Good morning, and welcome to the Xerox Corporation First Quarter 2019 Earnings Release Conference Call hosted by John Visentin, Vice Chairman 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 express 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 our Q1 2019 Earnings Call. Today I'm going to give you a progress report on how we're executing on our strategy, starting with our financial highlights. Our transformation initiatives are yielding results, which gives us confidence to raise our full-year earnings guidance despite revenue declines. We are investing in our core business as well as new technologies that create value for our stakeholders and positions Xerox for the long-term growth. Overall, we saw improvements in margin, operating cash flow and earnings per share as compared to the prior year period. Adjusted operating margin was 11.3% up a 140 basis points year-over-year. Margin expansion contributed to us delivering adjusted earnings per share of $0.91 up $0.23 or 34% year-over-year. We generated $226 million of operating cash flow, an increase of $10 million from a year-ago. Free cash flow was $211 million up $13 million year-over-year. While we drove improvements in these three key measures, revenue in the first quarter was down 7% at constant currency year-over-year. As a result, we are increasing investments in near-term revenue directed initiatives, which we expect to see benefits from as we move through the balance of 2019. The anticipated benefits of these investments together with the relative stability of our underlying page volume trends give us confidence to maintain our revenue guidance of approximately 5% down for the year at constant currency. Given our results in the first quarter, we are raising our guidance for full-year adjusted EPS from $3.70 per share to $3.80 per share to $3.80 per share to $3.95 per share. At our Investor Day in February, we discussed the key drivers of Project Own It, our enterprise wide initiative to simplify and streamline our operation and still a culture of continuous improvement. This…

Thank you, John. As John reviewed, we saw good progress on costs and productivity from Project Own It that drove margin improvement, which coupled with higher equity income and lower shares resulted in strong adjusted earnings expansion, up 34% and enables us to raise our full-year adjusted earnings guidance to $3.80 to $3.95, from a range of $3.70 to $3.80. This was all also demonstrates the current positive earnings expansion set up that we have while we build the foundation to turnaround revenue. I will now review in more detail the income statement. In total, revenue declined 7% in constant currency and 9.4% at actual currency. This below trend was largely driven by two factors, lower transactional revenues and a decrease in activity in certain areas as we implemented some of our transformational actions. I'll cover these factors in more detail when I review revenue. However, it is important to note that we saw relative stability and underlying page volume trends and anticipate revenue rates of decline will improve each quarter as we move through 2019. Turning to profitability. Adjusted operating margin of 11.3% improved 140 basis points year-over-year and drove $7 million in operating profit growth is the decline in revenue was more than offset by Project Own It’s driven improvement in gross margin of 50 basis points and in SAG as a percentage of revenue of 100 basis points. RD&E was 4.2% of revenue which was 10 basis points higher year-over-year due to lower revenue as well as reductions in sustaining engineering there were partially offset by investments within our research centers and incubation programs in support of our growth initiatives. Below operating profit adjusted equity income of $57 million increased $46 million year-over-year from one-time adjustments in the prior year as well as benefits to Fuji Xerox…

Thanks, Bill. Last quarter, we said we were executing against our strategic initiatives, which would position us to accelerate our transformation in 2019. With our first quarter results, we are now in that position. Our brand, our people the investments we are making and the improvements to our operation that come from Project Own It gives us confidence to raise our adjusted EPS guidance and maintain our revenue guidance for the year. 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 in the appendix to our materials additional supplemental reconciliations and posted on our Xerox Investor Relations website, a full set of earnings materials. Operator, please open the line for questions now.

Thank you, ma'am. [Operator Instructions] And our first question will come from Matt Cabral with Credit Suisse. Your line is now open.

Yes. Thank you. Bill just wanted to start off, wonder if you could help us bridge the EPS guidance just between expected underlying operational improvement for the balance of the year versus the Q1 upside that you saw particularly given the contribution from Fuji Xerox, and I know previously you hadn't included share repurchases in your full-year expectations. Just curious if that's part of the increase as well.

