Q4 2019 Earnings Call
Good morning, and welcome to the Xerox Holdings Corporation fourth quarter 2019 earnings release Conference call hosted by John Byzantine Vice Chairman and Chief Executive Officer. He has joined by Bill Osbourn, Chief Financial Officer.
This call Xerox executive.
I don't know available on the website at Www Dot Xerox Dot Com word slashed investor.
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At this time I would like to turn the meeting over to Mr. Byzantine Mr. Byzantine you may begin.
Good morning, Thank you for joining our fourth quarter 2019 earnings call last February we put a three year plan in place guided by our strategic initiatives to optimize our operations drive revenue re energize our innovation engine.
It gets on cash.
2019 was focused on building a strong foundation that will position us for sustainable long term growth.
And among other things, we expanded project on it or enterprise wide transformation initiative to optimize our operations drive investments back into our business.
Create a culture of continuous improvement.
We monetize our illiquid 25%.
Fuji Xerox over 20 times that assets annual cash flow.
Taking significant unrealized value.
Implement today more frictionless high velocity supply chain.
Create flexibility and customer responsiveness.
We invested in technology enhancements and product launches designed to increase revenue in core and adjacent market as well as new areas of innovation for future growth.
We stood by our commitment to innovate and put the brain power of our best scientists and engineers on solving some of the biggest challenges the modern world is facing.
And we promoted and attracted new talent at all levels of the organization to elevate our game.
We ended 2019 stronger delivering full year results that are ahead of schedule on almost all financial metrics.
Our employees are excited about the future and direction of their company and clients increasingly seek us out we're workplace solutions.
Our full year results position us well to deliver on our three year commitment of expanding adjusted margins by 200 basis points growing adjusted EPS annually by more than 7% generating more than 3 billion of cumulative free cash flow and achieving flat year over year revenue in 2021.
In the fourth quarter, we grew earnings per share increased cash flow expanded adjusted operating margin and maintain the momentum to improve our revenue trajectory compared with the first half of the year.
Adjusted EPS for the quarter was $1.33, an increase of more than 40% year over year.
Adjusted operating margin for the quarter was 16.8% up 270 basis points year over year.
Fourth quarter revenue declined 1.6% at constant currency year over year.
Leading an upfront payment from an OEM license, we granted to Fuji Xerox in connection with the sale of our stake in the joint venture.
Fourth quarter revenue was down 4.7% at constant currency slightly better than our expectation.
For the full year, we increased excess cash flow and operating margins year over year.
Operating cash flow from continuing operations for the full year was 1.24 billion, an increase of 162 million from a year ago.
Full year free cash flow totaled 1.18 billion up 187 million year over year.
We accomplished this while returning more than 70% of free cash flow to shareholders paying down $950 million in debt and increasing investments in growth area.
Full year revenue declined 4.7% at constant currency year over year inline with our guidance.
Our second half progress reverse the first half topline trajectory, but we have more work to do and this continues to be an area of intense focus for us.
Adjusted operating margin for the full year with 13.1% up 180 basis points year over year.
At the heart of project own it is simplification.
Redesigning seven key areas across the organization. So that we can better serve clients generate savings that can be reinvested in the business and physician Xerox for a return to growth.
The seven areas of focus we laid out our shared services procurement I T delivery supply chain real estate and organizational design.
We've made significant progress in each of these area.
For example changes to our supply chain in 2019 improved our responsiveness and increased our sourcing flexibility.
In June we expanded our commercial relationship with HP to cover more equipment supplies software and services in both directions.
Then in November we restructured our relationship with Fuji film and Fuji Xerox to both monetize and otherwise illiquid assets at an attractive valuation and establish a more traditional supply relationship.
Which will ensure we have the ability to source from the partner that can offer to highest value proposition.
We also redesigned our logistics network and inventory utilization models.
By maximizing competitive tension among our sourcing partners and improving the speed and responsiveness of our supply chain.
We are better position to serve our clients at a lower cost, thereby improving our revenue trajectory in margin.
This will remain an ongoing process as we stay current and ahead of trends.
Our investment initiatives under project on it are beginning to take hold as well.
For example, we now have nearly 200 bucks working across the organization in areas such as order the cash delivery human resources and fine.
We are on track to double that number in 2020.
Automation is key to having a frictionless high velocity business.
Lines as well as employees increasingly expect an Amazon like experience.
We are focused on implementing technologies that allow us to deliver exactly that.
Result of project on it we delivered gross savings of a billion dollars on a 9 billion dollar cost base in just 18 months.
In 2019, we achieved our target of annual gross savings of $640 million.
Due to our disciplined approach to restructuring.
We spent approximately 35 cents for every dollar saved.
We expect to deliver at least $450 million of additional gross savings in 20 Twond.
We are making progress on our three year revenue roadmap as investments in our business gained traction.
In the second half of 2019.
Benefits of revenue generating initiatives began to flow through and we expect a rate of revenue decline to continue to improve 2020 .
We are focused on capturing growth in core markets broadening services and software.
