Good morning, and welcome to the Xerox Holdings Corporation Third Quarter 2020 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Interim 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 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 2020 earnings call. I hope everyone is safe and healthy. For the third quarter, revenue totaled $1.77 billion, down 19.7% in constant currency year-over-year and up $302 million from last quarter. Free cash flow was $88 million, down $243 million year-over-year and up $73 million from the second quarter. Adjusted earnings per share totaled $0.48, down $0.32 year-over-year and up $0.33 from the second quarter. Adjusted operating margin was 7.4% down 460 basis points year-over-year and up 320 basis points from the second quarter. I couldn't be more proud of our team. With all this year had thrown at us, the team has remained steadfast and determined to provide exceptional support to our clients, while driving our transformation forward. The third quarter results reflect the agility of our business and the team's laser focus on Xerox's four strategic initiatives: optimize operation, drive revenue, re-energize the innovation engine, and our focus on cash flow and increasing capital returns. Let's walk through each area. Project Own It has instilled a strong sense of discipline and responsibility throughout the company. Employees at all levels understand the need to make smart decisions that drive continuous operational improvements, while preserving cash. That's been especially true during the pandemic. This foundation enabled us to react quickly to the business impacts, while continuing to invest in the future. Project Own It provides a framework to strike that balance, while positioning us to deliver at least $450 million in gross savings this year. We have taken and will continue to take actions focused on discretionary spending as needed. The company's flexible cost structure gives us confidence we're well-positioned to manage the business through the pandemic's uncertainty. We're investing in a number of areas that are making us more efficient…

Thank you for the introduction, John. Also, our business continues to be impacted by COVID-19, revenue improved compared to the second quarter in all regions, our businesses began to gradually reopen on employees return to the workplace, resulting in more of a hybrid work environment. This increased activity enabled higher equipment installations and contributed to a lower rate of decline in pre-page volume sequential cost savings from our Project Own It transformation program, as well as savings from dedicated actions to preserve cash that focused on discretionary spend item in response to the pandemic. We generated $88 million of free cash flow in the quarter and $253 million year-to-date and we maintained our commitment to shareholder returns with $150 million of share repurchases on $61 million in dividend paid in quarter three. We ended the quarter with $3.3 billion of cash, cash equivalents and restricted cash. We also strengthened our balance sheet and improved liquidity in the quarter by refinancing approximately $1 billion of debt that mature in 2020, and in October, we prepaid $750 million of $1.1 billion bond that matures in May 2021. Our $1.8 billion revolver that mature in August 2022 remains undrawn. Looking at our third quarter financial results, total revenue of approximately $1.77 billion in quarter declined 19.7% at constant currency year-over-year on $302 million above second quarter, so $412 million decline in revenue year-over-year reflects the impact of COVID-19 which has resulted in business closure and has limited the number of people returning to the workplace. The decline in revenue has moderated compared to the second quarter, which I will speak about in more detail shortly. Looking at profitability, the year-over-year ratios and measures presented here continue to be impacted by the decline in revenue resulting from COVID-19. Adjusted operating margin of 7.4% was…

Thank you, Xavier. Now let's open the line for questions.

[Operator Instructions]. Our first question comes from the line of Ananda Baruah from Loop Capital. Your question please.

Hey, good morning you guys, and really appreciate you taking the questions and congrats on continued progress. I know there's probably a lot of questions, so I'll try to keep it brief. The -- I guess the first is that, could you talk -- you gave good detail about the geos and sort of high level on the environment, could you give a little more context on some of the comments that you made around sort of adding and renewing contracts in Fortune 500? Do you think this is something that has legs or are people genuinely looking at sort of putting on projects and doing refreshes that they had put on the side and things like that? And then along with that is, you talked of growing market share in production and growing share in entry segments, and could you talk to why that is or why you believe that’s the case? And are there any structural shifts going on there that are leading to that? And then I have one quick follow-up. Thanks.

Okay. So good morning Ananda. So regarding the environment on the renewal contracts there. As you know, Xerox is focused on selling what added value contract to our customers are. And what we see from a renewal point of view is, first, our renewal win rate improved sequentially quarter-over-quarter. And we saw as well, an uptick in what is our new offerings supporting COVID-19. Specifically all offerings around software, on the digital transformation, including Digital Hub on the Cloud Print Services there. So good traction. Companies are still looking at transforming some of their processes on leveraging our offerings there. Regarding market share; yes, this is IDC data, quarter two data. We are quite proud of having maintained our production leadership on both regions, America and EMEA. With, I would say significant improvement there. We are also seeing, and this is related to the -- I will call that, hybrid work environment. We are also seeing a lot of activity around entry product, A4 printers. And we are quite unique here, by providing under a safe, secure, controlled and cost competitive environment. We are providing offerings to customers that match our requirements.

