Welcome to the Xerox Holdings Corporation's Second Quarter 2024 Earnings Release Conference Call. After the presentation there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the program over to Dave -- to Mr. David Beckel, Vice President and Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. I'm David Beckel, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation second quarter 2024 earnings release conference call, hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer and Xavier Heiss, Executive Vice President and Chief Financial Officer. 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. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor and 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'd like to turn the meeting over to Mr. Bandrowczak.

Good morning, and thank you for joining our Q2 2024 earnings call. Sequential improvements in adjusted operating income margin, cash flow, and revenue validate the comprehensive and strategic organizational changes implemented in Q1. Reinvention is a multi-year strategy to simplify operations and repositions Xerox towards market opportunities in print, digital, and IT services with the highest rates of underlying growth. With transformational changes of this magnitude, progress may not always unfold in a linear fashion. We experienced a short period of disruption in the first quarter during implementation of the redesigned operating model, but continued to execute reinvention according to plan. Notable improvements in operating processes and financial results since the reorganization further our confidence in this strategy's ability to deliver a targeted $300 million improvement in adjusted operating income above 2023 levels by the end of 2026. Summarizing results for the quarter, revenue of $1.6 billion decreased 10% in actual and constant currency. Excluding the impact of year-over-year fluctuations in backlog and reduction in non-strategic revenue associated with the reinvention, core business revenue declined only modestly. Adjusted EPS was $0.29, $0.15 lower year-over-year, primarily reflecting higher taxes and interest. Free cash flow was $115 million, an increase of $27 million compared to Q2 of last year. And adjusted operating margin of 5.4% was lower year-over-year by 70 basis points due to lower revenue offset by operating cost reductions. With the disruption in Q1 firmly behind us, the benefits of streamlined organizations with improved operating focus are materializing in the financial results. Q2 revenue was largely in line with expectations marking an improvement in trajectory from Q1. Adjusted operating income margin improved more than 300 basis points on a sequential basis and free cash flow grew sequentially and year-over-year. Momentum in equipment orders and pipeline, new product launches, and improved…

Thank you Steve. As Steve noted we made progress this quarter in design planning and implementation of structural changes expected to drive reductions in operating costs to meet our three-year 300 million adjusted operating income growth target. I'll spend time on today's call discussing the mechanics and assumptions underlining the target and key progress made in Q2. Sequentially higher operating income requires a leaner, less complex organization, fit for purpose to the market opportunities available to us. The structural reduction in organizational complexity through reinvention will be driven by three primary levers, geographic, offering, and continuous operating model simplification. These savings unlock require structural reduction in operating costs which when combined with a more favorable mix of revenue towards markets with higher underlying growth rates will drive cash flow sufficient to fund growth while reducing leverage. I'll start with an update on geographic simplification. We are currently executing a shift in how we distribute product in certain markets from a direct to an indirect model. This shift in distribution strategy does two things. One, it allows greater focus on providing print and digital service capabilities for channel partners who are best positioned to serve our clients within their region; and two, allocates more time and resources on being the leader in the markets in which we maintain direct operations. This quarter, we transitioned our operations in Ecuador and Peru from a direct to an indirect model, following a similar move in Chile and Argentina in the prior quarter. We continue to evaluate the optimal mix of direct versus indirect distribution by country, across our operations in Western and Eastern Europe, and will provide updates as transition decisions are made. Offering simplification will narrow and optimize our offerings over time to those with the greatest levels of competitive differentiation and profitability.…

