Thank you for standing by. Welcome to the Xerox Holdings Corporation's First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this program is being recorded. And now I'd like to introduce your host for today's program, Mr. David Beckel, Vice President, 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 first quarter 2024 earnings release conference call, hosted by Steve Bandrowczak, Chief Executive Officer. He's joined by John Bruno, President and Chief Operating Officer; 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 express 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 Q1 2024 earnings call. This past quarter, our organization implemented one of its most intense periods of structural change in recent history. As part of reinvention, we redesigned and restructured our organization from top to bottom, letting a lot of good people go in the process. This work was hard but necessary to position Xerox for long-term success as we navigate the secular challenges associated with print and repositioning our business for long-term sustainable growth. Summarizing results for the quarter, revenue of $1.5 billion decreased 12.4% in actual currency and 13.2% in constant currency. Excluding the impact of backlog reductions in the prior year quarter and the intentional de-emphasis of certain non-strategic businesses, revenue declined mid-single digits. Adjusted EPS was $0.06, $0.43 lower year-over-year. Free cash flow was the use of $89 million, a decrease of $159 million compared to Q1 of last year, and adjusted operating margin of 2.2% was lower year-over-year by 470 basis points. Q1 results were below our expectations and are not representative of the operating improvements already observed following the organizational redesign. We experienced a short period of disruption associated with the reorganization, particularly as it relates to sales of equipment. But momentum in equipment orders and continued strength in services signings activity, along with enhanced operating visibility and speed of decisioning suggests the structural changes implemented this quarter can deliver the improved in-year revenue trajectory, operating margins, and free cash flow required to achieve our full-year guidance. This past quarter, the employees of Xerox demonstrated the resilience and dedication required to enable a successful multi-year strategic repositioning of the Company. I have more confidence than ever that we have the right team and the right strategy in place to execute Xerox reinvention and deliver our three-year…

Thank you, Steve. As Steve mentioned, we implemented a comprehensive and complex organizational redesign this quarter focused on building a stronger, more stable business aligned to the evolving needs of our clients. I'll provide context behind some of these more impactful changes, but thematically, they're all designed to provide our sales and delivery organizations more time with clients, reduce organizational complexity, streamline decision rates, and create investment capacity for future product development. The first change was the implementation of a business unit-led operating model, replacing our previous geographic focus. This solution-led model incorporates the voice of our clients and partners from initial engagement through service fulfillment segmented by the economic buyer profile. To enable this alignment, we integrated all business groups responsible for the design, marketing, sales, development, and delivery of our products and services into one organization. We simplified organizational spans, layers, administrative reporting and supporting infrastructure formally needed to run the business. Bold changes of this magnitude designed to deliver global operating model simplification come with a high degree of disruption and we were no exception. We experienced disruption across our organization this quarter as our team acclimated to the changes, which primarily impacted equipment sales. I make no excuses for that underperformance and was disappointed with our results, as we did not meet our internal expectations. That said, I'm also proud of our team as they adapted to our new operating model better than I expected and are driving the intended outcomes to recover from the self-initiated but necessary disruption. I'm pleased to report we are seeing early indications and positive results from our go-to-market teams in supporting functions as we improve client and partner engagement and drive sales productivity. After a slow start in January and early February, equipment orders were up double digits year-over-year in…

Thank you, John, and good morning, everyone. As Steve mentioned, revenue profits on free cash flow declined year-over-year due mainly to a reduction of equipment backlog in the prior year quarter on the intentional reduction of non-strategic revenue. Excluding these factors, revenue would have declined mid-single digits. Revenue on adjusted operating profit were below expectations, due mainly to the effect of organizational change on our sales operations and constrained in a effort device, which affected equipment revenue as well as a more measured implementation of workforce reduction action within the quarter than originally anticipated. Turning to profitability. As part of our offering simplification efforts, we incurred $36 million of inventory charge associated with the exit of certain production print manufacturing operations. All profitability commentary to follow excludes this impact. Adjusted gross margin declined 240 basis points year-over-year due to lower revenue, including the termination of Fuji royalty income on higher product on freight costs partially offset by the benefit of structural cost reduction. Adjusted operating margin of 2.2% declined 470 basis points year-over-year due to lower gross profit on higher bad debt expense reflected in part a reserve release in the prior year period, partially offset by the benefit of structural cost reduction actions. Non-selling G&A, excluding bad debt expense, declined close to 10% in Q1, reflecting the partial quarter of headcount reductions on the benefit of cost action implemented in the prior year. Adjusted other expenses net were $3 million higher year-over-year due to an increase in non-finance interest expense, partially offset by the reversal of previously accrued contingent consideration on favorable business tax settlements. Adjusted tax rate is a 22.2% tax benefit as compared to 15.5% tax expense in the prior year period. The decrease in tax rates reflect additional tax benefit in the current quarter from the…

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

Yes. Thanks, guys. Good morning.