Hey, Matt. Thanks. Yes, so a few points. First of all as John and I stated on the call, we're very pleased with the progress of Project Own It and what it's doing for us from a performance – operational performance perspective. And just if you look at the first quarter, we are up 140 basis points and adjusted operating margin year-over-year. So obviously, we're comfortable with reiterating our guidance of 100 to 150 basis points. But with that said, we also said in the prepared remarks that we are – we have planned for investments during the year, we said during the Investor Day and during fourth quarter earnings call $0.32 and we're continuing with those and we're looking to based on Q1 results to increase those throughout the year. So the components are you hit on them a little bit from the share repurchase, the original guidance assumed more towards the latter part of the year. As you saw, we purchased a little over $100 million in Q1 and so that will have more of an effect that was originally anticipated. And then we added sort of $300 million which will be, as we go throughout the year we’ll have to work through the first remaining 200, the first 300 and then the second 300 be the latter part of the year. So both those will be positive and then you know, as I mentioned on the comments also the Fuji Xerox, we expect to be less of a year-over-year favorable effect. They had some one-time accounting items in the prior year, but it really is a combination of the timing of the share repurchases and the benefits from Project Own It.

Got it. And then on post sale you spent some time on this in the prepared remarks, but just wondering if you could dive a little bit deeper into what's driving some of the weakness that you're seeing. And just help us understand the initiatives you have in place to drive improvement and how we should think about the trajectory of post sale for the balance of the year?

Yes. So in post sale, you will allow our post sale is bundled as we've talked about over a 80% of our post sale is related to bundled contracts and we saw the underlying page volumes being consistent with some prior quarters which drives a lot of that bundled post sale, but there is a portion that is more transactional in nature and can be – won't be specifically unbundled supplies in the developing markets. We had strong Q4 and it was not as strong as in Q1. We do expect that is a timing issue and we do expect to see that come back. Another part of the post sale, that's more transactional in nature is paper. It's not a high-margin area, but it's in the developing markets, we still sold paper in particular Mexico was down year-over-year. That may not come back as much, but it is a low-margin items. And then the other item to call out from the transactional perspective and post sale is the IT hardware reselling which several of our XBS course do and that can be lumpy and the year-over-year there that was a decline in Q1, but we do have line of sight to specific transaction in Q2 and Q3 that we will improve that. But overall, as I said in my comments that we look throughout the year. We're confident based upon our updated forecast, the revenue, constant currency decline that Q1 7% will be the worst and will be improving throughout the remainder year, sequentially each quarter will be better than the next.

Thanks, Matt.

Thank you.

Operator, could we have the next question?

Thank you. Our next question will come from the line of Ananda Baruah with Loop Capital. Your line is now open.

Hi guys, good morning. I appreciate you taking the question. I'm going to start with revenue, but before, I'll say, congrats on the solid start to the year. So John, Bill you sound pretty confident that you have your arms around sort of what led the revenue weakness in the areas in which they were softer during the March quarter. Can you just speak a little bit more specifically to what gives you confidence that you have your arms around that? And then if you could also just give a little bit more detail into the areas in which – the specific areas into which you're increasing the revenue investment. And then I have a follow-up. Thanks.

Hi, Ananda. Look, I would say if we think what we've done in the last three, four months, we've implemented changes. We reduce layers, we increased spend, we reconfigured our go-to-market, we split DMO between the Americas, we transfer 28,000 accounts from U.S. enterprise XBS, we consolidated our real estate. So we think of everything we talked about, we optimized our workforce and while we don't ever want to minimize the risk of disruption that created by all these changes, but in each case we made these changes because we know what's best for Xerox in the long-term. I personally met with over 300 of our managers and I can tell you that while there was some disruption they are all excited about the future because we are investing in the long-term. You've heard me talk a little bit about the areas we're investing in which is in the service of the software, our equipment, our security, the summit we’ve had and in the future and innovation. So while we knew that this was going to cost some disruption in execution in the early part of the year. It still gives us confidence to increase EPS for the year and it gives us confidence to – for our guidance of 5% guidance for the years.

Yes, Ananda, I would just say on U.S. and for some specifics in some of these are programs that we already had in place and our $0.32 and we're just expanding upon them and putting dollars behind them and some of more additional programs, but we are building on our supplies management team to increase attach rates of supplies with additional supplies management sales folks. As John mentioned in the software sales area, we're adding a significant number of sales specialists. Just to deal with software sales that we didn't have before we have specific targeted programs in the A4 and A3 areas specific targeted marketing programs in those areas and in the eCommerce area. We're expanding, what we're doing there and we have an SMB attack plan. There's a lot of different initiatives. The dollars are going into those initiatives that we talked about originally, the $0.32 of EPS, we're reinvesting and we are expanding upon those investments as we move throughout this year as the Q1 results allow us to do.

That's really helpful context, but you guys, I appreciate that a lot. Quick follow-up just on the leasing business exploration. Can you share a little bit about the dimensions upon what you're evaluating it? Is it just straight return on capital? Are there some more subjective dimensions as well. And thanks, that's it for me.