Thank you, John, and good morning, everyone. As Steve mentioned, the benefit associated with this year's organizational redesign are materializing in financial results. In Q2, adjusted operating income margin, adjusted operating profit, free cash flow on revenue-old-improved-sequentially, while free cash flow-improved year-over-year, despite the lower contribution from finance foreseeable activity. Total revenue declined 10% in actual and constant currency. Excluding the effect of backlog fluctuation, reduction in non-strategic revenue on order-reinvention action, total revenues this quarter declined 3% in constant currency to more than 200 basis point improvement from Q1. Core revenue in the first half of 2024 was below our expectations, mainly due to the first quarter performance. However, continued momentum in equipment orders on pipeline supported by the improvements in sales operations Steve noted earlier, new product launches on continued strength in signings activity gives us increased confidence both core and reported revenue will grow in the second half of the year. Turning to profitability. Similar to Q1, we incurred inventory charge associated with the exit of certain production print manufacturing operations. All profitability commentary to follow exclude this impact. Gross margin declined 50 basis points year-over-year due to lower volume on higher freight costs, partially countered by favorable currency effects on revenue mix. Adjusted operating margin of 5.4% declined 70 basis point year-over-year due mainly to lower gross profit, partially offset by the benefit of structural cost reductions. Total operating expense in Q2 declined 47 million year-over-year or close to 10%, reflecting headcount reduction action taken in Q1, no labor reduction in overhead on the flow through of cost reduction implemented in the prior year. Adjusted other expenses net were 13 million higher year-over-year due to an increase in non-financial interest expense associated with our recent debt refinancing activities. While our debt balance is not significantly higher…

Certainly. And our first question for today comes from the line of Ananda Baruah from Loop Capital. Your question, please.

Yeah, thanks guys. Thanks for taking the question. A couple if I could. And Xavier just picking up right where you stopped. A moment ago, you talked about the reinvention initiatives being the catalyst for the guidance lower. Is it intra quarter, you guys moved around some of the timing of the initiatives and that's what's causing the impact or is it you're just learning more in the last 90 days about the impact of the initiatives, but the timing of the initiatives are relatively the same? And then I have a quick follow up, thanks.

Yeah, so thanks Ananda there. So yeah, we are executing the strategy as we've planned there. Ananda as you mentioned it, we go into the strategy and we assess each of the initiative individually here. As you know it we have not changed the guidance that we have for the entire program. So we stick with the three year guidance that we have there. Regarding the specific guidance for this year, if you look at the revenue guidance change it is entirely related to the way in which an action, specifically offering on view simplification here. If you exclude these the core business is behaving as we are expecting. Ananda, as we mentioned it, it is like modest decline, even like fatty situation when you look at certain lineups of revenue. From a profit point of view, operating margin point of view it is simply the timing of the action. I can give you an example, when you do or view a simplification action here, you have the impact from a revenue immediately, but you move from an indirect to direct model and then comes the action of taking the cost out of the cost base in the country that are impacted, but also in our corporate overhead. It is just a timing point, the overall program is executed as what we're expecting, although we are sticking to the three year guidance.

Hey Ananda, this is Steve. Just a real quick reminder, one of the things that we talked about is we had to make very large structural changes going back to early 2023. So we think about what we did with PARC, what we did with XRCC, our federal change implementing an operating model in the beginning of the year, what we did with production and manufacturing, now what we're doing in GL. It is a basket of activities that drives that end $300 million incremental operating improvement justice. And so what I want you to think about is this is not a linear, meaning that not every action drives a quarterly return, but the bucket drives what we want to do and we've got enough in that bucket that makes us confident that we're going to be able to deliver the end results. There are things that are out of our control, we talk about geo simplification, what happens with approval in a country, what happens with labor, what happens with the things that you need to do to get regulatory approval for the deal. So these are not straight where you can set up a plan, you know exactly what's going to happen in the quarter. However, with that bucket, we can feel confident that we are going deliver over the next three years, the exact financial results that we're talking about.

That's super helpful. You know, guys, I'll just leave it there given the time, and we can get it on the call back. I appreciate it.

Thank you. And our next question comes from the line of Samik Chatterjee from J.P. Morgan. Your question please.

Hi, thank you for taking my question. So if I can start off with following up on the question that Ananda had, but partly on sort of timing here. I heard you say that the 2Q revenues were largely in line if I heard you correct. So my question is, when we think about this incremental load guide for the full year, the 1.5% roughly sort of change is it primarily in the second half in terms of rebasing the second half, is that impact going to be more in the second half than the first half or rather, second half versus 2Q, how should we think about timing?