Good morning.

Good morning. Thanks for the question. Sounds like there's a lot going on here. Yes, I have a couple really, there might really be more clarification, if I could. But -- so selling of the South American -- some of the South American direct business entities, and I think you guys had mentioned that you're going to be doing something similar in Europe. All of this sounds like you're doing it in the name of simplification, but can you just touch a little bit more on the breadth of which those initiatives could end up taking? And it sounds like this is -- I want to just ask a couple of questions or a question about --clarification about the print production business, strategic actions you guys said you are looking at as well. So, is the taking of the direct, and you were really sort of going to the indirect in South America, turning attention to Europe, is that really the non-production business? So that's sort of the office business?

Yes, Ananda. If we take a step back, you know, part of the reinvention we talked about are geography simplification, and what we said was we'd look at country by country. Each country has a different set of dynamics, each country has a different set of partner capabilities, and each country has a different set of client sets. So we look at each country, look at each opportunity, and then determine what is the right economics between us being direct versus indirect versus going through a single partner or multiple partners. And that's what you saw in LatAm, right, where we were not going to provide the best client experience, the best capability, and the coverage. And we felt that a partner in that particular country would better serve the region and better serve our clients. It does two things for us. One, it gives us more reach and more expansion with a capable client or partner in that region. But it also allows us to, as we talked about in geo-simplification, focus on those growth areas that we can accelerate where we put all of our resources into like IT, digital services, driving more of the things that our clients need in core countries. So that's why we made the strategic change and we'll continue to accelerate that through the balance of LatAm and looking at Europe as well.

Ananda, this is John. I'll just add. It's the right question with regard to the way you're thinking about mix, right? Because we look at offer simplification more from production portfolio and geo-simplification more around cost of sales opportunities today and in the future, and what is the partner in those particular countries, and can they take both our core offering as well as our future offerings, and can we get greater reach at a lower cost of sales? So we look at our transfer -- our transfer costs and prices, the enablement capabilities, and how do you best serve clients because it all starts with what's the -- who's the economic buyer? What are they buying from us today? To your point, from office equipment and others, what do we expect that they will be buying with the mix shift of not only those products, but other services that we sell and who is best-positioned to bring them to market at the best and most optimized cost of sale? That's how we do it. And to your point around scale and reach and development, you would expect it to be right along the lines of what you would think about the major geographies in which we are today with the highest penetration. And then as you parade those down and just a simple return on invested capital and how we deploy them, we just have a Mendoza line, if you will, as to where it is that we want to ensure that we're above that line and we can continue to invest in those partners and not -- or I should say, and optimize our overall cost of sales in the region.

I think I'm getting it. Okay. That's super helpful context, guys. And then just real quick on the production, on the strategic actions around production print, like, can you just talk the breadth and depth and potential optionality? I mean, could you end up selling the entirety of the core production business? Is that included in that, in that option set? I guess, I guess the answer is always yes, but some context there.

Of course, of course. Listen, we are committed to the production business, full stop. I do not want to mislead or anything through these comments that there's somehow our concern. You have to look at the product sets themselves. These are products that were invested, invented, and have been deployed for many, many years in this space. The evolution of the technology and so forth and the changes, we're just looking at overall, our manufacturing of certain of those platforms, not our commitment to those platforms both today and going into the future, right? So we're still committed to those platforms for long periods of time from a service and supplies perspective. It's just we're not going to continue to manufacture them at a pace in which we believe is not conducive to the market demands, just based on volumes, based on needs, and based on the changes. We're also continuing to invest around the production platforms in areas that our customers are pushing and you can see that in a very robust portfolio of service offerings, whether it's productivity assessments, our free flow core, you can see some of our graphics, XMPie, our storefronts. There's a lot of demand around the production hardware. We're specifically talking about what we're ceasing of doing in the manufacturing of those certain products. To your question about potential M&A transactions, as with anything, we're always looking to optimize our portfolio and looking at strategic options and what's the best and right thing to do for the business, but it's really about growing within that segment. It's not about shrinking within that segment. That's not the design. It's about optimization. We can't be on a path about what we're doing around profit optimization, operation simplification if we're not willing to retire legacy parts of the manufacturing part of the business, which has a very higher cost to serve as the volumes come down without investing in the things that are the future ramp of growth moving forward.

