Good morning and welcome to the Conduent Fourth Quarter and Full Year 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 also note, today's event is being recorded. I would now like to turn the conference over to Alan Katz, Vice President of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to Conduent's fourth quarter and full year 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 website. We will also post the 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, February 20, 2019, 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 financial 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 2018 fourth quarter and yearend earnings call. Brian and I will cover our Q4 2018 and full year 2018 financial and operational performance highlights, outline select client wins that demonstrate the robustness of our core digital interactions offering, and lastly, our outlook for 2019. We will then take your questions. I'll start with an overview of key highlights for the quarter and the full year on Slide 3. 2018 was an important year in Conduent's journey. This was the end of the second year of Conduent as a standalone company and we accomplished several noteworthy milestones that I would like to very quickly recap. I will then focus my remarks on our pivots to growth. We successfully concluded the 3-year cost transformation program that began in mid-2016, overachieving our targeted savings of $700 million by approximately $30 million. My management team and Conduent teammates worldwide did an exemplary job in helping the company improve its financial health. Brian will take you through more specifics on this. We ended 2018 with a meaningfully stronger balance sheet, healthier cash position and a significantly lower net leverage ratio at 1.2 turns. We concluded our divestiture program with the closure of the sale of a select portfolio of standalone customer care contract in January 2019. In total, in 2018, we divested approximately $1 billion of revenue that was either non-core, unprofitable, not positioned for long-term growth or had no current scalable technology underpinning it. We now have a clean robust core business with a marquee set of clients, tenured relationships and differentiated set of key digital offering. We have consolidated our technology assets into 81 technology platforms, across 24 business solution areas. Many of them have been modernized, while some are being rapidly modernized and/or…

Thank you, Ashok. As we have discussed throughout the year, our 2018 financials have several factors that impact year-over-year comparables. Throughout this presentation and in the exhibits, in the appendix, we'll provide both GAAP and adjusted numbers, which provide a clean compare by 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 the 2017 and 2018 divestitures into the other segment. This includes the previously closed divested businesses as well as the portfolio of select standalone customer care contracts, which we announced the closing of earlier this month. We have also made a change to our disclosure on the face of the P&L by removing depreciation and amortization from gross margin and moving it below the line. This is an effort to align with how our peers report gross margin. In addition, we have made changes to the segment reporting, which I'll discuss in a few slides. Now let's start on Slide 8, with an overview of the fourth quarter financial results. I won't go through the walk of the full P&L, but will instead focus on a few key line items. Revenue was approximately $1.3 billion for the quarter, down 3.7% after adjusting for divestitures in 606. Further adjusting for currency and strategic decisions, revenue was flat year-over-year. SG&A continued to improve year-over-year driven by our transformation initiative. When excluding the impact of 606 and divestitures, adjusted EBITDA in the quarter, increased 0.6% year-over-year to $156 million with an adjusted EBITDA margin of 12.2%, a 60 basis point improvement. This was in line with the expectations given stranded costs and increased IT spend, which we discussed in the last call. We have increased…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Puneet Jain of J.P. Morgan. Please go ahead.

Yeah, hi. Thanks for taking my question and nice to see Texas settlement yesterday. Can you talk about your use of cash priorities for this year and beyond that? Obviously, there will be settlement payments. What should we expect for M&A contribution and cash outlay on M&A and capital returns for this year?

Sure. Good morning, Puneet. So as we think about the cash usage, we currently have about $750 million cash balance. We used $90 million in January for HSP acquisition. We do need some cash to deal with working capital fluctuations. And I will remind everyone, we do use cash in Q1 typically based on our seasonality. We tend to generate our cash in fourth quarter and use a lot of cash in the first quarter. We also need cash obviously to support the Texas payments. And beyond that, we'll move forward with a balanced capital allocation strategy, which includes looking at all options to drive shareholder value and that includes continuing to evaluate attractive M&A.