Timing wise, so just to go back to Q2, and give a little bit more detail on that, the impact in quarter two here. So if you look at our total revenue decline was 10%, including all the impacts that we mentioned. Now, to give more clarity on what we mentioned in our script there is 300 basis points of this impact come from backlog. So if you remember, year-over-year backlog last year was very strong, because we were crushing backlog. If you think about the second half, we will not have this impact anymore and this is the reason why we are thinking about [indiscernible]. The second point was related to 200 basis points. So 300 on backlog, 200 additional basis points related to what to call the end of non-strategic revenue paper endpoint devices on the sum related to the Forward Flow agreement, which has generated less interest income there. And lastly on the top 50 basis point was related to geos simplification and offering simplification. So you take all of this. So 10% from new decline, but at the same time 650 are rationally explained or driven by this section here. When you look into the second half now, you won't have the backlog flush anymore. We will still apply our decision on non-strategic revenue and the geo simplification impact will still continue. But when you look at these and this is the reason why we commented there, the backlog flush on the ability for us to drive the equipment revenues [ph] give us the confidence that will drive revenue growth during the second half of the year.

Thank you. I mean, I guess I'll just sort of rephrase that in the sense what I'm trying to get to, is did Q2 have an incremental impact in revenues coming in below consensus on account of the changes that you decided to do in between intra quarter and is that -- is more of -- or is more of the impact really more in the second half from these incremental changes? And secondly, maybe just for my follow on like, it seems like you're waiting for the bills to be finalized before you incrementally account for them in the revenue guide, full year revenue guide. So how do we get confidence that there's no more sort of some of these deals in the pipeline in terms of which geographies you want to exit subsequently in the year? Thank you.

Yeah, so I will answer the first question. So on the consensus, I don't think the consensus was taking into account some of the action. Because as we said it, every time we will have action ready to geo offering simplification, we will invest investor on [indiscernible] this is what we're doing here with 150 basis point here. Now, we're getting to second point on the second path there, we are executing as we plan the strategy here. I won't say the vast majority, but with some of the action already at play as we describe it here and if there are additional output or major or significant action, during the second half we will inform investor during our earnings calls.

I do think, it's John, I do think it's a fair point. And I think that to just kind of add something to that it is about not only the mix, the mix of the types of geographies that we're looking to exit, the timing and the pacing, the sequencing, but also the mix of the revenue types and the deals that we looked at. And some of the lower profitable deals in some of the areas and low hardware, we're just being very disciplined with regard to balanced execution across both geographic mix shift and products and offerings. And because we're at the halfway point of the year, it's not as if that there's things in the back end part of the year that we're very concerned about to answer your question directly. It's actually the opposite. It gives us -- it gave us all the information in our learnings through Q1 and Q2, gave us a good guide of what's in the pipeline and how we pace and sequence them. So that’s definitely is a timing and a mix issue.

Thank you. Thanks for taking the questions.

You are welcome.

Thank you. And our next question comes from the line of Erik Woodring from Morgan Stanley. Your question please.

Hi, this is Maya on for Erik. So I think just to start, if we think about let's say roughly a $6 billion revenue base, and with services being less than 10% today, that means it's maybe around 500 million to 600 million in annual revenue roughly. Do you think about that mix can more than double by 2026 but what's your assumption about your total revenue base at that point, meaning, are you telling us services revenue is going to double in two years or how should we be thinking about that, any color will help?

I think it's a combination of both. So yes, you do have to think about the broad based services, big asset services as a growth business for us. We really see an opportunity, a very good one in the middle market across our IT services business, because our brand is very well recognized. Those environments are dealing with lots of issues on technological upgrades. We're in there having conversations with customers. And we think that that IP service is part of our business and has very good growth in the SMB space. We're seeing similar items in digital services, but they're not as mature. And that is absolutely offset by the declines that we've shared with you over the same period of time on print. So we want to make sure that we get the print mix, right, both in production, in the enterprise, and on the low end. So it does -- it will -- you will see a mix shift within our print portfolio, between our low end A4 or A3 and our production at the same time, you'll see an increase of our IT services and digital services. And that's the whole point of ensuring that the geographies we position these offers in and the offers themselves, and how we grow them is how we're getting to this mix shift changes over time. And the savings that we're driving through them gives us the ability to invest in them. So yes, that's why it's kind of -- it's complex by its very nature and it's a multi-year program, over a period of time, as both Steve and Xavier pointed out to. But yes, you are thinking about it correctly with regard to growing the services business and offsetting the declines in print.

