Good morning, and welcome to the Xerox Corporation Fourth Quarter 2017 Earnings Release Conference Call, hosted by Jeff Jacobson, Chief Executive Officer. He's joined by Bill Osbourn, 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 express permission of Xerox. [Operator Instructions]. During this 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 Mr. Jacobson. Mr. Jacobson, you may begin.

Good morning, and thank you all for joining our call. We have two very exciting and important announcements to cover. First, today we reported strong fourth quarter results that demonstrate the successful execution of our strategic priorities. We also announced a transformational transaction in which Xerox will combine with Fuji Xerox, our long-standing joint venture with Fujifilm, to create a global leader in innovative print technologies and intelligent work solutions. We will spend the majority of the time we have today providing details on this value-enhancing combination. However, before we do so, I'd like to spend a few minutes taking you through the highlights of our fourth quarter and 2017 results. Turning to Slide 6. I am pleased to report that Xerox had a strong quarter that reflects the significant progress the company has been making. We delivered improvement across all key performance metrics. Xerox generated $2.7 billion in total revenues during the quarter, up 0.5% year-over-year or down 2% in constant currency. This compares to a 5.6% decline on a constant currency basis through the first 9 months of the year and, as we anticipated, represented a meaningful improvement to our revenue trajectory. This was driven by a 5% increase in revenue within our strategic growth areas. Importantly, equipment sale revenue grew 4.3% or 1.5% at constant currency, which is the first quarter showing constant currency growth since the second quarter of 2013. This was enabled by our focus on capturing the growth opportunities in the marketplace. To do so, we expanded our channel reach, introduced new products for our graphic communications and high-end customers, and successfully delivered our largest ever new product launch. Our Strategic Transformation drove solid operating profit margin of 14.4% in the fourth quarter, up 20 basis points over last year, while supporting our investments…

Thank you, Jeff, and good morning, everyone. I will start with an overview of the new company's financial profile and long-term targets, which will help clarify the significant value we're creating through this combination. As Jeff explained, the transaction we announced today will create a stronger company with enhanced growth prospects and margin expansion opportunities. And as you can see on this slide, we are expecting a rapid acceleration of the combined company's financial performance over the next 4 years. While we made significant progress toward improving our revenue trajectory over the last year, we continue to experience revenue declines. The combination with Fuji Xerox will allow us to accelerate our growth by providing access to key growth markets, unlocking synergy opportunities and leveraging each other's competitive advantages. We're starting from a base of $18.2 billion in pro forma combined annual revenues, and we expect to return to revenue growth by 2020. From an operating margin perspective, the cost-savings opportunities we identified will drive significant margin expansion over the next 4 years, with the majority also being realized by 2020. As we begin realizing the benefits from the targeted cost savings, we expect to achieve industry-leading operating profit margin in the high-teens by 2022, which compares to a blended margin rate of 10% on an adjusted basis in 2017. It is important to note that the lower operating margin rate for the combined company versus the 12.8% for stand-alone Xerox in 2017 is primarily due to backing out equity income and royalty revenue from the Xerox margin and adding Fuji Xerox in at a lower margin. We expect total restructuring charges of $1.4 billion related to the targeted transaction synergies and Fuji Xerox's separate cost-reduction program, which will be incurred predominantly in the first 3 years, in line with the…

Thank you, Bill. To conclude, today is a significant moment in the next chapter for our company and shareholders as well as the industry. The strong fourth quarter and full year 2017 performance we announced not only showed clear progress on our stand-alone strategic goals, but also provides positive momentum for the future and a solid foundation for the combination with Fuji Xerox. We are energized by the opportunities inherent in taking our Fuji Xerox joint venture to the next level, combining 2 industry leaders in unlocking significant value while unleashing innovation for future revenue streams. The proposed transaction will create substantial value to Xerox shareholders through a combination of an immediate special cash dividend and the opportunity to realize value from the future growth of a significantly stronger combined company. We are excited about the progress we have made at Xerox and the resulting performance improvement. While we work to finalize this transaction, we at Xerox remain committed to continuing our progress and further strengthening the company as we move into 2018. With that, I will hand it over to Jennifer.

