Good morning, and welcome to the Xerox Holdings Corporation Fourth Quarter 2020 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without the 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 the call. I hope everyone is safe and healthy. Times of adversity require working in unison, and I couldn’t be prouder of the way our team came together. We put our strategy to the test in 2020, demonstrating we can deliver positive earnings per share and free cash flow, while protecting our people, returning capital to shareholders and continuing to invest in our future. The team’s discipline allowed us to turn on a dime, tightly controlling expenses while steadfastly supporting clients. To summarize the full year results, GAAP EPS from continuing operations totaled $0.84, down $1.94 from 2019 and adjusted EPS was a $1.41, down $2.14 from 2019. Operating cash flow from continuing operations was $548 million, down $696 million year-over-year, and free cash flow was $474 million, down $705 million year-over-year. Adjusted operating margin was 6.6%, down 650 basis points year-over-year. We generated $450 million in gross cost savings, meeting our target for the year. Over the last 2.5 years Project Own It has generated $1.4 billion in savings, freeing up cash to reinvest in our operations, targeted adjacencies and innovation. We returned 112% of free cash flow to the shareholders in 2019. And we accomplished all of this, while revenue declined to approximately $7 billion, a decrease of 22.7% in constant currency from the prior year, as a result of office closures in practically every geography in which we operate. The impact of the pandemic continues. We're optimistic about the vaccine distribution and advances in testing and treatments though the pace of the economic recovery and office reopens remains fluid. While we saw sequential improvement over the last two quarters, we don't expect a return to growth in the first quarter. In 2021, we expect revenue to be at least $7.2…

Thank you, John. And good morning, everyone. As John mentioned, we are making changes to our business to drive organic growth. And after I review our Q4 financial result, I will expand on our plan for our financing business, XFS on our Innovation business PARC. In Q4, we sequentially grew revenue, adjusted EPS and cash flow versus Q3, consistent with a slightly improved economic condition we observed. But the year-over-year comparison shows that our financial results continue to be impacted by business closure resulting from COVID-19. We reported $1.93 billion of revenues this past quarter, a year-over-year decline in constant currency of 19.8%, when excluding the OEM licensing fee of $77 million that was paid to us by Fuji Xerox in Q4 2019, or 22.3% with it. Adjusted operating margin of 9.5% in the quarter, represent sequential improvement of 210 basis points over Q3 and a year-over-year decline of 460 basis point, excluding the 270 basis point impact of the one-time OEM fee from Fuji Xerox. The year-over-year decline in operating margin was caused by lower revenue resulting from pandemic-related business closure, which was partially offset by savings from Project Own It on participation in government assistance programs. The impact of which was significantly less than in prior quarter. Gross margin was 36.2% in the quarter, which is down 350 basis point year-over-year, excluding the one-time OEM fee from Fuji Xerox, or down 540 basis point with it. The year-over-year decline in gross margin was caused by lower revenue, coupled with less profitable revenue, reflecting lower POS sales and supplies on higher equipment sales and IT services revenue, which were partially offset by benefit from Project Own It. SAG expense of $440 million decreased $72 million year-over-year and was in line with quarter three SAG expense of $444 million. The…

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

Thank you. [Operator Instructions] And our first question comes from Ananda Baruah with Loop Capital Markets. Your line is open.

Hi, good morning, guys. Happy New Year. Thanks for taking the question and by the way, not for nothing, you guys are consistently looking at creative ways to - looking for creative ways to create value. So I just wanted to point that out and that you're aware of, but it's worth mentioning on this call. Could you guys just walk through and look, you did a good job of sort of teasing out a lot of details around the business separation. But at the highest level, could you walk through John, really what the sort of the philosophy behind doing that is? I know, you're going to say things like, operating efficiency, driving performance, you know, optimizing - optimizing potential and things like that. But like, in addition to that, you know, driving visibility, potential for, you know, sort of spinning them out, anything else you can give us there would be super helpful. And then I have a follow up.

Yes. Hi, Ananda. What I would say is the revenue trajectory, and the market opportunity that we see in these three areas, it gives us confidence to stand them up as a separate business. And to become a separate business, it will allow each area to be more focused, and flexible in responding to the demands of the market. We're working to identify and long term structure for each of these businesses, which may include the use of the holding company structure for financing and innovation. And we're looking to share more information in the coming quarters with you.

Okay, great. That's helpful. And I guess this is maybe for Xavier. When we think about sort of norm - like the structure of what free cash flow generation will look like, you know, in a normalized fashion, you know, so over the next couple of years, is there anything that we should keep in mind with what you guys are doing strategically, that could materially, you know, alter what the cash cycle might look like? As we model - you're giving good guidance through ‘21. But as we think about, you know, sort of out past ‘21 in modeling?

Hi, Ananda. Yeah, so good question here. So as you know, it, as we mentioned it in call there, so we are returning to growth. So obviously, revenue will be a key driver here. And at the same time, we want to maintain the investment that we're making currently on innovation. So if you look at the free cash flow here, obviously, net income driven by revenue is you know, clearly our key area of focus on where we are currently driving on putting our effort. At the same time on working capital, obviously, as you know, we will focus on inventory and payables. Revenue with AR could drive or will drive, you know, if the revenue trajectory is positive there will drive you know, some slowdown side on the working capital element.