That’s super helpful. And then just quickly on free cash flow for December. What are the different sort of levers and offsets that could have the free cash flow not be positive? It's usually a strong -- your strongest free cash flow quarter and you are positive this quarter. And so, what would cause it? What are the different levers and what would cause it not to be?

Yes, so as you know it, Ananda, we have put in place the cost discipline, and I would put that finance flexibility in our model, that give us, I would say confidence that we can deliver positive earnings on the free cash flow during quarter four. One key lever within this is around, first, delivering our earnings. The second point is on working capital and we have you know levers here, that we have identified and the team, who is currently putting a lot of discipline around improving some of the working capital levers.

Thank you. Our next question comes from the line of Matt Cabral from Credit Suisse. Your question, please.

Yes, thank you. As you guys are starting to see customers return to the office, wondering if you could talk about what page volume or usage trends have looked like for those customers compared to pre-pandemic levels. And then looking forward, just curious if you think the sequential improvement in revenue continues into Q4 and into next year or if you’ve seen things start to slow down a little bit, as cases have begun to pick up again around the world?

Yes, Ananda, sorry, not Ananda.

Matt.

Matt, sorry about that. Good morning, Matt.

Good morning.

As we look at it, as we do our modeling, we’re modeling a modest improvement quarter-over-quarter, and again, we can’t model the uncertainty of a pandemic. We really can't predict what it's going to look like. But I can say that our strategy continues to capture the top-line opportunities, and I think of how we go about doing it, as you know -- as companies are in a hybrid environment today, they are acquiring technologies that increase productivity, and that's a discussion that goes on, while maintaining security. Security is becoming a big issue in this hybrid environment, as well as cost effectiveness. And we've been investing in these offerings in IT services, and DocuShare Go, or Intelligent Workplace services or Capturing Content, and that's a bit what's allowing us to capture not only renewals, but also new deals going forward.

And then as my follow-up, circling back to the prior answer on working capital. Just wondering, if you can talk a little bit more about, when do you think that will start to reverse, particularly on inventory, given some of the revenue dynamics? And thinking about capital allocation more broadly, wondering if you could talk about your ability to maintain this level of buybacks, as we head into next year, and how you're sort of weighing M&A versus repurchases going forward?

Okay. So regarding -- good morning, Matt. So regarding working capital, as I mentioned it here, this is -- our area of focus in quarter four. You know that, usually sequentially, our quarter have like seasonality. I don't know if you noticed this there, but in quarter three -- quarter three was our highest quarter from a revenue point of view this year, where usually quarter two came at a second, on quarter four is the best quarter here. So we expect and we have modeled, we have different models here, managing -- or modeling the different outcomes that could happen during the quarter there, but we expect quarter four to be a stronger quarter from a revenue point of view versus quarter three sequentially and this will help, some of the lever that we have on working capital, and specifically on the inventory.

And the only thing I would add is that we continue to be opportunistic about M&A despite the COVID-19 crisis, and we evaluate our pipeline with a disciplined approach looking at IRR, ROIC, cash flow yields and we're looking both at tuck-ins and strategic acquisitions. That's ongoing, that hasn't stopped.

Thank you. Our next question comes from the line of Shannon Cross from Cross Research. Your question please.

Thank you very much. John, I was wondering if you could talk a bit about how you're thinking about the various scenarios you're modeling, and what I’m trying to get at is, is there an opportunity for maybe some fundamental changes on how Xerox approaches business? You've done certain things, you outsourced obviously with global imaging to HCL for back-office. I'm wondering, thinking back to some of the things that may be Pitney Bowes has done over the years, as they faced some pretty significant revenue challenges, maybe moving more to inside sales. I don't know, changing the way that you approach from a -- from a technician standpoint and a maintenance standpoint. I'm just curious as to, maybe if you can give us an idea of the scope of what you're looking at, and how much flex do you think there is in the model? And then I have a follow-up. Thank you.

