Good morning, my name is and welcome to the Xerox Corporation First Quarter 2009 Earnings Release Conference Call hosted by Ann Mulcahy, Chairman and Chief Executive Officer. She is joined by Ursula Burns, President and Lawrence Zimmerman, Executive Vice President and Chief Financial Officer. During this call Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. At the request of Xerox Corporation today’s conference call is being recorded. Other recording or rebroadcasts of this call are prohibited without the express permission of Xerox (Operator Instructions) During this conference call Xerox executives will make comments that contain forward-looking statements which by their nature address matters that are in the future and are uncertain. Actual future financial results may be materially different from those expressed here in. At this time I would like to turn the meeting over to Mrs. Mulcahy. Mrs. Mulcahy you may begin.

Thank you, Nikita and good morning everyone and thanks for joining us today. We will get started, if you will look at Slide 4. Before I get into the results for the quarter, I will begin with a look at the global economic issues we’re facing, what they mean to our business fundamentals, as well as the actions we’re taking to mitigate these challenges. Last month we adjusted our first quarter guidance to reflect an early assessment of our business results, including a negative impact from our equity partner Fuji Xerox and a significant swing in revenue due to lower sales of equipment and printer based supplies. Q1 earnings per share of $0.05 are in line with those revised expectations. Our Q1 performance largely reflects the downstream effect of the economy with constraints in the overall business environment which is delaying purchasing decisions as well as the Company’s distributors holding lower inventory levels. This is impacting us in three primary areas: First, the slow down in technology spending and lower business volumes together put pressure on hardware and supply sales. Second, we saw significant declines in developing markets that are hard hit by the economy like Russia, Eurasia, and Latin America. Third, continued negative impact from currency affected us on revenue and gross margins. As we monitor the shifting economy related trends in our marketplace, we are setting conservative expectations for the economy in 2009 and we are managing the business with a heightened focus on capturing the $550 million in savings from our restructuring and other cost reduction actions, generating operating cash and sustaining our strong balance sheet, and maintaining our investments in growth to ensure we strengthen our industry leadership and No. 1 revenue share. That is why in the second quarter we are moving forward with product…

Thank you, Anne and good morning. On March 20 after reviewing our January and February results we updated our first quarter guidance to $0.03 to $0.05 of EPS. We are now reporting $0.05 including a $0.02 Fuji Xerox restructuring charge. Our results were significantly impacted by the weak worldwide economic environment compounded by negative currency exchange rate effects. Our competitiveness and win rates continue to be strong, but overall delays in decisions by our customers and inventory management by our partners have lowered demand. As we go through my slides, I believe the best insight I can give you is looking forward to where our actions will lead to improved results sequentially. Now I will move onto the next slide. We continue to aggressively drive for revenue in all parts of our business while recognizing the economic realities we face. Although we all know that year-over-year comparisons will be challenging, going forward we expect sequential growth which will add positively to our results. Gross profit margin was 38.9% and represents good performance when considering lower volumes and the impact of the strengthening yen. In cost and price adjustments we expect margin to be stable going forward as restructuring savings as well as non-restructuring cost actions we announce in March deliver. RD&E and SAG expenses, excluding bad debts, declined significantly $178 million including $69 million positive impact of currency. Going forward year-over-year improvements will continue. Although bad debt expense increased $41 million they were consistent with fourth quarter levels, and as a percent of receivables declined slightly at approximately ¾ of a percent. Going forward we are assuming it stays at this level. Operating income was 5% of revenue and will improve going forward as we deliver additional revenue and continue to reduce costs and expense. Other net is primarily composed…

Thanks Larry. To summarize today’s review, here is our road map to get us through this recession and positioned well as the economy recovers. We will capture $550 million in savings this year from our 2008 restructuring actions and the additional cost reduction initiatives we began implementing in quarter one. Working capital improvements and the flow through form these cost initiatives will drive operating cash flow of about $1.3 billion this year. We will continue to broaden our industry-leading portfolio providing our customers with a relevant value proposition of reducing their costs through advanced technology and document services. And, we will bring the Xerox brand to more businesses of any size through our expanded channels of distribution. We are being conservative in our expectations for the balance of the year, assuming neither further economic declines nor improvements. With that, we are setting second quarter guidance at $.10 to $0.12 and we expect full year 2009 earnings to be in the range of $0.55 to $0.55. Thank you all for your time. Now Larry, Ursula, and I will be happy to take your questions.