So nothing on working capital that would - that could change, it would be an incremental headwind?

At this stage, no. If you keep it simple between net income on the working capital, the regional specific items. Revenue is a key item that we want to drive here.

Thank you, guys. Appreciate it.

Thank you. Our next question comes from Matt Cabral with Credit Suisse. Your line is open.

Yeah, thank you. I wanted to dig a little bit into the cost side of the equation in 2021. And I guess Project Own It you guys are talking about $375 million in savings, which I think is in line with the original target you guys gave a few years ago. I guess, if we take a step back, revenue dynamic have changed meaningfully versus that period of time, and you're guiding for 2021. That's about 25% below where you ended up in 2018. I guess with that in mind, why not look to target cost more aggressively. And maybe just talking about leverage, you have to adjust the cost base both this year and maybe as we think about 2022 and beyond?

Hey, Matt. As you know, so Project Own It is a three year program that we put in place and currently this program has delivered successfully more than $1.4 billion savings. Project Own It was also the foundation during COVID-19 to readjust our cost base and we did it successfully as well. So we keep this foundation and we'll build on it. So if you look at the next year, obviously you look at the overall margin, our margin sequentially improved quarter-over-quarter and speaking about operating margin, and you know, some of the outcome is directly related to the savings driven by Project Own It. Next year with more revenue coming into the base here, this is what is giving us confidence you know, in the free cash flow guidance that we can grow it year-over-year, and you know it, we have this management team as evidence and demonstrated hard commitment on the cost reduction here.

Got it. And then just on the situation with Fuji, I was wondering if you just give us an update on where that stands, if your guidance for 2021 includes them exercising the option or not? And maybe just more broadly how we should think about your approach to the Asia PAC region longer term?

Okay. So, Fuji relationship you know remain at [indiscernible] So we had - you know, we negotiated this transaction last year and you know, it was a relationship - remain relationship with Fuji is one of our main supplier and provide, you know, some of our line of equipment. And we have good relationship on this one. The second item on the Fuji, as you know it, we have negotiated royalty related to the usage of the brand, Fuji Xerox opted to have this royalty this will translate into $100 million cash payment in 2020 will depreciate it over a two year period, which is a period that we'll use here. So Fuji Xerox I will say so far in wrap-up relationship from a supplier point of view is going as expected, and our financial modeling are in line with what we’re expecting.

Thank you.

Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is open.

Thank you very much for taking my questions. My first is just I'm curious, given the stay at home situation and changes in work, work in the office? And that - how are the conversations going with customers that perhaps have contracts up for renewal or that your salespeople are talking to? And maybe if you could talk sort of from a segment basis, as well as geographic? And then I have a follow up? Thank you.

Yeah, Shannon, what we saw in 2020 was an increase in our signings and increase in our retention. And the conversations with the clients are focused on security, document workflow and transfer. Of course, there are industries that we've done very well in, like in the government industry, the healthcare industry, those are industries, and in the essential services industries while there are others that still remain quite close. Overall, we've had positive conversations with them. And we've been working well. We've also through it all has been able to increase market share in our product lines, given the focus that we've had on our clients.

Okay. And then I'm curious, Xavier, maybe you can chat about, the $375 million savings from Project Own It. What are some of the offsets from the standpoint that, you know, you're maybe not under as much austerity as you were last year, given, you know, higher revenue expectations? I know, some of our companies have talked about, you know, an increase in OpEx and return to certain expenses. So maybe if you could address where Xerox is relative to that? Thank you.

Yeah, Shannon. So, as I mentioned it earlier on the - in the call as well. So, we are permanently focused on our cost base here and we have done on will do what is required in order to ensure two elements here. So first things is gross margin, maintaining the gross margin and looking at gross margin expansion. On the second element is to protect the investment we are making to support the future - the future of business. And that’s the reason you know, three business standups that we just mentioned before, we would have more focus more visibility as well on the flexibility for these businesses here. Project Own It is 375 is what we have included currently, you know what we get, but depending on you know, the condition on how - that no, you know what will happen with COVID-19. But in our model currently with Project Own It on, you know, the methodologies or tools that we're using, we are planning, you know, to ensure that we will deliver the $500 million of free cash flows that we have mentioned in our guidance.

Okay, thank you very much.

Thank you.

Thank you. Our next question comes from Paul Coster with JPMorgan. Your line is open.

Hi, this is Paul Chung on for Coster. Thanks for taking my question. So first question is, can you just talk about, you know, the health of your VAR and distribution partners? You know, are you seeing any consolidation in the space? And, you know, once demand comes back, the senior partners can ramp up quickly, is this the case? And, you know, do you expect any changes in pricing? Just anything you can mention, on the health of your channel partners? I know you mentioned some leading channel inventory there to kind of shore up liquidity? And then I have a follow up.