Yeah, let me just also add to that. I mean, clearly as Brian mentioned, the conclusion of the Texas litigation does provide us with the visibility around cash requirements associated with that litigation. And now that we have visibility, we will continue to move forward with the balance allocation capital strategy. As regards specifically on M&A, we've been looking at assets that provide platform or technology capabilities or have a foothold in our big bet areas like healthcare, government, transportation. And as we look at these assets and has been saying this for a while, we find that multiples of this is extremely high. So we want to take a disciplined and thoughtful approach to ensure that just like we did the HSP acquisition that this allocation, capital allocation creates immediate shareholder value. I'm also concerned with the fact that, because of the specific quantum and timing for deals, we would not want to capture that upfront in our guidance and we will update you as we make these particular acquisitions.

Understood, understood. And it was nice to see increase in new business signings in Q4. But can that trend continue into this year and is your backlog and pipeline are at a level that can support positive organic growth in 2019 or is there any work like more signings or more incremental investments that's required to get to flat to positive organic growth?

Yeah, so, Puneet, you've seen our guidance points towards an organic 1% growth. I think the investments that we have made in our sales force, in our hunters, client engagement is beginning to bear fruit. Obviously, this is - sales is a kind of a job where you're only as good as your last quarter, so you have to continue to drive new business, which is a clear indicator of the fact that your value proposition is being accepted in the market. My pipeline is real, my pipeline is healthy, my conversion rates and yield have to improve. They have improved significantly over the last two years. But we have to sustain that momentum. I don't have any one-off large deals in that pipeline, which I'm always concerned about. My tenor of deals are manageable in the 2.5 to 3.5 year range. My book to bill is greater than 1. So if I look at the pipeline, the quality, the way the service line penetration is going, how the sales-force team is gaining traction, the quality of my digital platforms that are finding traction in the market, I feel that we are in a place where we are ready for the pivot to growth.

Understood. Thank you.

And our next question today comes from Shannon Cross from Cross Research. Please go ahead.

Thank you very much. I was curious on the cost side, with your transformation program running ahead of schedule, how are you thinking about opportunities going forward? Have you cut a lot of the low hanging fruit or captured I guess? Or is there a sort of multiyear path here? Then I have a follow-up. Thank you.

Yeah, Shannon, this is Brian. So we do have a multi-year plan that we're working on for continued cost cutting. It's going to be focused on continued accu-shoring. We talked about getting our low cost workforce to 55%. We ended the year in 2018 at 51%. So still have more opportunity there. We're going to be focused on automating client delivery and automating internal processes. A lot of that is still ahead of us. We're going to be focused on vendor spend reductions and continued real estate optimization, and then, obviously the stranded cost takeout that we talked about. We're not going to quantify the value of that program. We're just going to continue to point to margin improvement. And as Ashok mentioned, at the midpoint of our guidance, we're improving margin 1.3 points in 2019. It will get us a 3 point improvement to what the time has been when we execute against that.

Okay, thanks. And then, I noticed you mentioned insurance reimbursement in the commentary around Texas. I'm curious if we should think about that as being potential and potentially meaningful and as well with regard to some of the vendor issues you had last quarter, just curious how that's going in terms of reimbursement.

Yeah, so from an insurance perspective for Texas, we have a $100 million insurance policy. We're currently in litigation with carriers. And we're aggressively pursuing insurance recovery. We can't really say more than that. And as always with our vendors, we hold them accountable for any issues they create for our clients and we'll continue to do that. Our first priority is always to fix, resolve the issues. But we also hold our vendors accountable.

Okay. And just to clarify, the $100 million will be sort of - you would then net it against the 200 and some odd that you're paying Texas.

I can't - yeah, I really can't say anymore, but it would be a recovery against what we're paying Texas.

Okay, great. Thank you.

And our next question today comes from Mayank Tandon of Needham & Company. Please go ahead.

Thank you. Good morning. Ashok, thanks for the color on the digital opportunities. I think I missed the number that you mentioned in terms of the signings that are now at digital. And if you could also just speak to the competition for these types of deals, are they the same players that you were competing for on the traditional BPO or are these different players? And maybe if you could give us some sense of the win rate that are tracking currently versus, say, 6, 12 months ago?