(Operator Instructions) Your first question comes from Shannon Cross with Cross Research.

Anne, could you talk a little bit more about linearity during the quarter? It is obviously worse than you thought it would be in January, but how was March and how is April looking? Any thoughts you can give us on where budgets are coming out from your customers, just any color there would be very helpful.

We saw about an 18% revenue decline in the first two months and as you can see from the full quarter results, that was pretty consistent through out March. I think we saw, what I would characterize, as some modest, very modest improvement in post sale driven by printer supplies, but not enough to certainly say we saw significant improvement. I do think that much of what we’re seeing is consistent with the trends that we saw through the first color. You know, the continued delays in decision making. As Larry mentioned, our revenue will improve in second quarter, but that is kind of seasonally appropriate versus any kind of significant trend change. All in all we would characterize it as more of the same with certainly no worsening in March, but not enough of an improvement to kind of declare a trend change.

Okay great. How should we think about the 4% year-over-year decline in digital pages? If you look at that versus say the 10% decline in supplies and pressure on paper, how much of this do you think is continued inventory contraction versus end user demand? Obviously people aren’t printing as much, but I’m just trying to get a handle on, at some point one would think this would bottom out.

I think that is why we wanted to give you some context around what’s happening with the population of installed equipment versus the page piece of it. If you look at our post sale, it was down 7.6% points, paper and mostly printer based supplies were responsible for 5.2 points of that, which is 70% of the decline. So, clearly the inventory management piece of this and really not, if you will, purchasing in what we would call normal purchasing patterns is causing the majority of the post sale decline right now. Having said that, if we look at it, we would say the 4% page decline; by the way color is still growing, it is 16%, so still good growth in color pages; does represent what we would call business volume declines in the marketplace. I think it would be fair to say that the kind of 3% level that we saw in the global services side is probably more reflective of the overall volume declines than the 7.6% we saw in total post sale.

Okay great and then a final question on the restructuring and cost savings. How should we think about the ability for the cost savings, both the $300 and the $250, to flow through to the bottom line? I would assume pricing is out there and impacting, but maybe in a weak market people are being crazy and particularly aggressive, or maybe pricing doesn’t matter as much if there is just no elasticity. But, again, how should we sort of think about the contribution on the bottom line and how much you can actually retain of those savings?

I would not point at pricing as an issue. As a matter of fact, pricing moderated in Q1 versus Q4, so we do think that pricing is going to not be a major factor in this. Our bigger issue is currency swings, and that is where some of the $550 million will get offset the balance of the year. Obviously, if you look at our outlook, we expect earnings to consistently improve, particularly in the second half, and that is going to be because we see bottom line impact from the cost flow throughs in the second half, but it will have some offset based upon what happens in currency. If we look at the March 31 spot rates on currency, you’d look at that and say the first time we would see significant year-over-year improvement would be Q4.

Okay, great. Thank you.

Your next question comes from Mark Moskowitz with J.P. Morgan

In terms of Shannon’s comments around the pages, I am just curious if you can give us any sense that just qualitatively, Anne or Ursula, in terms of the customers where you are seeing the biggest page fall off. Is this because of delayed purchasing versus maybe they have been some of the bigger job cutters? If they are the ones who have been the bigger job cutters, doesn’t that mean that we have a few years here before this kind of rights itself?

The delayed purchasing really isn’t the factor on page declines, because one of the things that we wanted to emphasize is that the actual population continues to grow. The total digital population in the quarter grew by 3%. The color population grew by 27%. What this means is, is that we think some of our customers are holding onto technology for longer periods of times and that we’re not seeing cancels offset that. So, we are growing the population. The decrease in purchases shows in equipment sales, but clearly it is really not the biggest factor on page declines. We would look at it and say that the page declines really are subject more to the economic conditions and things like less advertising, less financial deals, less people in the workplace. But, that is why in many ways it is so important to keep a really good handle on what is happening to the population, because as the economy improves, to some extent there is a natural population to absorb the page increases with business volumes. So, we would look at it and say it is much more a reflection on what is happening across the board in different sectors on business volumes.