Yes, Shannon. Yes, so as we're modeling, we’re modeling all scenarios, as you can imagine. And if we look at what happened in Q2, we still managed to deliver a positive free cash flow. But we're modeling -- going forward; we continue to make sure that as part of our modeling, we’re continuing investments. So if we think of just inside of our business, I spoke briefly about RPA and robotics, and in the quarter, just on Robotics Process Automation, we saw over 1.5 million transactions across the organization. That's like a 300% increase year-over-year and that's in everything from order to cash to supply chain to human resources to sales. We're also focused on this whole DocuShare Go, I come back to the hybrid environment and what we're seeing is a trend of clients asking for security and cost effectiveness, because we're not modeling everyone going back to the office in the near future. Because if that happens, we don't need to model it, we have it. But what we are modeling is, how we're helping our clients' transition and assure that their employees are secure and productive going forward. And finally, I would say in innovation; we continue to invest in innovation. We're continuing to invest in monetizing the long-term innovation and in areas that gives us a little bit of confidence, is we're starting to see contracts like the DARPA contract that we just explained. In cleantech, we will have a prototype in 2021 that seems to be on track right now. So there’s a lot of exciting coming into innovation. While we're not anticipating the revenue this year, it helps us with the future.

Okay, thank you. And then, I’m curious from an equipment standpoint, clearly there is some pressure on margins, I assume, because of the mix shift more to the lower-end devices. But just in general as you talk to your suppliers and think about where pricing is in the environment, how should we think about the ability to hold in margins and also on page volume, how should we think about -- or cost per page, I guess, how should we think about the pricing environment there too, given the weak environment that we're in? Thank you.

So good morning, Shannon there. So, as you know, we manage very carefully the margin here. On the -- we are not having a contract like -- in a [indiscernible] environment, where we just have two-thirds of price of a box sale. Usually the equipment that we have, come with services there and we brought as well, with the ConnectKey environment, a lot of functionality that our customer required currently into a new work environment. So all the ability, the ability to manage workflow on the digitalization of the document, and in the current environment here. So the mix change that you mentioned there is, one of the things that we observe there, but at the same time, we managed this here. Just for you, maybe to get the insight on that, this quarter. Currency has a little bit of an impact there on the margin that's under pressure and a little bit of tariff, when you speak about year-over-year, but also quarter-over-quarter, some of the tariff had an impact too. So we still continue to manage margin very strictly there. And we want to be certain to get the right offer at the right price in front of our customers.

Thank you. Our next question comes from the line of Paul Coster from J.P. Morgan. Your question please.

Yes, thanks for taking my question. Just, first of all on black and white entry-level product, which seems to be doing quite well at the moment, owing to the hybrid work model. How much -- do you feel like that has got legs to it and how has it changed your sort of go-to market motion? I mean some of the fulfillment obviously is going to be to the home and I imagine some of the purchase decisions have shifted to the employees, at least in some businesses. Perhaps you can just talk us through that a bit?

Yes, so good morning, Paul.

Good morning.

So the first thing is that, the -- what you call the entry model there, so A4 black and white, is now becoming part of the new hybrid model there. And, as you know it, you know employee could be asked to work from anywhere and working from home is also a trend that we are seeing there. However, we are not like -- a personal printing model there. So we are speaking here about literally what enterprise customer ask us to deliver, which is secure; and by secure means, a bulletproof environment from a security point of view, so company knows that what is being printed or being trying to print there, is safely printed there. And second point of cost competitive set of machines there. And by cost competitive, it's not only use of price of the equipment; it's also the post sales and the cost of consumer welcoming with the equipment there. So we see a progressive shift and this is complementing the offerings that we have currently with our existing set of products there. To answer to your second point regarding channel inventory; the good point is that, channel inventory weeks of inventory has improved from quarter two to quarter three, and we see, as I mentioned it, our channel partner, making wise decision on cash management there. And we are supporting there -- purchase there. And we are clearly driving the activity when they have the endpoint among them -- with them there. So channel inventory is not a concern and we have the route to market, to enable these new ways of working in this hybrid environment.

Okay. A quick follow-up for John. You mentioned your uncertainty is really an expression of your customer’s uncertainty and in the enterprise space. So, and I mentioned most of them are sort of making things up as they go along here, because we all are. But have any of them said to you, we've had a fundamental rethink about the way in which we use printers', good or bad, so a strategic level decision that you think we should be aware of?

No, I would say that the discussion is more based on; I have this workforce to -- the workforce today that's remote. How do I keep it secure? How do share what their printing is not going to get me in trouble in the future, because it's a lot of information that’s out there. Secondly, the conversation that happens at least at my level and below is the costs. So while at the beginning, everybody went running home and acquiring printers and PCs and all that, everyone's pretty much acquiring their own supplies, and there’s really no control. So those are the two things they are looking at. So this hybrid environment, we don't know how long it's going to be, we don’t know what percentage is going to come back to the office, Paul. But we do know that, as this goes on, productivity becomes important, security becomes important, and workflows, understanding where the workflow is becomes important, and that's where we've been focusing on, with our clients in the large enterprise. SMB, same conversation, slightly different, where they're looking at virtual print and they are looking at ways that if they have to work from home, how do they know what's being workflowed at home and how do they assure they keep their information. That's a little bit where we're seeing upticks, and we look at IT services and our softwares and all of them growing quarter-over-quarter and year-over-year.