Yeah, so, Mayank, good morning. The digital interactions is something that is evolving as our clients find themselves to be more and more in a place where their end users are consuming more technology and have a need for immediate intelligent and individualized services. So given the - that we have - that we deliver our services and we have the advantage of delivering our services on technology platforms, about 62% to 65% of our business is delivered on technology platforms, that allows us to bundle a variety of services from an end-to-end perspective and deliver to the client. I don't think we necessarily have a lot of competition in this particular space. Obviously, it is evolving. A lot of people want to get into what I would say in quotes, digital. But clearly, the traction that we are building in the marketplace, the fact that we are able to bring bundled services, the fact that we are able to not only advise and consult on this, but also actually do the heavy lifting in terms of technology implementation gives us a clear edge. And I think we're beginning to - the investments that we made in 2017 and 2018 and are continuing to make in our platforms - the client-facing platforms, as well as the infrastructure on which it is build, we are finding the traction to only improve. We are finding the use of robotics, the use of - I mean, which is now literally table stakes, everybody has to bring that to the table, automation, robotic, the use of blockchain in many of our solutions as well as the whole analytic space. So If you look at what we do, the name Conduent is a play on conduit, a pipe for an enterprise, so we see it's ton of transactions going back and forth and I gave some of those statistics in my prepared remarks. So we see there's ton of transactions going back and forth and we are sort of positioned right in the middle of government and enterprises on one side and their end consumers on the other side. So we are able to give feedback to both side in terms of how the business and operating models of our clients need to change in order to cater to the increasing changing demands and requirements and which their end clients are consuming the services and goods that they have to offer. So I think we are - given our platforms, given a depth width and breadth of services, given our technology capability, we are fairly uniquely positioned in that. Yet we see some of the traditional competitors are ramping up to this particular place. We are seeing new competitors coming as a result of it, but we are also seeing a lot of new ecosystem partners, technology partners - large and small, very smart companies, very, very large company willing to partner with us more aggressively to take some of the solutions to the market.

That's very helpful. And I have a quick follow up, Ashok, you had shared some targets back at the analyst day last year in terms of getting to a mid single digit industry type growth rate by 2020 and also a mid-teens EBITDA margin profile - given where you are at today, what's your confidence level in terms of getting to those targets by 2020?

So we're not going to update our 2020 guidance today, but our long-term view remains that that we can get there on the top line and we can get the market profile to company to 50%. And we are making progress in 2019 towards that but we're not going to update the 2020 outlook today.

But that would include M&A too, right, Brian just to confirm.

Yes, it would.

Got it, great. Good job guys. Thank you very much.

And our next question today comes from Brian Bergin of Cowen. Please go ahead.

Hi, good morning, thank you. I wanted to follow up on that margin question there. As we think about the margin expansion factors from here, can you come on, on the contribution from cost takeout versus layering on the higher value services, I'm just trying to get a sense or frame reference for that 15% adjusted EBITDA target. And then as far as the stranded cost, you mentioned again the categories and how we should think about the cadence of those walking off in 2019 and into 2020?

So in terms of the margin improvement, a lot of it's going to be from cost cutting, but obviously as we start to grow organically and add on M&A, that will provide EBITDA and we're focused on doing deals that are higher than our margin target on both acquired deals and when we look at acquisitions, we have the same ones that we apply. So they'll help with the margin, but a lot of it does comes from cost cutting and getting rid of the stranded overhead cost. At the midpoint of our guidance range this year, the margin would be 12.8%. That includes 50 of stranded in the business. So once that's removed that's another point improvement, which gets to 15.8%. So we start to get, very close to that 15 just by executing against the stranded overhead cost. Right now, we are currently under transition service agreements. We are currently supporting four of the five divestitures. The customer care divestiture will go through this year. The others will start to wind down in the first half of this year. Once we do that we can have some stranded overhead so we'll expect to get about 30 absent between now and the end of the first half and then the other 40 at year end, I mean, that's how we get to the $50 million tax this year versus $20 million of benefit that we'll see as we take those cost out. And when we think about the overhead, it's corporate overhead, there is a finance team, the accounting team and the HR team, the legal team, it's been the IT infrastructure, which needs to get smaller because we're 20% smaller company and it's just focused on taking cost out in all those areas. And you can't do that until you are no longer supporting these divested businesses.

Okay, those are helpful, thank you. And then Ashok, as you think about the various service offerings that are now in your core, can you give us a sense of where you're most pleased with the turnaround in the performance. And then alternatively, where you think you still have the most work to do?