The fourth quarter it doesn’t seem like Ricoh and IKON had any really major impact on the market. Do you expect an impact on the March quarter when the March data comes out, or going forward into June that could either benefit or hurt Xerox?

Ricoh continues to be an aggressive competitor in the marketplace. We haven’t seen any significant impact up or down from Ricoh. They are an aggressive competitor and have been for a long time, but there is no significant change in their patterns.

Larry, what is kind of the view on your minimum cash to run the business? Is it still around the $500 million plus?

Yes. We have said $500 for a long time.

Thank you.

Your next question comes from Ben Reitzes with Barclays Capital. Ben Reitzes – Barclays Capital : Larry, your guidance implies $1 billion in cash flow from operations in the second half. You have done that many times in the Company’s history. Can you just talk about some of the puts and takes that give you confidence that you can do it once again? In the second half in particular, because I am backing into you need about $1 billion in cash flow from ops in those third and fourth quarters combined.

Well, first of all, I wouldn’t take credit for it. I think the Company did it actually. Second of all, I think what you said is true. For the seven years I have been here we have had that kind of cash production year, after year, after year, after year, and it is all centered around the second half with more of the earnings being in the second half and obviously more of the working capital improvement in the second half. So, as I look at a cash flow forecast and I look at net income, I look at depreciation and amortization, which is added back, I look at provisions that are added back. I look at working capital improvements, including AP AR and inventory, lower pension expense than last year. The only real minus that comes out of our use of cash is restructuring, that comes out dollars. And even that is lower than, not that you expected, but that we expected. I look at those numbers and if makes me very comfortable of giving the forecast of $1.3 and I am very comfortable with $0.3. Ben Reitzes – Barclays Capital : You think you get cash out of payables and inventory even in this economy?

I think first of all, inventory is one where you can have significant improvement. It is one thing to be surprised by volumes going down. We are not surprised anymore. We even had an improvement year-to-year in inventory in the first quarter and I think that is going to get better and better. So, I think we will have very good improvement. Secondly, accounts receivable. First of all you are selling less and so you are going to have less accounts receivable. We have had significant improvement on collections. In the quarter we lowered DSO by two days. So that is another area. Payables, I think everybody is paying slower, so if we are able to collect faster, pay a little slower, that will also help. I am not looking for some huge help from payables, but I think it probably could help in the long run. Ben Reitzes – Barclays Capital : All right, then switching subjects, on the supplies side you have a slide on the post sale, and you guys were talking about paper. That -$109 million is the supplies hit year-over-year right?

Yes. Ben Reitzes – Barclays Capital : According to my math if supplies, you know every $100 million in supplies is about $0.05 to EPS or so. Maybe I am wrong, but I am putting a pretty high gross margin on it. What is going on with supplies channel inventory right now? I mean is there a chance that you get that $100 million back in any of the upcoming quarters with a snap back in supplies, or is that a more gradual thing?

You are right, the $109 is the decline in supplies, and about 75% of that actually comes from what we would call printer-based supplies and A4, which is definitely all about more inventory management than it is aligned with page levels. This one we have been certainly anticipating the fact that, that kind of inventory management would begin to let up a little bit. We saw a slight bit of that in March, particularly in the US. But, the biggest issue continues to be developing markets where the vast majority of what we sell is through two-tier distribution and channel supplies there have been impacted dramatically. The answer is yes, we do expect some of it back. Not all of it back, because there will be a piece of it that is associated with end user volume that won’t come back. We are also not counting on inventories going back to historical levels either. We believe that, quite frankly, people are going to manage with less for some time to come. Having said that, yes we think gradually we should see some come back on inventory levels as they are going to be forced to catch up, to some degree, with end user volumes over time. Ben Reitzes – Barclays Capital : And it feels like the worst of the hit is over?

I would put it this way, Ben. I don’t think we expect further negatives, if you will, but we’re counting on more stability than improvement right now.

I think it is also year-to-year you are going to have the same kind of declines. Sequentially we should do better. Maybe some of the year-to-year declines will go down a little bit, but [interposing]. Ben Reitzes – Barclays Capital : Uh, thanks so much.

Your next question comes from Richard Gardner with Citigroup.

