Good morning, and welcome to the Xerox Holdings Corporation First Quarter 2020 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/investors. 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 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 for joining our Q1 2020 earnings call. I hope everyone is safe and healthy. This is an unprecedented time for individuals, businesses and governments around the world. None of us have lived through a global health crisis of this proportion. So we are learning fast, adapting and making decisions in the best interest of all our stakeholders including employees, customers, partners, shareholders and society. While we saw an immediate impact to our business due to the rapid implementation of lockdown measures globally, the disciplined approach we implemented over the last two years provides a foundation to move quickly to preserve cash, continue operations, provide support to our many clients on the front line and apply our manufacturing and R&D expertise to help save lives. I'm incredibly proud of Xerox team's dedication and ingenuity during this extraordinary time. For the first quarter, we generated $173 million of operating cash flow from continuing operations, a decrease of $49 million from a year ago. Free cash flow was $150 million, down $57 million year-over-year. Adjusted operating margin was 4.7%, down 630 basis points year-over-year. First quarter revenue declined 13.9% in constant currency year-over-year. GAAP loss from continuing operations was minus $0.03 per share, down $0.37 year-over-year and adjusted earnings per share was $0.21, down $0.45 year-over-year. These numbers are a direct reflection of the impact COVID-19 had on our business in the first quarter. All but two countries where Xerox operates experienced a full or partial lockdown in the first quarter. The absence of people from the office resulted in an approximately 50% decline in page volumes in March, which impacts our variable rate contracts. Delayed installs, whether because of an office was closed or limiting vendors on site, lowered equipment sales revenue by approximately $100 million in…

Thank you, John. Before I start the review of our financial results, I'll take a few minutes to discuss the financial impact of the COVID-19 pandemic on our first quarter results. Until the late February time frame, we expected to deliver results in line with our plan. But as the global economic disruption caused by the pandemic worsened, like many other companies, our business slowed. The lockdown in businesses resulted in delays in equipment installs and purchase decisions. And the variable components of post-sale revenue, such as managed print services agreements where revenue is based upon the number of page clicks declined. The third month of any quarter is typically our strongest, when the largest proportion of equipment is sold and profit is recorded. Therefore our first quarter was significantly impacted by the ramping of office closures in March, which limited our ability to deliver and install equipment. Further, as more businesses require employees to work from home, the use of Xerox equipment declined, impacting our post-sale revenue. Most of our customer relationships are contractual, with contract terms that typically include a discharge as well as a variable component that includes service and supplies linked to print volume and the percentage of fixed versus variable component varies by channel and geography. As a result, COVID-19 had a greater impact on equipment sales in Q1, as deliveries and installs which would have occurred late in the quarter were unable to be completed, while the decline in post-sale revenue was somewhat contained due to our contractual business. Through Project Own It, we have become a more agile operation and we were able to react quickly as the pandemic became more widespread. Project Own It initiatives have been ongoing and savings from these initiatives provided a partial offset to the sudden revenue impact…

Thank you, Bill. Today none of us have a crystal ball to predict what will happen next. However, it's our responsibility to think about the full range of outcomes and how to prepare ourselves, our businesses and our people for any outcome. As part of that work, we are focused on how many will work from home and for how long, a question we need to answer for our employees and for our clients. It's important to remember working from home is not a new concept. Many companies have implemented flexible policies over the last 10 to 20 years and many in recent years also asked employees to return to the offices to speed decision-making and foster collaboration. I can tell you this. In all the conversations I'm having with the CEOs, government officials and others, the prevailing question isn't whether to return to the office, it's when. That said, the next pressing issue businesses are dealing with is ensuring their employees can be productive and secure when they are working from home. How can we help manage their workflows? How do we protect our clients' distributed network of systems from hackers? In this environment clients are increasingly looking to extend the digital enterprise to the home and back, so information flows quickly and securely to the right people at the right time. So while the current economic environment presents challenges in the short term, we are working closely with clients and partners alike to extend Xerox' secured ecosystem beyond the office to the home to ensure a seamless working experience no matter the location. Now, let's open the line for questions.

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 reconciliation 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] Our first question comes from Katy Huberty of Morgan Stanley. Your line is now open.

Thank you. Good morning. First question, Bill, you mentioned that your services contracts, the mix of fixed versus variable differs by channel and geography. But if you average it across the business can you give us any sense for what the variable element is as a mix of the services business? Then I have a follow-up.

Sure, hi Katy. So, yes, the first thing to point out is to remind everyone that over 80% of our revenues are contractual in nature and involve multiyear contracts. But as you state there are components within the contracts that are fixed and those that are more variable in nature. And as I noted on my prepared remarks, it does vary by the way you go to market and by geography. For example in EMEA, it tends to be more variable in the post-sale in the SMB part, especially in the U.S. tends to be more fixed. And on an overall perspective, if you look to our components of post-sale, especially maybe the way it's broken up in our MD&A, obviously, the financing is pretty fixed associated with the lease arrangements. The supplies paper and other line item in our MD&A is more transactional in nature as you sell those. Those are unbundled supplies as opposed to the supplies that are part of these multiyear service arrangements. So, the services maintenance and rentals piece is the part that has fixed versus variable. And on average in recent quarter period, it's been around 50% of fixed and 50% variable. But that can change depending on where revenue is coming from as I said SMB in the U.S. has the higher percentage of fixed versus variable than others.