Ananda, the other thing I would add is, you know, think about, we talked about the collision between the physical and the digital world, production, you're thinking about it just as print production. The reality is the world is colliding. And so what you see in both the physical and the digital, our production environment, our production offering includes more and more digital options. You take a look what we do in Go Inspire, you take a look what we do on XMPie, what we do with our large partners in terms of driving demand and web services into storefronts to drive print and vice-versa. And we have a tremendous, tremendous growth opportunity in the physical and digital world in production. So don't just think about it as just output of being print.

That's helpful. That's helpful. Thanks, guys. I'll get back in the queue. Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Samik Chatterjee from JPMorgan. Your question, please.

Yes. Hi, thanks for taking my question. Maybe if we can start off with just the disruption that you saw in the quarter. You mentioned the disruption was primarily around the Salesforce restructuring that you did. How much of that was an impact on sort of shipping equipment out versus sort of what you saw in terms of your order pipeline? And maybe just help us also think about how, what steps you're taking to ensure you don't have any more disruptions of that same kind. Because when you talk about like the opportunity with GPS, identifying a lot of savings on the technology side as well as the backend and then options -- actions you're going to take in Europe, like all of that looks, sounds much more in terms, of you could have similar disruptions in the future. So how are you ensuring that you don't have similar disruptions? And then I have a quick follow-up? Thank you.

Yes. Thanks. Let me start with - first of all, we made significant organizational model changes to drive decision-making, to drive velocity and really improve our business, over the long-term. That all change had a tremendous impact on our sales go-to-market. As you look about the early part of the quarter, we had just tremendous changes. Several thousand new people were realigned to new organizations, aligned to new clients, aligned to new go-to-market. And as I've spent time on the road, a couple of things have happened. One, spend time with partners, spend time with clients, go-to-market leaders and sales leaders. As we got towards the middle of the quarter, you can see the stability, and what we see in terms of auto velocity. You can see stability in terms of activities, funnel building, the amount of calls we were making. And so, the early part of the quarter clearly disrupted the organization, from a sales motion standpoint. And then we started to get stability towards the middle of the quarter, and then saw velocity in order, specifically year-over-year order volumes. On the shipping side, on the services side, we saw SLAs that were normal. We didn't see any disruption in the services side, or disruption in installation or disruption in shipping. It really was on the sales activity, specifically early part of the quarter. John, want to give a call on what you see?

Sure. And the only additional color I'd provide, is that with any sales organization, you monitor things like your pipeline, which your pipeline is your leading indicator into what is orders that convert to revenue. And while our pipeline had a bit of aging, which you would expect because of the sluggishness in the first two months of the quarter, the sufficiency is holding. The quality of the pipeline is holding. And so, we're starting to see that conversion to revenue, again, more slowly than we anticipated in the first two months of the quarter, but March has improved over February and April to-date improvement over March, is giving us encouragement, because of what Steve pointed out. The engagement with clients is there, the partner engagement is there. The pipeline is sufficiency order and the backlog is there. This is about execution. And to Steve's point, when you rewire an organization with 6,000 people moving throughout the organization, to realignments and you're consolidating territories by 50%, things like that to streamline decision rights, we expected a level of disruption. But let me hammer home what your question is. We have no other further actions for the remaining part of this year, as substantial as what we did in Q1. Anything that we do from here is, consistent with the geographic exits, or the simplifications, which is much more closer to normal course, and speed of change for Xerox, not the type of change that we did in Q1. And that's why we have the confidence that, we do around what caused the disruption. It was anticipated. It's unacceptable. We understand that. We understand what we need to do to course correct it. We look for as much of the signs and the signals in our business, both current and moving forward, to ensure that we have the confidence necessary that, we can operationalize the change and continue to move through it.

So good. Thank you. And for a follow-up, maybe this is more for Xavier. The project reinvention, the target to get more than $100 million of savings in fiscal '24 itself. Can you give an update, on sort of when we just look at 1Q, how much of that sort of benefit did you see in 1Q, and sort of how to think about the linearity of the progress? I know you mentioned operating margins, improved sequentially through the year. But even in terms of timing, is it more back-end loaded versus front-end loaded, just thoughts around that, but also what are you tracking to in 1Q itself? Thank you.

Yes, Samik. So reinvention is on track. So, we have implemented the actions we plan to do here. The major announcement was at the beginning of the year, we're on the 3rd of January, we announced publicly the 15% headcount reduction. We started during quarter one to enact the year exit there, specifically in certain geographies where you have less limitation to implement this. So, the program is on track and as Steve and John, alluded during their script there. They also mentioned, the benefit will get not only from the cost reduction, but also the implementation of the GBS. So this is a step-by-step approach to be your journey. We are enacting on the delivering the action on the activities as we were planning to do that there. So we always, in some cases, like timing differences on some small actions there, but we are not changing our guidance from an adjusting operating margin for this year, on the $100 million year-over-year operating - net operating income improvement.

