Good morning, and welcome to the Xerox Holdings Corporation Second 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 Xerox's Q2 2020 earnings call. I hope everyone is safe and healthy. For the second quarter, revenue totaled $1.47 billion, down 34.6% in constant currency year-over-year. Companywide cash preservation efforts allowed us to deliver positive cash flow, earnings per share, and operating margin. Free cash flow for the quarter totaled $15 million, down $245 million year-over-year. Adjusted earnings per share totaled $0.15, down $0.64 year-over-year, and adjusted operating margin was 4.2%, down 820 basis points year-over-year. I'm proud of our team. It was not easy to deliver profitable results and continue investing in key areas of growth while the bulk of our markets were fully or partially shut down during the quarter. The fact that we did speaks volumes about the progress we have made in transforming this company and culture into one of continuous improvement. This is an extraordinary time in our lives, one that has challenged each of us to be better, do more and demonstrate that the situations we face only improve when all of us are working together. That's true for the pandemic and for the continuing battle against racial inequality. Xerox has approximately 26,000 employees located in more than 40 countries working at approximately 250 of our own facilities and onsite at thousands of customer locations, many of whom deliver essential services. After we initially closed our offices in March to all but essential workers, we stood up a dedicated team that quickly developed comprehensive safety protocol to keep employees and clients safe. While taking a cautious, methodical, and phased approach, we have now reopened roughly half of our own facilities and more than 50% of our active employees have resumed working onsite in some capacity. We continue to monitor COVID-19 transmission trends to ensure employees engaged in…

Thank you, John. As we stated during our Q1 earnings call, we assessed the impacts on our business under numerous recovery scenarios and we expected COVID-19 to have a significant impact on our business in Q2 based upon the impact that we experienced from the one month of business closures in the first quarter, and the expectation that closures would continue through most of Q2. We saw signs of recovery later in the quarter, as parts of the U.S and some countries in Europe began to lift lockdowns, thereby allowing businesses to reopen offices. And our current base case scenario reflects a slow gradual recovery in the second half of the year. Our focus on cash and expense management has only intensified as we managed through the crisis. In order to mitigate the impact on our revenue from the crisis, we implemented cost reduction actions, focus on cash preservation beginning in mid-March. Through Project Own It, we have developed not only a strong cost discipline, but also a more flexible cost structure that allows us to scale up or down quickly to assure the strength of our business, which enabled us to deliver positive earnings and free cash flow in the second quarter. The cash preservation actions in response to COVID-19 are aimed at discretionary items and are incremental to the initiatives under our Project Own It program, and both programs are continuing. The speed with which we are able to identify discretionary areas of costs that could be cut without impacting our future, develop actions and execute on those actions is a testament to our team and the discipline developed through Project Own It. Under our cash preservation program, we also identified opportunities to use certain temporary government assistance programs to provide cost relief while enabling us to thus…

Thank you, Bill. 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 reconciliations and posted on our Xerox Investor Relations website a full set of earnings materials. Operator, please open the line for questions now.

[Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital.

Hi, good morning. Thanks for taking the questions; and hey, congratulations guys on solid execution in a really tough environment. Yes, just a few for me, if I could. So you're talking about sort of gradual improvement through the balance of the year. Do you feel as if we've sort of -- like June quarter is then sort of the new sort of bottom in the revenue stream and I really would like to get a sense of, if you think that we can consider this to be kind of like the baseline business? And then I have a couple quick followups after that. Appreciate it.

Yes. Hi, Ananda. Look, our base scenario is for a slow gradual recovery, but we're modeling numerous scenarios, so that we have the flexibility, no matter how this pandemic continues to impact us.

And John and Bill as well, you made a handful of remarks, sort of with regards to CapEx and some of the initiatives around model optimization. Should we think of this as being sort of the core cost structure going forward? I’m familiar with the owners' initiatives and that sort of thing. And I guess really what I'm asking is it sounds like well, could you guys do something more significant from a cost structure perspective, or is it more going to be along the lines of what you've been doing over the last couple of years?

Yes, Ananda, I would say that again, we're modeling, and we have additional levers to right size our expense structure if necessary that are more long-term, but we'll consider it as required.

