Good day, and welcome to the Conduent Fourth Quarter 2019 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. 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.

Good evening, ladies and gentlemen, and welcome to Conduent's fourth quarter 2019 earnings call. Joining me on today's call is Cliff Skelton, 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 afternoon, those slides as well as a detailed financial metrics sheet are available for download on the Investor Relations section of the Conduent website. 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, February 20, 2020 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. 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 afternoon and was furnished to the SEC on Form 8-K. With that, I will turn the call over to Cliff for his prepared remarks. Cliff.

Thank you, Alan. Good afternoon, everyone. Welcome to our Q4 2019 earnings call. I will start today with a quick overview of the Q4 and full-year highlights and we will then discuss the results of our strategic and operational review. Brian will provide more detail on the financial results and we will go over 2020 guidance, and we will close with some Q&A. We achieved revenue for the full-year at the top end of the range and adjusted EBITDA right near the midpoint of that range based on the guidance that we set when I started as CEO. Despite signings for the year have been weaker than we would have hoped. We are seeing very strong initial signings performance in Q1. January new business signs came in stronger than anticipated. While these may be early signs of increased client confidence, it is still too early to call it more than the beginning of our turnaround journey. Before we turn to the results of the strategic review, I want to point out some additional operational highlights. Last quarter, we announced the launch of our three prong Systemic Transformation Program with a focus on growth, efficiency and quality of delivery. This has and will result in a series of tactical, and strategic projects, and is ubiquitous across all of our businesses and products. The framework will be used as the execution arm for our strategic and operational review focus areas. Some early efforts produced some quick wins. We improved IT and delivery performance, resulting in quality improvements for our clients and their end users. We are beginning to see positive proof points in client satisfaction as well indicated by both anecdotal feedback and our net promoter score rating. These are simply early signs and have not yet developed in the consistent trends.…

Thank you, Cliff. Before I begin I will note that throughout this presentation and in the exhibits in the appendix, we will provide both GAAP and adjusted numbers which will provide a clean compare by removing the impact of the divestitures that we have completed. Let's start on Slide 8 with an overview of the full-year financial results. As Chris mentioned, we ended the year with revenue and adjusted EBITDA in-line with our guidance ranges. Adjusted revenue for the year, which excludes completed divestitures was $4.4 billion, down 4.5% compared with full-year 2018. On a constant currency basis adjusted revenue was down 4% and at the top end of our guidance range. Declines were driven primarily by lost business in our commercial and government sectors, price pressure from renewals in our commercial and government sectors and volume pressure in the commercial business. These impacts were partially offset by growth from new business in the transportation sector. Adjusted even for the year, which also excludes the impact from completed divestitures was approximately $493 million down 7.9% compared with full-year 2018. And at the midpoint of guidance. Full-year adjusted EBITDA margin was 11.1%, representing a 40 basis point reduction year-over-year. Year-over-year declines in full-year adjusted EBITDA were driven by lower revenue, partially offset by efficiency programs and cost savings in IT, real estate and other corporate spend. Operating income for the year was a loss or approximately $2.1 billion, primarily driven by goodwill impairments, including an impairment in Q4. Let's move on to our segments summary on Slide 9. Commercial revenue for the year came in at $2.4 billion down 6.5% for the year and down 5.8% in constant currency. These declines are primarily driven by lost business, volume challenges with a few large customer care clients and price pressure associated with…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Puneet Jain with JP Morgan.

Hey thanks for taking my question. And I think the group approach Cliff that you shred makes sense. But given that you have all businesses in there. Should we view this as like a move away from potential divestments?

You know, I think as I mentioned in the narrative Puneet. First thanks for your question. But as I mentioned in the narrative, we want to maintain optionality for sure. When we look at possible divestitures as a way to increase shareholder value, it was a pretty simple math equation, if you will. In other words, look at the scalability of the asset minus disentanglement cost, minus the tax implications are tax leakage. And we wanted to compare that to what we could do internally to grow that particular asset. And of course, all assets are not created equal. But what we wanted to do to grow that particular asset and what we are finding, at least at this stage, and I want to reemphasize this stage. We see our ability to grow the asset set that we have compartmented the way I described in the narrative. As a way to create shareholder value more readily than with selling the asset, but we want to remain opportunistic in that examination and seen iterative process for sure.