Living you technology solutions and further penetrating the small and midsize business market. We also increased investments in areas such as supplies coverage to improve the attach rate on bundle supply sales.
With these investments we saw an improvement in supplies compared to the first.
Geographically Europe performed below our expectations.
The uncertainty and geopolitical friction within the region continues to create a weaker economic environment driving fewer deployments of large deals and delaying decisions.
To counter to regional dynamics, we are taking targeted actions and make investments such as expanding our presence in the SMB market.
Testing in our distribution channels.
The investments we made earlier in the year in the Americas continue to flow through the fourth quarter.
Largely within our U.S. enterprise account the high end segment and the SMB market.
In our core technology business, particularly at the high end.
The year it does involve Toro Hey, Jeff.
Chad press to cut sheet products that are unmatched in the marketplace drove moment.
In the fourth quarter competitive knockouts, and new business accounted for more than a third of iridescent both oral placements.
Tick enhancements, we made in the fall also contributed to an improvement in Asian five sale.
We have new innovations and enhancements in the pipeline for 22.
Xerox is unique in being able to our front end to end solution that takes clients from document creation to distribution.
For example, our free flow core software automates, the preprints process on both the Iraq and competitive printer products and as a key differentiator at the high end.
By extending its use to competitor products, we drove double digit you install growth for free flow core year over year, while opening the door to more competitive.
In the midrange segment, primarily in our new life production color printer offering stands alone.
We believe there's no other product that can match its capabilities at this price point.
This new device was a key revenue driver in this segment.
We will expand the prime length platform in Q1.
Hey, fours in the low and a commoditized numerous competitors and limited ways to increase price where margins.
Key to growth here is offering a total solution planned that drives more value and simplicity for clients in us.
Which we will do in the coming month.
We will introduce a very simple all unplanned targeted at small and medium businesses, which include the device digital labs service and supplies for a monthly price.
In January we expanded IP services for Smbs to all of our Xerox business solution cores.
Our offering spans hardware procurement pro engineering.
Product support and managed IP services.
Leveraging our footprint than existing relationships, we believe that theres, an opportunity for Xerox to fill this gap in the SMB market and drive growth.
We plan to extend this offering in the UK and Canada the second quarter.
Software is a key focus for growth.
With benefits of investments made early in the years starting to flow through.
One example is a new SAS based version of document.
Xerox's content management platform.
Makes work easier and more efficient.
This new version accounts for more than half of new business for this product a strong signal to continue doing that.
Well, we focused on improvements to our corn adjacent businesses, we are delivering on our commitment to Reenergize Xerox's innovation engine.
This year, we will celebrate parks fiftyth anniversary.
A reminder of the strong legacy of invention that.
Benefit both business and society.
Last year, we outlined four areas of focus and innovation.
Threed printing and digital manufacturing.
Hi work flow assistance.
Hi, LT sensors and services.
Digital packaging and print.
Later in the year, we added a focus area clean technology.
We have some of the world's best scientists and engineers focused on bringing new technologies to market.
In three D. Our acquisition of Vader systems about a year ago is accelerating our go to market strategy.
We are developing what is likely to be the industry's first additive liquid metal printer.
In a world that armed demand now manufacturing can be too.
With this technology manufactures will be able to make parts from start to finish in hours instead of days without sacrificing quality Australia.
We're on track to deliver a commercially available product this year for AI workflows system.
Focused on addressing some of the most time consuming task businesses face.
As our piece.
An area, where companies spend an estimated $60 billion annually.
On Aiotv, we're expanding the testing of our sensing and analytics technologies with prominent partners across the World from New York to Australia.
Our pilots are demonstrating an improved level of sensing and insight and industrial predictive maintenance applications that were not available before.
On digital packaging, we are engaging select customers to refine the requirements of our technologies and validate our value proposition and delivering greater personalization and operational efficiencies.
Including new use cases in inline marking and coding.
The team is also exploring a variety of commercialization models and pathways such as licensing to bring these solutions to market.
The significant impacts of climate change is front and mine for many of us.
We are applying business resources to develop new clean technologies that create a more sustainable world.
One area, we are focusing on is air condition.
The year gets harder and more people use air conditioning, there's a greater need for more efficient cooling technology.
Today Air conditioning accounts for significant global greenhouse gas emissions.
We are working with the U.S. department of energy to develop a solution that can reduce energy consumption of air conditioners by up to 80%.
Our powered by Xerox approach allows us to leverage our intellectual property to maximize reach and benefit commercially without having to build the end product ourselves.
Today, one of the larger three D. manufacturers uses our inkjet printer.
Another example is a recent deal we made with outcome the global leader in eye care.
Engineers are working with telecom to develop new eye care solutions that leverage our existing IP and will help millions of people who struggle with various I conditions.
Xerox has long define the modern work experience.
We're investing in key areas that will ensure we do so for many years.
Cash is critical to reinvesting in the business in the ways I've described.
We achieved 1.18 billion a free cash flow in 2019.
The high end of our guidance range, and representing 19% year over year growth.
We ended the year with approximately $2.8 billion of cash cash equivalents and restricted cash which brought us to a net cash core position of 1.8 billion.