Yes, I guess I'd only add is that, as we said in the prepared comments, Project Own It has given us the discipline to be able to be flexible with respect to our costs to right size them. I think we showed in Q2 with an $800 million revenue hit being able to adjust our cost structure in a relatively short period of time to mitigate at least a portion of that to generate positive free cash flow and adjusted EPS during the quarter. And scenarios going forward, as John said, we're modeling those. And we believe that we have levers to be able to adjust and right size as appropriate.

Thanks. And then the last one for me is free cash flow question. So, you gave us some metrics around share buyback, and we can back into what the dividend is for the year. And then you also made mention of still targeting your original tuck in M&A target. So that would seem to suggest that, well, here's really my question. Should we assume that you're going to use free cash flow for all of those? And if so, I guess we can take that as being your minimum free cash flow expectation for the full-year?

Yes, I guess the way I look at it is, year-to-date $165 million of free cash flow, including positive $15 million in very difficult second quarter, and we've said the second half of the year that we anticipate having positive free cash flow and being able to generate that in the second half. And so, that -- 165 plus, essentially is what we're looking at for the full year. And our guidance that we did -- CapEx we said in line with prior, which was approximately a $100 million pension, $135 million or so was our prior guidance. And the M&A is mainly the tuck-in type M&A, we did $190 million or so in Q1 of tuck-in SMB types in the U.K and Canada. And we gave guidance last quarter of $200 million to $300 million, but that just depends if the right deals are there. But just to go back and reemphasize what we said in our prepared comments is that, very fortunate we have a very strong balance sheet as a company overall to $2.3 billion in cash and cash equivalents on hand, and the undrawn $1.8 billion revolver that gives us flexibility.

That's really helpful. Thank you, guys.

Thanks, Ananda.

The next question comes from Matt Cabral with Credit Suisse.

Yes. Thank you. You guys talked about trends improving through June. Wonder if you could spend a little bit more on what that looked like and just broadly linearity through the quarter? And also if you could just comment on if you've seen that momentum continue so far through July?

Yes. So as said in the prepared comments, April and May, were clearly the most difficult months of the quarter. We saw some improvement in the revenues in the June timeframe as businesses began to reopen. At this point, we're predicting a slow gradual recovery the rest of the year. But not -- confident enough to get the exact percentages or what that looks like.

Got it. And then John, you touched on this briefly in your prepared remarks, but I'm wondering if you could spend a little bit more on just what COVID means for the business longer term, both in terms of the steady state outlook for office printing, even once the health crisis is behind us and in the rearview mirror. And more broadly, how we should think about that impacting Xerox's operating model?

Yes. Yes, Matt, look, if you think of what companies are doing, they're accelerating their digital transformation. They're prioritizing investments, but what's important to them is they're focused on cloud based software, remote IT support, workflow automation in a secure manner. And as we've seen over the last few years, we've been investing in these areas. So if you think of our ITS services that we now have ITS services available in the U.K and Canada and in the U.S. Our technical expertise, it's important to the SMB community, because as they have workforces and workflows, we -- it's a growing concern for them, especially in security on how do they automate their workflows. If you think of our software, whether it's DocuShare, where we're going to enable collaboration, we've been investing in DocuShare, and also DocuShare in the cloud. Hardware, even though folks will be working from home, what we're realizing is it's not just a printer, it's got to be secure. There are companies today that are putting -- companies I've spoken to today that they're putting edicts, you can't print from home. If there's -- if it's not on a secured network, it's not part of a whole secured workflow, you're unable to print from work. So how do we start connecting seamlessly to the office? And that's what we've been investing in. And our cloud for workplace, so we just announced -- not announced, we have the virtual print applications, and it allows us, our clients to print anywhere, anytime in a secured manner. So we've been investing in these area and that's where we see it going, but we don't -- we also -- and I want to reiterate this. We don't believe that, no one's returning back to the office. We believe that a lot of employees will be returning back to the office and it's for all the reasons, productivity is one of them, security is another one, education and you can go on and on. But more importantly, we believe everyone will be working, going back to the office once it's considered safe. And that's what we've been spending a lot of time even with our organization, with our path forward to assure that as we get our employees back to the office, it's done in a safe and consistent matter.

Thank you.

The next question comes from Shannon Cross with Cross Research.

Thank you very much. Just a couple for me. My first one is with regard to the high-speed monochrome installs, which were actually strong during the quarter. And just in general, I'm curious what you're seeing in sort of the high-end? Is this -- China coming back, so you -- actually I don’t know if you sell any through Fuji there. But clearly the iGen through Fuji, is there anything there? I’m just curious as to how that market is doing? And then I’ve a follow-up.

