Q3 2019 Earnings Call
Good morning, and welcome to the Xerox Holdings Corporation third quarter 2019 earnings release conference call hosted by job design team.
<unk> Chairman and Chief Executive Officer. He is joined by Bill Osborne Chief Financial Officer.
During this call Xerox executives will refer to slides that are available on the website www dot Xerox dot com Fort flashing investor.
At the request 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.
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During this conference call Xerox executive would make comments that contain forward looking statements, which by their nature I dress matters that are in the future and are uncertain.
Actual future financial results may be materially different than those expressed here. It at this time I would like to turn the meeting over to Mr. Byzantine Mr. Byzantine you may begin.
Good morning, and thank you for joining our Q3 2019 earnings call.
We delivered a strong quarter marked by increased cash flow earnings per share an adjusted operating margin and we improved the revenue trajectory.
Results were underpinned by the team's strong execution of our strategy to drive revenue optimize operations innovate and focus on cash.
We recognize the challenges facing our industry, but are laser focused on the opportunities and our path to stand up a better more agile and competitive company for the future.
We're pleased with our cash performance.
We generated 356 million of operating cash flow in the quarter, an increase of 82 million from a year ago.
Free cash flow, a 339 million up 88 million year over year.
Adjusted operating margin for the quarter was 12.1% up 120 basis points year over year strong evidence of the hard work, we're doing as a team.
Margin expansion contributor to adjusted EPS of a dollar AIDS in the quarter up 23 cents year over year.
The benefit of near term revenue directed initiatives are starting to flow through results.
Third quarter revenue declined 5.3% at constant currency year over year inline with expectations.
Well, we've made progress we have more work to do here.
Results paired with our execution gives us the confidence to raise guidance.
We are increasing our free cash flow out look to be in the range of 1.1 to 1.2 billion.
From one to 1.1 billion.
We're also raising our full year adjusted EPS to $4 to $4.10 up from our previously increased range of 380 to 395.
We remain on track to deliver at least 640 million of gross savings. This year due to project on it our enterprise wide initiative to simplify and streamline our operations and build a culture of continuous improvement.
During the first half of the year, we started executing several components of project on it such as transforming our shared services operations.
As I previously alluded to we intentionally moved fast knowing there would be some disruption.
The strength of our third quarter demonstrates our ability to rebound and react fast to change.
We remain focused on managing or shared services operations to mitigate the risk of further disruption.
Our investment initiatives are beginning to take hold.
For instance, robotic process automation, our P.A. is enabling parts of our order the cash operation to increase accuracy and reduce the amount of time it takes to generate complex invoices from days to minutes.
Our P.A. also is driving efficiencies in new areas, such as pursuit and bid development.
Using this technology to respond to multifaceted bids allows us to respond to our peas in record time and knockout competitors.
This technology helped to secure new business with one of the U.S. as larger school districts fourth intelligent workplace services.
We see potential for RPH to be employed more broadly.
We believe our results show, we're making meaningful progress towards establishing an operating framework that will continue to deliver sustainable productivity improvements.
This momentum will continue into next year as we progress with the planning of 2020 programs.
We expect to generate at least 450 million of additional savings and allow us to increase investments in our business.
Our revenue roadmap is starting to take effect. However, there's more work to do to improve revenue and the team is laser focused on this.
Our revenue trend improvement in the third quarter compared to the first half was largely driven by X be a high end sales and our U.S. enterprise business.
Xps had been good quarter, demonstrating the team's ability to rebound quickly from organizational and account changes we made.
Near term revenue generating investments in areas such as supplies. A 90 services also helped xps improve its revenue performance from the first half.
The uncertainty and geopolitical friction within Europe , particularly in developing markets continues to create a weaker economic environment.
While Europes performance was in line with last quarter it was below our expectations.
We did however, see an improvement in transactional supply sales in Europe , where we made investments to improve the attach rate of Xerox applies an unbundled equipment sales.
To capitalize on growth opportunities in the region, we're increasing our focus on small and medium sized business.
Growing our software and service business is key to improving our long term revenue trend.
Healthcare government retail insurance clients are experiencing fast evolving and user expectations regulations and technological innovations that pose increasing challenges.