Thank you. Our next question comes from the line of Jim Suva from Citigroup. Your question please.

Thank you very much. First one, clarification question and then kind of a more detailed question. On the clarification question on your prepared comments, you mentioned keeping the dividend rates where it is. Some people interpret rates in two different manners. One is a payout rate, like as a percent of cash flow generation, some people consider as a rate like a yield percent, and some people consider the rate like you currently have, I think it's about $1 per share. If you could just maybe clarify that? And then the more detailed question is, can you talk about the innovations coming out of research PARC? It sounds like the liquid metal is the kind of one that's coming out more sooner, and I don't recall hearing a lot more about the HVAC system, is that still in the works, and it sounds like that's kind of a little bit of a longer-term one. Just update us on research PARC? Thank you.

Good morning, Jim. No change on the dividend amount. So that's really no change, it's what it has always been, okay, just to answer that. And then on innovation, it's really – we're still on track, so we're looking at monetizing. We’ve talked about 3D IoT and in 3D; we're on track to launch the first version of the liquid metal 3D printer. It will print aluminum 4008, which is one of the alloys we’re working on, and it’s in multiple industries, will produce prototyping. We're having conversations now with the possible clients on utilizing it, before we formally announce it. And our roadmap includes expanding the range of metal alloys. So as we're looking at these offerings in innovation, it’s important to have roadmaps that go across the next two to three years. In cleantech we're excited. Like it’s science, but the team right now is on track to complete a prototype in 2021. And that has the potential to cut the energy consumption of air conditioning of up to 80%. So it’s not just -- it's reducing greenhouse gas emissions, indoor quality in the buildings and frankly, it's going to be reducing energy bills for businesses and individuals. So we're excited about that. But it's science and we’re looking right now, we're on track to develop a prototype by 2021.

Great. Thanks so much for the details. It's greatly appreciated.

Thank you. Our next question comes from the line of Katy Huberty from Morgan Stanley. Your question please.

Thank you. Good morning. Just looking at segment performance, those with more channel exposure like EMEA and supplies and paper improved faster than the rest of the business. So I guess the question is, whether you view that restocking as a one-time benefit, or could we continue to see restocking as we go into the fourth quarter and early 2021?

Good morning, Katy. So first of all, yes, EMEA had a little bit more pickup there. You know that COVID-19 had an impact as well, the business reopened a little bit earlier than in other geographies, specifically compares well to Latin America, which is a large -- one of our large channel areas there. Regarding supplies, papers or everything which is around inventory management. As I mentioned earlier, our partner distributor and reseller managed their cash currently very wisely. And clearly we do not expect like destocking activity happening there. What we expect is just seasonality, the quarter four seasonality, where we see an uptick on sales. But we do not expect the partner, to go back to a high level of inventory or higher level of inventory. They are managing their cash very wisely currently.

And what you view as normal seasonality in 4Q sort of up 8% to 10% sequentially or something like that?

So usually we do not provide this number, Katy, as you know that. But if you look historically, our quarter four is a stronger quarter. But let's be also here -- let's face the facts there, the ability for certain customer at the end of the year, you know to use their budget to close their fiscal year there. It will definitely be different this year compared to former years. But I won't use a pure reference point. We are modeling all potential scenarios here, in order to ensure that as we mentioned it, we will deliver positive earnings and positive free cash flow in the quarter.

Okay. And Xavier, you walked through the dynamics around the year-on-year decline in gross margin, can you walk through what drove the 170 basis points sequential decline in gross margin, given the revenue improvement?

Yes. So it is mainly on the -- if you look at this, I explained at high levels there. But we had a little bit of tariff impact on the -- some I'll call that -- not technical items, but items related to the mix that we have in the business. But I won’t say not so significant here. What we have seen right there, is that from a gross margin point of view, we have had some, I will call that, subsidies or money being given by your government here. Quarter two over quarter three, this amount was less. So I won't give you precise number there, but it was significantly less on as well, if you model quarter four. In quarter four, we do not expect this amount to be as strong or as big as what they were in quarter two and a little bit less than in quarter two.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Visentin for any further remarks.

Thank you for your time today. We continue to be guided by the strategic imperatives we've laid out. The strong fiscal policy instilled throughout our company, provides the flexibility to increase investments or dial back spending where necessary. Behind every challenge, is an opportunity, and we have taken this opportunity to speed our transformation and invest in our future. Be safe and be well.

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