Good morning and welcome to the Xerox Corporation Fourth Quarter 2015 Earnings Release Conference Call hosted by Ursula Burns, Chairman of the Board and Chief Executive Officer. She is joined by Leslie Varon, Vice President and Interim 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 and/or rebroadcasting of this call are prohibited without the expressed 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 than those expressed herein. At this time, I would like to turn the meeting over to Ms. Burns. Ms. Burns, you may begin.

Good morning and thank you for joining our call. Today, we are announcing significant actions that will define the next chapter of our company. We will spend much of the call today discussing our plans to separate into two strong independent market-leading companies. We will also discuss the multiyear strategic transformation program announced today. And of course, we will discuss our fourth quarter and full year 2015 results and 2016 guidance. Let me begin with our plan to dramatically change the way that we generate shareholder value. Today, we announced that the comprehensive structural review begun in October has been completed. The review has been a top priority for our Board of Directors and the executive team. We engaged outside advisers, including independent advisers to the Board in this process. It was a robust assessment of options for the company’s portfolio and capital allocation that would best position the company to maximize shareholder value. It became clear through this analysis that the benefits of separation outweighed the benefits of maintaining the current structure. The Board unanimously agreed that the optimal path forward for Xerox is to become two market-leading focused publicly traded companies. We are confident this is the highest value creating opportunity for our shareholders, for our clients and employees. These companies will both be significant Fortune 500 scale companies and leaders in their markets, one comprising our Business Process Outsourcing business; the other, our Document Technology and Document Outsourcing businesses. Document Technology, with 2015 revenue of $11 billion, will continue to lead the document management and document outsourcing market, leveraging its superior technology, solutions and innovation capabilities. BPO, with 2015 revenue of $7 billion, and already a leader in the growing market, will continue to pursue growth opportunities by capitalizing on its deep industry expertise, market-leading automation solutions…

Thanks, Ursula, and good morning everyone. I will start by walking through our results and then covering 2016 guidance before handing it back to Ursula to wrap up. In summary, we delivered solid results in quarter four. Services came in above our expectations, driven by good sequential margin improvement. Document Technology revenue was weaker than anticipated, primarily driven by lower supply sales, but margin remained in the middle of our range reflecting our ongoing cost discipline and business model flexibility. Q4 cash flow as anticipated was seasonally strong and drove $1.6 billion of full year operating cash flow resulting in a healthy ending cash balance of $1.4 billion. During the year, we returned a substantial amount of cash to our shareholders with $1.3 billion in share repurchases and $326 million in dividends. Turning to the earnings slide, I will walk through the income statement. Revenue in the quarter was down 8% at actual currency and 5% at constant currency. Currency cost us approximately $150 million on the top line. Services’ top line was flat at constant currency, helped by solid 3% growth in Document Outsourcing, offsetting a 2% decline in BPO. Document Technology declined 10% at constant currency and drove the overall revenue decline. I will speak more about the drivers when I review the segments. Gross margin of 31.3% was down 80 basis points year-over-year, but up 40 basis points sequentially. Sequential improvement was driven by Services, while the year-over-year decline was driven by Document Technology as well as a greater mix of services, which carries a lower gross margin. RD&E was lower by $5 million year-over-year and SAG was down $59 million or 6%. Good expense reductions in absolute terms, but not sufficient to offset revenue declines, so operating margin of 9.2% was down 120 basis points year-over-year…

Thanks, Leslie. Let me recap and reinforce a few key points. First, this is an executive team committed to enhancing value for Xerox shareholders. And with the support of our board, we are taking bold steps to do that by separating into two companies and undertaking a transformative productivity and efficiency program. Second, the plan to separate into two strong independent companies is the right step forward for Xerox as each company will benefit from enhanced focus and lower cost structure and an appropriate capital structure. Each will have the resources and focus needed to capitalize on unique growth opportunities and an operating model and cash flow characteristics to create value and drive in this sector. Finally, we are fully committed to becoming a much leaner and more efficient organization both at Xerox in 2016 and continuing on at the two companies in the years after. These efforts will dramatically improve the way that we do business. Thank you for joining us today. Our efforts to transform Xerox are underway and we look forward to communicating our progress in the coming months. With that, let me turn things over to Jennifer who will open it up for questions.