We've designed a suite of industry specific services that leverage our full portfolio from device to software, including Dr., Sharon XM pie that address these challenges and allows the rocks to move up the value chain.
Our industry specific services, specifically Xerox services for digital patient and digital citizens are seeing traction with new clients such as the Cardiff Council of Wales, and expanded business with clients such as the Ukase National Health service.
These services can also have an impact on the real world.
In the case of Xerox services for digital patients are offering enables doctors to have instant access to medical records, helping to reduce the time to diagnose and treatment.
Our services improved the patient experience and more importantly, let doctors focus on what really matters.
Treating patients and saving lives.
We continue to invest in our core technology business and are seeing the benefits of this strategy.
In the high end category arid that's continues to grow double digits year over year.
In the third quarter competitive knockouts, a new business drove nearly half of our iridescent placement.
Supporting our momentum in the high end as our recently announced ball Toro HF inkjet printer.
Compared to the competition. This first of a kind smaller Pratt offers increase productivity and better image quality at a lower total cost of ownership.
These differentiators have enabled us to build a strong pipeline within a few months and the team has started to deliver product.
We saw improvements in the mid range category the products that meant where our rate of decline improve the most compared to the first half.
We expect this momentum to continue with the recent launch of our Prime link line of equipment.
In production, we believe there's no other competitor that can match its capabilities at this price point.
Prime linked positions us well to maintain our dominance in an area, where we've led for the past five years.
In early 2020, our new embellishment accessory will further differentiate prime link and allow us to capitalize on our installed base and this fast growing segment.
The success re allows clients to produce media with fluorescence gold silver white and clear embellishments that until now required offset printing or much larger production devices.
We believe there's no technology on the market like this for at this price point.
In fact, the association for print technologies named our embellishment accessory a game changer.
Awarding us a vanguard breakthrough award.
Yeah Association also awarded the ball Toro with a Vanguard Pioneer award, making Xerox you only company to win to Vanguard Awards. This year.
Xerox has long been one of America's best known brands.
To Reenergize, our brand and build greater awareness of today's capabilities. We launch a digital first color campaign at the start of the U.S. opened around the tennis balls color.
A new capability now available on the I Gen five.
For the second installment, we announced xerox's first color of the year clear acknowledging there is hard debates on whether it's even a color.
The new campaign approach is driving strong interest in these xerox, Brad with engagement rates higher than industry benchmark.
We said since February we're going to capitalize on and commercialize a research coming out of our lives.
And we are making progress with our innovation roadmap.
Two products, they iworkflow assistance and three D printing are nearing the commercialization phase.
The promise of bringing three D printing for manufacturing has long been a futurist vision for advancing the industry building on decades of experience in printing and material science xerox's during this vision into a reality.
Xerox difference is liquid metal technology and their AI based design software, which allow manufacturers to make complex parts in hours instead of days without sacrificing quality or strength.
Similarly, our SaaS based workflow assistant that support knowledge workers with offering business development documents has potential to disrupt the RFP process, an area, where a company spend an estimated $60 billion annually.
We expect to introduce commercially available products in these two areas in 2020 .
We're pleased with the progress we've made on increasing our cash flow and we still have more opportunity.
In the quarter, we improved all aspects of networking capital.
Free cash flow in the third quarter was 339 million up 88 million year over year.
Our year to date free cash flow was 847 million an increase of 195 million from the prior year.
We repurchased $68 million of our shares in the corridor and distributed $61 million in dividends as of the end of the corridor, we returned $551 million to shareholders, including $368 million in share repurchases.
And we expect to repurchase at least $600 million of shares.
For the full year.
Before wrapping up I want to directly address some of the most frequent questions we receive.
There are macroeconomic conditions, such as trade and geopolitical uncertainties, creating well known headwinds in our industry.
Despite these conditions, we've been able to improve our operating margin and cash flows and increase our planned investments for the year.
We're taking a required actions to mitigate the risks these uncertainties could impose on our business.
Our strong cash flow means we're well positioned to accelerate our growth through M&A and can pursue opportunities big and small.