In 2019, we returned 72% of our free cash flow to shareholders.
Exceeding our commitment to return at least 50%.
In 2020, we remain committed to returning at least 50% of annual free cash flow to shareholders and we expect to repurchase at least 300 million shares.
Before wrapping up I want it to discuss our approach to M&A.
We have and dabbling M&A playbook that we used to evaluate all deals from tuck ins to multibillion dollar deals.
We have a disciplined approach to valuing and bidding on potential targets.
All deal models include fully evaluated ROI and I are.
Revenue and expense synergies are fully analyzed but deal models only include expense synergies in the evaluation of our returns.
With respect to our proposed acquisition of HP the value of this transaction goes beyond economics.
The printing industry is decades overdue for consolidation and the first mover will have a significant advantage.
As laid out in the Investor deck, we released in December we've identified significant cost and revenue synergies that are only achievable through a combination.
A combined company would be both more profitable and better position to diversify into higher growth market.
Any restructuring that either company undertakes in the interim simply incremental and does not diminish the scope or scale of this opportunity for both HP shareholders and Xerox shareholders.
We received positive feedback from HP shareholders, we spoke to.
They immediately appreciate industrial logic and believe in the value we can create.
With their supported in mind.
We secure $24 billion and binding financing commitments from three top tier banks in order to remove any uncertainty over our ability to finance the transaction.
And we recruited a slate of highly qualified independent director candidates for the election to the HP Board.
We're pressing ahead with our pursuit of this acquisition and they're already working key elements of an integration plan. So that we are well positioned to execute quickly when and if successful.
Now I'd like to handed over to Bill the cover our financial results in detail.
Thanks, John we delivered a strong finish to the year in the fourth quarter, we exceeded our expectations for EPS in revenue and we delivered cash flow in adjusted operating margin inline with our expectations.
Overall, we're pleased with the quarter and resulting full year performance.
On a full year year over year basis, adjusted operating margin expanded 180 basis points. Adjusted EPS was up 23% free cash flow grew 19% and we saw improvement in the rate of revenue decline in the second half of the year as investments in our business began to gain more traction and we expect this moment.
To continue in 2020.
Before going into details of our income statement I want to remind everyone that in the fourth quarter, we completed a series of transactions to restructure our relationship with Fuji film.
Which include the sale for more than 20 times related cash flows of our 25% equity interest in Fuji Xerox as well as the sale of our 51% partnership interest in Xerox International Partners next IP, which was fully consolidated.
Consequently, the financial results presented here are from continuing operations and exclude the financial results attributable to our former equity stake in Fuji Xerox.
And our exciting business.
We are now presented as discontinued operations.
Also I'd like to point out that the reported numbers include the benefit of an upfront OEM license fee of $77 million, we negotiated for Fuji Xerox, which was received in the fourth quarter in connection with restructuring that relationship.
This benefit was included in our updated 2019 guidance measures filed with the US Securities and Exchange Commission on form 8-K on December 32019.
That reflected adjustments, resulting from the transactions with Fuji film.
Looking at the income statement.
Total revenues in the quarter declined 1.6% at constant currency and 2.2% at actual currency, including the impact of the OEM license fee, which is reported in post sale.
Excluding this fee total revenue declined 4.7% in constant currency inline with the prior quarter and as I mentioned slightly better than our expectations I will discuss revenue in more detail shortly.
Turning to profitability adjusted operating margin of 16.8% in Q4 improved 270 basis points year over year.
A significant portion of the improvement came from Sag, which improved 120 basis points year over year, driven by productivity improvements from project on it and the impact of a $10 million write off recorded in the prior year related to the termination of certain Nike projects.
Gross margin of 41.6% improved 160 basis points year over year, including the impact of the OEM license fee and an improvement in services post sale margin.
These were partially offset by the lower equipment and supplies margins as well as transaction currency.
Our any was 3.8% of revenue unchanged year over year.
Below operating profit other expenses net of 8 million was 136 million better than the prior year due to lower non service retirement related costs and a prior year contract termination costs related to an IP services arrangement.
As well as lower non financing interest expense, resulting from lower debt and higher interest income from higher cash balance, which includes 2.3 billion of proceeds from the sale of our interest in Fuji Xerox Annex IP to Fuji film in November .
Our adjusted tax rate in the quarter was 25% compared to 27.7% in the prior year in contributed approximately three cents to our fourth quarter EPS.
Adjusted EPS of $1.33 was up 39 cents compared with Q4 2018, including a 25 cents benefit from the Oems B and benefit from share repurchase lower net interest expense and lower taxes, while the benefit from the write off in prior year was offset in.
Hi, early by the costs associated with incremental Tara.
GAAP EPS of $1.17 was 80 cents higher year over year, including the aforementioned 39 cents plus an additional 41 cents primarily from lower non service pension related expense.
Prior year costs related to the termination of an IP services arrangement.
Lower restructuring and related costs and the income tax on those adjustments.