Thanks, Ursula. Before we get to your questions for Ursula and Leslie, let me point out that we have several supplemental slides at the end of our deck, which provide more financial detail to support today’s presentation and complement our prepared remarks. For the Q&A, I would ask participants to limit follow-on and multi-part questions, so we can get to everyone. At the end of our Q&A session, I will turn it back to Ursula for closing comments. Operator, please open the line for questions now.

Thank you. [Operator Instructions] And our first question comes from George Tong of Piper Jaffray. Your line is now open.

Hi, thanks. Good morning. Ursula, can you provide some examples of how splitting the business can improve execution and drive better services results?

Hey, George and thanks for the question. I think that there are probably three areas that I can refer to. And there will be a mix between both Services and the Technology business, not only in Services, for sure. The investment profile that we will – that we have been making and will need to continue to make is to invest more in automation of our Services delivery infrastructure. That investment – those investment needs obviously compete with other investment needs in our tech business. And we would be able to actually focus those investments more – pointedly more, just more and it’s a big focus of ours and as the market has changed, we have realized that we have to make more investments there automation, cloud-based services, service-as-a-service offerings, etcetera. Second is on talent, interestingly this is both businesses. The dynamics of these two businesses, one grows, one doesn’t grow that much, one throws off a lot more cash, the other one doesn’t, actually at the leadership level will be able to actually have more refined incentive structures around the leadership of these two companies that aligns very well toward their dynamics and their growth profiles. And the third is around how we operate outside of the United States. It’s one of the areas that we put a lot of energy in our Services business, trying to actually piggyback on the infrastructure of our tech business. That was probably one of the most difficult areas for us to break into. And now we will be able to interestingly enough focus back our tech business on taking care of the tech sector and be very selective in how we expand further outside the United States in our BPO business, three areas of difference.

Thanks, George. Operator, next question.

And our next question comes from Shannon Cross from Cross Research. Your line is now open.

Thank you. I have one question on the quarter and then one question on the transaction or what you are doing. The first is just on the quarter, can you talk a little bit about the lower supply sales and how we think about that, is that – was that sort of the distributors or was that usage, what was sort of in there and how are you thinking about supplies and usage as we go through 2016? And then I had a follow-up. Thanks.

Sure, Shannon. So let me start first of all by reminding everyone that unbundled supplies in Xerox represent just 20% of our Document Technology revenues, different from many of our competitors because we sell so much of our supplies as part of the bundled contract. With regard to the lower supply sales in quarter four, it was in the U.S. and had to do with reseller stocking levels. So what we saw in quarter four was a lower level of stocking at the reseller level than we had in the year ago period. And that typically reflects some combination of the following factors; lower end customer demand, given the fact that we have had weaker equipment sales through that segment earlier this year, reseller cash management and the level of competitive discounts that resellers choose to take advantage of versus the price discounts from the Xerox level. So it was unusually weak for us in quarter four. We do expect better performance in quarter one and going forward. But we expect supplies revenue will continue to be pressured given the lower level of A4 equipment sales. Did you have another question, Shannon?

Could you hear me?

Yes.

Hello, okay. Yes. If you could just help sort of help us walk through, if we think about $1 of earnings for Xerox right now and then we split it and we obviously know that the margin differential and you have given guidance in that between the two businesses. But can you sort of help us walk through on the other line item where you think things will kind of play out, I mean I am getting in sort of $0.70 to printing and $0.30 to BPO, I mean that’s very much a squishy number. But just any color you can give us on that. And then also from a cash flow perspective, how we should think about how cash flow has come from the two businesses because we kind of know what they were like in 2009, but if we can get an idea of sort of how you are thinking about it now, that would be really helpful? Thanks.

Yes. So Shannon, I will start by saying that more of these details will become clear as we go through the process to separate during the year. So I don’t – I won’t give you specific answers now. But I will remind you that the margin in the Document Technology segment is higher than the margin in the Services segment. And the margin in the Document Outsourcing portion of the Services segment is above the segment average, which means BPO is obviously below. So that should give you some sense as to the profiles of the margins in the two businesses going forward. With regard to cash flow, I think you know that the Document Technology business and the Document Outsourcing businesses are very cash generative businesses. And the BPO business is less cash generative and is more in an investment and a ramp up growth mode.

