Hello, and welcome to the Conduent First Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [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.

Good evening, ladies and gentlemen, and welcome to Conduent’s first quarter 2020 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, May 7, 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. 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 afternoon and was furnished to the SEC on Form 8-K. With that, I will now turn the call over to Cliff for his prepared remarks. Cliff?

Thank you, Alan. good evening everyone. I hope you’re all staying safe and healthy. These are difficult times. Before I start my prepared remarks on the quarter, I want to spend a minute acknowledging that throughout this coronavirus pandemic, the Conduent team has continued to provide critical and best-in-class services to our clients and their end-users while ensuring the health and safety of our greatest asset, our associates. I’m very proud of the hard work, dedication, and decisiveness of all of my teammates. I’ve had to jump into action over the last two months in a situation unlike anything we could have imagined. It’s in times like these where leaders lead and pride in our company really shines. I’m grateful to be part of this team. Today, I’ll go through a business update including the impact of the current environment and Brian will cover the financials and our key sales metrics. We’ll then take some questions. Let’s turn to Slide 4 to review some of the key highlights of the quarter. Despite the impact from COVID, we started the year strong with Q1 revenue of $1.1 billion. This was down year-over-year excluding divestitures, but higher than our internal expectations. The strong performance was driven by increased volume, most prominently in our government services business, which helps to offset some of the COVID-related impacts. Q1 adjusted EBITDA was $96 million, down slightly more than expected, primarily driven by the loss of some higher margin revenue due to COVID-19 additional costs associated with moving to a work from home model and timing related to expense reduction efforts. In terms of our sales performance; in Q1, we signed $324 million of new business. This is 44% more than we signed in Q1 2019, and a 55% quarter-over-quarter increase. We’ve seen strong traction in…

Thank you, Cliff. These are unprecedented times and we’re all proud of the teamwork and sense of urgency and commitment demonstrated by our team. I sincerely appreciate all of the hard work from our associates and partners that has allowed us to keep delivering on behalf of our clients. Before I begin in the financials, I’ll note that throughout this presentation and in the exhibits in the appendix, we’ll provide both GAAP and adjusted numbers, which will provide a clean compare that we’re removing the impact of the divesture that we completed in Q1 of 2019. Let’s start on slide 10 with a review of the impact of COVID-19 on the business in Q1. Despite the slowdown in the economy throughout March, Q1 2020 revenue was above our internal expectations; however, adjusted EBITDA was below expectations. We estimate that the net impact to our top-line from COVID-19 was approximately $14 million in Q1, all of which was in our commercial and transportation businesses. In the commercial segment, we saw declines in volumes in our transaction processing business and in retail, travel and tech clients in our customer experience business. We estimate that the net impact in our government business was roughly neutral in Q1 while we started to see the impact of increases in our government programs for SNAP and unemployment. This was generally offset by declines in child support and other non-essential state program volumes. As cliff mentioned, we’re starting to see further volume increases in SNAP and unemployment and we anticipate continuing to see this trend in a more challenging economic environment. In our transportation business, while some of our revenue is fixed pricing or account-based, a significant portion of our tolling and curbside management business is volume based. These offerings have been impacted by stay-at-home orders and…

[Operator Instructions] The first question comes from Puneet Jain of JPMorgan. Please go ahead.

Hey, thanks for taking my question and glad to hear your voice and that you’re safe. So, it was nice to see improvement in new business signings in the quarter, specifically, given that it was driven by new logos. Can you provide more color on type of work that you are seeing? Are these long-term contracts or are these near-term projects driven by clients need to respond to COVID-19?

Puneet, it’s Cliff. Great to hear your voice as well. Yes, the Q1 signings were essentially all long-term contracts. We had a big call center contract, a transportation contract and a large government healthcare contract. And as Brian had mentioned, that represented some 280 million or so and then another whatever, $42 million, $44 million in sort of expansion businesses. So, the majority of Q1 is dominated by a long-term five to seven plus year kind of contracts, mostly in the government space, but not entirely in the government space. As I said, we had a commercial call center deal as well. That’s shifted slightly in Q2, where we’re starting to get more expansion business, but we still had another large deal that we signed in the government healthcare business and we continue to see Q2 as pretty positive with respect to long-term opportunities.

Got it.

Not totally related though to be more direct, we did get some volume increases associated with COVID as you would expect, but those are all retained within our current contract scenario, where we expanded what we already had, things like SNAP and unemployment insurance cards.

Right, right. And I know you talked about a relatively low impact of COVID on Q1 revenue was I think 1.5% something.

Right. But how should we think about impact on 2Q? Supply doesn’t seem to be much of a heck thing, but should we expect high demand impact in some of the areas in transportation benefit wallet like you talked about. And are you seeing improved trend of March, early April to now.