We have built a broad M&A pipeline that includes targets, both within our industry and in adjacent markets.
And we plan to deploy our capital Opportunistically and strategically.
To increase our competitiveness and maximize the return on our investments.
Lastly, we conducted a thorough evaluation of our customer financing business.
We received multiple attractive bid.
Both for all and specific parts of this business and we took a methodical approach when evaluating these bids against the benefits of retaining the business.
The bids come from something we already knew.
This is a valuable business.
Given the strength of our balance sheet, and where we are in a transformation journey.
We determined that retaining and optimizing the business through project on it will generate the greatest return for shareholders.
Now I'd like to handed over to build to cover our financial results in detail.
Thanks, John we're very pleased with our performance this quarter as we said last quarter, we saw signs that our long term strategy was gaining traction revenue in the latter half of the second quarter showed an improved rate of decline and we expected this trend to continue which it has.
We increased planned investments as a result first half margin expansion and continue to make these investments for the long term, while sustaining a profitable business in near term.
This quarter results from our transformational program project don't it continue to materialize with expense reductions contributing 120 basis point improvement in adjusted operating margin year over year on the topline total revenue declined 5.3% in constant currency, which is an improvement in the rate of decline in the prior periods.
Driven by improvement in North America, where performance in our Xps channel continues to stabilize from the disruptions that impacted the first half.
We generated $339 million of free cash flow in the quarter, which was $88 million higher than last year and year to date, we have generated $847 million of free cash flow, which is $195 million higher than the same period last year.
Adjusted EPS in the quarter was a dollar an eight cents or 23 cents higher year over year, reflecting the increase in adjusted operating margin higher equity income a lower share count and the impact of a gain on an asset sales that we closed in the quarter.
I will now review the income statement in more detail.
Total revenue declined 5.3% in constant currency and 6.5% at actual currency. The constant currency decline reflects 190 basis points sequential improvement, which as I mentioned was largely driven by North America, where we saw improvement in xps as well as in large enterprise, which benefited from a large.
Refresh order in the quarter.
Media performance was inline with last quarter and less at our expectations as certain countries remain impacted by an uncertain and weaker economic environment I.
I will discuss revenue dynamics in more detail shortly turning to profitability. Our adjusted operating margin of 12.1% improved 120 basis points year over year and drove $10 million in adjusted operating profit growth and the majority of the improvement was driven by expense reductions as our project only transformation continues to deliver.
In offset the pace of our revenue decline.
The improvement also included a 20 basis point benefit from a $5 million write off of IP projects in the prior year impacted this year's comparison.
Next gross margin was roughly flat in the quarter compared to last year savings from project own it mostly offset a 20 basis point unfavorable impact from transaction currency.
R&D as a percent of revenue was 20 basis points higher primarily due to lower revenue as well as certain investments in top line that we discussed last quarter.
Sag improved 150 basis points as a percent of revenue driven by cost reductions from project donut as well as a benefit in the prior year from a $5 million right.
Projects the impacted this year's comparison.
Below operating profit equity income of $58 million increased $15 million year over year, continuing the higher trend seen this year and reflecting improved performance improves your aucs in 2019, partially as a result of their 2018 restructuring initiatives and lower restructuring charges.
Other expenses net of negative $3 million was 60 million better than prior year. This improvement includes $43 million of non-GAAP adjusted items of which the vast majority or roughly $35 million is due to lower non service retirement related costs, reflecting the favourably.
Impact of a 2018 amendment to our U.S. retiree health plan and lower losses from pension settlements in the U.S.
Removing these nonperformance items other expenses net improvement primarily reflects a $19 million gain on sale of noncore asset.
Overall as I mentioned earlier adjusted EPS of one dollar eight was up 23 cents compared with Q3 2018, primarily due to improved operations share buyback higher equity income and the asset sale.
The lower retirement related cost is excluded from adjusted EPS performance, while the asset sale and the impact of the prior year write off of IP projects are included in adjusted EPS.
GAAP EPS of 96 cents was 62 cents higher year over year, reflecting the improved operating performance as well as retirement related cost improvements restructuring and related costs, including restructuring related to Fuji Xerox.
