Welcome to the Conduent’s Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over, Giles Goodburn, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. And thanks, everyone, for joining us today to discuss Conduent's second quarter 2024 earnings. I am joined today is Cliff Skelton, our President and CEO; and Steve Wood, our CFO. We hope you had a chance to review our press release issued earlier this morning. This call is being webcast, and a copy of the slides used during this call as well as the press release were filed with the SEC this morning 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 would like to turn the call over to Cliff.

Thank you, Giles, and welcome to Conduent's Q2 2024 earnings call. This, earnings today will be just a little bit different. We'll have Steve begin with the financials today and I'll follow with a strategic discussion regarding progress on our strategy framed by the categories of people and organization, our processes and objectives and our products and our technology, but in summary, Q2 adjusted revenue and adjusted EBITDA were $811 million and $29 million respectively at a 3.6% margin, all exceeding expectations. New business signings were $142 million up sequentially and flat year-over-year net of the large State of Victoria deal last year in our transportation business. This was all characterized by some recent strength in commercial sales, some weakness in government and a transportation business holding its own. Finally, the net ARR number was negative for the first time representing the low point due to the timing and sequence that Steve will discuss in a moment. All of this points to a consistent theme. While we're at the low point in our journey, in the trough as we say, we continue to be exactly where we said we'd be, in fact a little better in terms of revenue and EBITDA and we've said all along that this is part of a continued path to a 2025 exit rate parameter, lowered net debt leverage ratios, sequential margin improvement and less capital intensity. Meanwhile, our divestiture activity is progressing as planned, allowing us to deleverage our balance sheet and buyback some of our own stock including that formerly owned by Carl Icahn which has also allowed us to simplify and streamline our Board and in fact create some new strategic dialogue. Steve will explain the effect of those divestitures and discuss where we are at in that revenue EBITDA cycle. So let me hand it over to Steve. Steve?

Thanks Cliff. As we have done in the past, we're 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 5. I want to highlight again the progress that we're making towards our $1 billion of deployable capital exiting 2025 that we've previously laid out for you in our investor events and earnings updates. We've made significant progress with rationalizing our portfolio. During the quarter, we completed the second and final tranches of the benefit wallet transfer receiving the remainder of the $425 million of proceeds. The curbside and public safety divestiture closed on April 30 for which we received $174 million at closed with a further $61 million deferred over the next nine months. Also in the quarter, we announced the sale of our casualty claims solutions business for a price of $240 million subject to certain purchase price adjustments, which we anticipate will close later in Q3. These combined proceeds along with an updated and more favorable view on the tax drag associated with these divestitures puts us in the upper quartile of the $600 million to $800 million of targeted net proceeds. To date of the $1 billion of targeted deployable capital, we've deployed around 66% or $660 million against debt prepayment and share repurchases. During the quarter, we prepaid $300 million of our term loan B and repurchased approximately 43.3 million shares. I'll cover more detail on this later in my presentation. Suffice to say, we're where we said we'd be vis a vis this key component of our overall strategy. We've made significant strides in reducing our debt against a business that was traditionally too highly levered and even post these initial divestitures, Conduent retains a rich portfolio of assets that we…

Thanks, Steve. Let's turn to Slide 14 and spend some time talking about the business and where we are with respect to this journey. As you may recall five years ago we embarked on an operational and technological stabilization and optimization plan. Well never perfect that outcome is largely intact and then just over a year ago in March of 2023, we outlined a three-year plan that would build on our strengthened foundation to create a more nimble technology led business process solutions company with better synergies, more cohesiveness, different leaders, lower debt, less capital intensity, and a clear and charted path to market driven growth. That growth would be enabled by focusing on our client success to further penetrate existing and prospective clients, doubling down on strategic initiatives for each of our businesses and continuing to strengthen our leadership and our culture. The narrative also discussed how we would leverage our cloud based and AI infused technology platforms across our core competencies in order to grow in both the commercial and public sector markets. We talked about our portfolio diversity as a strength and an offset to economic cycles. We discussed how we would continue to optimize our business by rationalizing our portfolio, allocating approximately $1 billion of deployable capital in the most optimal manner. Fifteen months into this three-year plan I can tell you that we have made and continue to make strong and steady progress with more to do. We're on track to deliver against those commitments and our Q2 results demonstrate for those that have been following our journey that we continue to be where we said we would be. Let's turn to Slide 15 to give you a representation of the changes we've made tactically to advance that three-year plan. First, we continue to strengthen…

Thank you. [Operator Instructions]. Our first question is coming from Pat McCann of Noble Capital Markets. Please go ahead.