In Q4, we recorded $53 million of restructuring and related costs, bringing the full year restructuring costs $229 million roughly in line with our expectation of approximately $225 million.
For 2020, we expect restructuring charges of approximately $175 million full year.
Moving now to slide seven I'll discuss cash flow.
In Q4, we generated $398 million of operating cash flow from continuing operations, which contributed to full year operating cash flow of 1.24 billion a growth of $162 million year over year and within our full year guidance range of $1.2 billion to $1.3 billion.
Full year free cash flow was $1.18 billion up $187 million compared with 2018 and was at the high end of our guidance range driven by strong operating cash flow and slightly lower than expected capex of $65 million for the year.
We expect the level of Capex to increased to approximately $100 million for full year 2020, which includes planned investment in IP systems.
The increase in full year operating cash flow reflects higher profit, including the OEM fee better net working capital of approximately $25 million driven by improvements in inventory management and approximately $30 million of cash from finance assets.
Cash from finance assets was primarily due to lower sales of equipment on operating lease which more than offset a reduction in cash from finance receivables, which was less of a source year over year.
Restructuring payments for the year were $158 million less than expected as certain restructuring related payments in EMEA are expected to be made in 2020.
For 2020, we expect payments for restructuring of approximately $175 million.
Investing cash flow included acquisition spend of approximately $42 million, including a three d. acquisition at the beginning of 2019 and two tuck in xps acquisitions.
For 2020, we expect approximately a $100 million of tuck in acquisitions.
Lastly, within financing cash flows we returned $292 million to shareholders in the fourth quarter.
Listing of $60 million and dividends and $232 million in share repurchases.
For the full year, we completed $600 million in share repurchases and spent $243 million in annual dividends for total return of capital to shareholders of $843 million were approximately 72% of 2018 annual free cash flow.
We also reduced debt by approximately $950 million full year.
$550 million, which matured in the fourth quarter and we ended the year with $4.3 billion of debt and approximately $2.8 billion of cash cash equivalents and restricted cash on our balance sheet.
Let's turn now to slide eight for more detail on revenue.
Fourth quarter revenue declined 2.2% or 1.6% in constant currency.
Including the impact of the Oems. The Q4 revenue declined 4.7% in constant currency, which was inline with the third quarter and contributed to a second half rate of decline that is approximately 170 basis points better than the first half of 2019.
Geographically the improvement is in the Americas, which was down 3.3% in constant currency driven by growth in equipment sales, particularly in our us a large enterprise accounts as well as continued stabilization in our xps channel compared to the first half.
In EMEA the rate of revenue declined deteriorated slightly compared to the third quarter with fewer large deal deployments in the quarter.
We also continued to experience delayed decisions and see fewer large bids in the region, reflecting continued weak and uncertain macroeconomic conditions last certain regions within EMEA were impacted by the rollout of project own it initiatives that occurred in the second half we expect the modest disruption in operations, resulting from this.
To begin to stabilize early in 2020 and have targeted actions to improve performance in the region, including deal management process changes and targeted product programs.
Equipment revenue was down 1.5% in constant currency, which is a significant improvement compared to the first half as sequentially better and as I mentioned equipment sales grew from the prior year in the Americas.
From a product perspective, we had a great quarter in high end in both color and mono.
Hi, and color, we continued to see strong demand for our iridescent color production system and the demand for our newly launched del Toro Inkjet press exceeded our expectation on a global basis and we expect this momentum to continue into 2020.
In mid range the rate of decline improved significantly from the first half, but was down slightly compared to Q3 as the better than expected performance in the US was partially offset by lower sales in the EMEA region in the U.S.C. improvement came from installs and revenue from the recently launched prime like a new product in our life.
Some portfolio as well as from and large account refresh in the us and the ongoing improvement in our xps business and an entry higher sales in North America were offset by lower sales and developing market regions and EMEA.
Looking at activity, there's a difference that equipment revenue performance and installs this quarter, particularly in high end color, where we saw at 12% decline in installs compared to growth in equipment revenue.
This is primarily a result of product mix as growth in installations of high end production color systems, such as you're at Escobal Toro were more than offset by declines in lower end production systems.
This mix shift drives a net positive impact on equipment revenues as the higher end of the range systems carry significantly higher price points.
We saw a similar product mix impact in mid range in cells with lower installs of MSP devices, partially offset by higher installs of entry production devices that are at the higher end of the mid range product category. This in part was driven by the recent launch of Prime link, which I referenced earlier.
Turning to post sale.
Revenue declined 1.7% in constant currency or 5.8%, excluding the impact of the Oems.
This rate of decline was an improvement over the first half the slightly less than Q3, which included a large transactional services sale.
Contractual post sale was stable in the quarter, while bundle supplies rate of decline improved as we continue to see the benefit from the investments made to improve the attach rate of Xerox supplies in unbundled equipment sales.
Services revenue declined 4.5% in constant currency as growth in us large enterprise accounts and improving performance within xps and Eurasia was more than offset by declines that Latin America and in Europe , where the rate of decline was impacted by strong fourth quarter in 2018.
