Good morning, and welcome to the Xerox Holdings Corporation Third 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 Holdings 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 for joining our Q3 2019 earnings call. We delivered a strong quarter marked by increased cash flow, earnings per share and adjusted operating margin and we improved the revenue trajectory. Results were underpinned by the team’s strong execution of our strategy to drive revenue, optimize operations, innovate and focus on cash. We’ve recognized the challenges facing our industry, but have laid our focus on the opportunities and our path to standup a better more agile and competitive company for the future. We’re pleased with our cash performance. We generated $356 million of operating cash flow in the quarter, an increase of $82 million from a year ago. Free cash flow was $339 million, up $88 million year-over-year. Adjusted operating margin for the quarter was 12.1%, up 120 basis points year-over-year, strong evidence of the hard work we’re doing as a team. Margin expansion contributed to adjusted EPS of $1.08 in the quarter, up $0.23 year-over-year. The benefits of near term revenue directive initiatives are starting to flow through results. Third quarter revenue declined 5.3% at constant currency year-over-year in line with expectations. While we’ve made progress, we’ve more work to do here. Results paired with our execution give us the confidence to raise guidance. We’re increasing our free cash flow outlook to be in the range of $1.1 billion to $1.2 billion from $1 billion to $1.1 billion. We’re also raising our full year adjusted EPS to $4 to $4.10, up from our previously increased range of $3.80 to $3.95. We remain on track to deliver at least $640 million of growth savings this year due to Project Own It, our enterprise wide initiative to simplify and streamline our operations and build the culture of continuous improvement. During the first half of the year, we…

Thanks John. We are very pleased with our performance this quarter. As we said last quarter, we saw signs that our long-term strategy was gaining traction. Revenue in the latter half of the second quarter showed an improved rate of decline and we expected this trend to continue which it has. We increased planned investments as a result of first half margin expansion and continue to make these investments for the long-term while sustaining a profitable business in near term. This quarter results from our transformational program Project Own It continue to materialize with expense reductions contributing 120 basis point improvement in adjusted operating margin year-over-year. On the top-line, total revenue declined 5.3% in constant currency which is an improvement in the rate of decline in the prior periods driven by improvement in North America where performance in our XBS channel continues to stabilize from the disruptions that impacted the first half. We generated $339 million of free cash flow in the quarter, which was $88 million higher than last year and year-to-date we have generated $847 million of free cash flow which is a $195 million higher than the same period last year. Adjusted EPS in the quarter was $1.08 or $0.23 higher year-over-year reflecting the increase in adjusted operating margin, higher equity income, a lower share count and the impact of a gain on an asset sale that we closed in the quarter. I will now review the income statement in more detail. Total revenue declined 5.3% in constant currency and 6.5% in actual currency. The constant currency decline reflects 190 basis points sequential improvement, which as I mentioned was largely driven by North America where we saw improvement in XBS as well as in large enterprise, which benefited from a large account refresh order in the quarter.…

Thanks Bill. Our strong financials are an important part of our transformation story. But there are only one part. The hard work our employees have done over the last 18 months is yielding result. Our transformation is ongoing and we know we still have more to do. We are confident in our long-term strategy to return Xerox to growth and excited about the future. We will now open the line for questions. Ann?

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. [Operator Instructions] And our first question comes from Matt Cabral of Credit Suisse. Your line is now open.

Thank you. I wanted to start off on revenue. Wondering if the XBS account transitions that you talked about being a challenge in the first half of the year, if those are fully back to run rate yet or if there's still work to do to improve execution there? And then, going into next year, just if you can talk about, if you're still comfortable with the guidance for down 3% that I think you laid out at the Analyst Day earlier this year?

Matt, it's Bill. So addressing the first question XBS, as we said in our prepared remarks we're pleased with the improvement in Q3 and moving into past, lot of the disruption that occurred earlier in the year. With that said we still believe that there is improvement to be had there in Q4 and going forward within XBS. As far as guidance, really until, we will give guidance on 2020 in our yearend earnings call late January. So this time we're not formally updating guidance for revenues for 2020.

Got it. And then, margins continue to be the bright spot for you guys. John, I'm wondering if you talked a little bit more about the progress of Project Own It? Now that you're about a year into the initiative and in particular how you think about the potential for additional upside for the balance of this year going into next year and I think you had laid out 450 million for 2020 initially. So I am just wondering if that's still the plan.

Yes. Hi, Matt. That is still the plan. So we implemented a lot of changes with Project Own It. We reconfigured our go-to-market, our DMO, we transferred 28,000 accounts to XBS. We consolidated our real estate footprint and we're pretty much on plan to deliver $650 million, at least $650 million of growth and now we're getting on track to deliver our growth savings for 2020 which is $450 million.

Thank you.