Hey, good morning and thanks for taking my questions. I just have a couple of questions and then I'll pass the floor on. Number one, I wanted to circle back to the Carl Icahn share divestiture. After repurchasing his shares and him no longer being in the stock, how does that affect the decision making process for you guys going forward? Does that really simplify your strategic decisions? Could you any color you could provide there would be great?

Yes, Pat, this is Cliff. Thanks for the question. As many know, Carl as an activist had three board members out of our eight and as you can imagine when you go from eight to five decision making certainly gets easier. You got an extra three you got a lot of cooks in the kitchen for sure and from time to time activists will have a little bit of a different agenda vis a vis things like how much capital do you want to keep inside the company, how much capital do you want to distribute and what timeline etc. As everybody knows, Board's primary job is governance and of course keeping or not keeping a CEO is front and center, but in addition to that capital and asset allocation M&A strategy is always going to be a primary concern of Boards and frankly that just got easier for us and I can't tell you what it means in terms of actual decisions that are going to happen, but I can tell you the process is easier now and we feel a little bit -- I might call a little bit liberated in some ways.

Great. Thanks for that, and then my second question was just if you could give a little bit of commentary, additional commentary to what you've already said about how you where your confidence comes from for your full year target given the results you reported for Q2?

Well, I think, Pat, our confidence in terms of the full year is really resident in the walk through 2025, right. We've talked about the fact that we've got these cost efficiency programs underway that we're heavily through that work. It's going to become more resident in the second half of the year as we get into that and we're going to see this sort of modest sequential improvement in EBITDA as we progress through the year, and there's a little bit of incremental kind of sales ramp again resident in the guide in the second half of the year, but I think probably as important to that just to reiterate, right. We now see this as a sequential journey that we're going to see quarter-over-quarter as we process through the remainder of 2024 and then quarterly through 2025 to get back to that exit rate outlook that we've outlined and we've got a high degree of confidence that we've got the plans and the execution in place to deal with both the revenue side and the cost efficiency side as we work through that.

I think that's absolutely right Steve. The lag effect of the cost reduction efforts is going to manifest a little more in the back half. Some of the sales efforts are beginning to ramp up a little bit of a slow start in government that we think is going to finish we hope will finish strong compared to the first half. All those will affect our impact revenue and our earning EBITDA for the second half of the year.

Great, and if you don't mind if I could squeeze in one more, it just it seems as though given the divestitures you've already announced your you made significant progress there and it seems as though the march forward is towards the other side of the divestiture efforts, if you will, seems to be coming to focus now. I was just wondering though if there are -- how you view the possibility for any other maybe minor divestitures, if there are more opportunities there, should we expect more announcements in the future before you're done?

I think Pat the way we would look at it -- and Steve can fill in the gaps he sees fit in. We don't see any major compartment of divestiture activity on the horizon. There are a couple of small things we might consider, but as you may recall, the whole process was center posted on how do we get as many synergies with RemainCo as we can get, how do we take scarce assets from the outside point of view and monetize those to pay down debt primarily and then how do we grow what's remaining as fast and as well as we can, and we think we're kind of over that target. There's some puts and takes there, but we think we're over that target in terms of carve outs if you will.

Yes, just one thing further to add Pat, if you think about the divestitures we've made, we've targeted businesses that met a couple of different criteria. We thought they had scarcity value on the outside. We thought they weren't necessarily sort of one plus one equals three businesses inside of the portfolio, but we have a still have a very rich portfolio of assets that have strategic value either by themselves or in combination, and so we like the way that the portfolio is shaping up. We like our commercial and I'd say our public sector markets to kind of give balance to the business, and I think the mission will continue to be to work strategically as Cliff has outlined to drive those all of those businesses towards growth to drive towards those exit rates that we've outlined, but that doesn't necessarily take off the table that there might be some attractive offer that comes along on the outside for a particular discrete asset that we would accommodate and entertain as needed, but as obviously you can see, we are towards the top end of the range of what we've outlined for divestiture proceeds, but we're not at the top end the range and so it gives us room to do more if we deem it to be in the best interest of what we're trying to get done.

Yes, I mean the way I would characterize it in metaphorical terms is the radar is still open and operating in terms of opportunistic ideas. But we believe we've got a portfolio we can grow and if you look at these assets, some of them we're going to double down from a capital perspective, some of them we're going to optimize and get more efficient and some of them we're going to continue to just drive as is and so we see what we have is what we need.