Services revenue comprised approximately 36% of total revenue in the quarter and 30% of services revenue was from SMB.
We have focused actions to drive new business growth, which include increasing sales resources and delivery teams and services, which we expect to benefit 2020.
To summarize revenue, we're pleased with Q4 performance and with the second half performance trend, which contributed to a full year revenue decline of 4.7% constant currency slightly better than our guidance of down 5%.
We expect the investments in our topline will gain more traction in 2020, and we will continue to invest in actions to drive improvement in revenue.
Turning to slide nine.
Adjusted operating margin was 16.8% in Q4 and 13.1% for the full year inline with our full year guidance of approximately 13%.
Our project own and transformational program was expected to drive at least $640 million in gross savings in 2019, and it did offsetting the impact of revenue declines and contributing to 180 basis point expansion in full year adjusted operating margin.
We achieve savings across a seven targeted functional cost areas and we're continuing to focus on these areas to optimize operations for simplicity.
Importantly, the continued efficiencies and project own it create capacity to be more competitive such as enabling SMB focused marketing investments to drive revenue.
In 2020, we expect project own it will deliver an additional $450 million in cost savings, making further progress toward our goals of delivering sustainable productivity improvements and driving earnings growth.
Adjusted EPS grew 39 cents year over year to $1.33 in the quarter and we delivered $3.55 of adjusted EPS for the full year, which as I mentioned earlier was a 23% increase year over year adjusted EPS growth in the quarter and for the year is driven by our cost reductions which more than.
Offset the impact of revenue declines as well as benefits from the OEM license fee 25 cents and from share repurchases and other non operational items, which offset headwinds from currency and tariffs.
Moving on to slide 10, and a review of our capital structure.
We ended the year with $4.3 billion of debt, which is approximately $950 million lower year over year, reflecting the repayment of two bond maturities in 2019.
Majority of our debt supports customer financing activities and therefore, we break down our debt between financing debt and core debt.
Financing debt is allocated by applying a seven to one leverage to our finance receivables and equipment on operating leases, which together comprise our total finance assets.
Core debt was approximately $1 billion, which is well within side, our targeted core debt level of less than two times annual free cash flow.
We ended the quarter was approximately $2.8 billion of cash cash equivalents and restricted cash which puts us in a net cash position of $1.8 billion when netting cash against core debt.
In 2020, we have approximately $1 billion and bonds maturing and believe we have access to capital resources sufficient to handle upcoming debt maturities.
Our liquidity position is strong with approximately $2.8 billion of cash cash equivalents of restricted cash and a $1.8 billion bank revolver, which is undrawn.
As of December 31, 2019.
Our net unfunded pension liability was $1.2 billion, which is comparable to the net balance at the end of 2018.
As the increase in pension obligation as a result of lower discount rates was offset by asset returns and contributions.
The net balance includes approximately $815 million of unfunded pension liabilities for plans that by design or not funded.
In 2019, we contributed $140 million to worldwide pension plans and expect a stable level of contributions going forward.
Last on Slide 11, I will review, our 2020 guidance.
As both John and I stated earlier, we made significant progress in 2019 against our three year plan presented last February .
We are seeing the impact of our investments in revenue in the savings from our project only transformational program.
Which contributed to significant earnings strong cash flow generation and an improvement in the rate of revenue decline in the second half.
We returned 72% of our annual free cash flow to shareholders in 2019, and repaid approximately $950 million in debt. In addition by selling our equity interest in Fuji Xerox for over 20 times annual cash flow, we monetized and illiquid assets and increased flexibility to manage our business and the futures.
Alex.
Now, let's look at our guidance for 2020.
First our full year revenue guidance is a decline of approximately 4% in constant currency and we expect minimal impact from translation currency in 2020.
Our revenue guidance excludes the impact of the $77 million OEM license fee for Fuji Xerox in 2019, so as to provide a better measure of the year over year progress against our strategy the improvement in the rate of revenue decline in 2020 is attributable to investments in our topline supporting our SMB growth strategy.
And expansion of integrated product solutions.
We will continue to expand sales coverage and programs that have new product launches and refreshes plan through the year.
I should also note that we expect revenue declines to be more balanced throughout 2020 that is the rate of improvement we more gradual through the year as compared to 2019.
For adjusted operating margin guiding to approximately 13%, a 60 basis point improvement compared to full year 2019, when excluding the impact of the OEM license fee as project own. It savings are expected to continue to deliver margin expansion.
For adjusted EPS, we're guiding to a range of $3 and $63 is 70 cents and $2, an 80 to $2 a 90 cents for GAAP EPS.
This results in adjusted EPS growth of approximately 35 cents compared to 2019, when excluding the 25 cents benefit from the OEM license fee from 2019, the difference between GAAP EPS and adjusted EPS includes our normal adjustments around restructuring and related costs non service retirement really.
Got it costs transaction related costs and amortization of intangibles.
We continue to expect strong cash generation and are guiding free cash flow of approximately $1.2 billion, which assumes approximately 100 million of capex and is approximately $75 million higher than 2019, when excluding the impact of the OEM licensee we.
