Q1 2020 Earnings Call
[music].
Good morning, and welcome to the Xerox Holdings Corporation first quarter 2020 earnings release Conference call hosted by John Byzantine Vice Chairman and Chief Executive Officer.
He is joined by Osborne Chief Financial Officer.
During this call Xerox executive slurry first slide.
On the web.
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At the request of Xerox Holdings Corporation today's conference call is being recorded.
Oh, the recording <unk> Rebroadcasting of <unk>.
Yeah, but without the expressed commission Xerox.
After a presentation there will be a question answer session.
Ask your questions at that time, Please press star one anytime during this call.
You can withdraw your question by pressing the palace.
During this conference call Xerox executives will make comments that contain forward looking statements, which by their nature address matters that are the future and on a certain.
Actual future financial results to may be materially different than those express your it.
At this time I would like to turn the meeting over to Mr. teaching Mr. Byzantine you may begin.
Good morning, Thank you for joining our Q1 2020 earnings call.
Hope, everyone, it's safe and healthy.
This is an unprecedented time for individuals businesses and governments around the world.
None of US a live through a global health crisis. This proportion.
So we are learning fast adapting and making decisions and the best interest of all our stakeholders, including employees customers partners shareholders and society.
Well, we saw an immediate impact to our business. It's at a rapid implementation of locked down measures globally disciplined approach we implemented over the last two years provides a foundation to move quickly to preserve cash continue operations provide support to our many clients on the front line and apply them and if.
Factoring in R&D expertise to help save lives.
I'm incredibly proud Xerox team's dedication and ingenuity enjoying this extraordinary time.
For the first quarter, we generated 173 million of operating cash flow from continuing operations.
Decrease of 49 million from a year ago.
Free cash flow was 150 million down 57 million year over year.
Adjusted operating margin was 4.7% down 600, a 30 basis points year over year.
First quarter revenue declined 13.9% in constant currency year over year.
GAAP loss from continuing operations was minus three cents per share down 37 cents year over year and adjusted earnings per share was 21 cents down 45 cents year over year.
These numbers are a direct reflection of the impact covert 19 had on our business in the first quarter.
All but two countries, where xerox upgrades experienced a full or partial opt out into first quarter.
Yeah absence of people from the off this resulted in approximately 50% decline and page volumes in March which impacts our variable rate contracts.
The late installs, whether because of the office was closed or limiting vendors onsite lowered equipment sales revenue by approximately a 100 million of the corridor.
And the financial impact this global health crisis is projected to have on global GDP and our leasing portfolio required us to increase our bad debt reserve by approximately $60 million.
The results, we are withdrawing or 2020 financial guidance.
Well, we have models that are prepared for a range of potential outcomes.
We don't believe it as prudent to make assumptions given the number of unknowns related to the duration and magnitude of the disruption caused by cobot 19.
We have been actively managing this crisis from early in the year.
In February our focus without supply chain and ensuring we had what we needed to deliver for our customers.
We did.
By early March we had asked our employees to work from home where possible in many cases before governments had required.
The health and safety of our employees comes first.
We also shifted the teams focused as though on the front lives both supporting clients rely on that in times of need and with new health care initiatives that address gaps and what is needed to treat the sick and stay safe.
Well there are some positive trends emerging in the fight against covert 19.
They remain important questions about how and when economies and businesses around the world will reopen while keeping their people safe.
We're working closely with other companies government leaders and health care professionals to implement new work lies in line with recommendations.
In the meantime.
Our four strategic initiatives remain at the core of how we operate.
We have continued our intense focus on managing cash while streamlining our operations to do better for us and our clients.
We are investing in innovation and continuing to examine M&A opportunities that strengthen us for a long term.
We're better positioned to handle this crisis today because of the discipline and work we did over the last two years.
Let's walk through each of the four area.
Project up our enterprise wide transformation it should have to optimize our operations of instill discipline across the company that enabled us to take Swift action in response to covert 19 endemic.
Well, we saw early warning signs about the spread of the virus in Europe. We immediately established a task force of senior leaders to monitor developments in real time and began planning cost saving initiatives directed at discretionary spend and redirecting investments that are most critical areas, including innovation and.