Amortization of intangible assets transaction costs and related costs associated with the terminated Fuji transaction.
Other discrete unusual or infrequent items in the tax effect on these adjustments in Q3, we reported $27 million of restructuring and related costs, bringing the year to date totaled to $176 million. We continue to expect up to $225 million of restructuring charges for the full year.
Moving now to slide seven which is our cash flow.
We are laser focused on managing cash and this quarter, we generated $356 million of operating cash flow, which is up $82 million year over year.
Free cash flow was $339 million.
$8 million.
Cash flow drivers in Q3 included approximately $90 million source of cash from working capital, which is better year over year in every area accounts receivables inventory and accounts payable lower inventories reflect lower sales volumes and improved inventory management.
The increase in cash from accounts receivable is due to lower revenues and to the timing of collections and the increase in cash from payables reflects the timing of purchases.
Cash is a top priority for us and I'm very pleased with the improvement in working capital this quarter.
Contributions to defined pension plans at $37 million was nearly flat year over year in cash for restructuring and related payments of $17 million was $22 million lower than Q3 2018.
Year to date cash payments for restructuring totaled $71 million and when combined with $62 million of restructuring related payments reported in other current and long term liabilities, which were primarily related to severance payments associated with the shared services arrangements entered into Hcl earlier, this year and third party consulting costs.
We have spent approximately $130 million on restructuring.
For the full year, we continue to expect up to 200 million of restructuring and related payments.
Cash generated from finance receivables was lower year over year due to stronger originations. This is a good use of cash and we expect this trend to continue into Q4.
Through the third quarter, we generated $895 million of operating cash flow and $847 million of free cash flow capex of $48 million through September continues on the lower trend and we now expect full year capex to be around $75 million as compared to our previous expectation of 150 million dollar.
Yes.
Therefore, we are raising our free cash flow guidance range for the full year by $100 million from 1.0 to 1.1 billion to 1.1 to 1.2 billion.
Lastly, with financing cash flows we returned 129 million to shareholders in the quarter, consisting of $61 million in dividends and $68 million in share repurchases, we manage our pace of share repurchases in line with our free cash flow generation and with the strong cash flow in the quarter, we were able to purchase shares.
Through the first half, we returned $551 million to shareholders, including $368 million or share repurchases and we expect to repurchase a total of at least $600 million of shares in 2019.
We ended the quarter with $979 million of cash cash equivalents unrestricted cash on our balance sheet.
Let's turn now to slide eight for more detail on revenue.
Third quarter revenue declined 6.5% or 5.3% in constant currency.
This included a 70 basis point negative impact from the run off of the OEM business overall the rate of revenue decline is in line with our expectation compared to the first half and is primarily driven by stronger performance in North America, while EMEA remains challenged particularly in developing markets.
Our Xps channel continued to bounce back from the disruptions we experienced earlier in the year.
The same time, we saw the expansion of IP services and Xps with a large deal primarily installed in Q3.
We expect 10 of our core xps businesses are around one third of the channel to be selling IP services by year end.
Looking at the detail equipment sale revenue was down 3.3, or 2.2% at constant currency compared to a 9% constant currency decline last quarter, we saw improvement in many areas, but the biggest positive impacts came from high end sales large enterprise in the U.S. and the ongoing mitigation of earlier.
Operational changes in Xps.
Ill briefly elaborate on each of these drivers first high end equipment sales grew this quarter, reflecting continued strong demand for our iridescent color production system and higher sales of our percent entry production system.
We're also seeing a good response to the Bell Toro Inkjet press announced last quarter, which received a prestigious award for unique breakthrough technology at the recent print 19 trade show in our most recent forecast indicates that we're on track to meet our expectations for installations of El Toro Press. This year next in mid range.
The us grew equipment revenue compared to the prior year, reflecting a large account refresh in the us some of which occurred earlier than anticipated last our xps units showed improvement in the rate of decline as it continues to stabilize from the operational changes that were put in place earlier this year.
On the other hand continues to be challenged by a week and uncertain economic environment, particularly in developing markets impacting overall revenue. However, installs of mid range color products improved in Western Europe .
Wholesale revenue declined 6.2% in constant currency, which was slight improvement over the rate of decline in the first half.