Got it. And the new shares like revenue growth margins of some of those individual businesses are in each one of those two buckets. So we can track how are you doing, what is your goals there?

Yes, absolutely as we get this. We have began to stratify those businesses, as I said into the optimize, enhance and expand kind of buckets. And what we see is the investment kind of goes 30, 30, 40, if you will, as a percentage of investment dollars 30%, 30% and 40% left to right. And I wouldn't say that the margins - certainly the margins in the optimized businesses are lower. And that is where some of the opportunity is. But we would be happy to share that on a go forward basis as we developed as those projects are clear with respective business cases, timelines and returns, but -.

Yes. We would like to in our metrics file include a cut of the data based on those businesses on a go forward basis.

Got it. And totally, I know Brian, you said like 1Q new bookings will improve on both sequential and as well as on year-on-year driven by 90 million win. Should we expect like the underlying momentum to improve throughout the year as sales and operational investments begin generate returns or Q1 will be like a one off is driven by one last deal.

Yes, Puneet, I will sort to answer that. I would say we do expect Q1 to be strong. The quotas are somewhat linear. And if we continue to see the performance in Q2 and Q3, we see the output in terms of new bookings to be somewhat linear as well. But it can turn lumpy, but right now we see it to be somewhat linear.

Yes, I agree like bookings can be lumpy. But underlying momentum should improve it seems.

Absolutely. Absolutely now I understand your question. That is right.

We expect to deliver year-on-year growth this year for the full-year. Could be lumpy by quarter, but we are off to a strong start.

That is right.

Got it. Alright, thank you.

You bet. Thank you.

Our next question will come from the Shannon Cross with Cross Research. Please go ahead.

Thank you for taking my question. I'm curious, can you give us some idea of the size of the incremental investment that you think you will be making? Since it is obviously not necessarily included in the numbers and maybe a little bit more specifics as to where you will be targeting that investment? And then also sort of as a follow-up, how are you thinking about the need to refinance some of the debt that is coming due in 2022, 2023? just if you can give us an idea of how you are thinking about approaching that. You have some time, but it is always good to be prepared. So, thank you.

Yes. Okay, thanks Shannon. So, we are still in the planning phase of prioritizing and sequencing the incremental investment. What we are earmarking approximately 100 million to 200 million over two and a half years. And would likely start in the back half of this year. We are working still internally on this with our Board, we would expect about 25% to be OpEx and 75% to be CapEx or restructuring. And once we are through the process, we will provide an update to our guidance if necessary. But if we just did the math on all of that, it would be between five and 10 of incremental OpEx, potentially this year and 15 to 30 of incremental CapEx restructuring this year, if the math was linear. But again, we are still working on it. In from a debt maturity perspective, the term loan A revolver mature in 2022 in December of 2022, and term loan B matures in December of 2023. So we still have some time, but we will start early next year looking at our refinancing opportunities and obviously we want to do it well in advance of the maturity dates.

Thank you.

Thanks Shannon.

Our next our next question will come from Bryan Bergin with Cowen. Please go ahead.

Hi, this is actually Jared Levine on for Bryan. So first Can you kind of discuss your how look for growth across transportation, commercial and government for fiscal year 2020?

Sure, so I will just talk compared to kind of the trends we saw in 2019. So in 2020, we anticipate the transportation growth will dampen as we lapse some new business contracts that were ramping last year, and the tolling loss that we referenced in our renewal rate rolls off. In government, we anticipate more pressure likely to be down over 10% revenue declines. As we get the full-year impact of Caymus, California Medicaid contract rolling off. And then for commercial revenue was down about 6% year-over-year, constant currency in 2019. And we anticipate better performance and that declined moderating in 2020 as we get the impact of new business, and we lapse some of our losses in the prior year. And then just on margins, we expect margins for the segments to be flat to slightly up as we offset the revenue declines overall with efficiency improvements.