Digital technologies.
We've increased already intense focus on cash and keeping our balance sheet strong through the crisis and the resulting economic turmoil.
Opportunities to stretch into different areas that might be busier than their own.
For the time being our focus has been on keeping our employees whole during this crisis.
We are participating.
<unk> for men subsidy programs available in Europe, and elsewhere that reduce our financial exposure.
And we have chosen to pay whatever additional some is required so impacted employees in those geography continue receiving 100 per cent salary and benefits were permissible.
From a revenue perspective, we expected to deliver results in line with our plan until we began seeing economies shut down.
This ultimately resulted in approximately 50% decrease in page volumes in March.
While the long term contractual relationships and management services ensures certain fix minimum payments.
The current situation continues to have a significant impact on bearable contracts delayed decision, making and install and bad debt among other things.
We assess the impact on our business under several recovery scenarios.
What stay at home or they're still in place we expect the most significant impact and cute too with the gradual recovery and Q3 and performance closer to our plan level and Q. for.
Our clients are primarily large enterprise and small and medium sized businesses, both of which had to shut our offices and moved to remote working environments in March.
On the enterprise side, we saw a mix situation with some clients such as federal and state governments as well as health care providers, continuing to operate and in need of additional resources to address the pandemic.
Governments in healthcare clients are investing in high in production such as the <unk> ink jet press N.D.I. Genfive.
Placements of our new Black and White light production device. We're also strong come on public septic line and those in education.
Our ability to offer a total solutions that combines equipment and software remains a key differentiator.
We responded to emergency requests for equipment and support from clients.
Seems from Xerox supported the U.S.N.S. Mercy and the U.S.N.F. comforted. These 40 deployed to Los Angeles, and New York, respectively.
We rushed printers to pop up field hospitals in the Midwest and on the East Coast.
<unk> such as Cleveland Clinic started using our recently launched cloud based on demand print platform to help support to overflow volumes and business continuity plans.
We click click developed a nap for Imperial College healthcare NHS Trust, one of the largest national Health system Trust in the U.K. to help them track doctors and nurses to manage workloads during the crisis.
Even with all that what's happening in terms of both business and personal concerns we saw employees across the globe, including in Italy closing deals and wing back business from competitors for instance, or Italian partner at T.Q. close they deal over video conference with a top logo fashion company way competitor.
Had been and incumbents for 20 years.
What to solve the client with the power of our out to lengthen Versaflex connect Q. software and that.
This is just one of many examples.
In fact pipeline and orders were up in March strong signal demand for I'd technology and services remains high.
On D.S.M.B. side. Many of these companies took a much harder hit and I've less leeway in their business to absorb it prolongs economic downturn.
Many countries, including the U.S. I've instituted financial plans to support smaller companies and we are working closely with them to ensure there are aware of what the safety nets are available and how to apply.
With both S.M.B.N. enterprise clients Xeroxs leasing business are proving to be a key differentiator in winning and retaining business.
Are strong balance sheet allows us to provide flexible financing to qualified customers and invest in competitive takeouts, which will be even more important when we begin to emerge from this crisis.
We've also invested in additional partner support, including making favorable changes to xeroxs rebates structure, and providing increase training and marketing support on offerings that can help their clients navigate through this crisis.
Going forward extensive <unk> 19 impact on our business depends largely on Wednesday at home orders are lifted and what's required for businesses to return to the office, while keeping their employee safe.
In the meantime, we continued to invest in key growth drivers in our business and broadening our clients understanding about what they're asking do to support them both in a crisis in.
Among the areas we are investing his software this service or I.T. services portfolio with an emphasis on bundled technology packages for remote working in remote learning and increase work flows through box and other ads.
This month Xerox celebrate its hundred and 14th birthday, having survived many crisis is over that time, including the great Depression.
Interestingly the company that well when others fail you choose their offices ability to constantly innovate.
We are still investing in our five innovation pillars, and extending that we're up to new health care related initiatives that allow us to help stabilize during this crisis.