Great. Thanks guys for the thoughtful commentary. I'll pass the floor on.

Thank you. Our next question has come from the line of Marc Riddick with Sidoti & Company. Please proceed with your questions.

Hey, good morning. So really appreciate all the detail that was put into this and provided us. Wondering if you could talk a little bit about, earlier in the year, there was the announcement of the deal with Microsoft on AI and I was wondering if you could talk a little bit about the partnership I should say, and if you could talk a little bit about maybe what you're seeing from client receptivity and what your early read is on that?

Yes, it's a good question. Look, I mean, you can't turn the TV on without those two letters coming up everywhere. I think the hype is starting to settle into real execution. We try to kind of weather that storm and find our ways to some pilots and some early partnerships including Microsoft. Some of those pilots as I mentioned in my prepared remarks starting to bear fruit, especially around fraud and scanning and indexing. Healthcare has got some real opportunities and of course everybody is focused on what we can do in the call center space. So we're using those pilots and also what I mentioned about cyber we think is a great new idea. There's an AI implication there as well, but what I would say is Microsoft is leading the charge in many ways in the industry and they've got a lot of partners that they can select from or not and we've done some work. I met with their Head of North America just last week to talk about what we can do from a go to market perspective with respect to AI and the horizon is very bright, but we're going to be narrowly focused initially on those things that I just talked about. The partnership with Microsoft obviously is beneficial for them because they can use Azure for a lot of the hosting, but their sales force is quite strong obviously and we want to make sure that we can partner up as much as possible, but again we're going to stay narrowly focused on those three or four or five proven pilots that we've already executed on and we're going to move forward with those initially and that's where we're going along with the partnership with Microsoft and go to market perspective.

Okay, great. And then I wanted to just sort of follow-up on the status of the government direct express contract and sort of your thoughts there. Is there a sense of I guess, maybe just maybe if you could maybe put a little more color around that and then I have one final follow-up around cash prioritization?

Yes, yes. Well, look Steve told you in his prepared remarks what we don't know which is we don't know where this thing is going because we don't have any official messaging at all. We have what our bank partner told us is a negotiation with another bank and they have their own technology partner that is equivalent of ours, but here's what we do know. We do know that after 15 years – this is a very, very complex arrangement and it's very risky for the government. We've got $1.6 billion of deposits that happen every month for Social Security recipients, VA recipients and we our technology distributes those disbursements and the fraud risk is inordinately high -- the operational risk is inordinately high and it's been attempted to shift to other partners in the past and failed. So I would say the risk is significant to a conversion and we're notwithstanding the fact that it probably takes a year or two for that to manifest even if it does happen, we think there's a high probability that this thing could be retained, but we don't have formal messaging on in any way from our bank partner or the government. I just would tell you that we know this is a lot more complex than on the surface.

Okay, and then the last thing for me, it's certainly when you're looking at the walk that you have there and sort of getting to certainly reduce leverage and the like. Can you sort of maybe talk about and it might be a little early for this, but maybe future thoughts on returning capital to shareholders and sort of whether that would take the form of thoughts around the potential dividend share repurchase that type of thing or any thoughts or early thoughts on sort of when you sort of get to the other side of the walk, how that might evolve? Thanks.

Mark, I'll take that. So, if you think about the $1 billion of the global capital that we've talked about generating and deploying, and we're 66% through that, but if you piece together the various comments that we've made and think about debt that we've already prepaid authority to pay down more debt that we've got from the board. The repurchase of the Icahn shares and then the other share repurchases that we've been making. We're sort of upwards of $880 million of that $1 billion 000 already sort of earmarked, I would say for deployment. So there's about $120 million to $140 million to go that we haven't been declarative on, and so right now, I feel that we're pretty good being in that situation. I think we've got to work through the remainder of the divestitures and get that stuff done. Clearly, we've got to which is kind of resident and how we're thinking about the second half of the year. We've got to get operating cash flow moving in the right direction. And then then we've got about $120 million at some point in the medium term, short to medium term, we'll be able to start thinking about deployment, but I think we feel good right now with the path to generating the $1 billion and I think we feel pretty good about having allocated an earmarked around $880 million of that reducing the leverage giving out a target net leverage ratio of one turn and obviously we've made pretty significant strides to reduce the share count. So that's the way we feel about it right now. We feel pretty comfortable about where we are, but obviously there's a little bit more to come as we get through the next few quarters.

