Greetings, and welcome to Conduent's Third Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Giles Goodburn, Vice President of Investor Relations for Conduent. Thank you, sir. You may begin.

Thank you, operator, and thanks, everyone, for joining us today to discuss Conduent's third quarter 2021 earnings. We hope you had a chance to review our press release, issued earlier this afternoon. Joining me today is Cliff Skelton, our president and CEO; and Steve Wood, our CFO. Today's agenda is as follows: Cliff will provide an overview of our results and a business update. Steve will then walk you through the financials for the quarter, as well as providing a financial outlook. We will then take your questions. This call is being webcast, and a copy of the slides used during this call, as well as the press release, was filed with the SEC this afternoon on Form 8-K. This information, as well as the detailed financial metrics package, are available on the Investor Relations section of the Conduent website. During this call, we may make statements that are forward-looking. These forward-looking statements reflect management's current beliefs, assumptions, and expectations, 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. For more information regarding definitions of our non-GAAP measures and how we use them, as well as the limitations to their usefulness for comparative purposes, please see our press release. And now, I'd like to turn the call over to Cliff.

Thank you, Giles, and good afternoon, everyone. Welcome to Conduent's Q3 earnings call. It's great to have you all with us today. I hope everyone's staying well. These are certainly interesting times we live in. To start with, Q3 was a quarter where we continued to deliver on all the commitments we previously talked to you about, both in previous earnings calls as well as at the start of 2021. It's the consistent performance that I hope you'll come to more appropriate from Conduent as the quarters go on, and we're proud of it. I'm also pleased to report that we recently completed our debt refinancing, which we're also really proud of, and within the parameters and timelines we expected. Of course, we'll discuss that here in a moment. And then, today, in addition to discussing Q3 and the refi, we'll touch on some recent accomplishments and talk to you a little bit about how we feel about the remainder of the year. So, if you'll turn to Slide 4, you'll see that our revenue in Q3 came in at $1.38 billion, virtually unchanged from the prior year, and slightly up when compared to the strong Q1 and Q2 performance of 2021. Meanwhile, EBITDA came in at $130 million, very similar to Q2 of this year, and similar on a year-over-year basis when you compare it to last year, normalized for cost-saving efforts we had last year, these one-time, temporary cost savings we had last year. Margins remain flat quarter over quarter at 12.5%. Of course, that's somewhat benefitted by the strength in our government payments business. Regarding new business sales, Q3 delivered $344 million. That brings our year-to-date sales to $1.475 billion. That's a 4% increase over prior year, and that's so far, obviously. As you know, new business…

Thanks, Cliff. As we have done in the past, we are reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let's turn to Slide 8 and discuss the Q3 2021 results, starting with the P&L. We finished the quarter in line with our internal revenue expectations, with revenue at $1.38 billion, down 0.3% year over year. Revenue benefitted from increased pandemic SNAP volumes in our Government segment and increased new business ramp in our Transportation segment, as we begin to implement some of our previously announced flagship deals, including Ohio Lanes and Highways England. This was offset by lost business from prior years. Adjusted EBITDA for the quarter was $130 million, down 7.8% year over year, with the prior-year compare benefitting from temporary cost savings associated with COVID-19. Our adjusted EBITDA margin for the quarter was 12.5%, down 100 basis points compared with Q3 2020. Both EBITDA and margin were slightly above our internal expectations. The decrease in adjusted EBITDA was driven by an approximate $14 million of temporary cost savings that benefitted Q3 2020, and revenue mix in our Transportation segment. This was partially offset by favorable revenue mix in our Government segment and a benefit from lower employee medical expenses. Let's turn to Slide 9 and go over the segment results. For Q3, our Commercial segment revenues declined 1.7%, primarily driven by lost business from prior years, partially offset by new business ramp. Referencing our segment revenue trends in the appendix to the presentation, our net growth rate continues to improve sequentially in the Commercial segment, as we focus relentlessly on the twin hydraulics of better client retention and improved sales performance. For the Commercial segment, adjusted EBITDA for the quarter decreased 5%, while the adjusted EBITDA margin…

[Operator Instructions] Our first question comes from Shannon Cross with Cross Research. Please state your question.

Thank you very much for taking my question. I'm just curious, can you go a bit more into the stimulus timing of what's running out this year, and then how we think about potential - I realize a lot of things are up in the air, but maybe if you can talk about what's sort of at least in the infrastructure plan at this point in time that could come through and help to support the business. And I have a follow-up.