Yeah, I might add, I want to also just to highlight there. So when we do the compare, when you look at Q1 or Q2 revenue, and you say, okay, this is like a double digit revenue declines. So is it like those are future trend. We should not forget that last year, we had significant backlog flush there and we know that starting Q3 and Q4, we will be no more apples to apples compare and that obviously is why we are saying for the second half, our view is that we'll be on a growth mode on both this adjusted revenue taking into account all the different strategic actions that we are doing. But also if you look at the different line of revenue that we are driving here, the outcome will be positive. So we should not forget last year the backlog had an impact in the first half.

Got it. That's helpful to remember. And so I guess when we talk about kind of this business being a significant growth business, the digital and IT services, are you looking at breaking services out, when should we kind of expect that to become a part of your regular disclosures?

Yeah, so this is good question on the -- this is one of the most demanded question from investor here. So our plan so far is at the beginning of next year, we would like to present accompanying result in two segments. So we are working on this one, currently two businesses. One will be print or call print and the other one will be IT or Digital services. I'm not committing to this area, because it required for us to work on the reporting, so we can be compliant with the reporting requirement, but we understand that this is clearly a requirement. So we have a much better understanding of the hydraulics between these two businesses.

Got it. Thank you. And then I just have one last question. We've heard in a few different tracks about some potential product or supply shortages potentially being caused by the reinvention and actions you're taking internally. Do you think this could have an impact on customer spending or purchase intentions or even channel partner behavior?

We don't -- we've got no issues with supply internal shortages. I don't know where it's coming from. We're fine with inventory, and we are fine with supplies, not an issue.

Alright. Thank you so much.

You are welcome.

Thank you. And our next question comes from the line of Asiya Merchant from Citigroup. Your question, please.

Great, thank you for the opportunity, good morning. Just a high level, I guess I wanted to dig into the revenues that you guys are thinking about over this next three year period, how you guys are thinking about the operational improvements that you've already discussed, but what's kind of the revenue trajectory post 2024 and to what extent is that beacon whether it's print market decline, your own market share position within that? And if I can double click on the digital and IT services, areas which are -- which you present our growth opportunities, where are you seeing success in those, if you could double click on those in terms of drivers of growth there, whether it's geographical, vertical, I know you talked about the mid-market, so if you could just double click a little bit on that, that would be great? And lastly, the operational investments that you need to do in order to drive growth there, if you could double click on that as well, that would be great? Thank you.

Yeah, great question. Let me start with the strategy, as we've been talking about as part of the whole reinvention. First of all, we believe that the existing TAM inside of existing clients and accounts is a great opportunity for us very specifically, in mid-market and helping a lot of our mid-market clients, being able to absorb new technology, whether it's AI, RPA, intelligent document flow, looking at IP services, and how did they embed it. So we're perfectly positioned as a trusted partner in that ecosystem to be able to bring products and services. And we're seeing that across our offerings. In addition to that, if you think about what's happening today, in the world of AI, in the world of intelligent documents, you take a look at RPA, we are greatly positioned because we are already behind our clients firewall, what does that mean? That means we're embedded in their security, we're embedded in their business processes. And therefore, we can create capabilities and solutions that brings client success and client value. We talked about changing and really focusing on client outcomes about a year and a half ago. And that really means how do we bring more value to our clients through our technology, and not just bring solutions from a product standpoint. So that's where we get services and that's where you saw some of the things that we highlighted in the opening comments around the things that we're doing with our clients. John, you want to go through some specifics?