That’s a good question. So, the benefit wallet impact is sort of a continuum based on insurance – I mean, excuse me, interest rates and that’s not going to vary a month-to-month until those rates start changing the dominant irritant if you will, or a downside for Q2 is really in transportation. We think it’s modulated somewhat with the increase in volume in the government space. We think based on roughly what consensus said before and you can sort of interpolate from what our previous guidance was that it’s about a 10% downward implication on revenue in Q2, compared to what we would have expected ordinarily and slightly worse than that on EBITDA, just because a lot of the revenue reduction in transportation has some fixed cost associated with it.

Got it. Thank you.

You bet.

The next question is from Bryan Bergin of Cowen. Please go ahead.

Hi, good evening. Thank you. I hope you’re all doing well.

All right.

I wanted to ask here on the supply impacts; you quantify some of the costs in 1Q. How should we be thinking about the cost impacts in 2Q? And just about clear, what type of supply capacity are you currently at considering you have remote work from home, but I assume some delivery centers still up as well?

Yes. So, the sort of the complexion on the work from home, work from work, unable to work sort of percentages; right now, 75% of our workforce is working from home. Roughly 20% is working from work. As you know, we’ve got lots of business that you can’t really do from home. We’ve got printers and we’ve got scanning machines and in some countries, excuse me, you can’t – it’s really not a capability to be working from home. And then we’ve got roughly four-ish percent or so, a couple thousand people that are just sitting at the ready, waiting to get back into a facility where they, where they can work from work. And so that’s really the downside, it’s about a 4% impact of 4% to 5% impact on a workforce that they can’t meet the demands. What we’re finding is the supply attribute of the demand supply situation is pretty strong. We’re getting good feedback. In fact, our migration to work from home helped us to get some new business just due to the speed, at which we got to working from home. So, we’re pretty optimistic on the performance and we’re seeing really very, very minor, really no SLA issues. All client feedback’s been very strong. So from a supply perspective, it’s – we’re in pretty good shape. In terms of the cost, I assume that second part of your question was what are we doing on cost reduction? Is that right, Brian?

Yes. I’m just trying to frame how much it’s going to cost you in the second – the impacts, right that are going to cost you and I guess the – you’re going to have some net reduction against that. So, I’m just trying to frame how – from a margin standpoint, how we should be thinking about that?

So, we’re doing everything we can to mitigate any of the EBITDA effects through around a $100 million cost initiative. Now, about half of that is what we call temporary. It goes hand in glove with the volume decreases specifically in the transportation business, and that of course, will come back as things modulate back to the new normal. The other half of it we consider to be long-term cost reduction efforts that will stay through 2021. So obviously, we want to impact the margin that EBITDA impacts of Q1 and Q2. So, we want to continue with some permanent cost reductions as well, not just temporary cost reductions in the second half of the year and it adds up to about a $100 million.

Okay. That’s helpful. And then – and just as we think about the range of potential scenarios for 2Q on revenue, just want to confirm that the last answer you gave to Puneet, that was all in 10% on just the transportation line, not the overall.

That was overall, but that wasn’t the overall impacts large in that. that’s over and above what we would have already anticipated for Q2. That was – could have been interpolated from guidance as well as consensus.

Okay.

It’ll be higher than that on a year-over-year basis, obviously.

Okay, okay. Makes sense. To what extent, do you think the tailwinds that you’re experiencing in government can offset some of those tougher areas?

Well, I mean, we built in the tailwinds – a modest portion of the tailwinds into that 10% answer. but obviously, it depends on how long this lasts and how long unemployment lasts, how much more it’s got ratchets up et cetera. But we do see what could be in the neighborhood of $20 million to $40 million in revenue kind of plus up associated with a government services business over the course of the remainder of the year to offset any revenue degradation we get in the transportation business.

Okay. Thank you.

You bet.

The next question is from Mayank Tandon of Needham. Please go ahead.

Hey, good evening. This is actually Kyle Peterson on for Mayank. Thanks for taking my questions. Focus a little on some of the new signings; it’s obviously good to see the momentum flowing through. How should we think about some of these deals kind of going from pipeline to generating revenue, particularly in this kind of virtual environment? Is this kind of a late this year type of timeline or we – is this more kind of looking into next year that helps the 2021 momentum, just kind of want to see how these kind of parlay in revenue?

Yes. It’s a great question and it varies, right? The answer is not perfect, because it varies. If you look at some of the commercial call center business that revenue prints pretty quick, I mean the migration conversion timeline, in fact, it’s already happening in one of the sales we made in Q1. If you look at some of the activities in government healthcare eligibility claims processing, where we’re migrating from a different provider, there’s conversion time buildup time. Some of those things, one of the contracts for example, from Q2 is going to take probably five to six months before we start realizing that revenue. So, it varies transportation somewhat in the middle of those two. So, it’s a blend across the board. These are all not backloaded to answer your question, but they’re also not all front-loaded. So, we’ll start seeing some of that revenue as early as Q2. and then some of that we won’t start seeing until Q4.