Yes, Ananda. There is a few things we're looking at. One thing is – I know we've talked about this I brought up of configure discussions that from a balance sheet perspective just look at our leverage in the optics of net debt that is supported by these financing assets. I think it's, we get screened out by certain investors because of that. That's one thing that you look at, you look at our peers and most of our peers and competitors do not have an internal financing business anymore. We also look at it from a simplicity perspective. This is a core competency that we need to have internally versus externally and naturally we will look at it and say, are we do we believe we're getting the right value for it. And each transaction and that clearly will be evaluated. But you look at just the optics of how it impacts our balance sheet and whether this needs to be a key competency that we have internally within the Company.

Thanks Ananda. Operator, next question, please.

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

Hi, one clarification question pretty easy, probably more for CFO, the more risk strategy question for CEO John. On the financial question. It might correct that in your prior guidance for the full-year, you did not include any stock buyback and now you are or might just hearing things a little confused today. And then the strategy question was the expense side, it looks like to own it is having a pretty good material impact and giving great traction. But what are some examples of some revenue items you're doing different that Xerox, potentially could improve upon because in the past, it seems like the story has been again and again about revenues not coming in where you want and we're already starting off the year that way and it looks like the back half of the year, we'll have to see a hockey stick improvement?

Yes, Jim. So first of all, regarding the EPS guidance that we laid out that we are going to at least $300 million of share repurchase at the Q4 call and then on the Investor Day, but we specifically said that as far as our guidance for the year that was weighted towards the back half of the year, are the latter part of the year we have limited impact to the guidance numbers that we were providing to the extent that was moved up to earlier in the year, which we've been doing this is demonstrated by the $100 million or so repurchase in Q1 that obviously would have an increasing impact on our EPS.

Yes, very clear. I got it. Thanks.

And Jim, we're doing a lot. So I talked a little bit about what we've done in terms of reducing layers, moving organization, simplifying our business, and specifically what we've done is, while all the organization has gone on in the last quarter, we've also invested in areas. So in a competitive win back programs, we've invested heavily in sales organizations, in tools and offerings, if you think of the offerings that we've announced that – whether it is our security offerings, whether it is our services offerings that we're focused on. All of that is going on in the last month and ready for prime time and all our teams are being trained and ready to go on that and we're starting to see some positive out of it. I would tell you that. Yes, well, first quarter back to first quarter, I never take disruption lightly, but we knew we made the decision that we were going to do a lot of these changes early. The teams we got, great teams, great leadership team that I've personally met with that have accepted these changes, now we're off and running. So we're confident in maintaining our 5% guidance.

Thank you.

Great. Thanks, Jim. Operator, next question please.

Thank you. Our next question will come from the line of Paul Coster with JPMorgan. Your line is now open.

[Indiscernible] these organizational changes might be in North America, [indiscernible] difference between the two regions. Is that the case and is restructuring – is the change in the sales now done such that you can get this 5% trajectory over the course of the year.

We’ve got the second. Paul, we got the second half of your question. The first part will – you were...

Yes. You have to go back. I think we have in a bad connection on the first part. I think it say something about organizational changes in the Americas, et cetera. But the second part regarding the disruption and your one key point to look at and thinking about the degree, we did know that we are doing a lot, when you think, there were things we had to do from a restructuring perspective and we said let's get what we can get done as soon as possible. And if you just look at our restructuring dollars spent in Q1 as a percent of the full-year, that's kind of an indicator that you were targeting still this $225 million or so, a full-year restructuring. We did $112 million in Q1. So a biggest part of the disruption, we do believe is now and is behind us, it's Q4, Q1. There is changes still clear would be made that will be working on throughout the year, but we do believe that the biggest part of the disruption has occurred already.

Yes.

Okay. Well, you just did a great job of interpreting my garbled commentary there, but the other part was really the difference between Europe and North America. It looks like the disruption been greater in North America than in Europe, is Europe yet to come?

Well, I would say that Europe went through changes over the last year. And if you think of what we've done is we've taken areas from Europe and transferred it to North America like LatAm. But having spoken to the leaders and I'll be in Europe in the following month or so and having spoken with all the leaders, everybody is excited about the changes we're making and excited about moving forward.

Okay. And one last question, you've chosen to some of your cash for repurchasing shares instead of making tuck-in acquisitions that might accelerate the turnaround in revenues, can you just comment on that, John?