Thank you. Thanks for taking my questions.

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

Great, thank you very much, guys. And good morning. John, I was wondering if you could maybe just clarify, the comment you just made to Samik about no further actions, being taken for the remainder of the year. I just want to make sure I understand that. The actions, when it comes to geographic simplification, offering simplification, model simplification, were you saying that those were - for what you plan on doing in 2024, those were finalized, or completed by the end of 1Q and there's nothing left, to do for the remainder?

No, no, no.

Am I just clarifying that?

Yes, sure, sure. Just to be clear, what I said was to the extent and the size of the action is related to headcount, the disruption and the rewiring of our operating model that was done in Q1. And the remaining parts of things that we might do with country exits, and those types of things, they're more surgical interaction and they're targeted. What we did in Q1, was a top to bottom realignment of our organization, operating model alignment, we did a reduction in workforce, realignment of folks. That's very, very disruptive, as you can imagine. And what I was saying is that the size, the majority of what we did was in Q1. The stuff that we will do for the remainder of the year, we'll continue to roll out, just as you would expect in places in which you have, in certain geographies, workers' councils, et cetera. Those things are timed as our exits in particular countries, or if we do further things along our product lines. But that's more manageable within how we run our business consistently, as opposed to an event-driven thing, which we did in Q1.

Okay. No, very clear. And maybe just as a quick follow-up to that one again, your kind of qualitative comments are very clear. Is there any way that you could help us understand, then if we're in a nine-inning game, how far along we are then, and the actions that you need to take? It seems like we must be pretty far given all the - all of what you did the heavy lifting in 1Q, but how would you kind of clarify that with us?

Yes, Erik. It's Steve. So as we talked about coming into the quarter, we spent a lot of time from a reinvention standpoint, looking at the strategy, looking at the three-year plan, and we gave guidance on what we're going to do over the next three years. I would say the actions that have been taken so far not result in the P&L, but still need to roll out. We probably implemented roughly half of the big strategic things that, we needed to do. So, we still got a ways to go in terms of things, we need to implement. But as John said, more structural in terms of they are isolated, and there are events that are isolated to individual units, or individual countries as opposed to the significant change, we made in Q1. And if you think about the amount of change with an old model redesign, the amount of people that got - we talked about rewired. But really know when I come in, who do I report to, what's my job, did my quota change, did my sales territory change, all those things were tremendous disruption, in how to get settled down in the first couple of weeks of the quarter, and all of that's behind us. So about 50% into what we're trying to implement. And obviously, over the next 18 to 24 months, we will implement the balance of the reinvention.

Got it. Okay. That is very clear. Thank you both for that color.

Welcome.

Maybe just switching gears. I think, Steve, maybe this is for you, but anyone feel free. The $49 million of R&D spend this year, I think, was the lowest quarterly total I've seen from you guys. And in your presentation, you obviously talked about investing in higher ROIC projects, or acquisitions. But with such a pullback in R&D, like is there a risk that, you're maybe taking a too kind of near-term approach to margins, at the at the risk of not pulling forward investment, to stabilize top line trends? Can you just help us understand, how you think about the actions needed on the R&D, and kind of innovation front to stabilize top line, versus your prioritization of maybe taking some costs out of the model, again to get that margin expansion? How do you think about balancing those?

Yes. Look, we - when we talk about the reinvention, it's a balanced execution between what we're doing to drive operational efficiencies and investing in our growth businesses, whether it's organic or inorganic growth. The new Board coming in, you saw the names of the nominees, and we are all looking at how do we invest in the right areas of this business, whether it's organic or inorganically. And we absolutely are investing for the long-term in the business, and we'll accelerate that. As we free up more cash, as we free up more of the balance sheet and the actions that we've already taken, and will take, will absolutely drive more headroom that will allow us, to take those dollars to reinvest back in our business.

