Good morning, and welcome to the Xerox Corporation Fourth Quarter 2018 Earnings Release Conference Call, hosted by John Visentin, Vice Chairman of the Board and Chief Executive Officer. He is 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 expressed permission of Xerox. After the presentation, there will be a question-and-answer session. [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 Mr. Visentin. Mr. Visentin, you may begin.

Good morning and thank you all for joining us for our fourth quarter 2018 earnings call. This morning we will give you the highlights for the quarter then talk about the progress we've made on our four strategic initiatives and last show you how our results and our strategy position us for 2019 and beyond. Overall, our fourth quarter results demonstrated improvements across a number of key measures. We delivered adjusted operating margins of 16.1% for the quarter, up 180 basis points year-over-year. This is primarily the result of project Own It, an enterprise-wide initiative we launched in mid 2018 to simply and streamline our operations and instill a culture of continuous improvement. Our margin expansion contributed to us delivering adjusted earnings per share of $1.14 for the quarter, up $0.11 or 10% year-over-year. On cash flow we overachieved our full-year expectations. We generated $398 million of free cash flow in the fourth quarter, an increase of $101 million year-over-year and we delivered $1.05 billion of free cash flow for full year 2018, which is an improvement of $183 million over 2017. We returned more 92% of that free cash flow to our shareholders in 2018 through share repurchases and dividends, exceeding our commitment to return at least 50% of the free cash flow to shareholders. And we ended the year with $1.1 billion of cash on the balance sheet. Revenue in the fourth quarter was down 6.1% at constant currency year-over-year, which was in line with our expectations. Bill will discuss the Q4 revenue dynamics on his remarks, but we have developed a three-year roadmap for revenue growth that we will take you through in detail at our Investor Day next week. We continue to progress on our four strategic initiatives; to optimize our operations for greater simplicity, to…

Thank you, John. Overall, we were very pleased with how we finished the year driven by strong margin expansion, cash flow above our expectations, and growth in adjusted earnings per share of over 10% year-over-year. In line with our expectations, revenue declined and faced anticipated headwinds. However, we more than offset this impact to deliver our best results of the year. I will now begin with a review of the income statement. In total, revenue declined 6.1% at constant currency and 7.8% at actual currency, broadly in line with expectations and the directional commentary we gave last quarter. Total revenue was impacted by almost 1 point from the significant OEM declines we've highlighted in recent quarters as well as headwinds from the benefit in the prior year from the launch of the ConnectKey portfolio and higher licensing revenues, a $20 million year-over-year impact. I'll spend more time on the revenue dynamics in the quarter in a moment when I review the revenue slide. Turning to profitability, adjusted operating margin of 15.1% improved 180 basis points year-over-year as the decline in revenues was more than offset by cost reductions and productivity improvements. The improvement came from a significant 130 basis points improvement in our SAG ratio driven by our project Own It actions as well as a lower annual performance incentive compensation accrual. RD&E also contributed 20 basis points to year-over-year margin expansion. We captured cost savings and overhead and within mature product sustaining engineering they more than offset increases in spend within our research centers and incubation programs in support of our innovation growth areas. Gross margin of 40% was lower by 30 basis points year-over-year, a good result considering the prior year included in approximate 100 basis point combined benefit from the higher licensing revenue and the change in…

Thanks Bill. To wrap up, we closed the year strong, growing adjusted EPS 10%, expanding adjusted operating margin 180 basis points and delivering over $1.05 billion in free cash flow, 92% of which we returned to shareholders. We've laid a good foundation for 2019 and we look forward to our Investor Day on February 5th where we can share more details on our strategy and longer term financial plans. We will now open the line for questions. Jennifer?

Thanks John. Before we get to the Q&A with John and Bill, I will point out that we have posted on our Xerox Investor Relations website a full set of earnings materials, as well as supplemental schedules to provide you with an overview of our fourth quarter earnings. Operator, please open the line for questions now.

Thank you, ma'am. [Operator Instructions] Our first question will come from a line of Ananda Baruah with Loop Capital. Your line is now open.

Hi, good morning guys. Thanks for taking the question and thanks for all the information. I guess a few from me if I could, at least a couple, I'm trying to not to take too long, but could you guys just quickly go through what you saw in the marketplace with regards to impact from macro it sounds like Bill, you hinted there may have been some push outs, and then just would love to get your context now what the competitive marketplace looks like as well, just to start off and then I have some specific – specific questions? Thanks.