I think that's right, and I think those are certainly Board decisions and what I would say is Steve's got it exactly right. In the near term, we're going to stay the course that Steve outlined.

Excellent. Thank you very much.

Thank you. Our next question comes from the line of [Indecipherable] with Singular Research. Please proceed with your questions.

Good morning, guys. Can you hear me? Thank you. In the last previous call, I think you mentioned healthcare as a sector where you're seeing increased outsourcing. Is that the only sector you wanted to highlight or is that across the board you're seeing an increased interest in outsourcing?

We're seeing certainly in healthcare, certainly in logistics, certainly anywhere where they in turn are being squeezed from an efficiency point of view. We're starting to see increased interest in outsourcing and not just outsourcing. In many cases, refinement of the outsourcing relationships we already have in an increased appetite, believe it or not, for nearshore and offshore capabilities, which is obviously where the margins are quite a bit stronger for us and we'd be far more interested in pursuing and that's across the product spectrum of certainly CX, but also scanning, indexing some FA&P, but we I would say primarily healthcare and logistics, but I don't think it's contained only to those two. Steve?

Yes, I think, the other thing I would add on is think about kind of close remarks about how we're seeing new opportunities to deploy some of the solutions that we've traditionally thought about commercial solutions into our public sector markets and so I think we think of that as an interesting market adjacency that's where we're seeing good fit for some of the solutions that we've traditionally thought of as being just in the commercial market, but I'm seeing in addition to logistics and healthcare, we've got kind of strong, we've always traditionally had strong positions in the travel and entertainment sector and also in automotive and so I think we're seeing that propensity to address cost and transformation pretty broadly across many of the verticals that we operate in.

That's a really good point. I think one of the secret sauces here is to stop thinking in silos in terms of product suites and sectors. In other words, we have massive call center capabilities, it could be deployed in the public sector. We have accounts payable and procurement capabilities that state and local governments need. There are a lot of there's a lot of cross functionality here that heretofore has not been tapped. So I think it's not confined or contained to any one industry and also it involves the public sector. So it's coming from everywhere. We just got to execute on it.

Okay. You also mentioned that when clients are considering offshoring to countries that they haven't previously considered, what new geographic markets are emerging as attractive outsourcing destinations and do you guys have capability in that in those regions?

Well, I think there's a little bit of and Steve can -- Steve runs a lot of our geographies in terms of country managers, so let him comment as well, but I think there's some experimentation going on. I mean there is quick looks at places like South Africa and Egypt. I don't think there's any widespread movement in those directions. The traditional places remain strong, Philippines remain strong, India remains strong. We've got a large presence in Guatemala and Jamaica and so, I think we're seeing certainly some growth in the Philippines for sure and a resurgence in India, but Steve, what do you think?

Yes, only a little bit really to add there. I think that's right. I think the key clearly is to have a mix of near shore capability and offshore capability, and I think we like our geographic mix. I think as I said in my remarks, we're adding some capacity in a couple of places there because we're seeing increase in demand. I think there is that there can be a tendency to want to go off and explore slightly more esoteric geographies, but I think the key in our business is building scale in key markets and driving cost efficiency in those locations, which is what we're focused on and so we're very happy with our geographic mix. I think it's a nice balance and we're seeing continued demand for those geographies.

Thank you. Just one last question, since I'm relatively new to this name. Just in case I'm trying to understand how would a typical revenue model with the GenAI, Microsoft collaboration work? What would a typical engagement be like? And how does that collaboration revenue model work for you?

Well, it all starts with a go to market capability. Look, I mean, as you know, GenAI takes a lot of compute power, which means data centers being built everywhere and a lot going into the public cloud and specifically Azure and so Microsoft's interest in the partnership, which by the way is very early in terms of what we hope to achieve, would be look more business we get the more business they get because the business is going to be hosted in the public cloud in Azure and so that's a growth strategy for the company, for their company. In our case, we want to get more GenAI out in the marketplace and we want to prove that our products can be enhanced with GenAI. So it's not like there's an exchange of revenue back and forth. It's basically it's basically we both win at the same time is sort of the model. I don't know if that got to what you were after, so maybe ask it again if I didn't answer it exactly.

I think I understand. That's all I had for right now. Thank you guys for taking my questions. Sure. Thank you. This does conclude the question and answer session. [Operator Closing Remarks].