I wanted to follow up on Ben’s question. I am not sure if you are willing to do this, but just to phrase the question a different way: I was wondering if you would be willing to give us an indication of where you think supplies channel inventories are currently both in the developed and developing markets and how that compares to what you would consider normal for a normal purchasing environment?

You know what; it is tough to do, Rich, only because I think the rules have changed as well. We know that 8 to 12 weeks would not have been that kind of is in the historical range. It is obviously well below that. We saw it go below six weeks and it is hard to tell where it is right now. The other thing is, is that there is volatility depending on region as well. We would say that the US went up a little bit, but it could come down. Europe and DMO were relatively flat and we didn’t see much improvement. I think if we had to categorize it, we would say that DMO is at an all time low and clearly the one that is most impacted by lower inventory levels. Europe and the US have been relatively stable at a lower rate by at least, probably, 1/3 over the past couple of quarters. Richard Gardner – Citigroup: Okay and Anne, has DMO historically been higher in terms of weeks of inventory versus US and Europe? When you say that you expect levels to remain lower, on a go forward basis than they have been historically, is that just because DMO seems to be getting a little bit more frugal about managing the weeks of inventory, or what makes you make that statement?

Well it wasn’t really just a DMO statement. I think, by the way, DMO wasn’t necessarily characteristically higher than other parts of the world. We were more impacted because the vast majority of what we sell there is kind of the low-end printers and A4 devices, which get all of their supplies through, kind of, channel distribution versus the bundled arrangement that are more prevalent in the European and US markets. What I am suggesting is that we are not counting on a return to the past in any way. We do think that there will be some permanent adjustments coming out of this that we are planning to manage to and make sure that we’re not expecting inventories to all of a sudden bounce back to previous levels. I think that is a true statement across the world, not necessarily just a DMO statement. Richard Gardner – Citigroup: Okay and Larry, we have obviously seen favorable moves in the yen so far in the quarter. You also talked last quarter about going back and renegotiating some of your supply agreements with Fuji Xerox and hoping to get a little bit of benefit there. Larry, could you help us out with how we should be thinking about gross margin going into the second quarter based on the renegotiations in the currency movements that we’ve seen?

I think, number one, when you look at gross profit margin, what we are saying and thinking here is that it will be stable through out the year. So, we think this 39% range is the right number and within that we would be managing the currency side, the price side, any kind of agreement we have with suppliers outside of Fuji Xerox, but also we have an agreement with Fuji Xerox and within that agreement, like any agreement, within an agreement there is room for negotiations around it. We are constantly revisiting that where we try to limit the amount of exposure we have. It is a hard thing to put words around, but I can assure you that the negotiations around that have yielded and that we are doing everything on the cost side to maintain gross profit margin at a stable level. Richard Gardner – Citigroup: Is there anything about your hedging strategy that would keep favorable changes in the yen from flowing through immediately, or how quickly do those actually hit the cost of goods line?

Because a lot of it goes into inventory in the first instance, it takes awhile, good or bad, to hit you and it depends on how fast you sell it. Secondly, we never hedge. You know if you hedge 100% you’re really not hedging. So, we hedge some percentage, so there is always taking something as an absolute number and then the rest of it you would either get the advantage or the disadvantage. For instance, we got a good portion of the good new that happened with the dollar to the yen, because we weren’t 100% hedged. We have a strategy of a certain percent that we do and as we get closer to it we do more. We spend a lot of time on it actually, but we obviously would pass up some of it, but get some of it. Richard Gardner – Citigroup: All right, thank you all.

Your next question comes from Keith Bachman with Bank of Montreal.

Anne, do you get the sense that the actual machines in the field have declined at all either through idling or just general business disruptions?

No, I mean the answer is they haven’t declined and the way we kind of measure our MIP, and by the way I should point out at this point that we track basically, it is a Europe and North American kind of number because it is impossible to kind of track MIP in other parts of the world. But, I think it is largely indicative. MIP is clearly up. It is up a little bit less than it would have been in previous quarters, but close enough to certainly have us feel comfortable and part of our definition of MIP is active MIP in terms of service contracts and that kind of thing; so these would be actively purchasing supplies or service, so these are not idled machines in the field. We are comfortable that MIP is growing and clearly is there active in customer environments.