Thanks, Jeff. Before we get to your questions for Jeff and Bill, I will point out that we have posted on our Investor Relations website the full set of our normal earnings slides to provide you with the details around our fourth quarter results. [Operator Instructions]. At the end of our Q&A session, I will turn it back to Jeff for a few closing comments. Operator, please open the line for questions now.

[Operator Instructions]. And our first question will come from the line of Shannon Cross with Cross Research.

Thank you very much and congratulations on the deal. I just want to walk through quickly so people -- so I make sure I'm correct on exactly what you're getting. So effectively, if you're a Xerox shareholder today, you're getting $10 a share in the dividend, you're getting $12 effective benefit from a synergy that you expect to receive in the next few years and then you get 50% share in a company that for fiscal -- or sorry, for 2017, generated about $2.6 billion in EBITDA and you expect will maintain an investment-grade balance sheet.

So Shannon, it's Jeff. Thank you, and I think you've summarized it very well. So again, it's a $2.5 billion dividend that we have said is about $9.80 per share. There will be $1.7 billion in total cost reduction. That's the $1.25 billion in transaction cost synergies, plus the $450 million from Fuji Xerox. If you put a normal industrial multiple of 7x to 8x EBITDA on the $1.25 billion, I think we get to the numbers that you stated. And then they get 49.9% of a growing, thriving company that you mentioned. So I think you've nailed it pretty well.

Okay. I just want to make sure because I'm getting over $50 a share in value, so I just wanted to make sure that was correct. So with that then, can you talk a bit about, as we look at the company over the next couple of years, you've laid out synergies, but how are you thinking about, first, how the company is going to operate together? What are your first sort of focuses to make sure that go-to-market remains very consistent and then you can continue to see improvement, for instance, on the equipment sales side of things? And then can you talk a bit about like the goalposts we should look for? So again, we know synergies. But beyond that, are there things that we can look toward to see that this combined company is effectively executing?

Yes, sure. So Shannon, the most exciting part of this is, as you said, it's the go-to-market and it's the innovation aspect. The cost synergies drive tremendous value that you delineated in the question you gave. What I really like about this is when you go through integration, people worry about the integration complexity. What we're doing now is we get to participate in growing markets. So Xerox participated in about an $85 billion market that was declining at about 3%. We now have access through Fuji Xerox to a $36 billion market that's growing at 2%, with very large shares in China, Asia Pacific and Japan. And the beauty is we don't have to worry too much about complexity of integration or go-to-market because the go-to-markets for the most part will stay exactly as they are. What I get really excited about is when I look at the innovation and getting into the new markets by combining technologies. One of the things in unlocking the value is we tended to have duplicative R&D. And now we're going to be able to divide and conquer. We'll be able to take the 6,500 engineers that this combined company has, that produces about 1,500 patents a year over the last few years and accelerate innovation in the areas of industrial print, which is a $100 billion market that is untapped for us today. You know the packaging market very well, flexographic corrugated labels, folding carton, that's still very much an analog market that's not digital. We can take our print technologies and move them into the area on non-paper substrates, printing on objects, virtual reality, Internet of Things, machine learning, voice activation for multifunction devices. So while the cost synergies will provide the value that you delineated, the future is all about the innovation and the growth and the access to the growing revenues.

Our next question will come from the line of Katy Huberty with Morgan Stanley.

Thank you. My congrats as well both on the quarter and the deal. I guess two questions. One, do you have a view yet as to whether Xerox's largest shareholders would be supportive of this deal? And then secondly, you just did a good job walking through some of the innovation and revenue synergy opportunities. How quickly do you expect Xerox to take advantage of some of the IP end markets that Fuji plays and that Xerox does not? Is that something you see happening over the next couple of years? Or are those growth opportunities beyond 2020?

