok. As a quick reminder our 2018 financials have several factors that impact year-over-year comparables. As such throughout this presentation and in the exhibits in the appendix we will provide both GAAP and adjusted numbers, which provide a clean compare removing the impact of the divestitures that we completed in 2017 and 2018, as well as the adoption of the 606 revenue recognition standard. On a segment basis we have moved the historical results for both the 2017 and 2018 divestitures, which include the commercial vehicle operations, off street parking, actuarial and HR consulting and government software solutions businesses, and to our other segment. Once we have closed the sale of our standalone customer care contracts, we'll move those historical financials to other as well. We will not be moving the $70 million of stranded costs related to the divestitures into the other segments. So they will remain in the Commercial and Public segments and you should see a benefit to segment margin in 2019, as we address these costs. Now let's start on slide eight, with an overview of the third quarter financial results, and I'll walk through the P&L. Revenue of approximately $1.3 billion for the quarter was impacted by divestitures and the 606 accounting standard change. Adjusting Q3 2017 for the impact of these items, revenue would have been down about 4% year-over-year. Looking at our year-over-year revenue on a GAAP basis, we are down $176 million of which $82 million was as a result of the divestitures, approximately $21 million from the exit of our diversity loan business and $34 million from the impact of 606. The remaining impact was from strategic decisions most of which was due to the runoff of low profit or loss making customer care contracts. Adjusting for all these…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Puneet Jain of JPMorgan.

Hey, thanks for taking my question. I guess the operational issues that you mention it seems like a lot of them stem from the infrastructure subcontractor that you use. So my question there is how much of a charge or penalties that you to incur in 4Q can be passed on to that subcontractors. And as you reassess in sourcing of some of that work, how fast you can address those issues? It seems like the core for 2019, core revenue for 2018 has been rebased lower. So do you expect these issues to continue into next year as well?

So Puneet, this is Ashok, so let me -- there's multiple questions that you've asked. So let me actually address each one of them. Number one is that we did inherit a very challenged infrastructure both from a network perspective, the quality of the assets and unfortunately a contract that necessitated us to continue to work with the service provider that we had engaged with prior to the formation of Conduent. We have addressed just like we address the client facing application issue with another large service provider that work with outsource to our prior to the formation of Conduent last year similarly we have addressed this issue for the last six months to seven months. As we have progressed from more labor intensive work to digital technology work, the impact or the nonperformance of this has become severely amplified resulting in penalties as Brain mentioned as well as detriment of Revenue that's one of the reasons that we gave for the changing of the guidance. Now we have under -- we have our arms around the problem, we will constrained by the contract. We were constrained by the fact that we did not pose a lot of these assets. We have brought in experts into that. We have completely retailored our organization brought in new talent, and we think that at this point in time the yield on that is not becoming apparent, but let me assure you that we have our hands around the problem. We are working diligently to resolve it, including holding accountable the vendor, their service provider to provide us better services, and using each and every means that we have to ensure that happens. With regard to the impact that we've had with clients my basic focus at this point in time is to ensure that these service providers or these specific service provider we hold him accountable, we hold them accountable in order for them to service our clients and meet their needs. I will take all necessary action that is permissible under the contract and under the law to ensure that I hold them accountable, but at this point in time my priority is to ensure that I provide a smooth and seamless service to my clients.

Got it. And how much of these issues, like could be isolated to, like few clients or a few processes, it seems that way, but could there be a risk that this could be like a symptom of, like an underlying operational challenges from significant cost cuts over the last few years?

Yes. So this is isolated to a few set of plans in a particular segment of our business, especially in the public sector part of the business. We do not face these challenges in our Commercial business. As we are moving our data centers and consolidating them, modernizing them and moving to the cloud, as you can see with regard to the pipeline or the deals that we have signed, our clients feel confident with regard to the services that we are able to deliver. We feel confident that as we prevented our technology platforms both the quality of the client facing applications and the infrastructure that supports it is a robust. So the isolation of this is important, because that allows us to take quick and efficient remediation actions, which is what we are doing right now. I think, the subpart of your question with regards to the speed of cost cutting, let me actually phrase that and change the premise of that question, because we needed to do a clean-up of the company. We needed to ensure that our management bandwidth is supporting those businesses that are core and that have a future in the company. We needed to -- we've got burdened with not only infrastructure issues and contractual issues, but also with a significant amount of unnecessary debt et cetera, which needed to be brought down in order for us to translate our operational performance into our financials. So I actually think that we have been trying to make the investment as you see in the increased CapEx, we're spending $200 million, we have not swayed from that, we are continuing to spend the $200 million on our infrastructure as well as on our IT applications and we will continue to do that. So I think the efforts that we have done that I thought I highlighted at the end of my prepared remarks, lead to the fact - lead to the creation of a solid foundation for the company to pivot, these incidents and issues that we have again are isolated, we will be rectify them we are on our path, it takes time for our a data center migration and its impact will become apparent, but we are on it.