While our lives maybe physically closed R.R.M.D. teams remain up and running collaborating remotely and continuing to make progress.
The three D. engineering team has pulled forward to key Workstreams software development using simulation tools and machine designed documentation.
They remain on track to launch the industry's first liquid metal print or by the end of the year.
The team developing our first a I work for assistance offering continues to expand the base of trial customers, helping to refine the core A.I. engine and the value proposition in preparation to make it commercially available in the late Q3.
And I don't see the engineering team working on our industrial predictive maintenance solution is advancing to <unk> capabilities.
Including underlying <unk> on them and models and simulation tools, all of which is being done remotely.
In digital packaging the team is engaging lead customers in how our technologies can deliver new levels of late stage personalisation and improve operational efficiency in production environments.
Newest innovation area is clean tech and we are focusing on identifying technologies that reduce humankind negative environmental impact underworld.
The team is refining the techno economic model for one of our initial early stage technologies focused on improving building energy and H. back efficiency.
This will help guide our technical team to test key assumptions in our work with the U.S. Department of energy to develop a solution that could reduce energy consumption of air conditioners by up to 80 per cent improve indoor air quality and buildings and reduce greenhouse gas emissions.
Given our strong focused on innovation, we were able to quickly stand up a team of our smartest engineers researchers and scientists.
I think creatively about how to address the challenge is presented by this virus.
It was clear that we all had a role to play and our finest problem solvers worth equal to the task.
Within weeks, we are working with others to scale up production of a disposable low cost F.D.A. approved ventilator and related airway pressure monitor.
Also we are now making hospital grade hand, sanitizer at our facility outside of Toronto, Ontario in Rochester, New York.
We expect to produce and deliver up to 140000 gallons of hand, sanitizer and the second quarter.
And our entire inventory was so before we made the first batch we will continue to make sanitizers and ventilators as long as there is the man.
We have and will continue to run our business prudently when it comes to any expenditure.
Are rapid response to early warning signs in Europe allowed us to move quickly to eliminate discretionary spending so we could continue to fun growth initiatives.
Xerox has a strong balance sheet and liquidity at the end of Q1, we had approximately 2.7 billion of cash and a 1.8 billion undrawn revolver.
We have approximately a billion of debt maturing and 2020, which we plan to refinance overtime as our court that level remains within an investment grade crowded metric range.
We are committed to our shareholders return policy.
Loading our current dividend rain and plan to return at least 50 per cent of manuals free cash flow.
We will continue to be opportunistic about M.N.A., despite the covert 19 crisis.
And Q1, we acquired for smaller companies extending our strategy to grow in G.S.M.B. market in Canada and the U.K.
We're focused on implementing arts three year plan around to for strategic initiatives.
We are making smart investments across our portfolio from court two adjacent to new markets.
We believe the economic environment will present unexpected opportunities and we will evaluate them with our established emanate Creek area.
As we have always done we will evaluate the returns of any cash out location strategy, including share buybacks to achieve the best return for our shareholders.
Now I'd like it handed over to build to cover our financial results in detail.
Thank you John.
Four I started to review of our financial results I'll take a few minutes to discuss the financial impact of the Cobin 19 pandemic on our first quarter results until the late February timeframe, we expected to deliver results inline with our plant.
What is the global economic disruption caused by the pandemic worse. It like many other companies are being just slow.
Locked down in businesses resulted in ways that equipment installs and purchase decisions into bearable components Upsale revenue such as manage print services agreement where revenue is based upon the number of page plagues declined.
Third month of any quarter is typically our strongest was the largest proportion of equipment is so old and profit is recorded.
<unk>, our first quarter was significantly impacted by the ramping of office closures in March which limited our ability to deliver and install equipment.
Oh, there is more business is required employees to work from home the use of Geox equipment decline.
Impacting our post tail rapidly.
Most of our customer relationships I contractual with contract terms you typically include discharge as well as a variable component that includes service and supplies linked to print volume and the percentage of fixed versus variable component berries by channel and geography.
As a result, cope with 19 and a greater impact on equipment sales and Q1 as deliveries in installs, which would have occurred late in the quarter were unable to be completed while the decline and postal revenue was somewhat contained due to our contractual business.