Okay great, thank you. Then, Ursula, there was a mention of a new competitive dynamic around the solid ink opportunities and I just wanted to hear a little bit more about what’s different as we look at the next six months for the solid ink side versus in practice what has happened over, say, the last 12 months.

The next six months, and actually in the second quarter, you will see the launch of a break through offering for every day color in the office. The discussion that we’re having with our customers is about changing the total cost of ownership for a color implementation in their environment. It is environmentally responsible, productive, reliable, easy to use and for high color users it is a value proposition that is unmatched today. It is also a benefit to Xerox Corporation. It is out in customer test sites today. Industry analysts have seen it. They have actually crawled all over it and the product positioning and price per page is very attractive. So you will see that fundamental change in the second quarter. We are launching it in a measured way, so the impact on the financials will be seen in 2010 more than in 2009. Base a little bit on the economy, based on the fact that we want to make sure we are positioning it correctly, so a fundamental change.

Your next question comes from Chris Whitmore with Deutsche Bank.

My first question is around existing contracts. Are you seeing any pressure from customers to rescope or downsize your service or outsourcing engagements?

Do you mean on existing contracts?

Yes.

Generally speaking, no, I mean our contracts are fairly rigorous in terms of the way they are constructed. They are not applicable for mid contract kinds of negotiations. I think the place we see it, obviously is when we are renegotiating contracts at the end of their term where clearly, by the way, we flow through benefits because it is usually a technology cycle shift. So, we are able to give the customers the benefit of lower prices, but maintain margins. That is generally a strategy to ensure that we do. In some cases we’ll renegotiate earlier as well and give the customer the benefit on an earlier negotiation. But, it would be unusual for us, in a mid contract kind of scenario, to renegotiate price.

On the topic of pricing, I understand Q1 pricing moderated a little bit. But, how do you think about your pricing strategy going forward in terms of how do you balance your goal to grow MIP while continuing to hit your gross margin targets?

We know what range we want to be in, in terms of pricing discounts and we’ve said that that is a 5% to 10% range. That is what we plan on. Clearly this quarter it was closer to the 5% than the 10% and so it did moderate. We will generally use pricing to take advantage of market share opportunities, particularly in color, because whatever discounting we do to place a color technology, the return on post sale is more than attractive enough to offset that. So, generally speaking, the price discounts will be invested in color, you know, incentives to drive those placements so that we can take advantage of post sale.

Larry, what is your outlook for absolute SAG dollars imbedded in the guidance and within that what is the bad debt expense level?

Bad debt, we assume, will be at the same relationship that we saw in the fourth quarter and in the first quarter, so the absolute dollar amounts will be similar. That is the first point. SAG levels, at least for the next two quarters, should be bigger dollar reductions year-to-year because of currency and also because we are going to capture some of the cost savings more as we go forward. Fourth quarter we will get more cost savings, but then the currency kind of flattens out, so the absolute dollars will, I think, moderate from the standpoint of a year-to-year basis.

Importantly, I think Larry’s focus on year-to-year is important here, because there are seasonal shift in SAG, for example a Q2 SAG because of seasonal revenue will be higher, although the year-to-year flow through on cost reductions can be significant.

Larry, I was a little surprised to see you using cash for acquisitions and not buying back stock if you do have excess cash, particularly in light of the debt payments coming due, how do you think about acquisitions versus stock buy back?

I think in this environment we wouldn’t consider a share buy back so that is the first point. The second point, I think from an acquisition standpoint, this acquisition that global did was just one that was so good for Xerox, Xerox future and Xerox shareholders from the standpoint of buying the largest Ricoh dealership accretive seconds after we bought it and producing that it was really an easy decision to go forward with that. I think for the most part, the kinds of acquisitions you would see in this environment are going to be smaller ones associated with global would be the basic kinds of acquisitions we would do.

Your next question is a follow up from Shannon Cross.

Can you talk a little bit about the competitive landscape? There has obviously been changes, you know IKON, Ricoh, what’s going on with Kodak in terms of some their movements away, to some extent, from that business and then Canon and HP. If you could just sort of talk about what you’re seeing from a competitive standpoint, that would be great.