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

Hi, good morning guys, appreciate you guys taking my question. A couple of revenue and then a free cash flow question, quickly if I could. So clarification, it sounds like, I hear you guys say that you achieved your revenue targets, your eternal target for September quarter?

Yes. I would say if you look at the guidance we gave, the updated guidance at the end of Q2 being down approximately 6% for the full year that implied with the first half being around 7.1%, the second half would be around 5%, at constant currency down we ended up at 5.3. So, we're always striving to do better, but it was in the zone of what we were thinking about for the second half and being in the 5% zone.

Yes, no doubt, that's helpful Bill, thanks. And could you just sort of rinse for us what you're seeing is the sort of order of magnitude, the contributing factors to the improvement you saw later in the June quarter and then sort of tracking to your expectations, sort of September quarter and forward? How much do you think, I mean, eventually couple things is new products is obviously the structure Own It initiatives, it sounds like you have some refresh of what’s going on and then just sort of plain old macro. Anyway to bridge for us, you guys personally what you're seeing as the strength contributors that would be helpful and then I have quick follow up.

So Matt just to be clear you are talking more on the revenue standpoint or cash?

On the revenue?

On the revenue standpoint? So yes, I mean we sort of forecasted what we would be thinking would be happening in the Q3, based on what we saw late in Q2, we saw XBS starting to pick up late in the second quarter. We knew the pipeline. We had an IT sale coming, but with it said, in other areas like large enterprise and high end, there was the large customer refresh in the large enterprise that helped mid-range, but overall large enterprise performed well relative to our expectations in Q3 and high end, Versant and Iridesse demand continues to be strong and we were pleased with that.

It sounds like for you guys it's more structural and that this stuff is somewhat incremental and maybe sustainable in the context that whenever a macro backdrop is?

Yes, I think some of it is sustainable. You guys heard me, obviously we talked to the one large IT sales for other things within large enterprise, there was a refreshment overall things were doing well there and also in the supply side as we talked about in our prepared comments the unattached cash supplies we made investments in that area and we saw improvements in the unattached supplies, post sale revenue performance and we're expecting that to continue on into the future also.

Thanks guys, one last quick one for me. You talked about the reduction in CapEx for this year. Is that really what's leading to the increase in the free cash flow guide or is there something more structural? I know this won’t work in cap improvements and really what I'm wondering is your guiding up the free cash flow goal for this year. I know that in your three-year plan from Analyst Day, the intent was to continue each of the next three years to improve upon free cash flow. Now that you sort of reset the level up here, should we continue to expect sort of the aesthetic, the spirit of the three year plan to continue? So regardless of where you come in for 2019 free cash flow, can you increase in 2020, can you increase in 2021 still? And that's it for me, thanks.

Yes. So couple things. So the free cash flow you are right. The CapEx contributes to that that also our confidence in that range raising, the range also comes from stronger working capital management throughout the year. So it's a combination of the two that's giving us confidence and raising the range. As far as guidance to the future in our three-year plan for 2020 was 1.1+. I'm pretty sure, we laid out there at Investor Day and we're not formally updating guidance at this point, but we're confident that 1.1+ still holding for 2020 and beyond.

Great, thanks so much guys.

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

Good morning and thank you so much for the questions. I was wondering if we could start by talking about what kind of a competitive landscape you're seeing, clearly Xerox outperformed certainly in the U.S. But I'm curious as to pricing, how some of the competitors who are struggling a bit more than you are reacting to the situation. If you can just provide some color that'd be great?

Yes Shannon, its John here. What we're doing is, we're focused on a maniacal execution of our strategy. So we've invested in our transactional supplies organization and we're putting a focus directly on the clients. And we will always see a pressure on pricing, but if you think of our solutions where 85% of our businesses are wrapped in services that's a strategy that we have that's working for us and we're seeing a lot of competitive win backs with our new products like Baltoro and PrimeLink, those are competitive advantages. We're seeing some traction there, but it's really on investments and it comes down to blocking and tackling and that's where we are with the competitors right now.

And then, with regard to the large deal you had this quarter just, are there any more large deals in the pipeline in the near term and is that deal completely installed at this point or did some of it fall through to fourth quarter?

The large product represses was certain large customers, it will happen periodically each year, throughout the years. This one was mostly installed during the quarter. So it might be a little going on Q4, but with that said, even outside of that our large enterprise performed well especially in the U.S. And so, we have a confidence of continued strong performance going into Q4 even without those large customer refreshes, which tend to be more periodic in nature.

And then, my last question is just on M&A. Curious your balance sheet is in pretty good shape, is there willingness to lever up the balance sheet or we’re looking at more sort of tuck-in deals and what kind of valuations are you finding out there? Thank you.