Through project on it we are becoming more agile operation and we were able to react quickly as a pandemic became more widespread.
Project on it initiatives had been ongoing in savings from these initiatives provided a partial offset to the sudden revenue impact from the health crisis.
In addition during March we implemented in operational resilience planned focused on cash an expense management <unk> Jobing are strong balance sheet in order to mitigate the impact of the crisis on our operations and business.
With regard to our customer financing operations, we have low historical bad debts less than 1% of revenue in 2000, a 19, but if the increase our bad debt reserve by approximately $60 million in the first quarter reflected expected increasing write offs of customer least receivables, resulting from the pandemic.
Are bad debt reserve is an estimate of losses that are expected to be incurred in the t. shirt and is calculated by applying a projected loss rate to all portfolios by country based upon historical trends and projected behavior, which takes into account global package.
In assessing the level of bad debt resorted Q1, we looked at current and forecasted economic conditions current portfolio credit metrics as well as the level of write offs our portfolio during the credit crisis in 2008 in 2000 or nine.
As of March 31, 20, 24.4% of our finance receivables were reserved compared to 2.6% as of December 31 2019.
Our finance portfolios diverse with no sympathy in concentration in any one name industry or geography, and we have a disciplined credit policy and are working with our customers are partners reserve relationships over the long term.
Importantly.
We have a strong balance sheet insufficient liquidity with approximately $2.7 billion, a cache yeah sure equivalent and restrictive cash at the end of Q1 and at 1.8 billion dollar Undrawn revolving credit facility that matures into third quarter of 2022.
Now looking at the end Pepsi.
Over revenues in the quarter declined 13.9 per cent of constant currency and 14.7% it actual currency.
Until March we expected revenue to come in closer to our plan, which would've been a decline in the mid single digits.
Turning to profitability adjusted operating margin of 4.7% Q1, with 630 basis points lower year over year.
Largely as a result of 190 basis point decline and gross margin and a 410 basis point increase in Sag as a percentage of revenue, including 330 basis points from the increase bad debt provision.
Will decline gross margin, it's impacted by low revenues, including higher margin posts tail revenue, primarily as a result of disclosures due to cope with 19 health crisis.
As well as the impact of price reductions in line with historical trends.
Transaction currency and terrorists, which are partially offset by benefits from our project own it transformation actions.
Operating income, which impacted by accelerated revenue declines, resulting in lower gross profit.
We're only partially offset by expense productions and includes an approximate 60 million dollar increase in bad debt expense, which as I mentioned covers all projection of higher bad debt as a result of the pandemic last ardine is a presenter revenue increase 30 basis points and attributed to the decline operating margin. However.
Ardine expense declined by 8 million year over year, partially due to the timing of investments.
Blow operating profit other expense net of $23 million with $16 million better than the prior year, primarily due to lower non service retirement related costs lower non financing interest expense and higher interesting <unk>.
The lower non financing interest expense is the result of a lower average that balance and the higher interest income is due to a higher cash balance which includes $2.3 billion proceeds from the sale of our interest in fuji's here ox annex psyche to Fuji filled in November.
Are just to tax rate in the quarter was 29.4% and compared to 26.3% and the prior year.
The higher tax rate year over year, it's primarily due to geographic mixture profits as well as the impact of discrete items, a lower pre taxing.
Adjust C.D.P.S. or 21 sense, what's down 45 cents compared to Q1 2000, a 19.
Significantly off our plan to earnings level, which anticipated grows year over year.
The decline was largely driven by the Kobe 19 impact on operations, which offset the benefits from Costa productions and also a 20 cents impact from an increase in bad <unk> expense.
Benefits from lower net interest expense lower chairs and other cost reductions were offset by the negative impact from higher taxes tariffs and transaction currency.
The gap loss of three cents per share with 37 cents lower year over year, including the aforementioned 45% decline and adjust the G.P.S., partially offset by and that benefit non gap adjusted items related to lower non service related pension expense and higher transaction costs related to the H.B. transaction.