Well I think that we would probably frame two significant competitors as IKON, Ricoh, and HP in terms of who we see most frequently. Obviously the IKON, Ricoh more in the transaction technology business. HP more in the office services side, but they are clearly out there and have a more aggressive strategy. I think it would be fair to say we see less of all of the other competitors. I think our win rate, if you will, against the other competitors has been quite positive and we feel very comfortable that we’re well positioned to compete. We are very pleased, I would also say on the services side, our biggest problem is kind of delayed decisions, but our win rate there against competition has been very strong, as evidenced by the P&G deal that we announced. In the high end I think it is fair to say that the iGen performance is indicative of what we’re seeing on the high end from competitors as well

Right, on the high end it is production color. Particularly the iGen4 product, we are pleased with the performance of. We never use the word very, but if we did I would say we are very pleased. We are pleased with iGen4. It continues to be a standard for the industry. It is a great upgrade path for customers who have the iGen3. It also opens up the aperture for applications to come in on this new business of printing, so, photo applications, packaging applications, it is applications more and more to help the graphic arts industry be more profitable. So, production color is strong. I will say Kodak and Centive, but I just want to emphasize that Kodak we don’t’ really see a whole lot of in the marketplace. In the past you saw that we saw them in this high end color segment. They are essentially not there. If we run into them it literally is one out of every ten times, it is very, very low. I will say, as well, we are taking share in continuous feed black and white and color large tons of share and that was where their strong point was. Then in production black and white space where they had offerings as well, we don’t them that much. The big competitors are IKON, Ricoh on the device side, and HP on the services side and we’re positioned from a technology base and distribution capacity against IKON, Ricoh as well. HP, as Anne said, we compete very effectively on deals. What we’re doing now is trying to get people to make the decision to make the deals, to get the deals and then we feel very, very comfortable that they will decide Xerox more than they will decide HP.

I have one question with regard to leasing. You have a captive leasing business, which has been beneficial albeit it has debt associated with it. I am curious as to what some of the other competitors are seeing out there. I mean are you hearing from customers that it is harder to get access to capital and do you think you are winning deals because you can provide it? Just any clarity you can give there would be great.

I actually think you are right, Shannon. I think one of the things, and it is an optics perspective, is that our leasing business looks like general debt and obviously it is an advantage to have right now. I think our penetration is getting higher as it plays well in tough economic times. So, we feel good about it. I mean, the important thing about our financing business is that it is a Western Europe and North American financing business, so the huge risk would be in emerging markets now and we do not have any financing debt in the emerging markets. But, we do believe it is an advantage and our customers see it as an advantage, although I would say we are being, I think, conservative and appropriate with our financing business. You will not see us doing things like 0$% leasing or very aggressive programs. We don’t think that’s a good thing to do at this point in time. But, our leasing package is clearly an advantage to our clients.

Your last question is a follow up from Richard Gardner.

Can you offer a little bit more color on the weakness in the DMO markets in terms of countries and products? You have given some detail there, but any more color would be helpful. Then also on iGen4, just a sense of whether the strong placement growth that you had in iGen4 in the quarter was due to upgrades from iGen3 or new placements?

On DMO on kind of countries and products, as I said, on the product side, because the predominant business we do is printers and A4 devices, obviously that’s where we saw the biggest decline. One of the things that you’ll see from our activity is that in segments two through five, which is kind of the higher end of the black and white space, we grew 9%. In segment one, which is the printer, low-end primarily DMO space, 85% reduction in installs. So, I mean, the disproportionate impact right now in the DMO space is clearly all about low end products: which is good news in terms of profit exposure, because those do not have as big an impact. From a geographical perspective, I would say the biggest issues we have right now are Russia and Eurasia. That is because of the lack of availability of credit which has really shut down a large portion of their business. Then the currency impacts as well as the economic impacts in Latin America as well, in that order. I think that is fair. I think in other areas like India we are seeing actually less impact than we are in the Eurasia and Latin American territories.

IGen4, both our populations on machines in the field and our installs grew in iGen4. So, clearly there are some upgrades or paths forged from iGen3 to iGen4, but we have a significant amount of new placements as well. So, MIPs grew and installs grew.

Thank you all very much for joining us this morning. We appreciate your interest. Have a great day.

This concludes today’s presentation. (Operator instructions). Have a good day.