Yeah, I think our commercial business has really done very well. So if I look at their performance for the quarter and for the year, they've grown about 1.8%. I'm very pleased with the recovery on the government sector side, which obviously we have talked about last time as some of the deals had slipped into Q4 as a result of the elections, et cetera. So they have recovered smartly. I'm happy with the way my HRS business is gaining traction. That is a very big part of what I do in terms of services that we provide to our clients' employees, et cetera. That has really benefited from the refresh of technology that we have done. It's a huge investment that we have made. And we're beginning to see a lot of good traction in that space. Transportation is another space, where we've done, we've shown good progress. Of course, I am concerned with the fact that the infrastructure issues that we have, which are most manifest in that particular area are getting resolved. But there needs to be some work that we need to still do and that's the investment that I talked about in my prepared remarks. But overall, I think the core of the business is more stronger, more robust and pivoting to a place where we can now talk about more traction in the digital ecosystem.

Thank you.

And our next question, ladies and gentlemen, is from Frank Atkins of SunTrust. Please go ahead.

Thank you for taking my questions. I wanted to ask a little bit about currency. You guided revenue in constant currency. Can you talk a little bit or just remind us of our currency exposure on both the revenue and cost side?

Yeah, so, it's really from a revenue side that we talk about translation currency, right now, based on where rates sit, it's about 40 basis points headwind. So it's not that big of an issue as we sit here today.

Okay. That's helpful. And then, as my follow-up, wanted to ask just maybe a two-parter, can you talk about any impact from the government shutdown? Has that impacted any of your verticals in 4Q or 1Q? And then, the margin of the work that you're seeing in the pipeline, if you could comment on that?

Yeah. So, Frank, we have seen no impact as a result of the shutdown. The government programs that we work on are fully funded. Obviously, if the shutdown had extended or there is another new version of it, I would not be able to comment on that. But the last one, definitely, all our programs are funded. Again, remember, we don't get paid on a transaction basis. We get paid by account. So even if there is an impact or de-funding of any of these agencies by the time it percolates to us would be a significant lead-time on that. You want to take the next, Brian?

What was your follow-up, Frank?

It was margin of work that you're seeing in the pipeline.

So that, again, the new deals that we're working for the most part all meet our margin targets. So, the deals will be at 15% or higher. And that's how we manage the pipeline and manage the sales force.

Okay, great. Thank you very much.

And our next question today comes from Keith Bachman of BMO. Please go ahead.

Hi, thank you. I had two as well. First, I think is for you, Brian. If you could just clarify, when would you anticipate the first payment associated with litigation to be made? And my real question is, underneath or above that is, what's your ability to do M&A this year? If I look at the cash flow effective guidance you gave, just using round numbers, it would be at $200 million. And if the Texas litigation is $80 million, then you already did one deal in $90 million. So it doesn't leave a lot of free cash flow. So for M&A this year, given what you've already done in Q1, should we think about more limited activities or would you take on debt to facilitate more M&A? And then I have a follow-up.

We have liquidity to deal with Texas and to do in fact an M&A. So, it's not a barrier given our cash balance and then the revolver, and where our leverage sits. But it's all about finding attractive M&A. And the first payment starts in Q1. The way this stuff works right now, there are three payments this year and $79 million is paid based on the way the payments are structured today. And the first payment happens in the first quarter of this year.

Okay. And then my - thanks for that, Brian. My follow-up is then, in the transportation area, Ashok, you mentioned that's a little bit in terms of still doing some investments there. What is your current win rates and how would you anticipate that evolving in transport in particular and just wondering when that could be - when you could demonstrate some growth in that category.

Yeah. So transportation is, as Brian was explaining during the segment explanation in his prepared remarks, consists of about 4 businesses. It consists of public safety. It consists of parking, tolling and transit. And in transit, we have 2 businesses. One is the U.S. transit business and the other is international transit. We have actually seen good traction and growth in all these segments. We've had issues with regards to our infrastructure, which we talked about last quarter, with regard to a particular state in our U.S. tolling business. That is now behind us. We, obviously, when you get negative publicity on that, it does have an impact with our other clients or prospects. We've have had conversations with them. But fortunately for us, this issue is resolved. We have clarification from the client as well that we are in operation. The backlog is done and the toll by plate is behind us. And that confirmation helps us go to our prospects and clients to continue to build traction and generate new business. So overall, I would think that it's a highly technology-intensive business. Clearly, the impact of the legacy infrastructure and its non-performance has a direct and very quick impact on the tolling business. But the good news is that it's behind us. We still have some work to do to modernize it. But the issues with regards to share infrastructure performance and availability, that's now behind us and I feel much more confident. So, transportation is clearly a big bet for us. We think that it not only has opportunities in the public sector space, but combining that with our commercial space and the fairly large European and American auto manufacturer footprint that we have, we think that we can expand this to beyond just a public sector opportunity to a much more of a combined public and private sectors opportunity.