Non capitalist G.P.S. include restructuring and related costs, the amortization of a tangible assets non service retirement related costs transaction or related costs net and contract termination costs as well as the income tax on those adjustments.
Q1, we recorded $41 million of restructuring and related costs and for 2020, we still expect restructuring charges of approximately $175 million for the full year.
Moving now Friday, I'll discuss cash flow.
As you were aware of this management team is focused on cash John and I remind you of this back every quarter.
Was it is our priority and we have a detailed cash management process in place, which at a macro environment such as this has become even more detailed.
We are monitoring cash inflow was an outflows daily we are reducing discretionary spend and we are redirecting investments to the most critical areas I'll discuss more in our view a cash and liquidity shortly and will now look at our first quarter cash flows.
In Q1, we generated $173 million of operating cash flow from P. to the operations, which was $49 million lower than the first quarter of 2019, primarily driven by lower income.
Working capital was $133 million better than the prior year, reflecting the higher cash from accounts receivables due to lower revenue in higher cash from payables due to the timing of payments, partially offset by a lower level of purchases.
The higher catch generation from accounts receivable and accounts payable, partially offset by higher inventory levels.
Even toy levels were impacted by equipment installation delays and lower demand for posting primarily caused by office closures in March the year over year change in cash in the other category is primarily in other current and long term liabilities, which reflects a low work rules, particularly incentive related or cools associated with.
Indirect channel partners in the current year and the timing of payments for restructuring related costs in the prior.
Restructuring payments, a $35 million <unk> in line with prior year, and we continue to expect little year restructuring payments approximately $175 million.
<unk> $23 million in the quarter in free cash flow with $150 million, we still looks back <unk> attacks approximately $100 million for pull your 2020, primarily related to investments and R.I.T. infrastructure.
In investing cash flow acquisition spend of approximately $193 million includes three acquisitions in the U.K. and one in Canada all to further R.S.M.B. strategy internationally.
Spend as above the $100 million it'd be guided to for talking acquisitions and 2020. However, we did spend well under $100 million in 2019 as a couple of the acquisitions. It closed in Q1 were originally expected to closing queue for of last year.
We now expect our full year 2020 talk in emanate to be in the 200 to 300 million dollar range is Sean mentioned, we will continue to be opportunistic about emanate. Despite the cobin 19 crisis and we'll continue our disciplined approach evaluating the returns on any cash allocation strategy.
Lastly, within financing cash flows we were turned $58 million into evidence to shareholders in the first quarter and we did not have any share repurchase just in the court.
We had no payments on debt and ended the quarter with $4.3 billion of debt in approximately $2.7 billion of cash cash equivalents and restricted cash on our balance sheet.
Let's now turn to slide nine for more detail on rabbit.
Well this quarter revenue decline, 14.7% or 13.9% it costs to currency as I mentioned earlier, it's at the end of February we had been on path to deliver revenue with our plan level, but it's our first quarter business is largely skewed to March the expansion of the <unk> make disproportionately impacted.
Our first quarter remedy.
Geographically America's revenue declined 11.8% in constant currents heat, while AMEA was down 17.6 per cent in constant currency.
Our European operations were more heavily impacted due to the earlier onset of the pandemic, which resulted in business closures. The entire month. The March while in North America does this shutdowns impacted or operation is largely in the second half of the month.
In addition, a large proportion of our business in Europe is through indirect channels, which was heavily impacted in March as channel partners lower purchases to manage your cash inventories while in the U.S., we have a larger direct business for SMB large enterprise customers.
Equipment sale revenue was down 27% in constant currency and the poor with every product segment impacted however equipment sales grew in our U.S. enterprise operations, and which among other industries covers government healthcare education pharmaceuticals, and food industry clients all the central industries during the.
Pandemic.
These customers are continuing to invest in new equipment in in certain areas are developing applications that are increasingly provide for example in education remote learning is driving more print flowing to production facilities either in school districts or in Queens service providers for workbooks, and worksheets to support teachers and students.
Embarking on remote learning to navigate school closures.
Looking at activity in the quarter the decline in sales than our high end devices is primarily in the lower end of the range, which was impacted by office closures and lower indirect channel activity. This was partially offset by the demand <unk> press I, each and and continuous speed colored systems.