Yeah, for sure, Steve. So I'd like you to think about digital services in two ways. For large enterprise clients they look at work streams like invoice processing, invoice accuracy, the types of things that are both ingested via scanning and things that are printed, PDFs and their formats, the from, the to, and all of the handling of all of that. Robotic process automation and all those types of advancements in that space is just helping clients be much more efficient. And that's kind of more of a large play, a larger play in that space. You're seeing in the graphic communications and in the marketing space, Chief Marketing Officers are trying to understand the efficacy of both print and digital ads. That's why you see barcodes embedded on so many index cards or on various different offerings and physical items or watermark. They're trying to understand what the effectiveness is on a printed page, on a digital page, on programs overall, and make better decisions in that space. These types of things are the types of current today's issues, the advancements in AI in some of the areas that both Steve talked to and Xavier talked to earlier. Gen AI is dependent upon good data and good data comes from documents, the repositories of these documents have to be scanned, have to be indexed, have to be redacted. You need to understand chain of custody across these items. So the whole digitization of a document, the origination of the documents, the ability to redact, the ability to secure all these types of digital services and they are combined. It is no -- it is very much a kind of a multi prong approach because there is no one particular area. That's why people say Omni commerce, omnichannel, that's what they mean, it's coming both physical, both digital, but the processes are the same. So we're seeing these types of things emerge in digital services and the IP services around it is managed cloud, just like our Managed Print, manage IT security, and those things. And we believe that that's an SMB opportunity for us more than the large market, because that's where we see the market need. That's where it's very highly fragmented, it's very geographically put in place really like NFL cities, if you will, in the U.S. We have an opportunity to do some consolidation in that area, and extend our services through our brand and through our distribution easily without having to invest a lot more in that space. And so that's how we're balancing those issues.

Okay, and to what extent, you know, what about just the broader print market, I mean, to what extent is your operational income improvements speaking in just challenges in the overall print market?

Yeah, so in the overall print market, it's pretty simple. If you look at our -- if you look at our positions across the three main categories more broadly, it is a gain share program in a secular challenged markets, right. So that means refactoring our offers in each of those three pillars. So it's a grow our market share position on the low end in the A4 and in our offerings and expanding in that space and creating more opportunities, mostly through are indirect channels. As we look at this mix shift, and you look at our Geo strategies, these are tied together. We want to build more channel ready products, higher velocity and capabilities across our A4 portfolio and if that's a gain share program. We are the leader in A3, that's a whole share and continue to differentiate. That's why you hear all the issues we're talking about in AI and enhancements. And we focus on that. That's a reshaping and continue to be competitive in the leader in that space, because we are the leader. This is why we want to make sure that the places in which we're direct, were surrounding that A3 market of more value added services to continue to enhance and protect print. And then on the production side, those are areas if you break the production market down, there's parts that are growing in that space, you see cut sheet inkjet, we see specialty labels, and really all the productivity that surrounds the presses. All the pre-press, post press items and making the presses run more efficiently because runtime and optimization for a large production clients is critically important. Down machines aren't making money for them, these are complex ecosystems. So you're seeing advancements on our side, we want to gain share in the software and services. That's why it's services led software enabled program there. We have to bring more capabilities to our print clients to help them as the digital divide there, which is very much a laggard. A lot of that stuff are still analog processes. We want to make sure that we're bringing productivity tools, and we're making these print shops or these embedded print customers inside the large enterprises, more practical. So it's different for each of the main three categories. It's gain in the low end, it's hold and surrounded strength in the mid, and it's enter new segments by repositioning our production portfolio to where the market is moving versus where it has been and where we've been in previously.

Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steve Bandrowczak for any further remarks.

Recapping today's call, structural changes implemented in Q1 resulted in a short period of disruption but are driving notable improvements in operating efficiencies and sales effectiveness. The sequential improvement in financial results observed in Q2 and improvements in underlying processes designed to enable future cost reductions gives us confidence the reinvention strategy is working and will deliver the targeted 300 million of improvement in adjusted operating income by the end of 2026. I thank you for joining the Q2 earnings call and I wish everybody a great day.

Thank you ladies and gentlemen for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.