I also think it's important to look at R&D as we normalize it, because there's a lot in the R&D line year-over-year, with some of the exits that we had in park and some of the divestitures and things like that, that have an impact on what you're viewing. But you are 100% correct that as you do a mix shift, and a realignment of your R&D spend from the type of spend it is. We will continue to make investments in the areas in, which we see profitable growth capabilities. We just have to do it responsibly, and we want to make sure that we can self-fund our innovation, and capacity both organically and strengthen the balance sheet, as Xavier talked about, through our capital structure enhancements to do it inorganically, but that's all part of our execution journey. So we're very mindful of that. We're not cutting our way to prosperity. We're trying to rebalance the company and reinvest in the right categories that, we can grow and sustainably grow where our brand has a right to play, our field distribution has a right to deliver, and we can be successful in those spaces. And that's why it's a rebalancing, and that's why it's an OD driven, not just the cost cutting. It's an organizational redesign of who we are, how we go to market and strengthen our core print, and then invest in the adjacencies that can protect our core print business, as much as grow within that same customer set.

Okay. Very clear. And then just one last clarification from my end, which just congrats on the kind of maturity extension that you guys talked about. As we think about capital allocation priorities this year, debt repayment was number two. What other actions do you anticipate taking for the rest of the year that, we should be considering on the debt side? And that's it for me? Thank you.

Yes. So Erik, you know the maturities that we have for this year is quite limited. So, we are still - so in May, we will pay down the remaining part of the $300 million debt that we have for this. So this is already in plan on that, we already partially paid some of this year. We have as well our - secured debt repayment, which is going as planned this quarter, quarter-over-quarter. So, we are more like $100 million of debt reduction on the secure side there. And we are also looking at our term loan B, on how we can improve the condition of the deal currently here. Nothing material. The vast majority of what we are planning to do, is in the line of what we have seen, and we have communicated here.

Perfect. Thank you so much, guys.

Thank you.

Thank you. One moment for our next question. And our next question is a follow-up from the line of Ananda Baruah from Loop Capital. Your question, please.

Yes, guys, thanks for the follow-up. Just on GBS, it sounded like GBS is sort of putting its arms around a number of functions there. Could you just sort of go back through that and let us know - what the gist goal of GBS is? It almost sounded to me like it was a coordination, of all things kind of like back office administrative, and sort of certain lower level business processes. But I guess, could you just go back and put some additional context around that?

Sure. And whether you got two shots, two bites at the apple, I love it. So what GBS is called Global Business Services not shared services for a reason. It's a business service function, is what our vision is. And both Steve and I have, a long track record in history of implementing these types of organization in our previous lives, and we understand the potential for them. And we know we absolutely have the right leader, and the right team across GBS to drive our vision for it. It is not a back office only function, but it absolutely will evolve from more of the core administrations in its first part. So you always start with the administrative activities, around these key areas of record to report, or order to cash, hire to retire, these administrative functions. But as we get consolidation of not only systems and platforms in both our tech stack, and our BPO and business process operational stacks, we're going to continue to push that up into ways in, which we can improve our go-to-market capabilities, with more services and things that we can have, better inside sales force type tools and enablement. And we want to drive better platform things into our areas. So, we want our finance, our HR, our legal teams to really focus on policy and strategy initially, and have GBS focus on the consolidated operations and platforms. And then we'll continue to do the same, in cross order management and inventory controls, and service management anywhere, where we can get tech stack efficiency and business process, operational efficiency through the, not necessarily centralization. But the central coordination of activities initially, is what we're driving through this team. So it does go broader than administratively, but we absolutely are starting initially in the areas, where we would through the shared services functions in those G&A areas.

Yes. This is Steve. I'll add one more thing. And that is as we simplify and get to single end-to-end processes, we then look at how do you apply technology, to both elimination and driving more operational efficiencies, whether it's around RPA, whether it's around AI, whether it's around how do we think about ChatGPT going forward. So think of as we centralize, and as we standardize on processes. We then have an enabling capabilities to drive more operational efficiencies, through technology. We've been talking about the journey of RPA for a long time here, over the last couple of years. We've been talking about how we're implementing AI, and investing more in AI into our processes. And so, GBS will be the function that we look at to really drive leading-edge technology on our end-to-end processes. And some of those, we may actually take to market, like we do RPA, like we're doing with some of the other functions that we're building internally.

Got it. That's super helpful. 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.

On Earth Day, I'd be remiss not to mention our ongoing commitments, to providing clients with sustainable products and services. I am proud to say, we are recently named an Energy Star Partner of the Year in 2024. For a fourth year in a row, a Global 100 most Sustainable Corporation from Corporate Knights, and we are included in CDP's A List for climate change transparency and performance. Recapping today's call. Q1 marked an important milestone in our ongoing reinvention, with the implementation of comprehensive, and strategic operating model changes that more closely aligns our businesses with the needs of our clients. The magnitude and speed of changes caused some disruption during the quarter. But the new operating model, has already delivered intended results and as evidenced, by momentum in equipment orders, and continued strength in our service signings. We look forward to updating you on the reinvention progress in future quarters. Have a great day.

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