Thanks Shannon. Operator, next question.

Thank you. And our next question comes from Brian Essex of Morgan Stanley. Your line is now open.

Hi, good morning and thank you for taking the question. I was wondering if you would give us a little bit more detail on the process that you went through, how these decisions were made. And then if you could follow-up with the management structure that you anticipate as you walk through the transition process, including what we can expect at the very top leadership level, current President like Bob Zapfel and Jeff and how they are going to fit in, as well as on the CFO search side and how you anticipate staffing the financial side of the business?

Three good questions. Let me start with the process. In October, actually before October, but in October, we spoke to you about undertaking a review – a structural review that was focused on our portfolio of offerings and our capital allocation structure and process. That was in full swing by the end of October and included our Board – the entire management team and our Board of Directors and some advisors that we had from the outside. And the intention there was to take a look at not only our internal business, but as importantly, the markets – the trends in the markets, the trends in segments of the markets that we are highly invested in healthcare, transportation, these areas, very contemplative, steeped in fact in data – facts and data and just a very good bottoms-up process. That process lasted until just recently ended actually. And we made the decision that in the middle of January to separate into two companies and to do a separation. So that was it. We had no external process pressure on that, which has been reported a lot in the news. Actually, it was not engaged at all in the decision making process and so I’m pleased with that. We came up with this decision based on market trends, based on our strengths and weaknesses, based on the performance that we had in these two businesses, based on the current dynamics and thinking by shareholders, by our customers, etcetera. Shareholders meaning, how they value allocation methodologies. As far as management goes, one of the things I will start with me as we have gotten this a lot, one of the things that was removed from the process early as we went into this and I did with the Board was to move me…

Great. Thanks, Brian. Operator, next question.

Thank you. And our next question comes from Matt Cabral of Goldman Sachs. Your line is now open.

Yes, thank you. So, on the Document Technology business now that you have a more focused printing company as one of the two entities going forward, can you talk about your views on the opportunities for consolidation in the market and if Xerox would look to participate in any of that consolidation going forward?

Most of our focus in this area has been on distribution consolidation and we are still actively pursuing that type of activity. We found that our brand is strong and our offers are very strong and we just have to get more people carrying them to the market. So, that will be our primary focus from an acquisition standpoint. That was one part of the question. What was the second part, I am sorry?

I think that was it. I just highlight a couple of additional things, Matt. On the distribution side, as Ursula said, we have been adding to the portfolio of businesses in the Global Imaging suite inside of Xerox. And Global Imaging was an acquisition we did in 2007. You know it’s been extraordinarily successful and had a very, very successful 2015. In addition to that, we continue to pursue opportunities to expand our offerings in Document Technology, which includes the acquisition we did of Impika, a few years ago in order to position us more strongly up in the high-end of inkjet. So, we see further opportunities in those kinds of areas.

Great. Very good, thank you.

Great. Thanks, Matt. Operator, next question.

Thank you. And our next question comes from Ananda Baruah of Brean Capital. Your line is now open.

Hi, guys. Good morning. Thanks for taking the question. Appreciate it. Ursula, we would just sort of just love to get what your initial view is – current view is on how you guys would view I guess sort of the value pitch like really what’s the pitch to investors, what will it be for the Doc Tech company given the revenue growth profile, margins are really solid, cash flow was up obviously. But as investors begin to develop themselves a view of the Doc Tech company standalone as investable assets, how would you like for them to think about it given the constant currency revenue growth profile of the company? And then just sort of a sub-question to that, this will be it for me. Anything that you can talk about that could be additive over time to the revenue growth profile would be – at least philosophically useful as well? Thanks.

Right. So, I will start with the Services, with the BPO company and then get into the Doc Tech company. BPO company, think about nimble, expensive, so growing, really keen focus on operational expertise and flexibility and a capital structure and allocation policy that’s aligned towards investing for growth. Our services business – our technology business is market leader, cash generative and having a capital allocation strategy that is focused on returning a high proportion of that capital to shareholders. It will likely – it will have to be investment grade. We are going to push hard for that to be the case and invest and then make sure that we setup the company that way, because it has a financing business that’s captured as you know and will benefit from the investment grade rating. And not look at the top line in total you have to look at the top line in sub-pieces. We will be able to have a better explanation and more discussion about that as we separate the companies, meaning that we will start speaking more about the graphic communications business and what happens underneath there and how it is transforming and how we are leading that transformation, how our Document Outsourcing business is growing, focused and how we are leading the transformations there? So, little bit more focused on the dynamics underneath the business that will help to sell both of these companies – the differences around both of these companies.