Got it. Thank you.

And the next question will come from Mayank Tandon of Needham and Company.

Thank you. Good morning. Ashok, you mentioned that you do expect new business signings to start to tick off sometime in 2019, and I believe you gave us a timeframe around next year. Could you maybe just talk about like what will be the key catalyst to get that new business activity to pick up and then ultimately drive hopefully some positive organic core growth in the business?

Yes. So Mayank, number one is that our sales teams are still ramping. I feel that they are in a better position with regard to the understanding of our various capabilities and in a various appreciation for the changing dynamics in the marketplace. If you see in the last few months in the Public Sector, we had certain deferments or lack of decision making as a result of the events leading to yesterday. Hopefully, that is behind us now and people will come back to work and make decisions. We've seen a significant shift in the way, our Commercial files are consuming technology and processes, that the pivots to technology has been much faster quite honestly than I have seen any other shift happen in the past. Europe which has been a very soft market for us because there's been a significant amount of the business was customer care. So as the sales team and as the organization which has had a long history if you will, or and or a muffled memory of selling customer care, pivots away from that to more digital transactions that deal will only get better. There's no question about the fact that the growth for us will be driven significantly by performance in the new business. We have thought of hinting towards inorganic, we now have the dry powder to exercise on that, we've given - we have done one. We will do transactions of that nature which are accretive quite immediately, to our balance sheet and to our financial performance. But the core business growth is absolutely important. We are not going to cut down on the discipline that we have, we are not going to slack down on the kind of deals that we do, the deals that are out there, we are finding them. Traction is building, it's a matter of time before it happens.

Okay that's helpful. Then as a quick follow-up any additional insights you can provide, Ashok, on the pending litigation with Texas that might help reassure investors that you can actually navigate through this and ultimately at least come out, in a situation that is better than where you are today with it?

Yes. So as I mentioned in my prepared remarks we engaged in discussions with the state of Texas to try to establish a framework for settlement. However, these discussions did not lead to a formal settlement - formal settlement negotiations and in accordance with the accounting guidance we therefore determined that we're required to increase the reserve from $38 million to $110 million. That's an increase of about $72 million. Mayank, I will also emphasize the point that we take this matter extremely seriously. We have dedicated resources helping us resolve this matter in a reasonable fashion. But in the meantime we will continue to defend ourselves very vigorously.

Okay. Thank you. Operator: The next question comes from Jim Suva of Citt.

Thanks. Ashok, you've been there now for quite a bit of time, and you successively did a lot of divestitures. But I guess the surprising thing of laying out five different issues now, I think is catching investors in the stock off, off guard today of the reaction. Things like outdated infrastructure and stuff shouldn't be a surprise today, and now they're really kind of coming out. So what did you uncover, or is this just a new look under the covers or a new chapter, or how should we think about, why now as opposed to 12 months, 14 months, 15 months, 18 months ago?

Yes, Jim, so we've been talking about the challenges of our business right from inception. We've talked about - I think, in fact I've characterized it as at one point in time, our infrastructure being fifth world with no necessary trying to characterize any fifth world situation, but it is being challenged, and we've been working on it. We have addressed and remediated our client facing applications very, very quickly, because that was - that has impacted not only the performance of our business, but the services we provide to our clients, citizens, consumers et cetera. From an infrastructure and network perspective, the work was started last year it takes time for it to sort of unravel or for the results to good or bad to become to be revealed. And since we were constrained by the service provider that we used -- we were EE challenged, and this out of blow up in our face if you will or got amplified, as we moved more and more of our capabilities and our business from labor base to more technology base and the amplification became extremely apparent in our results as you have seen in this particular quarter. This is not a new issue. We've been addressing this for a while. The impact of this has suddenly accelerated and got amplified. We've been working on it. This has forced us to make the changes much more quickly. Those changes have already been made. We've hired talent within the company. We've hired external experts and vendors and professionals who can help us in this journey because trust me we understand the impact of this on not only our financials, but the impact it has on our clients' performance and our ability to deliver the services to them. So again not new but amplified suddenly, if you look at the other reasons we've talked about which is a yield in Europe our expectation of the yield in Europe was much higher but sales cycle is taking longer because we are changing what we sell it's been Customer Care. We have not been selling Customer Care since the first quarter of this year there. The market itself has been sort of soft and we've had challenges with regard to the ramp of our sales team, which we have all identified and are correcting as we speak.