The IP services sale and our Xps channel that I mentioned earlier is recorded in post sale.
We also saw an improvement in transactional supplies sales in EMEA, where we made investments to improve the attach rate of Xerox supplies in unbundled equipment sales.
Offsetting these positives were the contractual component, which continues to decline on trend, reflecting lower page volumes prior quarter equipment sales declines and higher mix of low usage products as well as lower paper sales in Latin America.
Services revenue, which is included as a part of both equipment sale and post sale revenue streams declined 4.6% in constant currency overall, but grew in the SMB channel.
Services revenue comprised approximately 38% of total revenue in the quarter and 30% of services revenue was from SMB.
The decline reflects the factors driving equipment in post sale as well as the impact of lower signings in prior periods.
We are increasing coverage in SMB and actions in place to drive growth in this area, which we are expecting to gain more traction in 2020.
To wrap up on revenue in our results. We are beginning to see the impact of the revenue related investments, we're making such as the improvement in supplies in the expansion of IP services sales at our Xps channel.
We remain focused on our strategy and investing to achieve our strategic goals and our maintaining our full year revenue guidance to be down approximately 6% and constant currency.
Turning to slide nine as mentioned earlier, adjusted operating margin or 12.1% increased a 120 basis points year over year, reflecting the progress of our project owner program, which is on track to deliver $640 million of gross savings. This year and provides an offset to the impact of revenue declines.
While enabling investments for future growth.
We are maintaining our adjusted operating margin guidance to be in the range of 12.6% to 13.1% full year.
Our adjusted EPS expanded 27% year over year to a dollar an eight cents. Therefore, we're increasing our full year adjusted EPS guidance from $3.80 to $3 a 95 cents.
Two $4 to $4 intensive.
This also incorporates expectations for investments in Q4 as well as the current assessment of the impact of tariffs that recently went into effect.
While we are taking actions to mitigate the impact of these tariffs such as raising prices on certain products. At this time, we are estimating approximately 24 million dollar cost impact from tariffs in 2019 with a significant portion occurring in Q4.
Last I'll review, our capital structure, and I'll wrap up with a few words on the leasing business.
We ended the third quarter with $4.8 billion of debt unchanged from last quarter, but approximately $400 million lower compared to year end as we repaid a march bond maturity with cash.
We break down our debt between financing debt in core debt financing debt is allocated by applying a seven to one leverage to our finance receivables and equipment on operating lease, which together comprise our total finance assets.
Core debt was approximately $1.6 billion, which is well inside our target core debt level of less than two times annual free cash flow.
We ended the quarter with $979 million of cash cash equivalents and restricted cash and our core debt net of cash was approximately $600 million.
As a debt latter reflects we have a $550 million bond maturing in December . This year. We believe we have access to capital sources as well as sufficient liquidity to handle upcoming debt maturities. In addition to the $979 million of cash cash equivalents in restricted cash we have a $1.8 billion bank revolver.
Which is undrawn.
Another important element of our capital structure is our pension assets and liabilities.
As of December 31, 2018, our net unfunded position was $1.2 billion, which compares to 1.4 billion as of the end of 2017 and 2.2 billion as of the ended 2016 and includes approximately $775 million of unfunded pension liabilities, which by design.
I do not get funded.
From a funding perspective, we continue to expect contributions of approximately $140 million in 2019, and believe we are well positioned to have a stable level of pension contributions overtime.
Before turning back to John I'll provide some detail around the review of our customer financing business.
As part of our business transformation, we embarked on a comprehensive strategic review of our entire business and customer financing was one component of that.
As part of this review, we evaluated our own operations as well as the number of alternatives, including a sale of all or a portion of the business.
We received multiple bids with attractive premiums, but considering the IR our ROI in cash flow yield of the bids received compared to retaining and optimizing the business through project don't it as well as given the strength of our balance sheet and where we are in our transformation journey, we determined that retaining the business will generate the greater.
Return for shareholders.
Now to wrap up we continue to execute on our strategy in this quarter. We are seeing results, we improved our revenue trajectory sequentially and we're on track to meet our full year revenue guidance of down approximately 6% in constant currency.