If Ananda, I could just put a point on a couple of things that Ursula said specifically to Doc Tech, because I think the growth opportunities on the BPO side are clear. If you step back and look at the Doc Tech market, it’s a $90 billion market. When we combine the Document Outsourcing growth with the Doc Tech segment what you will see is that our performance was essentially down 4% at constant currency in 2015. So, it is clearly under pressure. But certainly, the developing markets economies were under pressure big time in ‘15 as well. So, I would call it modest decline and as Ursula said, with important pockets of opportunity both in Document Outsourcing as well as, for example, in graphic communications. So this is an area where we believe that a more focused business will be able to make selective investments in attractive growth markets and improve the performance on the top line.

Thanks, Ananda. Operator, next question.

Thank you. And our next question comes from Keith Bachman of BMO Capital Markets. Your line is now open.

Thank you very much. I feel like I am always following Ananda’s question. I wanted to ask you two questions. I agree with the characterization that the Services business or the BPO parts of the service business is probably not congruent or leveraging the core printer business. With that said, I am not sure anything has really changed. I am curious what you really learned? In other words, why would you buy it? And then secondarily, part of the strategy over the last couple of years within the broader context of Services has been M&A. And I think Xerox has been – has not been able to generate the growth through inorganic means within the M&A side of services. Is that a pricing issue or a structural issue? What’s the process and as you are in – going through the separation this year, will you have the ability to go ahead to engage in M&A even as you are trying to go through the separation? Thank you.

Yes. So, let me take both of those and it will be a little bit of a conversational tone. Let’s start with the M&A piece. We have acquired in the first couple of years of our M&A during the year about $350 million worth of assets for a couple of years in a row and the last 2 years have not been able to generate that same level of performance. We were always shooting for more. By the way, we have – it’s not, not seeing opportunities. The good news is that we do see some. We also have – but we do have very specific requirements and high hurdles for accepting an M&A deal. I don’t expect that those hurdles will go away at all. So, we are guiding down as you can see, $100 million to $400 million in M&A, because we do have – as I said, a high hurdle. I think we will be able to get somewhere in the middle of that range, maybe to the high end if we are a little bit lucky there. So, no strategic change in M&A, no strategic change in our desire to acquire, a little bit narrow and we talked about being a little bit less diversified in our offers, definitely focusing on commercial healthcare, definitely focusing on transportation and those assets. Focusing a little bit in those two areas and maybe others in going internationally, so – but I don’t think that there is a big change. We are not having a big change in our strategy for M&A and we are going to keep trying. As I keep saying, I have money to spend. I am hoping that we can actually use it more frequently than we have in the past. As far as what has…

Thanks Keith. Operator, next question.

Thank you. And our next question comes from Tien-tsin Huang of JPMorgan. Your line is now open.

Hey, great. Thanks for all this detail. Long-term and short-term question, I guess the short-term one, just the incremental savings from the restructuring that you are announcing. How much of that will we see as incremental in 2016, is that net of any cost synergies we might see from the separation. And then just the longer term question on the BPO front, when you are talking about 5% industry growth, do you think, when you did your long-term study on the strategic review for that asset, do you think that the current business mix can get to a 5% growth rate with better focus and whatnot or do you see there potentially a big shift in the business mix to get there? Thanks.