And within that transportation business, as you know, there is really four sub businesses. They are really not all created equal in terms of the dampening or the growth and some were growing quite handsomely. Others are growing a little more slowly or somewhat dampened.

Got you. And then when it came to a potential divestitures were there any potential challenges resulting from other notable BPO assets for sale specifically stay in local health?

No. We had many inbound inquiries across the spectrum of our assets set and we found really no show stoppers or speed bumps anywhere in there. As I said earlier, it was more of what we think we can do internally versus what those assets are worth on the market and we like what we have in-house.

Okay, great. Thank you guys.

Thank you.

Our next, the question will come from Mayank Tandon with Needham. Please go ahead.

Thank you. Good evening. Maybe for Cliff or Brian, just given the ongoing churn in the business and the portfolio, what is the level of visibility to the guidance that you provided on revenue? And then also a Brian, maybe you could talk a little bit about the trend line of revenue over the course of the year. You did talk about some of the seasonality on margins, but it would be helpful to get a sense of how the revenue will trend over the course of the year as well.

Okay. Thanks Mayank. So, we have visibility to the midpoint of our guidance and it aligns with our internal plans, our internal budget targets. We still have work to do on the new business side that will drive revenue in the current year, but we are comfortable with the guidance range we have given, and we think Q1 new business signings that we believe we will see is a good indication of kind of a strong start to the year. And then, as you think about revenue as it progresses through the year, we believe we will see the revenue decline as we get into the last quarter, maybe Q3 moderate a bit as we get more impact from new business. And then, just to add, as we think about next year and get into 2021, we believe we can improve significantly the rate of decline and maybe even deliver flat revenue if everything goes as planned. And that we would see growth turning in 2022.

Great. So on that note, what level of bookings would you have to see this year, not to put you on the spot, but just maybe a sense of the growth in bookings or a dollar number that you have in mind that you could share with us that you would need to generate this year to be able to able generate flat revenue in 2021 potentially, or at least show improvement relative to a 2020?

That is a great question Mayank. The way I look at it is growth - flat in 2021 and growth in 2022 is resonating both retention as well as bookings. And we expect bookings this year to be significantly improved from last year, 160% to be more explicit as what our targets would say. And if we achieve that, well that is a little bit of a lag because it kind of depends on expansion versus new bookings. But, what we know we need is a reduction in losses coupled with those bookings to achieve the goal. And so, if we stay consistent with what we are on-track to achieve in 2020, and achieve that again next year with very slight for modest improvements. We are going to be where we need to be.

Okay and final question on margins. Maybe Brian the puts and takes on margins, I realize revenue is going to be the key for margin expansion overtime. Any I think you want to call out in terms of margins that can provide some color in terms of how we should expect that to run over the course of the year?

Yes, first, I would say on margins, we have to deal with the revenue client, and we also have to bring back some employee costs that we didn't have last year because of the performance. And for those things will be offset by efficiency drivers that we are doing in automation. you know some of the things we will do in the optimized businesses and in the corporate functions and our real estate and it portfolios to drive savings, but they will be offset by those other issuers. And then as we see margin progress through the year, again in my prepared remarks will be down. We believe in the first half at the midpoint of guidance, about 50 basis points and then up to 50 basis points in the second half.

Okay, great. That is helpful color. Thank you guys.

Thank you.

[Operator Instructions]. Our next question will come from Ashwin Shirvaikar with Citi. Please go ahead.

Thank you. Hi Cliff, hi Brian. The question is with regards to sort of the transformational pillars chart that you guys put out? And I'm wondering, how this may be different than some of the initiatives that have happened over the past few years in terms of getting to a disciplined offering, development of local market repositioning, process improvements some of those kind of things seem to be more of the same and maybe there is nuance that I’m not necessarily understanding. But if you don't mind kind of going through how is this different than before?