We also delivered strong cash flow and EPS, which allows us to increase our guidance for both of these measures.
I will now hand, it back to John to summarize before we moved acuity.
Thanks, Bill our strong financials are an important part of our transformation story.
But there are only one part.
The hard work our employees have done over the last 18 months is yielding results.
Our transformation is ongoing and we know we still have more to do.
We are confident in our long term strategy to return Xerox of growth and excited about the future.
We will now open the line for questions and.
Thanks, John before we get to the Q any with John and Bill I would point out that we had in the appendix to our materials additional supplemental reconciliations.
And posted on our Xerox Investor Relations website, a full set of earnings materials.
Operator, please open the lines. The question is now.
Thank you as a reminder, asked a question, namely the press Star one on your telephone switch on your question press the pound Keith Please standby will be compiled documenting roster.
And our first question comes from Matt Cabral of Credit Suisse. Your line is open.
Thank you one most of our start off on revenue wondering if the xps account transition that you talked about being a challenge in the first half of the area. If those are fully back to run rate yet or if there's still work to do to improve execution there.
And then going into next year, just if you can talk about it if you're still comfortable with the guidance for down 3% I think you laid out at the analyst day earlier this year.
Hey, Matt its Phil so addressing the first question Xps as we said in our prepared remarks, we're pleased with the improvement in Q3 and moving past a lot of the disruption that occurred earlier in the year with that said, we still believe that there's improvement to be had there.
The in Q4 and going forward.
Within Xps.
As far as guidance.
Really until you will give guidance in 2020 amid our yearend earnings call late January .
So this time or not formally updating guidance forum for revenues for 2020.
Got it and then margins continue to be the bright spot for you guys. John Im Im wondering if you talk a little bit more about the progress of project on it now that you're about a year into the initiative and in particular, how you're thinking about the potential for additional upside for the balance of this year going into next year and I think you had laid out for us.
$50 million for 2020 initially so just wondering if thats still the plan.
Yes, Hi, Matt that is still the plan. So we implemented a lot of changes with project on it we reconfigured our go to market idea. We trends were 28000 accounts xps, we consolidate our real estate footprint and we're pretty much on plan to deliver to 650 million at least 650 million of growth and now.
We are getting on track to deliver our gross savings for 2020, which was $450 million.
Thank you.
Thank you.
Next question comes from any other borough of capital Your line is open.
Hi, Good morning, guys appreciate taking my questions.
Yes, a couple of revenue and then a free cash and question quickly if I could so clarification sounds like while you guys cadence you achieve your revenue target your internal target for September quarter.
Yes.
If you looked at the guidance, we gave the updated guidance the ending Q2 being down approximately 6% for the full year that implied with the first half being around 7.1% the second half would be around 5%.
Instant currency down we ended up at 5.3.
So we're always striving to do better but it was in the zone of what we were.
Thinking about for the second half and being in the in the 5% zone.
Yes, Okay. That's helpful. Thanks, and could you can you just soda rent spreads what youre seeing is wall.
So we're going to magnitude the contributing factors.
The improvement you saw late later in the June quarter, and then sort of tracking for your expectations.
In September quarter and forward, how much you think.
Thank you couple of things as new products is obviously, the structural and initiatives.
Yes, the gaps and refresh that it's overnight.
Yes.
Great macro any weight the grades for.
You guys principle that you're seeing.
The strength contributed that would be helpful and they have a quick follow up.
So Matt just to be clear you're talking more on the on the revenue standpoint, our cats and under our underwriting.
Standpoint.
So.
Yes, I mean, we sort of forecasted what we would be.
Thinking would be happening in Q3 basin. We saw late in Q2, we saw xps starting to pick up late in the second quarter.
We knew the pipeline, we had a 90 sale.
Coming but with that said in other areas like large enterprise in high end.
There was the large customer refresh in the in the large enterprise said help mid range overall large enterprise.
Performed well relative to our expectations in Q3 and high end Versado in iridescent demand.
No continues to be strong and we're pleased with that.
Okay sounds more strike it sounds like it's you guidance more structural and that that.
Yes. This.