Let me start with the second question, do this first part of the – first question, then Leslie will take over. Second question, we haven’t really looked at a specific growth rate and whether we can get the 5%. But I can tell you one thing and that’s that we can grow higher – faster than we are growing today. There is no doubt about that. Particularly as we mix our portfolio, we are heavily mixed towards customer care. That business by the way, we can actually grow that business a little bit faster than we are growing it today, but that business doesn’t have a margin profile that we actually want to expand too much further. So we are being very selective in how we go forward in customer care and picking our customer care accounts and engagements that actually are broader than what we would call bare customer care. And rest of the business lines, transportation for sure and commercial healthcare and even government healthcare, the core portion of it are growing at rates that can support a 5% rate. But we have to do some portfolio mixing to make sure that we can actually – mixing and timing to make sure that we can get there over time. And you will hear more about it as we do even deeper work in the separation process and looking at the BPO business. As far as – I just want to also transition to this $2.4 billion and make sure that we are clear about what we are doing here. Normally in Xerox and so every year in Xerox, we do a fair amount as you know of restructuring and remixing of how we spend the money. We get some productivity benefits from our vendors. And we get the rest of the productivity benefits from us. This $2.4 billion is foundational in three basic parts. One, we will get some part of it from our normal interactions with our suppliers to make sure they actually drive some of their productivity and give that to us. We can get to be about $1 billion over the 3 years plus or minus – give or take some. And we also get naturally, every year level of productivity from both our tech and services business foundational. And what we are explaining and what we are doing with this transformation was taking that first part and the second part and adding on top of it a $600 million additional savings program. And we are doing that by changing – focusing on changing how we work. This is not and it’s a big – we are kind of readying ourselves for the markets in the future and the business in the future and trying to actually shift out – take out an additional $600 million as we go forward. And I will have Leslie go through some of the – a little bit more line item here.

Yes. So Tien-tsin just to come back and clarify a couple of things, when Ursula was talking about customer care, it is clearly our objective to expand the customer care margin. It is not our objective to increase the proportion of customer care business inside of our BPO business.

Perfect.

So we certainly want to grow customer care. We want to grow the other higher value offers more quickly so that we can drive the BPO margin up. With regard to cost transformation, we save about – we capture about $600 million a year, which is roughly 4% to 5% kind of annual productivity. In addition to that in 2016, we are expecting an annualized savings from the transformation program of about $100 million. And that will be captured from a variety of focus areas, things like the structure of the organization, so we can start the two separated companies lien, which will include both layers of management as well as support functions and infrastructure. It will include labor productivity and taking advantage of automation and changing how we deliver services to our customers. So our expectation is that we will invest about $200 million in restructuring this year, in 2016. And since we will be doing the transformation throughout the year, we are really just starting. We expect the savings that we generate in 2016 will be probably around $50 million from the strategic – from year one of that incremental program.

Thanks, Tien-tsin. Operator, I think we have time for one last question.

Thank you. And our next question will come from Jim Suva from Citi. Your line is now open.

Thank you and congratulations. It seems like you definitely have done a lot of work and a lot of work ahead. I have two questions, one fundamental operations, the other one on the separation. The first is on the fundamental operations, did I hear correctly the renewal rate was around 78% and I believe that seems a little bit normal, was there any cause behind that or something that we should be aware of. And then on the separation, the $2.4 billion, I believe that’s all about the savings. The question I have is have you identified the amount of costs associated with the separation, like do you need an additional ERP system or human resource systems or are things actually already run right now on two different systems. I am just wondering if there is separation cost of the $2.4 billion in savings is net of those costs? Thank you and again congratulations on all the news.

So Jim, thanks so much for the questions. Let me start with renewal rate and then I will talk about synergy. So you are right that the renewal rate was light in quarter four and it was at 78%. Although for the year, the renewal rate was up 3 points to 84%. There was one large renewal in the quarter that would have been unattractive for us. And therefore, we walked away. With regard to dis-synergies, we haven’t yet spoken about dis-synergies. But in some of the areas that you are poking about – poking at, there has not been a whole lot of integration, in for instance, IT between the ACS acquisition back then and the legacy Xerox. So we will talk more about dis-synergies as we go forward. But we certainly expect the benefits of the separation and inclusive of the strategic transformation to more than offset any of the dis-synergies.

So thank you for joining us and for your questions. I have a couple of things to close on. First, we are creating two strong market-leading companies, positioned to capture unique industry opportunities and maximize value. Each company will have resources that are appropriate and focus to capitalize on growth opportunities in their markets. We are going to leverage each company’s distinct growth profile, operating model, cash flow characteristics, et cetera. And very importantly, during this year 2016, it’s about delivering 2016, we are really focused on that. We closed 2015 well and I want to make sure that we carry that into 2016 and we will keep you up-to-date on how we are progressing as we speak to you throughout the year.