Yes. So let me take the two-part question, Katy. So first, regarding the largest shareholder, we have not spoken. Obviously, this is a transaction that's been in the works for many months, so we have not spoken on that issue. So we just don't know, and we only know what we read at this point. With regard to integration and access, one of the exciting areas, if you were to look at inkjet as an example, right now, we have separate strategies for Fuji Xerox on inkjet, Fujifilm on inkjet, Xerox on inkjet. And you definitely know very well, Fujifilm has tremendous IP in the areas of inkjet heads, certainly ink capabilities as well, and we'll be able to leverage those. When we've talked about it and through the conversations we've had through this negotiation with Fuji Xerox, but certainly with Mr. Komori and the team at Fujifilm, one of the things was about how do we divide and conquer, how do we take the best technologies of what was all three companies and unleash it so that we can apply people who are working on some of the things I talked about, like in Palo Alto Research Center, whether it's augmented reality, Internet of Things, machine learning; and then we have people in our Yokohama facility in Japan working on the other things that we need to. Now we do need to be a little careful because this will be the integration phase. So there are certain things we're allowed to discuss and work on, and there are certain things we cannot. So for the next few months, and we expect to close this transaction sometime in the second half, we can only do a lot of planning. And then hopefully, we'll hit the ground running upon the close.

Our next question will come from the line of Ananda Baruah with Loop Capital.

Congratulations from me as well. Look, there's a million questions. I'll try to keep it short here, so I'll bundle. So do the synergies include -- the cost synergies, do they include what were the existing synergies or are the existing synergies incremental? And then I guess why not, if I read this right or heard this right, why not non-GAAP accretive in 2019 if you're closing in '18? And I might try to squeeze a follow-up in.

Yes, a couple of things, Ananda. First of all, regarding the synergies. The $1.7 billion, the $1.25 billion combination synergies in addition to the $450 million cost-reduction program at Fuji Xerox, that $1.7 billion is in addition to our ongoing Strategic Transformation program, which we and our regular earnings document that Jeff went through briefly, up to $1.7 billion over the 3 years, approximately about $475 million. So those are in addition to the $475 million that we were doing in Strategic Transformation on our own. As far as accretiveness in 2019, there are -- there's a benefit, the synergies will be coming through relatively quickly as we're incurring costs upfront to obtain those. But our analysis is that we will be getting it in 2020.

Yes, Ananda, let me give you a little background on that as well. Because if you think about it, one is on the $2.5 billion we're going to have interest on the dividend. The equity income, we will no longer get. And then in order to do this deal basically, we're doubling the amount of shares, so if you think about it from that standpoint. So if you were to look at Xerox today, and let's just use a round figure about $8 billion market cap, and we deduct the dividend of $2.5 billion, let's value Xerox from that standpoint at $5.5 billion, we then double the share count; and that $5.5 billion, by doubling the share count, buys us 75% of Fuji Xerox, implying the $7.3 billion value. Now knowing the company and having worked with them as long as we have, we certainly view the intrinsic value as much more than $7.3 billion. So -- but it's really -- there are three factors, we normally get the equity income, we're doubling the shares and interest on the dividend.

Got it. That's helpful. And then just last one real quick. The free cash flow generation, I think you guys mentioned $1.5 billion to start. And then I think there was a remark that, but it will be greater than that, and it would seem that it would have an opportunity much stronger than that. So could you just give us some context around that remark?

Yes. I don't want to give specific guidance out beyond 2020. But looking at the significant cost of $1.4 billion that we'll be incurring to effect the synergies predominantly in the first three years, we don't expect those to be continuing on. And absent those costs, we would expect even significant free cash flow over and above the $1.5 billion we cited.

And our next question will come from the line of Matt Cabral with Goldman Sachs.

So on the $1.7 billion in savings for the combined company, Jeff, can you just talk a little bit more about just how you arrived at that number? And how we should think about the net amount of that dropping through versus what you think you'll have to reinvest in the business over time?

Yes. So we've actually done a lot of work on that, Matt. And we've had numerous meetings throughout this negotiation process, and we've done a lot of work with both Fuji Xerox and Fujifilm, outside advisers, et cetera, as we worked through this. So the way I would look at it is, first of all, the total $1.7 billion, and again, that will be in excess of what Xerox is already doing as part of our Strategic Transformation program, that $1.7 billion will be by the end of 2022. Of that $1.7 billion, about $1.2 billion will be by the end of the second year post close, so let's call it 2020, which would be 70%; and 85% of it would be by the end of 2021 or the third year. Most of that $1.25 billion will flow right to the bottom line, okay? So the vast majority of the -- so I'd say on the $1.7 billion, somewhere in the neighborhood of about 80% will flow through the bottom line.