Okay, that’s helpful. And then I guess just to follow up, trying to get some clarity on the transportation business since a lot of moving pieces there. I know you mentioned the 10% revenue headwind. Is that just on the – is that just on the transportation business or is that on the total piece of the pie, including some of the offsets from the increased government volumes. Just want to make sure we’re kind of thinking about that. Hope you’ll answer this very quick.

Right. The transportation headwind is going to be more than 10%. The 10% is a blended number, which would include the offset – a modest amount of offsets from government revenue. It’ll be higher and it’s higher in a couple of key areas. And it obviously depends, right? If this is sort of staying off the road, staying out of the toll road, staying off the subways kind of phenomenon, last well into late summer, into the fall. the number starts to get a little worse. If we can start to see some modulation come back in June, which is what we’re hoping and what we’re starting to see, especially in some States, where people are starting to get back on the road already. It’s a little better scenario. the two businesses, the biggest business, it’s a feeling that this is a tolling business. And then second, the parking business, believe it or not, the enforcement business has been reasonably flat, less people on the road, but more people speeding and then the transit business somewhere in the middle. So, we’ll see a good – we’ll see more than 10% of revenue degradation that transpo alone business through Q2. And we were modeling the – sort of the last half of Q1 of a recovery in the transportation business.

Okay. And then I guess just to clarify, you’re talking that 10% that’s a sequential based on 1Q number credit?

Yes. the 10%, it’s a little misleading. It’s going to be higher than 10% in terms of straight revenue reduction in the transportation business. So we…

Yes, yes.

And so it’s basically to think about it as we already were down 6% to 8% year-over-year and Q2 and this would be a 10% on top of that.

Okay. Awesome. That’s helpful. Thank you.

You bet.

The next question is from Shannon Cross with Cross Research. Please go ahead.

Hi, Shannon.

Thank you very much. Hi. So my question is, you talked about the opportunity to reduce real estate over time and it sounded like sort of rethink how you structure your workforce and where they’re working. Maybe the bigger picture kind of question, but I’m wondering sort of what lessons you’ve learned in the last few weeks, and if you had any thoughts on, I don’t know, what the workforce of the future might look like and how that could benefit margin. Thank you.

Yes, it’s a great question. And it varies a little bit whether it’s onshore or offshore. So, specifically onshore it’s – we’ve got 150 some sites and some of those are pretty small. Most of these sites are more than 50% working from home. And so the way we’re looking at this new model Shannon is, is a short-term, meaning 2020, and a longer term game plan in three components to the short-term attribute. One is, where can we continue to work from home and shut down some sites and save some lease expense. And where are the easy ones, where there are a 100% out, we have no contractual issues. It’s, an easy plug-and-play, shut it down work from home. Where do we need to migrate back into working from work where we have some government contracts, in some cases we have government contracts where the mandate is you have to have a site and it has to be in our state and you can’t work from home. So, where are those, and when do we start moving those back into place safely, so that you can keep the right social distancing, and the right other cleanliness protocols that we think we need to have. And so you need to meter that slowly. And then the third leg of that stool is contact tracing. How do we – how do we monitor the situation across all 150 sites, and the other, you know, 70 or 80 sites offshore to make sure that we can manage this crisis and not see a resurgence and do something that we really shouldn’t be allowed to have happened. That’s all 2020. I think in the – during the remainder of the year, we’re going to migrate or consider migrating to a more holistic, a heavier work from home kind of environment where we can continue to save real estate dollars. We spent over $200 million a year in lease expense. We think there’s at least a 20% improvement. We can get there over the long-haul and maybe more. But we want to – we’ve got an inventory. Every one of those sites look at every contract, look at every client expectation and look at whether the work is degraded by working from home. Thus far, we’re not seeing huge degradation in performance. So, we think there’s, there’s a real opportunity here over the long-haul into 2021.

Thank you, that’s helpful. And then in internationally, can you talk a bit about what you’re seeing in your sites in Philippines and Jamaica and that just in terms of, I don’t, employee’s willingness to, again, I’m assuming some of them are obviously working from home, but I’m curious, given some of the shutdowns and in some of those regions how it’s impacted your business or if it’s starting to turn back on.