Okay. That's very helpful. And then just stepping back we haven't heard other companies talk about a return to their original financial plan in the fourth quarter. Can you just talk about the cross currents? Is it that you see enough pent-up demand for equipment installations that that would offset the weaker economic environment and the fact that we may not be 100% back at the office even by December?

So, yes. Just to make sure I was clear in my prepared comments. We fully expect Q2 to be worse than Q1 to be the worst quarter of the year. With that said, our base model assumes businesses reopening late in Q2, early Q3, and then Q4 not back to plan, but closer to plan. With that said, we've modeled other various scenarios where Q3 is similar to Q2 and both those quarters being worse than Q1. And then Q4 is where things start. It's a quarter where it starts getting better. And even in that model, we have modeled positive free cash flow for the year. But it is hard to predict. But in all of our models, Q2 is worse than Q1 and Q4 we're getting closer to plan, but we're clearly not at plan.

Okay. Thank you so much.

Thank you, Katy.

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

Thank you very much. I know you guys aren't giving explicit guidance. But I was hoping you could just walk through your free cash flow dynamics a little bit, in particular, how we should think about the flow-through of lower net income versus potentially offsets be it working capital, the inflow from financing receivables, just across the balance of the year?

Hey Matt, it's Bill. So, obviously, lower net income will continue to be a negative into Q2 just as if it was in Q1. We do expect similar dynamics on the working capital as far as receivables as a result of lower revenues being a source. We hope to manage our inventories better. It was unexpected what happened at the end of Q1 which resulted in the higher level of inventories than expected. We expected those inventories to be sold which as I noted on the prepared remarks delayed about $100 million in ESR that we still expect to occur just later in the year when businesses reopen. And then we -- as I noted in the prepared remarks continue to manage payables as closely as possible to purchases, what we're actually buying and making sure there's nothing discretionary that doesn't need to be bought and then managing the timing of those payables. So we expect that to be a source.

Got it. And then thinking about the cost structure, it sounds like you're still on track for the $450 million gross target you guys laid out coming into this year. I'm wondering, if you can just talk about puts and takes to potentially do a little bit more and if there's any potential to bring forward what you had sort of laid out as the plan going into 2021 into this year?

Yes. So the $450 million initiative is pretty much by the beginning of the year was mostly lined up. We knew what we were doing the actions we were taking. If you noticed the restructuring charges for the year as some of that lines up with those initiatives we've held it still at $175 million. So we're very confident in achieving the $450 million in addition to the $640 million we did last year. But then as we noted on the on our prepared remarks, once we saw what was happening with the pandemic in the March timeframe, we took additional initiatives from a cost-control perspective, looked at things such as like, all our contractors and set our -- what's really necessary versus not necessary. It's the first variable component. You go to -- you looked at overtime hours, other various initiatives that we -- look it's almost like a blank sheet with expenses and analyzed every one of them and set in this environment what is really necessary. With that said, one of the key things is that, we want to make sure we continued investing in key areas whether it was in our IT services initiatives or whether it's in the SMB market as noted by our investments in multi-branded resellers expanding our SMB strategy over to the U.K. and into Canada.

Thank you.

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

Thank you very much. John you mentioned, you're doing now disposable ventilators and hospital-grade sanitizers which is great for everybody, as well as the first responders and the citizens widely. When you think about though for shareholders, can you talk a little bit about are the profitability of these kind of at your normal corporate average or they take an investment a few phases to get going? And then the concern is in six months from now is there going to just be an oversupply of such materials?

Jim yes, look first and foremost what we did is, we launched these initiatives to address the needs of patients and frontline health workers. So saving lives was extremely important. That said, we took a disciplined approach on what we can manufacture, what's the minimal CapEx required, assuring that we don't have inventory that's left over should the needs decline, whether it's in ventilators, hand sanitizers. And we also looked at masks at one point and I think -- and we did quite a bit on masks. So we didn't do this only for a financial gain. This is really contributing against the pandemic. But I would tell you that our focus is we'll manufacture it as long as required. And when it's -- and if it's not required then we can stop it quite quickly.

Yes, Jim. Minimal upfront investments on these initiatives and as John said, we're not going to build up a lot of inventory unless we're certain that the demand and the sales will be there.

Thank you so much for your details. And its really appreciated, John.

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

Thank you very much. I wanted to ask about what you've seen so far in the month of April. And specifically, I'm just curious, if the conversations that your salespeople are having with new customers have changed now that some of the states and some of the countries, certainly in Europe are starting to look at opening up. So has there been any shift in tone or interest in sort of restarting at this point? And then I have a follow-up. Thank you.