Got it. And then just a clarification, a follow-up for Bill. So FX was a nice tailwind to revenue in Q4. The revenue guidance you gave was on a constant currency basis. Can you just help us understand how you're thinking about, as of today, the FX impact on both revenue and operating margins for 2018?

Yes. We have modeled that in, obviously, to our guidance. And we do see it, based upon recent rates being a tailwind both from a translation currency perspective in '18 and from a transaction currency. As far as effect on profits, we're estimating that at least a $50 million tailwind and -- could be higher based upon recent rates for 2018.

Our next question will come from the line of Jim Suva with Citi.

First, a question about the fundamental Xerox relationship as it is today, just stand-alone; and then second, more about this new relationship. So first of all, this year and -- well, in 2017, you launched several new hardware products. Just can you update us on how they're going? I believe they came out a little more staggered than what you thought. Are they completely all out the door now and into your retail distribution VAR channel? Or are they all trained? And when do we hit kind of the sweet spot of the most traction from those? And then I'll ask a follow-up question on the Fuji Xerox after that.

Yes, thanks, Jim. No, for the most part, the products rolled out just as we thought they would. So as we discussed before during Q2, there were about 4 A4 products that came out. So by the end of the first half, we had all 13 A3 products and 4 A4 products. And in the third quarter, we had the remainder of the A4 products come out. So if you remember at the last earnings call, we said we had some confidence, but we didn't want to get out too far ahead of ourselves. But based upon what we knew about our September equipment results, we had some confidence. The fact that, and I think the evidence is at constant currency, we grew our equipment sales revenue 1.5%, which was the first time since second quarter 2013 that the company has grown their equipment sale revenue line. So it's being very well-received. Our channel partners are growing to the tune of about 65 last year. And we're pleased with the trajectory and where things are moving.

Yes. But my question was, is the quarter that you just printed, is that the quarter where basically, they're all in the channel, all your VARs are selling them and distributors are selling them, is that -- and that's kind of the best that it gets? Or is that kind of the early ramp of it, and in 2018, they really hit with a lot more force than even what we saw in this quarter, Q4?

Yes. So Q4 was the first impact that you had seen. Admittedly, it was coming off of a Q4 2016, if I remember, was down about 10%, a little bit of an easier compare. When we get to Q1, what you'll see is we were down about 5.7% at constant currency Q1 2017, compares now to these, we'll get into some relatively easier compares in Q2 and Q3. Q2 2017, we're down 14.6% at constant currency. And then Q3, we were down again double digit, but the thing is people ask all the time, is this something where you'll get four-quarter or five-quarter of benefit out of it? And one of the things -- we will get the normal four-quarter or five-quarter of benefit out of the new products, but the multi-brand expansion strategy is the thing that will prolong this for a while. And the reason I say that is I keep coming back to this $15 billion multi-brand reseller market that we really never participated in. We only had about 1% market share. And as we can continue to grow the number of multi-brand reseller partners there, every share point is worth about $150 million. I'll also mention that as a result of the transaction, as we're going through best practices with Fuji Xerox, they have a similar, similar issue from the past where they haven't focused on multi-brand resellers. And it's an area that they're going to explore, too, which is part of the beauty of bringing these 2 companies together is comparing the best practices. As I mentioned before, their market shares in Asia are much higher than our market share. We're going to adopt their best practices as well.

Just a follow-on to Jeff's comments, Jim, just we gave full year guidance in the regular earnings materials that we believe is very strong full year guidance. But just we've historically given -- look, we don't give quarterly guidance, but we give sort of expectations. And just from a revenue perspective at constant currency, we said full year down 2% to 4%. We would expect, just given it is a more challenging compare, as Jeff said, Q4 was a good -- I mean, Q1 last year was a good quarter, we'd expect to be near the lower end of that 2% to 4% on the full year guidance in the first quarter. And as far as our adjusted operating profit margin, our 13% to 14% in the full year is due to seasonality that we expect to be slightly below the low end of that range, but are fully confident in being within the full year range of 13% to 14%. As far as adjusted EPS, historically, we gave -- well, we gave guidance for next year of $3.50 to $3.70, $3.60 being the midpoint. And historically, the first quarter has typically been about 18% to 20% of the total, just to give people some guidelines what we're expecting in Q1.