We will also continue to target returns to shareholders of at least 50% of our annual free cash flow, which will include dividends and at least $300 million in share repurchases last we will evaluate the use of unallocated cash as we progress through 2020.
We will now open the line for questions and.
Before we get to the acuity with John and Bill I will point out that we had in the appendix to our materials additional supplemental reconciliations.
Posted on our Xerox Investor Relations website, a full set of earnings materials.
Operator, please open the lines. The question is now.
As a reminder to ask a question you will need to press star one I can tell us out so I wish I had a question press the pound Keith.
Our first question comes from Matt Cabral Credit Suisse. Your line is open.
Thank you.
John on the HP acquisition, you touched on this in your prepared remarks, but im wondering if you could dig a little deeper into what you see is the biggest benefits of industry consolidation and just what gives you confidence in at least 2 billion of incremental cost takeout created through the combination.
Yes, Matt we.
When we looked at the combination of 2 billion one thing Thats clear as you only get that come but you only get that 2 billion. If the two companies combined together.
This is a detailed analysis per pillar of what we believe would be savings of combining the two companies together and in our document that we presented to the shareholders. We went into a level of detail that talks about it so our confidence in the 2 billion is quite high. So we can headset and if you look at our.
Team in our track record of what we've done with project on at here, we delivered a $1 billion over the last 18 months and we're on track to deliver to 450 million plus in 2020. So we have the track records. This document and this that we put together was built but our team our management team. So you look at who's on our management.
Team and these are a lot of folks that have done restructuring in the past.
I can tell you that the shareholders they see the logic and the proposed transaction.
They've told us that the combination of the two companies bring tremendous value.
Inside of our business case, we only focused and we only used the cost savings, but there are synergies that are detailed as well that we believe we can get by combining the two companies together.
Got it and then now that you've exited the JV with Fuji Im Wonder if you talk a bit about what that supplier relationship looks like going forward and how you're thinking about opportunities in Asia. After the technology agreement ends with them in March of 2021.
Hey, Matt its bill so we look at the.
Nick renegotiation of the relationship with Fuji film as clearly a positive from a supplier perspective.
Many benefits a more normal type of relationship now supplier customer as opposed to before we all said to factor in the 25% interest.
As far as in the when we renegotiated the relationship.
They are actually benefits in the product.
Fly arrangements, we have with them going forward there were certain terms that exist in the prior agreements that we negotiated a more favorable terms going forward and as we've discussed before.
Product supply arrangements go out from a period of five to seven years and really the earliest any of them come up for renewal on a staggered basis is 2023 as far as looking forward in the impact.
As we can go into the.
Into the Asia Pacific market.
Under without for products other than geographic products for zero graphic related products, we could potentially go in as early as April 2021 under.
The Xerox named however, they choose to extend for two years to use of the Xerox name. We can still go in to the Asia Pacific markets was geographic products, but not under the Xerox name some more likely we would be going in a more significant way two years later in April 2023.
Thank you.
Thank you and our next question comes from any other Farah capital. Your line is now open.
Hi, Good morning, John Bill Congratulations on solid results in second straight quarter of.
Offline.
Topline momentum.
To me if I could just starting back out back with with HP, John what would be Xerox's next preferred action given the letter.
Guides to board level options that you guys published whether it be to engage in Congress Asia.
Or would it be take kind of go into the summer with avoid level elections, and then I have a business model follow up thanks.
And then the I can say weve. The meetings, we've had with CHP shareholders have been quite positive and they understand our transaction. They believe in the combination another concern as as ours is turned the refusal to engage in a normal course of action at this point and the process. So we're hoping to engaged with the age.
Executives.
And we've offered that engage with them and have a discussion on how we bring this to closure because we both see the logic of this combination and we're not where we are yet.
Okay Thats helpful. I appreciate that context, and then with regards to the 2020 guidance in John you alluded to in the lead to you made that Jim.
Well, they still existing goal of game flat constant currency revenue growth in 2021.
The 4% guide or 2020, while well quite quite favorable as I think you're probably trending a little bit as schedule right now how do you go from some how do you see slipping from the 4% in 2020 could flat.
2021, and it's part of that conservatism.
Let me let me just stop there that have a quick point on the margin since the cash of 2020 as well thanks.
Yes look we're confident in the revenue guidance and think of our continued demand for high end production systems are strengthen the us and be channels, our new product launches that we're going to be doing a new investments in 2020. So we're executing on this strategy and well transformations not linear we've seen that there has been but.
Along the way like we had in the first quarter of last year, but we're building an organization to respond quickly to this and on that and for 2021, our road to flat revenue is just.
We believe that we can get there and we're going to do it by improving the organic revenue and like I said the traction on the above topics and just add on and on the.
2020 were expecting really minimal impact from inorganic as you know last year, we did.
Approximately $40 million of tuck in acquisitions, we've guided towards.
100 million this year, but we're expecting minimal impact, but in 2021 Yo factored into I'm getting to flat. When you have 100 million target in 2020, and 2021 that that would also have a favorable impact on getting to flat by 2020 white.