In the mid range we.
Missing in decline in our European indirect channel partners as well as you know U.S. indirect channels in X.B.S. organization their primary Serb SMB customers and we're <unk> difficultly impacted by the March slowdown inactivity.
In our entry segment lower channel sales in a Mia and the U.S. were partially offset by a large order in Eurasia that occurred earlier in the poor.
Wholesale revenue declined 11.4% actual occurrence fee or 10.5% and constant currency wholesalers impacted by the industry trend of lower volume devices and page volumes, but in the first quarter page volumes dropped further it's offices closed and more employees began working remotely.
Well I post sell revenues largely contractual are bundled contracts have a fixed component as well as a variable component that is based upon couric volume.
In addition, we had lower activity and unbundled supplies, which are largely in indirect channels and developing markets.
Xerox services revenue declined approximately eight per cent. Your every year in college. The currency also be impacted by March closures services to clients were down significantly more in European operations as compared to the U.S., However, signings and both Europe and the U.S. were very strong we had significant wrote the renewals with the high.
Ice renewal wind rate in over two years, and the new business signings rate of declining improved significantly compared to 2000 at 19.
We have implemented revenue actions that are focused on maintaining stability and our whole markets, while building capabilities to capture new opportunities.
We are continuing to invest in our top line in areas that are essential for today and in our innovation areas that are key far longer term future.
John talk about some of the offerings to support a flexible work environment, such as digital Mail services Nike services supporting remote workers and learners are investments in top line. In addition to improve signings Q1 and are mostly contractual business gives us confidence in our revenue rebounding is businesses.
Resume operations.
Now turning to slide 10 hour view our profit in earnings.
Adjusted operating margin was 4.7 per cent in the quarter well below our target due to the significant decline a revenue caused by the pandemic.
As a result of the discipline, we have developed through our project only transformation program, which quickly implemented actions reduced discretionary span in response to the pandemic. These actions are in addition to our plant and initiatives in our program to achieve at least $450 million a pro savings in 2020, which we are on track to deliver across.
Seven targeted functional cost areas, where the goal of simplifying our operations.
And 2019, we'd see $640 million roast cost savings and importantly began to transformation to make her operations more agile, which will help us through the current crisis.
Just C.D.P.S., a 21 sense declined 45 cents year over year, well below our plan, which we expected increase year over year.
As I mentioned earlier, the decline was largely driven by the impact of covert 19, or an operations and the 27 impact from an increase in bad debt expense as well as the negative impacts of higher taxes and transaction currency, which were partially offset lowered that interest expense lower shares and other costs.
Productions.
Moving on the slide 11 in a review of our cat structure.
We ended the corner with $4.3 billion of debt, Oh, which 3 billion supports customer financing activities and therefore, we break down like that between financing debt and coordinate.
Financing that is allocated pipeline seven to one leverage for financing receivables and equipment on operating leases, which together comprise our total finance assets, who are debt was approximately $1.3 billion and we ended the Puerto with approximately $2.7 billion of cash cash equivalent.
Restricted cash, which puts us in a net cash position approximately $1.4 billion when daddy cash against poured that.
And 2020, we have approximately $1 billion in bonds maturing, which we plan to refinance overtime through the debt capital markets or other alternatives such as securitization.
Oh liquidity position as strong with approximate $2.7 billion, a cash cash equivalent to restrict the cash and a 1.8 billion dollar bank revolver, which is fully available to us.
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 2000, an 18 and C. increase in pension obligation as a result of lower discount rates was offset by asset returns in contributions.
<unk> includes approximately 815 million of unfunded and two liabilities for plans that by design or not funded.
In 2000, a 19, we contributed $141 million worldwide pension plans and expect to contribute approximately $135 million in 2020.
Last slide 12, I'll wrap up some thoughts on the balance of 2020.
During this unprecedented time, we're focused on the health and safety of our employees customers and partners and we are actively engaged in supporting the fight against this pandemic. We are also focused some mitigating the affected this crisis on our business and operations. However is jotted buys you uncertainty around the containment.