Thanks Ananda. Just a couple of points, we did point to there were a few large new business signings that were pushed out into Q1. We expect those to still be signed within Q1 from an overall marketplace perspective when thinking about terms the impact of the government shutdown for the 30 plus days has some impact on us obviously from our government accounts. About a third of our government accounts were impacted. We estimate that the post sale revenues under our management services, consumables, et cetera, was about, would be about $4 million a month on post sales. So it's a number, not a big number, but it would have had some impact. But overall, we gave our guidance and expectations as far as you know going into 2019 our revenues, guidance being down mid single digits are 5% to constant currency. And our other guidance measures are not dependent upon the significant improvement in revenue year-over-year.

And with the deals that got pushed out where those A3 deals, did those include high-end deals as well?

Both, the ones I was primarily referring to were large managed print services deals that include significant amount of A3s and then, like so we fully expect those to be signed in Q4. I mean Q1, sorry, Q1 2019.

Okay, great I appreciate it. And then I'll just do one follow up here, just could you, I know you're going to talk about this next week, but just to kind of set this up, with Own It could you just kind of give us some context around the order of operations for the various kind of transformation initiatives, how should we expect you guys, I know you're already underway, but like how are you layering into it kind of combination of revenue initiatives and cost initiatives, supply chain, and which will come sort of more towards the front end here and which will be the ones that you'll get to kind of as you go through it later on? Thanks.

Ananda, we'll do - Ananda it’s John. So we'll detail it next week and we'll show you the whole project Own It on all the different areas of how we're redesigning all our different layers, all our different organizations and what you're going to see next week is what the outcome will be, not only for 2019, but also for 2020 and 2021. So you'll get a lot more detail next week at our Investor Day.

Okay, great. I appreciate it, thank you.

Thanks Ananda. Operator, can we have the next question?

Our next question will come from the line of Shannon Cross of Cross Research. Your line is now open.

Thank you very much. I guess my first question John is, can you talk a bit about your thoughts on cash usage and not necessarily just 2019 and I know we're asking all these questions you're going to address next week, but we have to try. So, when you look at the cash flow, obviously Xerox is a high cash flowing business, it doesn't appear that you need to spend that much in terms of restructuring next year and I think it was like $225 million at least in terms of the EPS bridge. So are you looking to acquisitions, are you looking for a way to sort of reverse the revenue decline inorganically as well as organically? I guess I'm just trying to figure out you can squeeze for so long on the cost side but then how do you sort of right the ship in terms of the top line?

So what I would say Shannon is, what you'll see next week is not just the cost side but also where we will be making investments. And clearly cash is one of our clear focuses and we've already signaled that we will be over a $1 billion in 2019 and you'll see our 2020 and 2021 guidance as well. And look, we're going to use our cash on what gives us the best IRR and we're looking at all different options and next week we're going to detail on our revenue where we will be doing investments and where we see revenue in terms of growth and all that in the next three years.

Okay, and then can you talk a bit about the leasing business, I don't know, Bill if you want to take that, but just in terms of your thoughts on leasing how core is, and I know you'd been sort of looking at options around it, and it looks like there's going to be some financial receivable runoff that benefits cash flow this year, so just curious as to keep it solid, expand it, how are you thinking about it?

Yes, so we don't specifically comment on anything regarding strategic alternatives, but the leasing business in particular, we're pleased with. It's a profitable business for us. It's integrated, it's part of our offerings to the customers. Even though we were downgraded below investment grade we're still able to operate the business efficiently and profitably and overall we're very pleased with it.

Okay, thank you. Look forward to next week.

Thanks Shannon.

Thanks Shannon. Operator, next question?

Thank you. Our next question will come from the line of Jim Suva with Citi. Your line is now open.

Thanks very much. Thus far on the call in the slide you talked a lot about Project Own It which sounds quite compelling. A lot of focus and maybe it's just my hearing was more on the cost side and then even if it was on the revenue side when we look at the revenues, it looks like there's literally no stabilization from the past two years by your actions. So can you help us understand about why the focus isn't on revenues or any improvement at all on revenues?

Yes, I would say Jim, first and foremost we have a full court press on driving revenue. For our 2019 guidance, we're not relying on revenue to actually guide on the EPS and the cash flow on the other the margins and the other numbers. That said, what you're going to see next week is a detailed strategic plan on revenue and revenue growth and how do we get there and what are the plans we've put in place. Project Own It, what Project Own It allowed us to do is not just simplify our business, but it also allowed us to have the space to reinvest in areas that can help us with driving revenue and growth and we're going to take you through all that in detail next week.