Shannon, it's Bill. So the pace volume declines we saw starting in March, obviously, continued into the April time frame, not giving specific numbers. But, as I mentioned before, we are expecting Q2 to be worse than Q1. And interestingly from a sales perspective, as we mentioned on the call, renewals we have the highest rate of renewal in Q1 in over two years. And new business signings, although down slightly, still at a very low rate and then actually a very good quarter in Q1. And the sales process is still going on, especially in the large enterprise area in terms of getting deals negotiated. It's, obviously -- the issue is recognizing the revenue and getting the installs associated with those deals.

Okay. And then, John, can you talk more specifically on what you're doing in terms of helping customers with work from home? And I'm just trying to think about how -- like what product software services you have that you're able to leverage with your customers? Because clearly there are a number of IT hardware companies that are -- well, services companies that are trying to help out their customers. So I'm just curious, specifically, within Xerox' portfolio what you're using. Thank you.

Yes. Shannon, yes, one of the things we're working with the clients and implemented for some clients is, like, we've got a unique suite of softwares and service and apps that really allows us to get the desktop experience for our clients and workplace from home and beyond. Security becomes absolutely key for them. So we have offerings, whether it's IT services for remote workers, a digital hub and cloud trend, our virtual print management services and I can go on and on. And what we've done is we, with examples, whether it's a large hospital where we're helping them with the whole register of daily health and availability of their thousands of essential employees, to assure business continuity, we're working with some different banks where we've launched programs that allow them to equip their critical staff, with not just printers, multifunction devices. And the key is security. The biggest concern right now with everyone working from home is security and workflow of documentation and the workflow that goes back and forth. It's not just I need to print this, its how do I keep it secure. And somebody's offering using our XMPie using our DocuShare Flex is allowing us to help these clients through it.

Thank you.

Thank you. And our next question comes from Paul Coster of JPMorgan. Your line is now open.

Hi. Thanks. This is Paul Chung on for Coster. Thanks for taking my question. So, if you could kind of expand on a -- as it looks like you plan to offer kind of a broader range of solutions, IT services, to your customers like a VAR distributor. Is this capability client-device only, or do you intend to offer a range of on-prem and cloud-based enterprise infrastructure solutions? Thanks.

I'm not sure I understood. But I can say the offerings that we just described that we're putting in place, is we're looking to also offer it in a cloud-based solution and offering it for our clients and for our partners. And some we're implementing as we speak.

Thank you.

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

Hi. Good morning, guys. Thanks for all the detail and hope that you guys have been doing well. Appreciate the question. Is there anything from -- Bill, from sort of sensitivity perspective with regards to revenue and operating margin that you can provide to us, just as we think about 2Q going into Q3 and even into Q4 that we could use as a guide rail as we do our work? And then anything else in that regard. And then I have a follow-up or two. Thanks.

Yes. As I said in the prepared remarks, our Q1 operating margin -- our gross margin was down due to the loss of the -- both ESR, but also the higher-margin post sale. Operating margin in Q1 though, in particular, was hit by the $60 million bad debt charge. Obviously, there will be true-ups to that, as we update our estimates. But the initial impact was likely to be the greatest charge would be in Q1. So you wouldn't expect that to repeat at the same magnitude in future quarters, as you're truing that up based upon on new data. With that said, you have the post-sale having more of an impact starting in Q2 versus Q1 where it tailed off in the March time frame. You're having it for the full quarter. And post-sale tends to be higher margin versus ESR, so you'd expect to have an offsetting or a more negative impact in Q2 than in Q1 for that. So I would look at it that you don't have the repeat of the bad debt charge to quite the magnitude you had in Q1, but you also have a greater negative impact of post-sales being impacted for the full quarter versus what happened Q1.

That's really helpful. I appreciate that. And then just a follow-up on the -- on how to think about the cash flow model through the year? I may have missed it, but any comments on payables? And your bad debt expenses are going up that much. But I'm also wondering if you're expecting delays in payments of enterprise customers. John, it sounds like you've been having a lot of conversations with key customers. So I would love to get your thoughts around that when we think about timing of cash flow payables -- sorry receivables…

Receivables, yeah.

As we move through the year. Yeah, exactly.

Yeah. So we put in a process starting in March to work with our customers. And as I mentioned we have long-standing relationships with these customers. We want to work through this pandemic with them. Oftentimes, we're able to negotiate solutions with them maybe extending the term of the contract, forgiveness of a payment for a month or two and just adding it on to the back-end. It's really on a case-by-case basis, but we are clearly working with our customers. On the SMB side, we point out what's available from a government subsidy perspective and making sure that they're getting all that they can get from a subsidy perspective. But we are getting the requests. We're working through it with our customers both large enterprise and SMB.

Appreciate it guys. I’ll let it go there. I can get the rest on the follow-up -- on the call back. Thanks.

Okay.

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.

Okay. Thank you, Tim. Well, this isn't the year we planned for. This is the one we have. I'm really proud of this team. We moved quickly to help ensure that Xerox and its stakeholders will come out of this crisis in a position of strength. So thank you and be safe and be well.

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