Some with incremental and may be sustainable in the context that whatever macro backdrop is.
Yes, I think some of it is sustainable you goes I mean, obviously, we talked to the one large Nike sale, but other things within large enterprise there was a refreshed, but overall things we're doing well there and also on the supply side as we talked about our prepared comments.
Thats supplies, we made investments in that area and we saw improvements.
Got it had supplies.
Wholesale revenue performance and we're expecting that to continue on into the future also.
Okay. Thanks, Thanks, one last quick one off the cash.
You talked about the reduction in Capex for the here is that really leading to the the increase in in the free cash and GAAP.
Or is this.
Something more structural I got this working cap and trade that can really well I'm wondering if you're guiding up and free cash flow goal for this year I noted that youre seeing your three year plan for the analyst day.
The in tablets can continue each of the next three years to improve upon free cash flow now that you sort of reset the level up here.
We continue to expect sort of the data right IRET, you're planning to continue regardless of where you come in for 2019 free cash flow can increase in 20 can increase in 21.
That's it for me thanks.
Yes so.
A couple things so the free cash flow you're right. The capex contribute to that that also our confidence in that range raising the range also comes from stronger working capital.
Management throughout the year.
So it's a combination of the two that's giving us confidence in raising the range as far as guidance in the future.
In our three year plan for 2020 was 1.1 plus.
So we laid out there at Investor day, and we're not formally updating guidance at this point, but we're confident.
And that 1.1 plus.
Still holding for 2020 and beyond.
Okay, great. Thanks, and let you guys.
Thank you and our next question comes from Shannon Cross as Cross Research. Your line is now open.
Good morning. Thank you. So much further questions I was wondering if we could stop start by talking about what kind of a competitive landscape here seen clearly xerox outperform certainly in the last.
But I'm curious as to pricing how some of the competitors who are struggling a bit more than you are reacting to the situation.
If you can just provide some color that me great.
Shannon's done here.
We're doing is we're focused on a maniacal execution of our of our strategy. So we've invested in.
Our transactional supplies organization, and we're putting a focus directly on the clients.
We will always see a pressure on pricing, but if you think of our solutions were 85% of our businesses. Our wrapped in services. That's a strategy that we have that's working for us and we're seeing a lot of competitive win backs with our new products like ball Toro and Prime link those are competitive advantages, we're seeing some traction there.
But it's really on investments.
Comes down to blocking and tackling and Thats, where we are with the competitors right now.
Okay, and then with regard to the large deal you had this quarter just are there any more large deals in the pipeline in the near term and is that.
Ill completely installed at this point or just so that fall through to fourth quarter.
The large product refreshes with certain large customers you will happen periodically.
Okay.
Each year throughout the years.
This one was mostly installed during the quarter.
So I might be a little going on Q4 with that said even outside of that are large enterprise.
Performed well, especially in the U.S. and so we have a confidence of continued strong performance going into Q4.
Even without those large customer refreshes, which tend to be more periodic in nature.
Okay and then my last question is just on M&A.
Sure, Yes, your balance sheet, some pretty good shape is our willingness to lever up the balance sheet are we looking at more sort of tuck in deals.
And what kind of valuations are you finding out there. Thank you.
What we said it but we're not going to comment on our M&A, but we've built a pipeline both looking at large and tuck in and we're going to go through our vigorous analysis of that whether its ROI see looking at cash flow yields looking at how it fits into the business.
Whether it's an adjacent or not into what we do and tuck ins will continue to look at tuck ins, but all of that we're looking at it and evaluation. So we're using our valuations and make sure that we're making the right flow.
Okay. So.
So size is not as much of the consideration as as contribution now it's really it's not it's not a question of side. It's really a question of where does it fit with US and then doesnt fit the metrics were looking for and it's all the usual suspects whether it's I, our cash flow yield ROI see where does that fit into the metrics.
EBITDA evaluation, so we got a whole lift that we go through and all on what we're saying as we're looking what size is not an issue right now.
We continue to look at tuck ins and we continue to look at different opportunities.
Okay. Thank you very much.
Thank you and our next question comes from Jim Suva of Citi. Your line is now open.