Hey, Shannon, it's Bill. As you pointed out on the high-end mono, we did grow year-over-year, primarily related to transactional type printers, financial institutions for statements, et cetera. And our Nuvera did well in the high end black and white. On the color side, it was challenged, delayed decisions clearly as people are preserving their cash during the pandemic and it impacted, in particular, our mid and high-end sales, but we do believe that those will recover once the -- past the pandemic.

Okay. And then the A4 business also was pretty strong in black and white. Was that effectively your ability to sell A4 into people who are now working from home or was there something else there?

Yes. Yes, I think I had a prepared -- one of my prayer comments, but dealing with the lower end of the A4 is in the black and white does serve work-from-home purpose and that did help mitigate some of the declines or the declines in the mid and higher ends of the entry sentiment.

Okay. And then just my last question. In the release, and I think you mentioned it during your comments. I think you got about $60 million from government programs during the quarter. I'm curious how much of that is recurring, how we should think about it? Just as -- and I know there are new plans and stimulus and who knows, but just when you're thinking about your forecasting and budgeting for the remainder of the year, are you incorporating anything in there? Thank you.

Yes. So -- yes, I mean, those programs are from around the world, European countries, obviously U.S Cares Act, Canada, et cetera. And those each have varying time lines of when they're incented. But we factored into our scenarios, even without the extension of those, we believe that we'll be able to generate positive free cash flow in the second half of the year.

Thank you.

The next question comes from Paul Coster of JPMorgan.

Yes. Thanks for taking my question. I just want to follow-up on the cash flow situation. It sounds like -- well, first of all, you're not reinstituting guidance, but you are reactivating the share buyback. So it suggests to me that though there's a lot of uncertainty out there, it's a lot less than a quarter ago when you suspended the share buyback. Can you just comment upon that? I mean, are we starting to attenuate the uncertainty and do you think we'll be reinstituting guidance by year end?

Yes. We, as we said in our comments, we managed our cash conservatively. During the second quarter as we are evaluating the impact of the pandemic on the company. We implemented the incremental cost actions over and above the Project Own It. And by the end of the quarter, we got comfortable enough with what we're doing from a cash perspective to be able to state that we expect positive free cash flow in the second half, in addition to the $165 million of free cash flow year-to-date. Based upon all of that, we were comfortable enough in instituting -- reinstituting our share buyback and at least $300 million during the second half of the year.

Okay. And then, John, I wonder if you could just give us a little bit of color around sort of maybe anecdotal color around the conversation with enterprise customers. Because it just seems so complicated at the moment. You've got all of these digitalization processes playing out, which work against you in some ways and yet flavor some of your new businesses. And the occupancy rate is going to improve, but maybe not to where we were. And you've also got enterprise IT budgets probably down 5% year-on-year anyway. How are they talking to you? What happens at the end of the contracts? Are they sort of just delaying, perhaps give us some color around a couple of conversations you've had?

Yes, Paul, the -- and it's exactly what you just said, all of the above. So the conversations are, we're looking to get our employees back. It's going to be in a safe manner and it will take time. And as we take time, we need to get them as productive as possible in a secure manner. And what are some of the levers that you can help us with in these levers -- in these situations, and that's where we're focused on our workplace cloud, our software, our ITS services. Every CEO I've spoken to, and it's not just the CEO, I don't think anyone believes we're not going back to the office. It's really at what rate and pace. And that's why we've -- we even modeled our own gradual recovery and we're modeling numerous scenarios because we need to have the flexibility no matter what happens going forward. But if I look at our businesses and our ITS, our software and cloud workplace, while they're not large businesses for us, they've all grown during this pandemic. And that gives us even more reason to put more wood behind it and focus on that with our clients.

But it is the purchasing delaying or are you -- I mean, I'm just wondering how much conviction you’re seeing?

Yes. No, I would say that a lot of the purchasing it's either delaying or not open. We -- there's not much that we can say it's been, we're not doing it. We haven't had that many. And in fact, we have -- we keep -- we continue to get quite a few competitive wins as well, and large wins and renewals. And what's they're focused on in some cases is just when, not if, but when, so we're not at the stage yet. I’m not seeing enough of where the clients are just canceling CapEx.