Yes. Look, we're not going to – we're never going to comment on the potential targets. But we're focused on building a deep M&A pipeline that will support our revenue roadmap, but that pipeline will include tuck-in acquisitions that will help us grow our SMB market and also acquisitions like we just did in an innovation like Vader, a small 3D metal print company that I spoke about earlier. But in each case, all we're going to take a disciplined approach and the investments that will drive the highest IRR. So that’s what we’re focused on.

And just to remind you, if you look at our full-year capital allocation. There was a significant unallocated $450 million and $550 million. The incremental 300 share repurchase still leaves for the tuck-ins. As John mentioned, we evaluate those on a case-by-case basis and what type of IRR providing us.

Okay, thank you.

Thanks, Paul. Operator, next question please.

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

Thank you. I just wanted to go back to the question about acquisitions and I'm just curious, I mean, ASI is in a go-shop right now, clearly from our knowledge of the industry, it would make a lot of sense to layer on. I realize you're focused on share repurchase and you've got a strong dividend. I think John, how you think about if you're going to get to flat revenue in a couple of years and then some growth, is that something you can do with the existing technologies you have whether it's at Park or within Xerox or is it something where you really think you might need to have a bit bigger of an acquisition.

Shannon, I would reiterate what we said at the Investor Conference where we're going to focus on innovation and we've decided what the four areas of innovation are. And then even inside of the areas that we're in today, we'll look at areas like 3D and digital packaging, and how do we disrupted both in a Xerox inside attitude or in us disrupting the whole industry. On M&A or potential targets, we're not going to comment publicly on it. But like I said earlier, we are taking a disciplined approach and the investment needs to drive IRR for us and look for the strength of Xerox in the future.

Okay, thank you. And then just – because obviously there's been a number of – a lot of discussion around the leasing business and potential for what might happen to the proceeds. Can you just define for investors what a strong balance sheet means to you? I think you gave some metrics at the Analyst Day, but if you can say at this point where you're at in terms of your definition of the strong balance sheet? Thank you.

Yes. Hey Shannon, so a couple of things, first of all, and I say this before many times on these calls that we believe that we’re currently our balance sheet is investment grade. We were downgraded towards the end of the year, not because of the state of our balance sheet but because our requirement of our topline being at least flat to growth, but we currently – with investment grade. We have a goal of getting back as a company to investment grade, our store actions have been those of supporting a strong balance sheet, we paid down debt. Over time, we funded our pension plan and it's important to us, just from whether it's attracting and retaining significant customers whether they're in the government or elsewhere to have a strong balance sheet and not going to put a specific, number on it, but just know that we believe we are currently investment great quality balance sheet although we were downgraded obviously below that because of our topline performance and we have a goal of getting back there.

Great, thank you very much.

Thanks Shannon. Operator, we have time for one last question.

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

Thank you. Good morning. As you pointed out, supplies revenue was particularly weak this quarter despite a fairly constructive business environment and stable page volume trends. Some of your competitors have also seen weakness in supplies. So wondering whether you think that third-party competition is an issue at all in the business and if not, if you can talk a bit more about what you think drove the pull-in of transactional deals into the fourth quarter?

Yes. So thanks Katy. So you kind of hit on a lot of the points there, but from a supply perspective, the majority are most of ours and we believe it differentiates us from a lot of our competitors are bundled contracts, the tide underlying page volumes, et cetera, and we've seen stability although declining very consistent rates in those page volumes in recent periods and it was more the lumpiness to specifically the unbundled supplies to smaller portion for us and a lot of our peers in the developing markets. There are – from time-to-time, there are incentives to pull things to make sales in certain periods and Q4 was strong and supplies. It was up a couple of percent in the unbundled supplies area in Q4. And just looking at the timing of those sales going forward, we believe that they will be coming back in future quarters.

Okay. And then just as a follow-up, if I assume a $100 million a quarter of share buyback in the first half, $200 million a quarter in the back half, it could be anywhere from $0.10 to $0.15 of EPS impact for the full-year versus not assuming much last quarter. Is that a fair characteristic of how much you've added to the EPS outlook from share buyback?

So share repurchase is a part of the guidance and the increase and also the expanding of the range sort of goes to the timing of the share repurchase, where we are $0.10 range or $0.15 range. But naturally you would get to the earlier you purchased the higher – the later maybe for that range. We're assuming that the incremental $300 million would be more in the latter part of the year.

Okay, thank you.

Thanks Katy. John, anything to wrap up?

No. Thank you very much. With our transformation initiatives are yielding results, giving us confidence to raise our full-year earnings guidance, while maintaining revenue guidance for the year. Thank you all for joining us today.

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