Yes, happy that you asked them. So in previous endeavors here, the focus was primarily in the technology space and finding ways to frankly get a lot of efficiency through consolidation of hardware and upgrading of hardware. And in some cases, building out some new software and capabilities. My view would be that we didn't always put the right people in process, efforts in play to enable the utilization of those technology investments. This is a very different approach is not only a very different approach to execution, but it is a very different approach to where we intend to spend the money. We looked at it from two different angles. One angle is the systemic pain points across our sales to service continuum. And where there are hurdles to success, whether it is solutions architecture or go to market plan, or certain specifics in our sales or operations. We have identified pain points and we have identified solutions for those pain points that will result in projects that is part one. Part two is that will be juxtaposed against the business categorization that I mentioned earlier in the narrative, where in some cases the business needs are simply more around making a business unit more efficient and driving margins up. In some cases, in order to retain clients it is simply a tweak to the technology to make sure that we are delivering what we have promised. In other cases there is new opportunities to enhance and go up and down the value chain with a product where we can steal market share. Those were all different approaches. It wasn't that we didn't have business cases before we did. But the fall through those business cases, weren't quite as rigorous as we thought before. And then finally, the execution of and follow through of the project set is a very different program. We have an Enterprise Project Management Office now, we didn't have that before, it is cross functional led by the business units, we didn't have that before, we have inspection routines metrics. It is a completely different environment than we had before. So and the efforts are quite different as well.

Got it. And then you talk on Conduent looking forward to the optimize, enhance and expend buckets, I mean I find quite useful in terms of how to think of the business, it seems to correspond to how I think of your businesses. Am I maybe reading too much into it if I maybe say that the optimized bucket is one. Maybe you have the most problems and hence you have more problems with regards to growth. So you are more focused on margins. Your transportation and commercial offerings might be more developed. Is that a fair way to look at it. A little bit more color on how you arrived at these might be useful.

Yes. No, I would not characterize it the way you did necessarily. The way I would characterize it is in the optimize business. Think of those as businesses where we don't need a new product to win. The products are fine. What we need is more efficient capabilities, we need to put in AI and machine learning and self-service and fuel process hand offs. And with that we drive value to both our clients and to our margins. But we don't - it is not a rebuild, it is a refinement. The second bucket, the enhancement bucket is, these are business units and products and offerings, where our clients are telling us look in order to retain us, in order to grow more with us, you need to do some tweaks to your technology offerings and modify them to make sure you stay up with the market, if not get ahead of the market. And so that is quite a different model. And then the third model is, they are in the value chain of a particular capability, take claims for example, in the healthcare space. Up and down the value chain and the process flow. There are opportunities to take market share within the competition if we had a different product. And so that would be an example of an expand business unit. So very different, but I would not characterize the optimized businesses as problem businesses at all, but more like improvement or optimize or drive margin or sort of simplify kinds of businesses.

Got it that is peaceful hear. And if I could squeeze one more in, just maybe just building on a previous question. You have down 6% to 8% - projection, you are basically still keeping margin flattish, it is the accomplishment mean. What do you need to see in terms of revenue growth from an exit perspective to make maybe margin improvement in 2010 you want a deliverable target.

So in the next year or two, our focus is going to be to turn revenue around to make the right investments. And so we actually see margin relatively range-bound for the next couple of years as we prioritize revenue. And as we start to get revenue growth, that is when we will be able to see margin improvement. And long-term, we see no reason this business can't get to a 15% margin, which we view as industry average, but in the meantime, we need to focus turning around the top-line and making the investments in the business.

Understood. Thank you.

And as you know, Ashwin a lot of sins can be forgiven, if we grow top-line with respect to margin. So, that is mission number one. So, that is where we are going.

Absolutely. Absolutely. Thanks.

This will conclude today's question-and-answer session. I would like to turn the conference back over to Cliff Skelton for any closing remarks.

Well, thank you all for listen in today. We are in a quite exciting time here at Conduent, we certainly have a lot going on as you just heard. I'm very proud of our team. It has been a difficult year in 2019. I'm proud of the team for their hard work. I appreciate the support of all of our stakeholders as we go forward to continue this journey and our pivot to growth. So, thank you all very much. Good bye.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.