Got it I understood and then and then Bill just quickly on the 2020 op margin guide.
Free cash flow guidance, I think you flip part of this.
So that 13% margin, which is flat.
And the free cash flow, which is which is kind of relatively flat. It sounds like the in these part of that the reason than flatness is that backing you sort of say if you take out the license intact.
From some synergies could actually good margin would actually.
2020.
Yes, you are pointing out the slight increase in free cash of 2020, but can you can you just sort of backfill for us, particularly given the 450 million of gross cost saves.
Why perhaps.
Michael expansion will be greater in the free cash flow expansion will be greater and that's that's it for me I appreciate.
Yes, great. So from an operating margin perspective, just taken a step back when we laid out our three year plan last February we said in year. One we do 100 to 150 basis point improvement. This year. After you take out the Oems. The we actually did 110 basis point improvement going from about 11 three to 12 for.
So on on plan with our three year plan and we are also.
Valves and taking into account entered and we're also able to make significant investments in our back office and then revenue our topline and still achieve that 110 basis point expansion in line with 100 under 50 basis point guidance as far as next year you hit on the main point that takeout that Oems the it's real.
The about a 60 basis point improvement at according to our three year plan. We said 100 150 in year, one and then approximately 50 basis points plus in year two in year 360 basis points being in line with that and a lot of that continuing to come from.
On initiatives, which were targeting $450 million in 2020.
So we think we believe that were clearly on planalytics with respect to our adjusted operating margin expansion.
Thanks, a lot.
Thank you and our next question comes from Shannon Cross of Cross Research. Your line is open.
Thank you very much John I was curious.
Obviously, it back and forth with HP HP has indicated that the offer significantly under that I use what they believe valuation of their assets are so now that you have your slate of directors out there is their willingness to revisit your offer just how you're thinking about that and then also curious as to and this is I'm not actually share with the answers I'm curious how the too.
Boards with work together post deal so should we assume that the direct your as you put out for HP, you're kind of short term tickets the deal done or would you assume you have a significantly expanded pork following combination of hps Xerox. Thanks.
Yes I.
I would say our slate as a group of highly qualified accomplished individual and they understand what the challenges are of a global enterprise and Thats, what weve brought forward as as we said and that was after we got the $24 billion secured on price, we're not going to speculate on potential actions. We've said many times that we would.
Are you willing to meet with HP to begin negotiating a transaction.
And we're asking HP to engage in a constructive dialogue.
So that we could explore ways of maximizing value for both our shareholders.
Okay. So if they don't then it just it moves to the ports that I guess you don't anticipate.
Any like you're not going to negotiate on Sunday, So thats fine I.
I guess the question I had two with from Dell is in terms of cash flow.
Finance receivables was about 175 million of cash I think in 2019, which as Lee was down year over year, but still obviously it was a source of cash, but if you use in fourth quarter. I know these things can sort of the are not linear by any means but.
That combined with a 58 million in cash that you got from the sale. The IP provide somewhat of a headwind when you look to next year. So I'm curious how much more benefit you can you give can get from working capital is there any sort of onetime or so we should think about for next year and cash flow.
Or is the vast majority of that just going to come from the improvement operating profit. Thank you.
Yes as far as.
The.
The the working capital improvements for next year. The main thing that we're focusing on is improved working capital in particular, we had over $100 million improvement. This year in inventory, we expect some continued improvement.
Next year inventory, but as well, we think there are significant opportunities and.
Receivables and payables as far as finance receivables 175 million dollar source, obviously thats a source that.
Is that a good source that we work to be less of the source and and as part of our modeling for next year with the improved revenues NSR and originations we are in our model factoring in.
Less of a finance receivable source.
Which is a good headwind to have means that we're getting more.
Yes, our and more Miss out there and you're right, it's about $58 million of the onetime or for the OEM. So the two of those being headwinds we expect to.
Still overcome those mainly through improvements not only in our cost structure, but also.
In working capital components of a RFP.
Although we had over 100 million this year from an inventory, we still think theres. Some some improvements that we can get in inventory for next year.
Great. Thank you very much.
Thank you and our next question comes from Katy Huberty with Morgan Stanley . Your line is now open.
Thank you. Good morning Bell question for you on revenue the 4% constant currency decline in 2020, how do you compare that to that 3% decline you talked about at the analyst day, a year ago are those comparable and if so.
How would you explain the difference.
Yes so.
There have been adjustments, obviously with the Fujifilm transaction in disc ops and everything but at high level, just taking a step back I think that we're probably about 100 basis points off where we would have like.
To a venue we guide to 3% at a lot of its due to various reasons and you always a bumpy start at the beginning of year with them. The disruptions we talked about on the xps side.
That approved clearly in the second half and there is clearly room for improvement continued improvement in xps going forward in 2020, but we believe we have levers in place and rates improved so get the flat bye.
2021, but you're correct just taken.
That is hub at 100 basis points.
Less than where we would like to be at this point.