We believe it's more on the delay and we actually still see strong pipeline in the services area, in both the Americas and in EMEA, we have double-digit growth in our pipeline in those areas, which sort of points to also not cancellation, but just more delays in decision making.

All right. Got it. Thanks so much.

Our next question comes from Jim Suva with Citigroup.

Thank you very much. Bill and John, you guys both talked a little bit about the innovations you're coming out with, whether it be liquid metal, printing, hand sanitizers, ventilators and something like that, which is very encouraging. Is the goal eventually to have that just be kind of part of Xerox's core recurring normal business, or I know -- I think it was about six months ago, you legally changed some of the reporting -- not reporting, the legal entity structure. Does that make it so you're kind of looking at some point there monetizing that through like divestitures or standalone businesses, or how should we think about that? Because it seems like you're actually positively bringing out some pretty innovative stuff out of research PARC.

Yes. So Hey Jim, it's still a couple of things. The holdco is -- when we put that in place about a year or so ago, it clearly does give us flexibility to do things like you talk about the things in a separate legal entity under the holdco potentially spin it off, partially sell, et cetera. But no specific plans at this time with respect to any of our innovations, but you brought up the health care things that we're doing in the hand sanitizer area and in the disposable ventilators. The hand sanitizer has gone very well for us. In fact, we're going to be doubling production here, starting in the second half. And it is a good business. We feel like we're doing good as a part of being in that business and its profitable for us. And on the ventilator side, we're starting to see more interest. We're getting partners and distributors qualified to be able to sell those ventilators and we are optimistic on that also. As far as long-term in the health care, really we're taking it, just really quarter-to-quarter and seeing if it makes sense. We're doing our part. We believe of doing a good thing here and being in those businesses whether it's long-term, it's still to be decided.

Great. And then as a quick follow-up on the air conditioner side, is that something that you would like to be licensing like some intellectual property and trademark and patents on it, or is it you would like subcontract it out or actually build it? Or how should we think about that as it eventually starts to gain some pretty positive reviews given the energy efficiencies and environmental friendliness?

Yes, Jim, I would say everything is on the table. When we talked about all our innovation even two years ago, we talked about looking at what we would do with it and what would it be best to monetize it for Xerox and cleantech. So we're at the early stage and now we're focused really on completing a prototype by the end of the year, and we'll be focused on all the scenarios going forward.

Great. Thank you. It's quite innovative and encouraging. I appreciate it.

Thank you.

Our next question comes from Katy Huberty with Morgan Stanley.

Thank you. Good morning. Given the accelerating shift from paper to digital based processes, can you talk a bit about what percentage of your revenue today comes from digital products and services? And then as you look to increase that mix over time, do you see it more coming from growing the existing offerings, or more so looking to launch or acquire more digital services to increase that mix?

Yes, the digital services and offerings, including the IT services, we haven't quantified those numbers exactly. They are both growing. even during this quarter. They grew the IT services grew from Q1 to Q2. The digital services grew year-over-year. So even a very challenged environment, those folks are growing at the appropriate time. In sizing, we'll start quantifying that, but as far as organically they're growing and we also would look at potential M&A in those areas as we did in Q1 with some of the tuck-in M&As in the U.K and in Canada, both did IT services already. And we rolled out IT services to our whole XBS portfolio companies earlier this year. So organically and M&A will be involved in that and at the appropriate time we'll start breaking out and quantifying the exact amounts, but they are a growing piece.

And Katy we will continue to be opportunistic on M&A and we're going to follow our disciplined approach, IRR, ROIC and all others as we look at the possibilities that hasn't changed.

And then as a follow up on cash flow, Bill, you mentioned that payables and inventory were a use of cash. What actions can you take and how quickly do you think that reverses in the back half in order to get more cash for working capital?

Yes, inventory, we clearly see where was a use here in Q2, that we will be managing down those inventory levels. You know, during the second half that normally is the case with the company as we get towards the end of the year. But even more so this year we expect the inventory to be more resourced. Payables really was used as a sort -- was a use because we just were doing less overall purchases. More than anything, we expect that to be also less of a use in the in the second half.

Great. Thank you.

Thank you, 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, and thank you for your time today. Now this year has challenged us and it's only half over, the challenge assumptions about our business and those of many of our clients. And while there remain questions about the near-term future, we're confident in our strategy and we're positioned well to come out of this even stronger. Today Xerox is better able to serve our clients and deliver modern workplace experience for both the employers and employees. Be safe and be well. Thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.