Yes, I would only add that you know Jim clearly we want to improve the revenue trajectory on a constant currency basis, the last you know '17 and '18 and in our guidance for '19 are you know in the zone of the 4.5% to 5% range. So it's stabilized to that 4.5% to 5% down in constant currency, but it’s clearly we want to change that trajectory going forward.

Great, thanks so much for the details.

Thanks Jim. Operator, next question?

Thank you. Our next question will come from the line of Katy Huberty with Morgan Stanley. Your line is now open.

Thank you, good morning. If you included the indirect channel what would signings have been in the quarter in terms of rate of decline, and how should we think about the weaker signings in 2018 translating into revenue trend for that business this year? And then I have a follow up.

Thanks Katy. Yes, so the indirect channel it is actually hard to get accurate data on that, because actually we are dealing with partners, we have some internal measures that we get is that we're not comfortable enough in disclosing that on a regular basis, but that's part of the reason why we look at it is signings a meaningful number going forward to continue disclosing it, primary represents our enterprise business which is the more mature part of the Managed Print Services which has been declining. But from our internal measures, the SMB part which includes a lot of MPS business through indirect channels is growing upwards of low double-digits in recent quarters.

Okay, thank you. And then just a couple clarifications on the EPS guide, it looks like you're not assuming a share count reduction in the EPS range. Is that because $300 million of spend just offsets dilution or should we expect that ultimately share count should come down in the year? And just as a followup, same line of questioning, what are you assuming in terms of debt pay down and any interest expense reduction in the EPS guidance if anything?

Okay, share repurchase a couple things, so we will have the flow through effect of the $700 million of share repurchases done in the second half of ‘18 and the benefit of that flowing through to ‘19. And you are correct that these $300 million that we said we would do as part of our proposed capital allocation for 2109, we did not include that benefit in the adjusted EPS guidance says. The timing of it, the amounts could be lumpy, could be weighted towards the back end, so we did not include that potential benefit in our EPS guidance for 2019. As far as the debt, we will be refinancing the $1 billion of debt that's coming due during 2019, $400 million in March, another $600 million in December. Our liquidity that we have, whether it's the cash on balance sheet, the $1.8 billion revolver allows us flexibility and timing. As far as interest expense with the downgrade from investment grade, we've estimated that, that probably specifically because we had one debt issuance, they had coupons steps in it and also it causes our undrawn revolver to cost more to be about $5 million or so more on a full year basis of debt cost.

That's perfect. Thank you.

Great thanks Katy. Operator, is there any other questions?

Ma’am, that was our last question. Oh, I'm sorry, we actually just had Paul Coster from JPMorgan queue up.

Thank you.

You're welcome. Paul, your line is now open.

Hi this is [indiscernible] on for Coster. Thanks for taking my question. On the midrange you had a tough comp there, but it performed pretty well. What's driving the momentum there? And then on the high-end same thing, but did you see more push outs in that segment relative to others and then are you seeing more competition on the high-end?

Yes, hey Paul, it’s Bill. So on the midranges we are very pleased with our market share and we've increased by 3 points each of the last couple of quarters and significant market share improvement really since the ConnectKey launch that occurred in the second half of 2017, so we're very pleased there. On the high-end we are still the market leader, are market leader there in market share and we're very pleased with that, but it's an area that we clearly believe there are parts we could improve upon. We do have some products, enhancements that are going to be announced later in the year that we believe will help and specifically Iridesse has done really well for us, but it just has not been enough to offset other parts of the high-end portfolio.

Okay, and then my follow ups on restructuring charges, looks like they're on track for $200 million again for the fourth consecutive year. So when can we expect the drop off on these kind of recurring charges longer term? Thank you.

So a couple of comments on restructuring charges. First of all going back to ‘18 it was around $170 million which was a decline from 2017, but the company is looking to in the restructuring charges, we actually given the geographies and the change in our restructuring severance policies et cetera, that we were able to do more for the lower dollar amounts in 2018. There is a fair amount planned efficiencies that we have, coming forward, so we've estimated continued $200 million. We’ll go out to the outer years and we'll talk with that further at Investor Day next week, but $200 million is our best estimate at this point for 2019.

Thanks, Paul. John, do you have any last comments to close?

Yes. Well, thank you everybody, and look at our Investor Day next week. You'll hear more about our overall strategy, our long term financial outlook, and our plan to stabilize and grow revenue in new and existing markets. You'll also see firsthand some of the innovations that will enable us to expand beyond our core technologies. So I look forward to hosting you at the event next week. Thank you.

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