All right, thank you.

And our next question today comes from Brian Essex with Morgan Stanley. Please go ahead.

Hi, good morning, and thank you for taking the question. Ashok, I just had a question, just a follow-up, I guess last quarter you noted lengthening sales cycles and I know the comment on that this quarter. Particularly, with regard to the new business, TCV, how much of that was pushed from last quarter? And is there may be an offsetting amount pushed to next quarter and maybe just a little bit of detail in terms of those sales cycles and how that issue is maturing as we head into 2019?

Yeah. So, Brian, when you bring in the new value proposition, especially in the digital space, there is a longer sales cycle than when you're just trying to sell a customer service contract, which is basically - takes a week to displace a competitor and take that job over. There is a lot more proving that you have to do. There's a lot more pilots that you have to do to convince the client and as well as ourselves that we can deliver. Obviously, as that traction builds up, as performance gets better and better, the infrastructure improves, word of mouth, people begin to believe that this is real, and that there is value to be obtained from it. So that's basically what we're saying. I wouldn't say that we are continuing to see dramatically increased sales lead-time on most of the businesses that we are doing. Yeah, if you're going for a blockchain kind of an opportunity, that takes a little more time in order to convince, explain and understand. The one thing going from Q3 to Q4 clearly was - from the government business perspective, remember, we had talked about in Q3, because of elections and so on, so forth, some of the transactions had not, they were not signed, so we saw some of that. But in the normal course of a 90-day period, you do have slips from one quarter to the other. I wouldn't read too much into it. We've had it in the past, we've had it. We will continue to have that. But it's not significant enough for us to call that out.

Got it. That's very helpful. Maybe if I could follow-up, in terms of resolution to issues that you're having with the vendor that's not meeting their SLAs on the infrastructure side, maybe - any way you can help us understand what you're doing to mitigate that issue? Is there any out to the contract in how we might think about your ability to engineer a solution around those issues, so that you can effectively deliver for your customers?

Yeah. So that's the focus area for us. The number one focus area is to remediate these contracts. The issues essentially relate to service and performance levels, the backlog of work, speed and implementation, plan for modernization. And all of these are hampered because of the inflexible nature of the contract that was signed when this work was given. So, some of these were given as part of a wider program of giving the people, the assets and everything away. Now, in terms of client-facing applications, we were able to take that back pretty quickly, right; in the beginning of 2017, you'd probably recall. But some of these ones because of the inflexible nature of the contract and the way that it was designed, we've had to take some time. Now, clearly, our approach to them has been literally to hold them accountable. We have raised the bar on terms of the SLAs. We've brought in more experts, because remember, when this deal was contracted in 2015, our people, our assets, our infrastructure was all given away. So we were left with no capability. So, we've hired new people. We've changed the leadership and management. We've brought in experts who can help us design this. And we are looking at all opportunities in order to not only - my first focus is to ensure the availability and the delivery capability to my clients is done and that I hold these service providers accountable for the fixes and for the SLAs.

This concludes our question-and-answer session. I'd like to turn the conference back over to Ashok Vemuri for any closing remarks.

Well, thank you everybody for joining us on this call. Clearly, as we said in our prepared remarks, we are happy that some of the legacy issues are behind us. We've spent the first two years cleaning up the shop, as it were. We are now pivoting to growth. We think we have a sustainable, we think we have a robust business value proposition for our clients. Our digital story is resonating. The team has significant confidence in its ability and I'm very thankful to my management for being able to conclude what I believe is the first phase of our transformation in the first two years. We are ready for our pivots to growth. Thank you so very much.

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.