You mentioned in this slide deck and also on this call that investments are beginning to impact to revenue you saw that in the back half of 2019 any contacts for how much incremental revenue you were able to generate in 2019 or what the incremental revenue impact is in in 2020.
So at a high level those investments played out in various areas somewhat in the SAR.
We had significant improvements in the second half of the year with respect FSRU on the 1% to 2% decline range versus the first half.
Q1 was down around 5% Q2 around 8%. So so investments there, but in the post sale area in particular, and we've talked about this quite a bit.
Supplies in particular unbundled supplies most of our supplies are part of bundle arrangements over 75% of arrangements relate to bundled supplies, but there are what we call to unbundle or unattached supplies and earlier this past year.
We.
And our organization really created an organization to sell.
With respect to those unbundled supply agreements and we saw significant improvement from where we are like in the first few quarters, 9% to 12% year over year to clients a significant low single digit declines supplies. We saw significant improvement in the second half of years based upon our investment in the supply is area and we started to see some.
Improvement in the IP services.
Well, we've made investments of expanding that from where we had three of our xps quarters. Two were 10 by the end of the air and early this year will be pretty much all of xps selling IP services.
Thank you and then just one last question a separate from that discussion around valuation and what you would ultimately be willing to pay any feedback from the banks you provided the debt commitment around whether there's the potential to take on even more dad or what leverage ratio.
Hi, they'd be willing.
For you to AG said.
Hey, Wes.
We believe you know that we have flexibility, we we lined up the 24 billion dollar and financing commitments and we believe our arrangements with those financial institutions allow us flexibility if need be you could imagine k. the amount of analysis that the banks went through before.
He agreed.
Give us a $24 billion in financing.
The due diligence that they have to go through with us to give them confidence.
Thank you congrats on the quarter.
Thanks.
Thank you.
It comes from Paul Coster of Jpmorgan. Your line is now open.
Yes, thanks for taking my questions. So a couple of quick ones just building on a men's questions from earlier on.
Explains why operating margins.
The improvements is attenuates a little bit.
So can you just talked little bit about the owned assets.
But on gross savings so is it still sort of 65 cents. Some every dollar or is it side also attenuates against removing swings twin cities.
So I think you're referring to Paul.
Cost of our savings and we've said that you know that our cost to get those gross savings.
Is less than 40 cents on the dollar was about 35 cents.
Last year, but it's a little less than 40 cents and Youre looking to next year that $450 million of gross savings that we expect a similar type of cost and 30 540 cents range in order to achieve those savings.
Okay. So no change in the payback on.
Those savings.
Gross savings.
No.
Okay and then the question is going and so as you look sequentially from Q1, assuming the business sizes.
You are looking to 300 basis points plus.
Year on year improvement in revenues.
Maybe I missed a little bit the nuances earlier on but can you just talked so Scott why the sub inflection.
These new initiatives will suddenly mature at the same time or some other reason why has that close to them.
So if you look at what we're guiding towards in 2020 versus a normalized.
2019 were guiding towards about 150 basis point improvement.
Year over year to get that approximately 4% nets minimal.
Inorganic involved in that as I said, yes, there was little last year to have a rollover and.
They're just we're not factoring in that much for this year, we do expect those investments to accelerate so that 150 basis point improvement year over year from 19 to 20, we could see being in the.
200 to 300.
At this point improvement in 2021 versus 2020, but we will also part of it as I said earlier factors in that.
Allocated approximately $100 million per year of tuck ins that can be more or less in any given year last year was only $42 million, but that we would expect.
Those couple of pushing and by the way those tuck ins were not just looking at the US we are looking show in certain countries in Europe , and expanding the xps models those countries, but we could see that having.
<unk> 0.2 points of them benefit also potentially in 2021.
Got it one quick question just talked about it may the Hyatt.
During the improvement in black what princes.
We saw those amazing.
Just simply the Lumpiness that business and then its pros count so as you think that's sustainable.
Hi end has overall had showed significant improvement in the second half of the for the full year, we actually grew.
Our high end.
Yes, our.
In the first full year ending Q3 in Q4.
But if you take step back and we've talked allies things at the new year, the relatively new year test products that out for about a year. So now.
Strong demand for that del Toro, our high end inkjet machine touchy inkjet significant demand for that and our agent refresh certain features on the Eitan Eitan five that has also contributed so the high end clearly a success area for us full year on year over year.
Growth from the us aren't in the third and fourth quarters.
2% to 3% growth from any Srs Sarah.
Referring to continue.
Referring to the black more segments and securing Heinz is that just simply enterprise counts lumpiness or is that.
Yes.
Hi, and enterprise, it's still have some of the eyes and machines yet.
Oh, yes.
Sure I'm, referring to black and white.
We can to supplement.
Okay.
Okay alright. Thanks.
Thank you.
Ladies and gentlemen, this does conclude our question answer session I would now like to turn the call back over to John for any closing remarks.
Thank you for your time today as we started 2020.
Alex is positioned to make further progress against our three year plan.
We've built a strong team and even stronger foundation.
We will continue our efforts to achieve success.
I'm once thought was impossible Xerox, we're moving forward thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.