Yes. Yes. So it’s on a gradient. So on the – on one end of the spectrum you’ve got Guatemala and Mexico where we’ve got 4,000 or 5,000 people where 97 – between 95% and 98% of our associates are working from home and doing fine. In fact, we’re migrating volume that direction. On the other end of the spectrum, you have Jamaica where they’ve got a lot of tough government rules where it’s not quite so easy. In that space, we’ve got a little bit less than 50% working from home and the 46% range, about 11% in the office working from work. And then the rest of them that are just waiting, they can’t. And so what’s happened there is that the reason we’re okay there is some of the inputted volume our clients whose call volume are way down – is way down. And where we are getting the call volume there, we can migrate some of that over to Guatemala to cover it. So that’s the other end. And then somewhere in the middle is the Philippines, where we’ve got about 70% working from home, about 7% or so, less than 10% in the office, because the transportation is so different from some of the outlying areas in the Philippines to get into Manila; and Cebu, , it’s a little harder. And so we’ve got some, some 20% or so in the Philippines that can’t get in. You add it all up and we’ve got roughly 3000 or so of our associates that can’t get in and they’re waiting. No, they’re not, they’re not getting paid, but they’re waiting to get to work and we’re starting to meter that slowly but surely. And then of course, India is in the middle, but we don’t have call centers in India, a lot of the work we have in India, scanning work and technology work, and right now it’s over 90% in a work from home environment.

So scanning can happen at work from home?

Scanning can happen at work from home. It’s not – it’s really more indexing and taking files in recrafting the file and sending the file back out in the claims world. It’s not an OCR scanning. It’s a probably misspoke. It’s not an OCR scanning machine. It’s more of indexing work.

Okay, great. Thank you so much.

You bet.

The next question comes from Ashwin Shirvaikar from Citi. Please go ahead.

Thank you. Hi, Cliff, hi, Brian. Hey, thanks for the presentation. Hope you and your families are staying safe.

You as well.

Yes, thank you. I guess my first question is with regards to the context that you signed this quarter, prior quarter, and the ramps associated with it. And ordinarily, some of these contexts might be quiet tougher ramp it involves sitting down with the client, things like that. Do you have anything like that that affect the pace of the ramp? Do you have seen any changes in the speed at which clients are ramping signed work if you can comment on that?

Yes, it’s interestingly, there’s sort of two kind of avenues to your question on ramp. Prior experience on ramp in Q1, what we found, one of the reasons we were – we thought revenue was pretty positive compared to expectations, where we had much faster ramp with new signings in Q1 than we might’ve had otherwise. And some of the ramp down on previously lost business that we’ve already discussed with you is a much slower ramp down. In fact, we hope we can drag that down, drank that along even further. So it’s funny and it depends on the industry. And so again, on the new business we signed and Q1, we see really rapid ramp on call centers. We signed a very large deal in the call center space in Q1 and it’s ramping very quickly. And then we signed a government business of pharmaceutical benefit business in the government space that’s a longer ramp. And so we’re looking at our initiative planning process to optimize that ramp schedule to get that revenue that impact revenue on the board as fast as possible and leveraging our relationships with our clients, sort of drag our feet in any previously lost business that doesn’t have to be ramped down right away, that we can sort of retain as long as possible due to solid performance.

Got it. Now, thank you for all that detail. The second question I had was with regards to cash flow, I know you don’t have a formal outlook out there, but if you could kind of walk through some of the puts and takes as we kind of look at the current revenue situation in broad terms, the cost actions you’re taking. And some of them might also have cash implications, but if you can talk about the ability to generate a positive cash flow or the next three quarters?

Go ahead Brian?

Yes, it’s Brian. So what I would say first is that our free cash flow, excuse me, was in line with expectations in quarter one. And as we think about the rest of the year, it’s hard to get guidance given all the dynamics in the COVID-19 issues. But a couple of points; one, the Cares Act is going to provide about a $70 million benefit this year. $6 [ph] – $5 million of that is from deferring payroll taxes into 2021 and 2022, and about $5 million is a permanent cash tax benefit. We also in our modeling slide, we’re taking down CapEx to $145 million, which will help, we’re going to have $10 million of higher restruction we believe, but we’ll also have lower cash interest. So those things are on a net basis the help. And then obviously there’s even an impact from COVID and how much of that we can all set versus not, and you know, so we’ll have to obviously give you updates as we progress, but that’s how we’re looking at it right now. But we could get pretty big benefit from some of those other items.

Got it. Thank you very much.

Thank you, Ashwin.

This concludes our question-and-answer session. I would like to turn the conference back over to Cliff Skelton for closing remarks.

Listen, thank you all for joining today. It’s certainly been a quite an interesting journey for all of us. I know you all are experiencing that. I hope everybody’s family is safe. Here at Conduent, we’re very proud of our teammates and how hard everybody’s working in these difficult times and taking care of their own families. At the same time, we’re very optimistic. We’re seeing the right signs from the pipeline, from sales, from quality and from client impact. We just need to keep the pedal down and we’re looking forward to the new normal and getting there as soon as possible. Like everybody else. So I want say to everybody stay safe. Thank you for joining and we looking forward to seeing you in the next call. Thank you very much.

Than conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.