Thank you very much you provided a lot of that commentary and additional details which is greatly appreciated I. Just have one question and that is you increased your cash flow. Your earnings you made a lot a lot of progress.
But the.
Stock buyback you kind of kept the same maybe it's because the question. You mentioned are the statement of at least but also it seems like on this earnings call. Maybe just what I picked up a great year, you mentioned, maybe M&A a little bit more than in the past, so as M&A, but taking a higher priority than in the past or.
Am I, just kind of hearing that in kind of pulling that out as far as a priority.
Yes, I wouldnt necessarily say that we evaluate our capital allocation.
Continuously.
We have plans at the beginning of year, and we will evaluate it throughout the year.
We're comfortable with the 600 million.
This year and share repurchases.
And as John just said on M&A front, we're looking at various sizes deals to extent, they would make sense and complement our company in the right price.
Right, but you got a lot more cash flow coming in and lower capex.
Spending than previously thought some kind of wondering where do you kind of earmarked goes dollars to go too.
Yeah, I mean, we have we have flexibility in our allocation. Obviously earlier this year, we paid down to $400 million debt that was do we have $550 million.
Coming due here in the December timeframe that we'll evaluate on how to deal with that we may initially pay for that out of our funds on hand, and then the refinance that later.
We believe that strong as you point out strong cash flow does provide us flexibility on whether it's additional share repurchase or M&A as John spoke to.
Thank you so much for additional questions and answers it's appreciate it.
Thanks.
Thank you and our next question comes from Katy Huberty with Morgan Stanley . Your line is now open.
Thank you good morning, what's your demand linearity look like in Europe did deteriorate as you move to the quarter was it just consistently we can you mentioned investments in the SMB.
Market within year at how long do you think it takes for those investments to convert to better growth.
Yes.
The demand in Europe .
Joe was pretty much throughout.
Throughout the quarter.
For the most part we didn't see increasing or decreasing.
I should say was weak relative to our expectations.
We had expected of Europe to do better in Q3 than it did Americas perform.
Within or slightly better and our expectations I wouldn't say that there was really ramp up.
As far as weakness in Europe during the quarter, but it was below our expectations throughout the quarter.
Okay, the SMB investment impact.
Yes that some of it will.
No.
With that sooner than later.
To the extent, we're looking at tuck ins in those tuck ins that are.
No SBS like that where we're looking to do that potentially over in Europe also obviously, it's a timing when those with them.
Close or the extent we find those.
Actually act upon.
And then other areas as far as sales coverage, we're seeing.
Secret Xps, we've made investments in terms of trying to get better sales coverage.
And working through disruption, we talked to earlier this year and we've seen a fairly quick response and.
Turnaround with respect to that in Q3, and if you think of our investments Katie.
Our guidance for fourth quarter doesn't materially change the economic environment in Europe .
So.
For the year, frankly, but we're making investments now in some cases can take a little bit longer no different than what we've done in the last few quarters.
Okay. That's helpful. And then just one other follow up fourth quarter implied EPS guidance is.
A little bit lower than where consensus was coming into this quarter is that chest.
Conservative.
Timing of how it's impacting.
So.
Couple of things so yeah, I was actually a waiting for that question because I knew in coming years. Some point, we looked at closely a couple of things to think of one thing is the investments. We're talking about you on last call. We said it'd be ramping up into second half of the year level of investments and that's true even from Q3 to Q4 in the investments, we're making on whether in the rest.
New side or on the own inside.
The those investments will clearly impact through quarter, but will benefit us for the long term, they're also will be increased impact.
Q4, we expect Integrys impacted year from the tariffs that were enacted in the September timeframe, and obviously that will have a year over year impact also but.
Those are just a couple of items.
Look too but.
I think the high end of the range gets close to about what we were last year, but.
We just have those couple of variables that I mentioned.
Great. Thank you so much.
Thank you.
Ladies and gentlemen, this does conclude your question answer session I would now like to turn the call over to John for any closing remarks.
Thank you everybody for being on the call. While we've made progress we have more work to them.
And if each quarter, we get better, but we'll continue to do so by remaining laser focused on executing our strategy. Thank you for joining the call today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.