Thank you so much for the details.

The next we have a question from Bryan Bergin of Cowen.

Good morning. Thank you. I wanted to ask some bookings, do you have outsized renewals pending in the coming quarters. And can you give us a sense of what level of increase you're talking about when you're citing a positive turn in 2019 new business bookings? I'm trying to connect a level of confidence in 2019 new business bookings growth well also hearing longer sales cycles and other factors?

So hi Bryan this is Brian Walsh, starting with the new business. We expect to pivot the new business growth for the full year in 2019. We haven't said exactly when that happens and exactly how much it is, what we would expect double-digit growth for the full year and hopefully it's sooner rather than later. We expect organic revenue growth to be back end loaded. We now expect between flat and 1% for the full year. So that's obviously a delay from what we originally expected but we still are focused on organic growth in addition to getting growth through acquisitions.

Okay. And I know you gave the 2019 outlook here to your thought process on your prior fiscal 2020 margin goals change here and really how critical is top line growth to driving the projected margin expansion?

We're still comfortable in 2020 of getting about 15% EBITDA margins and we expect to make progress on margins next year. I'm at the midpoint 13.7% so top line growth is important. It obviously takes pressure off the cost base, but we're focused on cost transformation, we're focused on driving top line organically and inorganically and we're confident in our margin improvement next year and in 2020.

Okay. Thank you.

And our next question will come from Brian Essex of Morgan Stanley.

Hi, good morning and thank you for taking the question. Brian, I just want to talk to your adjusted free cash flow guidance saying cash flow conversion for the year and outlook going into next year, it looks like maybe given the year-to-date number of a $41 million drag that we've got on slide 12 will be your guidance and it looks like you're looking for a meaningful ramp in 4Q. What are some of the elements we need to consider as we kind of reconcile a ramp in free cash flow conversion and what kind of bleeds into the fiscal 2019 as we look at the cash flow generation of the company?

Just a couple of points, if you look at the year-to-date free cash flow were down roughly $50 million year-over-year CapEx is up $57 million, so it's completely driven by our increased investment and that's going to IT infrastructure, that's going to our enterprise applications for internal systems and that's going to our client facing applications and that's important to fix the IT situation. So, that's driving the year-over-year decline on a year-to-date basis. In the fourth quarter, we have strong free cash flow projected $200 million to $235 million and that's typically where our fourth quarter weighted in our free cash flow and that's going to come from strong collections performance, which we're very focused on and have a path too. We'll also have in Q4 another tax payment of roughly $45 million that we'll have to make and so that is inside of that as well. And we'd expect about $50 million of CapEx, but we're comfortable with our forecast and when we look at the full year it is at the lower end of our conversion 25% to 30% and that's a reflection of EBITDA being lower and then the incremental CapEx we've had to invest in the business. As we think about next year, we expect CapEx to stay elevated next year. We expect restructuring to get cut back. We're doing about $85 million of restructuring this year. We expect that to cut in half as we get into next year which will help cash taxes will remain about $80 million on a business as usual basis. But we're comfortable with the cash generation of the business. We still see using our free cash flow to invest organically and inorganically and we're comfortable with the model.

Got it. That's helpful. Maybe just a follow-up if I could circle back on the legacy vendor just for a minute and maybe try and connect a few dots, Ashok, is there anything you can incrementally you can tell us about the relationship there. How locked into that relationship are you - as you - have you kind of developed on that platform that it'd be too costly to move or what kind of leverage points that you have with that vendor either to move away from them or to really kind of hold their feet to the fire to execute to their SLAs.

We have to hold their feet to the fire, we have to execute on the same game plan that we did with the previous service provider who was providing services to us on the client application side. Clearly this is a complicated and extremely sprawling infrastructure that's not been invested for over the last 10 years. And therefore there are challenges on both sides that we have to appreciate. But given that the bulk of the issues lie with the service provider, our job is to ensure that they provide appropriate services to us so that we can continue to service our clients. My immediate focus at this point, I've had multiple conversations with them. They have demonstrated commitment. They have accelerated and improved their performance over the last few weeks. We will continue to hold them accountable to that. And as I said I am not shy, as I have demonstrated in the last year, I am not shy to take any and every action that is available to me under the contract as well as under legal recourse to ensure that I get what I'm paying for. I also want to emphasize that this is again a situation which has gotten amplified. It is not that we don't keep an eye on it. We have an eye on it. We have the talent to take care of this but it's gotten amplified as we've moved - as we have moved and pivoted very quickly to a digital - to become a digital interaction company. I think we will, I don't want to give a timeline but I think a quarter or two should have - we should have this completely resolved. I don't think we would need to bring in new contracts for this. But clearly as I said, if that is required that shall also be done.