Okay. And then my quick follow-up is, are there any governmental approvals or antitrust or just any type of government approvals aside from the shareholder approvals we need to just keep an eye on for this pending transaction?

Well, any transaction of this magnitude, Jim, always has to go through government regulatory review and then shareholder approval, as you said.

Right. But can you let us know which ones those are specifically, if you happen to know? Or we can do that on a follow-up call.

[Indiscernible] would be the most notable.

Our next question will come from the line of Paul Coster with JPMorgan.

To start, Bill, any view on where the debt will be issued and what kind of debt will be issued to support this? And Jeff, the more substantive question for you really is, is there any risk here of in product harmonization near term of one or other of the regions being disrupted, the clients kind of not being clear on what the product strategy is and there's some potential dislocation -- very short term?

Thanks, Paul. Just a couple of things on the debt. As we said in our prepared remarks, we'll be issued at investment grade; we're confident on that. We have bridge financing that is committed to. We will, between now and the close, be looking to potentially issue public debt associated with the $2.5 billion dividend. But details on that to come, but we are evaluating.

Yes. And Paul, on the second part of your question, actually, it's a very fair question and one that most people would think about. In this case, we actually have benefit of bringing the 2 together, and the reason is this. Our 2 companies, even though they were separate, we combine R&D, we combine manufacturing, we do it for each other, but we actually make the same product. So the beauty of it now is now we'll go to things like a common controller so we won't have separate front-ends. We'll have synchronized introduction of new products. So as an example in the past, Fuji Xerox might roll out a product, and we wouldn't see it in our territories till a year later. We're going to have opportunities of also synthesizing our supply chain. When I look at areas, the thing that really excites me because -- while I've never run a manufacturing facility, I've run companies that had very -- been very intense in supply chain and manufacturing. When we look at gross margin percentages, what happens is people always focus on price, and that's very important. But if you go back to the last three years at Xerox, our gross profit percentage has been relatively flat at 40% in a market that has price decline. The way we do that is we really get a lot of absorption and sweat the assets in our factories. We will have an even greater ability now to fill our factories in both locations, to sweat the assets, to get the right absorption, which is a real benefit of bringing that together. And again, as I mentioned before, the coordination between our R&D centers to unleash innovation, we'll be able to compete much more effectively on global Managed Print Services' deals to increase our win rates, best practice in shares. And then also, we won't have what I'll call the sharing of margin between the 2 businesses, which will be able to make us much more competitive on a global basis because we're not splitting the margin any longer.

Do you have another question, Paul?

No, I'm good.

Great. Operator, I think we have time for one last question.

Our last question will come from the line of Steve Milunovich with UBS.

So it looks like there's elimination of a lot of current inefficiencies. Are there going to be any issues in terms of integration, particularly in R&D culturally? You've got two headquarters. What are you thinking about organizationally in terms of dealing with that? It's been kind of an arm's-length relationship in the past. Now it's going to have to be much tighter.

Yes. Steve, actually, so first, I never want to minimize integration because integration is always complex. But again, this is a 56-year partnership, so everything we have done over the decade has been joint R&D, joint manufacturing, joint product development. Our people know each incredibly well, and they've been doing this together for a long, long time. So instead of it truly being 2 separate companies that have never worked together, this is a case where if we introduce a product that came from Fuji Xerox in the past, it was with great involvement from the Xerox people and vice versa. If it was Xerox introducing the product, it was with great involvement from Fuji Xerox. So from that standpoint, I think it'll be relatively seamless compared to most integrations.

Okay. And I just want to ask about the sales margin, which was down. Is that because you're moving into more A4-type equipment? And where do you expect that to be heading?

Yes. Clearly, we have a commitment to A4, which on the upfront has a lower margin than our A3 and high-end products. And -- but we do believe that, obviously, over the life of that equipment, that it is a very attractive margin. But upfront, as we are committing and building up our A4, we seem to feel there is some negative impact on margin.

Great. Thanks, Steve. That's all the time we have for questions today. If you have further questions, please contact me or anyone else from the Investor Relations team.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may all disconnect. Everybody, have a wonderful day.