Yes, Shannon, Steve. I'll cover some comments on stimulus, and then I'll flip it to Cliff, and Cliff will talk about the infrastructure bill. So, look, stimulus is clearly one of the components that we're dealing with as we think about the runoff from the effects of COVID. We've obviously had some headwinds and some tailwinds, and so, whilst I want to stop short of kind of giving - sort of talking about guidance for 2022, clearly, when we come back and talk about 2022 at the beginning of next year, the effects of the offramp of government stimulus, and then the effects that we expect to come back and continue to come back in Transportation and Commercial are going to be part of that rubric as we think about 2022. And clear, that we're going to witness - the pandemic SNAP program effectively concluded legislatively at the end of September of this year, but we've got a remaining element of taper of that revenue that we'll see in Q4.

Yes. And just, I'll follow up a little bit, Shannon, on - again, not to stumble into guidance for 2022, but think of 2022 and the roll-off of stimulus as a settling year, if you will. The confluence of a good base business, the stimulus runoff, COVID return - volumes coming back post COVID, the return of supply chain and sort of the workforce attributes that we're all living with, as we start to see all those things repair and come back into a good run rate, that bodes well. But it's - your guess is as good as mine on timing in 2022. Those are just factors to consider when you think about 2022. With respect to Transportation and infrastructure, there's three infrastructure bills we're focused on - one U.S., one in the UK, and one in Australia. And with respect to the one in the U.S., there's a lot going on, whether it's in tolling along the interstate highways, there's some bills - some attributes in there on cameras in school zones, bus corridors, congestion management, and there are some parking capabilities we have in there for automation that can bode well. But you know as well as I do how the government timing works. You start out with allocation from the federal governments to a state, and then the state decides how they're going to distribute. We then go compete for it. We've got to win it, and we think we'll win a lot of it. And then, the revenue recognition comes into bear. So, again, that's more of a timing issue. We think there's a lot to be captured. When it happens is likely kind of up in the air, but there is a lot to be captured, and we think that we're going to capture some of that. It's just a matter of when.

Okay, thank you. And then, you increased your restructuring charges. Can you talk about when the flow-through of benefit - again, I'm not trying to get you to guide for next year, but how should we think about incremental benefits coming from that? And then, just in general, given where you're seeing growth, what you've seen from COVID, all of that, how are you thinking about the opportunities for increased cost reductions, or at least optimization, as you look to the next couple of years?

Yes. So there's a couple things going on. In the migration to work-from-home - and by the way, work-from-home, in many ways, is a good thing for us. We're seeing good SLA performance in a work-from-home environment, higher percentage of our folks currently working from home and likely to stay at home. That creates some advantages, from a recruiting perspective, that we like compared to, say, retail or others that have to be in a brick-and-mortar. But it also creates some opportunities in our real estate footprint to downsize some, and so that's what we're focused on, and that's where you see a little bit of that increase in restructuring cost. And we also see some good work around moving to a chief operating officer model, where we've got a heavy focus on quality and efficiency. And that's driving some opportunities for us to create efficiencies that also contribute to that restructuring charge. So that's kind of the migration that we're focused on with respect to restructuring.

Great. Thank you very much.

You bet. Thanks, Shannon.

Thank you. Our next question comes from Puneet Jain with JPMorgan. Please state your question.

Hey, thanks for taking my question. It looks like this quarter's ARR number was down year-on-year, as well as on a sequential basis. Is it just like the timing of some of the new projects in the pipeline, or some of the tailwinds might be running off - COVID-related tailwinds in Government business and others might be running off that could be driving lower ARRs?

Yes. Look, if you look - Puneet, it's Steve. If you look at the quarter in isolation, then it's down a little bit. But I think I'd draw your eyeline to thinking about it on a year-to-date basis. So it's up 15%, ARR, year over year. And importantly for us, the Commercial segment is performing quite nicely as part of that. So, whilst the quarter was a little bit down, as always, we're managing to a sort of a full-year - more of a full-year view, and I'll let Cliff add on here. And so, I just kind of - I'd just make sure that you think about the sort of - the year-to-date view, as well as just the quarter. Cliff?

Yes. I would just call it lumpiness. In the Commercial business specifically, we're actually up in all 3, sequentially, year over year, and year to date, up actually 19% year to date on ARR, slightly down in the other two segments. But that's really lumpiness more than anything. What I think we really need to pay attention to, Puneet, is year-to-date ARR and that net ARR metric, and those are very positive signs.

Understood. And your free cash flow goal for this year at 20% of EBITDA. Can you talk about like how should we think about normalized level of free cash flow, like medium-term targets or anything? Like, can it go back to where it used to be at 35%, 40%? And what drives free cash flow from 20% to that higher level?