What we said is that we're not going to comment on our M&A, but we've built a pipeline both looking at large and tuck-in and we're going to go through our vigorous analysis of it whether it's ROIC, looking at cash flow yields, looking at how it fits into the business, whether it's an adjacent or not into what we do and tuck-ins what we continue to look at tuck-ins, but all of it we're looking at it in evaluation. So we're using our evaluations to make sure that we're making a right flow.

So size is not as much of a consideration as contribution?

No. It's not a question of size, it's really a question of where does it fit with us and then does it fit the metrics we're looking for it and it's all the usual suspects whether it's IRR, cash flow yield, ROIC where does that fit into the metric, EBITDA evaluation. So, we got a whole list that we go through and what we're saying is we're looking what size is not of an issue right now. We continue to look at tuck-ins and we continue to look at different opportunities.

Thank you very much.

Thank you. And our next question comes from Jim Suva of Citigroup. Your line is that open.

Thank you very much. You've provided a lot of commentary and additional details which is greatly appreciated. I just have one question and that is, you increased your cash flow, your earnings, you made a lot of progress, but this stock buyback you kind of kept the same, maybe it's because the question you mentioned are the same in at least. But also it seems like on this earnings call maybe just what I picked up with my ear, you mentioned maybe M&A a little bit more than in the past. So is M&A be taking a higher priority than in the past or am I just kind of hearing that and kind of pulling that out as far as a priority?

Yes, I wouldn't necessarily say that. We evaluate our capital allocation continuously. We have a plan for the beginning of the year and we will evaluate it throughout the year. We're comfortable with the $600 million this year in share repurchases and as John just said on M&A front, we're looking at various sizes deals to the extent that would make sense and complement our company at the right price.

Right, but you got a lot more cash flow coming in and lower CapEx spending than previously thought. So I'm kind of wondering where do you kind of earmark those dollars to go to.

Yes. I mean, we have flexibility in our allocation obviously earlier this year we paid down $400 million of debt that was due. We have $550 million. It's coming due here in the December timeframe that we'll evaluate on how to deal with that. We may initially pay for that out of our funds on hand and then refinance that later. But we believe, as you point out, the strong cash flow does provide us flexibility whether its additional share repurchases or M&A as John spoke to.

Thank you so much for additional questions and answers. It's appreciated.

Thanks Jim.

Thank you and our next question comes from Katy Huberty of Morgan Stanley. Your line is now open.

Thank you, good morning. What did demand linearity look like in Europe, did it deteriorate as you move through the quarter or was it just consistently weak? And you mentioned investments in SMB market within Europe. How long do you think it takes for those investments to convert to better growth?

Yes. The demand in Europe was pretty much weak throughout the quarter for the most part. We didn't see it increasing or decreasing. I should say, it was weak relative to our expectations. We had expected Europe to do better in Q3 than it did. Americas performed within or slightly better than our expectations. I wouldn't say that there was really a ramp up as far as weakness in Europe during the quarter, but it was below our expectations throughout the quarter.

And SMB investment impact?

Yes that some of it will take effect sooner than later to the extent we're looking at tuck-ins, those tuck-ins that are XBS like that we're looking to do that potentially over in Europe also obviously it's a timing of windows with them, with close or the extent we find those to actually act upon and then other areas as far as sales coverage, we're seeing particularly with XBS. We made investments in terms of trying to get better sales coverage and working through disruption we talked to earlier this year and we've seen a fairly quick response and turnaround with respect to that in Q3.

And if you think of our investments Katy, like our guidance for fourth quarter it doesn't materially change economic environment in Europe or for the year frankly. But, we are making investments now that in some cases can take a little bit longer. No different than what we have done in the last few quarters.

That's helpful and then just one other follow-up. Fourth quarter implied EPS guidance is a little bit lower than where consensus was coming into this quarter, is that just conservatism or timing of how it's impacting the most?

So, a couple of things. So yes, I was actually waiting for that question to come. I knew it would come here at some point. We looked at closely a couple of things to think of. One thing is the investments we are talking about. On last call we said, we would be ramping up in the second half of the year, the level of investments and that's true even from Q3 to Q4 in the investments we are making whether in the revenue side or on the Own It side. Those investments will clearly impact the core, but it will benefit us for the long term. There also will be an increased impact, Q4 we expect to have greatest impact of the year from the tariffs that were enacted in the September timeframe. And obviously that will have a year-over-year impact also. But those are just a couple of items to look to, but I think the high end of the range gets close to about what we were last year, but we just have those couple of variables that I mentioned.

Great, thank you so much.

Thank you. And ladies and gentlemen this does conclude our question-and-answer session. I would now like to turn the call over to John for any closing remarks.

Thank you everybody for being on the call. While we made progress, we have more work to do. And in each quarter we get better, but we will continue to do so by remaining laser focused on executing our strategy. Thank you for joining the call today.

Well, ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.