Yeah, So as you know, it, we don't have a – I call that a specific concentration in distribution partner by themselves here. So what we see currently, I will say so quite, I won't say normal, but a healthy situation. Our relationship with a distribution partner, specifically in the SMB market on the reseller had been, I would say, quite positive during the year. As you know it, you know, we went through on, we leverage XFS in order to support some of their activity at the top of the crisis last year. But at the same time, I will tell you when I was pleased with the outcome, you know, from a cash situation here, where we finished the year from receivable, cash flow positive situation and DSO improvement as well. So no, no specific tension, I could mention here with our distribution, as of now.

Okay. And then my follow up is on your shareholder return guidance of at least, you know, $250 million for ‘21. So assume your dividend doesn't change, kind of leaving no lower case of buybacks in 2020. Is that the right way to think about it? And then when free cash flow kind of normalizes more so in, you know, fiscal year ‘22, maybe that percentage goes back to kind of historical norms?

Yeah, I would look at it as we've committed to 50%. But we've also been approved to acquire back $500 million of our stock opportunistically in 2021.

Thank you.

Thank you. Our next question comes from Jim Suva with Citigroup Investments. Your line is open.

Thank you very much. John, you mentioned about the separation of businesses. And then you mentioned the term stand up to businesses a lot. I'm not overly familiar with that term stand up, I am more familiar with, you know, like tax free spinouts, IPO, SPACS, distribution to shareholders, like what happened with Conduent and carve-outs but then I also realize you do have a shell structure - holding company shell structure also. So I didn't know, you know, are some of those vehicles more likely, and others less or they all on the table? I'm just trying to kind of figure out what you mean. Thank you.

Yeah, Jim. We're looking to identify the right long term structure for each of these businesses. And we expect to share more information in the next few months. But, you know, as of now, you could argue that they're all on the table.

Got you. Okay. And headed that? Are you looking at, you know, like, three new headquarters for all of them and board of directors and executive slates and all of that, or is that just kind of a little premature to talk about?

I think it's premature to talk about it. Stay tuned.

Okay. Got you, very much. And the last point, probably a CFO question potentially, ahead of you know, the standing up of all these businesses, Are there additional costs that we should be aware of, or cash flow that needs to be earmarked for these actions? Or is it - that will come when the decisions are kind of more put into concrete?

So that - that's also something and as John mentioned, we are currently assessing you know, what that means, and how we will you know, do this conduct [ph] and the cost that will be associated to this will be communicated later on. We plan during an investor day to share with you more information.

Got you. Okay. Well, thank you very much for the details. It's greatly appreciated.

Thanks, Jim.

Thank you, Jim.

Thank you. We have a question from Katy Huberty with Morgan Stanley. Your line is open.

Thank you. Good morning. In the third quarter, I believe you've benefited from some replenishment of channel inventory. Can you comment on in 4Q whether channel inventory was a tailwind or a headwind? Then I have a follow up?

Sorry, It was a replenishment of?

If you can repeat the question?

Of channel inventory.

Okay. No, no, no, so I will give you the sequence here, quarter to quarter three what we saw is that the channel partner for cash obvious reasons, have managed your inventory. And I say channel partner is a 2-tier distribution on resellers. In quarter four, we did not see you know, a strong improvement in the situation. We have, I would say higher set of what we call week of inventory, but well below the norm on the channel inventory is currently are held by the channel partner at the - I won't call that lowest level but at a low level.

And then just as a follow up, some businesses we speak to are saying that they're not going to ask their employees to come back until sometime between say July and Labor Day of this year, does yours 7.2 billion, at least revenue forecast contemplate a scenario like that, are you assuming some improvement in return to office in the calendar second quarter?

So we are looking at this on when we model this Kathy, we look at, you know, I’ll call that modest improvement during the year, specifically connected with vaccine on how the vaccine will be spread and enable people to be back to work. So this is more like a second half revenue expectation here. Quarter one, as you know, it will be certainly very similar to quarter four. The vaccine has not yet impacted on. We see modest improvement in some of our leading indicator, but we do not expect quarter one to be strong improvement versus quarter four.

Okay. And then lastly, how are you thinking about post-COVID normalized print volumes in a world where there is more remote and hybrid work? And this came up in some other questions, how much flexibility is there for you to adjust the cost structure of say volumes are permanently lower by say 10% or 20% versus pre-COVID levels?

So two point Katy, the first one, as you know it - we have evidence that we can adjust the cost structure of the company to you know the situation and we did it during COVID-19 and we'll keep this focus. So moto on the driver of the team is still the same here. So one point on print volume, what we see is clearly new ways of working and interestingly enough, we see that when people are working from home, they use as well some of our solutions. So we should not look at this by saying it's only you know, printing from home become personal printing. They use, you know, some of the Xerox solution, including software solution here. So we see a balance in revenue coming here. Will the print volume be similar to 2018, 2019? It's very early to assess currently. We are watching this. We see the impact of COVID in 2020. And we see as well, quarter-over-quarter how print volume grew sequentially.

Great, thank you.

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the call over to John Visentin for any closing remarks.

Thank you for your time today and I just ask that everyone be safe and be well.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.