Yes. Look, so yes, 20%, remember, has got the impact of the CARES Act in it, so if you normalize out the effect of the CARES Act, it would be 25% in 2021. And normalizing 2020 as well, that would be a 9% increase over 2020, which was 16%. So we are on this path of sequential improvement, and you, like we, are kind of thinking over the midterm, that's kind of where we want to get the drivers. Clearly, some of those conversion effects are going to be affected by restructuring and other items that we'll clearly come back and talk more about when we talk about 2022 and beyond in terms of where we're heading. But certainly, looking at the last year, year to 18 months, we're trending in a direction that we're confident with.

Got you. Thank you.

You bet. Thanks, Puneet.

Thanks, Puneet.

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Please state your question.

Good evening. So my question was with regards to sort of the sequential trends that I'm kind of looking at here, particularly when I look at Transportation, right? And I know that Q3 can be generally weaker because of transit being weaker in the summer. But is there anything else going on when I look at that 12.1% growth in 2Q going down to 2.9%, which seems to be perhaps a little bit more of a decel [ph] than one would normally expect?

Yes, Ashwin, let me cover that. So, Transportation in Q3 for us did have a couple of places where were some revenue moved a little bit to the right on us. It hasn't gone away. It's just pushed a little bit. So probably this is one of the areas where, whether it's chips or whether it's supply chain elongation, is just creating a few little ankle biters for us around revenue, and so I think you're seeing a little bit of that in it. Longer term, as I said in my prepared remarks, we're just starting to get into the teeth of Highways England and Ohio Lanes and some of these other big contracts. I think you're also right in pointing out that European international transit isn't really yet recovered. So there's a couple of things going on there that we feel confident as we move forward, are things that are going to come back to us. But you're correct, there were a couple of items in the quarter that just moved a little bit to the right on us.

Yes. It's timing, Ashwin. If you think about the fact that our Transportation business, especially the transit business, is heavily equipment revenue generated. So, as the supply chain slows down, and as chip manufacturing has slowed, the development and the implementations start to slow down as well, and it's just backlog. And it's coming back. I mean, the revenue is not gone. The revenue is all booked. It's just a matter of getting the implementations done and the equipment deployed and operational. And so, we're catching up. It's coming around.

Okay. And by supply chain, you mean just fewer truckers on highways, mainly because all these trucking companies are still looking for people to drive their trucks?

Ashwin, my comment was slightly different to that. I'm actually talking about getting equipment shipped, getting equipment through customs, getting equipment literally off of ships.

Yes. An example would be Highways England, where we're deploying equipment, and we're - and there's a lot of development work being done where they need chips. And so those two things are causing that project to be slightly behind time line, not behind revenue, but slightly behind time line. So yes, I mean, you're right. It's everything. It ships, it's trucks, it's the entire supply chain environment. But that's coming around, and the whole industry is feeling the same thing.

Got it. And if I could ask you to kind of look perhaps at your pipeline and give us some color on how that is shaping up, given all of your efforts from a cost perspective, from a capability perspective, is the message getting out that you're transforming yourself, your clients recognizing it and so on?

It's a great question. I wish you'd asked me to ask that. I wish I had asked for that, because we're very bullish on the pipeline. The pipeline - gross amount of the pipeline is reasonably flat, $21 million, $22 billion, which is what we were a year ago. But what's changed in the pipeline is just what you said, the confidence level, confidence both from us and our clients. So what we're seeing in the deals that are in the pipeline is more confidence in the quality of the deals, more of the deals in the staging that have moved slightly to the right, which bodes well for the last half of 2022. As you know, these pipelines are 5-year pipelines. And what we like to see is anytime you can move those staging to the right with higher confidence in the near-term in terms of the likelihood of winning, then we get more optimistic. And that's what we're seeing right now in the current pipeline. So we think the high-quality improvement in both technology uptime, operational excellence is leading to more appetite from our clients, or more propensity to buy. And so, we've got to get the deals through the pipe and get them booked, and that's what we're working on.

Got it. Thank you for that.

You bet.

Thank you. And ladies and gentlemen, that ends today's question-and-answer session. I'll turn it back to management to see if there's any - they have any closing remarks. Please go ahead.

No, listen, thank you, operator, and I appreciate the folks that joined today. I hope everybody is well out there, ever-changing the circumstances for sure, as we talked about in the opening. But that includes our presentation. Again, thank you, and have a great day.

Thank you. All parties may now disconnect. Have a good evening.