Okay that's helpful. I appreciate the additional color.

The next question comes from Keith Bachman of Bank of Montreal.

Hi. Thank you very much. Ashok, I want to go back to some comments on CY 2019. When you think about dispositions and then strategic actions which are two different things, as you look at 2019 will all those actions be concluded? In other words will you have cleaned everything up you think by the end of this calendar year such that there won't be any more even some of the strategic decisions, i.e., walking away from some of the contracts as well as further dispositions?

Yes. So Keith two parts to your question. One is that we have completed all the dispositions, the divestitures are with the -- when we close out the standalone call center business that will be the end of the divestiture program that adds up to a $1 billion. With regard to strategic actions which were things like long tail and remediation are not doing standalone call centers. I think the discipline is now very well entrenched in the company where we are not going to shy away from continuing to be extremely disciplined about the kind of deals that we do whether it's with regard to tenor, whether with regards to the terms and conditions, whether it's regard to multiple service lines which is what we need, we will be maniacally focused on service level penetration. We will do deals in our core markets, so that discipline is not going to go away, but the actions with regard to dispositions and what we have so far called strategic actions will go away. We want to give our numbers with as little noise as possible in 2019. So we don't have to keep doing adjusted, adjusted, adjusted and that what numbers that you see will be based on our core 2018 numbers and I think we capture that in the appendix of the back of what our core is and that is the number that we are using to project the growth for 2019 and our guidance is based on that growth. We are maintaining the numbers that we had given in our prior guidance I'll buy it on a smaller base.

Okay. Let me follow up then on a question on new business TCV. As you mentioned in one of your comments you're trying to get into the new areas or digital areas and yet that's a very competitive area and some of the activities are new for you. How are you finding when you're kind of get into those areas pricing as well as margin profile in the new categories. And then before I submit the floor, I just wanted to acknowledge thanks very much to Alan Katz and team for a very helpful slide deck.

Thank you Keith for recognizing Alan and his team, we are not betting our shop on moving everything to digital. Clearly, there are parts of our business like omni-channel et cetera, which remember when you move to digital the ramp time, the sales cycle time take some certain a longer period of time than if you are doing things like omni-channel et cetera, which are shorter ramp. Yes, the shortest ramp time, the shortest deal is that if you if you do customer care, but obvious reasons why we are not going to touch that business. I am not moving the entire company totally to digital interactions, because we are not yet ready for that. We have certain areas that we have really moved fast. We are fairly advanced. We are actually the market leaders in some areas like whether its workers compensation and sat away, whether it is on some of our HRS business et cetera, where we believe that we have the advantage and we are going to -- we are going to try and maximize that, we're going to try and expand that service line capability into our existing clients, as well as prospect. In that particular space, the pricing is actually very good. The margin yield is actually very good as long as they keep moving to [ph] assay service business or more digital technology business. The pricing is actually very good. The yield is of course a little delayed, but the margin profile is better. But I am not at the point where I am betting the house on everything digital. It will be a judicious mix of things that are traditional not called a customer care, not call center, but still traditional, a little bit of technology and as we pivot to about 15% 20% 25% of our business will be digital. We will actually be disclosing our percentage of digital business in subsequent quarters, so that the market can actually better understand, you can better understand where that shift is happening and what the profile, the financial profile of these two different horizontal businesses if you will look like.

All right. Many thanks.

And this concludes our question-and-answer session. I would like to turn the conference back over to CEO Ashok Vemuri for any closing remarks.

Yes. Thank you very much for attending this call. I'm sure we will continue to converse over the course of this year as well as next year. I just want to reiterate the fact that notwithstanding the change that we have demonstrated. We put the guidance the way we saw it. We saw the impact -- what is having and we disclosed it. For one, I'm completely convinced that I've never seen our company as strong as it has been whether in terms of the traction in the market, the client response or whether it's my balance sheet, whether it is the dry powder that I have to make investments both in my own business as well as acquire capabilities through M&A. I feel confident about my team. I feel confident about the guidance that I've put out there. It is a transition. It is a transformation and it will have some bumps, but we are invested for the long-term for the medium term and long-term and we will not, feel ourselves compelled to provide or meet any short-term requirements by compromising on either the quality of service we provide our clients, or the investments that we make in our business. I look forward to continuing the conversation. Thank you so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.