Pandemic in the business resumption makes it difficult to predict the full impact on our business operations and financial performance.
As a result, we are withdrawing or previously issued full year 2020 financial guidance for revenue E.P.S., adjusted operating margin and free cash flow.
Bisesi impacts on our business under several recovery scenarios and we expect the most significant impact in q. too with a gradual recovery in Q3 and performance closer to our plan level in Q. for.
And so he stated our revenues are largely contractual and we have demand built in from the Q1 delayed installations. Therefore, we believe we will be able to rebound once businesses reopened on capital allocation, we are committed to our dividend and our policy of returning at least 50% of free cash flow to shareholders are dead.
Levels within our targeted leverage for an investment grade credit metric and we have a strong balance sheet and liquidity, which supports our dividend policy.
We have a discipline process for evaluating returns on cash allocation strategies, including share repurchase determine the best returns for our shareholders.
Well now turn it back to John for some additional comments before going to queuing it.
Thank you Bill today, none of us have a crystal ball to predict what will happen next.
However, it's our responsibility to think about the full range of outcomes and how to prepare ourselves our businesses and our people for any outcome.
As part of that we're we're focused on how many will work from home and for how long a question that we need to answer for employees and four o'clock.
It's important to remember working from home is not a new concepts.
Many companies I've implemented flexible policies over the last 10 to 20 years.
And many in recent years also asked employees to return to the offices to speed decision, making and for us or collaboration.
I can tell you this and all the conversations I'm, having what the C.E.O.s government officials and others. The prevailing question isn't whether to return to the office it's when.
That's the the next pressing issue businesses are dealing with this and sharing their employees can be productive and secure when they're working from home.
Can we help managed to work flows how do we protect our clients distributed network of systems from hackers in this environment clients are increasingly looking to extend the digital enterprise to the home and back information flows quickly and securely to the right people at the right time.
So while the current economic environment presents challenges in the short term.
We are working closely with clients and partners alike. So extends xeroxs secure ecosystem beyond the office to the home to ensure a seamless working experience no matter the location.
Now, let's open the line for questions.
Thanks, John <unk> I would point out that we have in the apartment to I'm materials additional supplement for reconciliation.
<unk> type of perfect earnings materials.
Operator principle in line for questions now.
Thing, Yeah, I never mind here to ask a question <unk>.
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Thank you. Good morning at first question now you mentioned that your services contract <unk> <unk> <unk> <unk> parents die.
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Sure I Katie I'm. So yeah. The first thing to point out is you know to remind everyone that you know over 80% of a revenue some contractual in nature and volume about multi year contract, but as you stayed gar components within the contract said with our fixed and those that are more variable in nature and.
As I noted are prepared remarks, it does very pie. The the way you go to market and by geography for example.
Then me it tends to be more variable in the post tail in at some be part, especially in the U.S. tends to be more fixed.
<unk> <unk> overall perspective, if you look to our components <unk>, maybe the way it's broken up in our M.D.N.A. Obviously, the financing is you know pretty fixed associated with the the lease arrangements that supplies paper. Another line item in R.M.D.N.A. is more transactional in nature as you sell those those are <unk>.
Bundled supplies as opposed to the supplies that are part of these multi year service arrangements. So the the services maintenance and rentals P. sister part that has fixed versus variable and on average in recent <unk> been around 50 per cent fixed and 50% bearable, but that can change depending on.
On you know we're revenues coming from as I said that some be in the U.S. has a higher percentage fixed versus variable than others.
Okay, that's very how file and then.
Just stepping back we haven't heard out there Cantonese talk about a return to them Reginald financial plan in the in the fourth quarter can you just talk about that cross currents. They they think U.T. and now.
And for equipment installation dot would offset.
A week or economic environment, and and the fact that we may not be 100 per cent docket office, even even by December.
So yeah just to make sure I was clear my prepared comments, we fully like to to to be worst sink you want to be the worst quarter of of the year with it said our base model, whom is businesses reopening latent you too early to three and then you for not bad.
Planned, but closer to plan with that said we might on other various scenarios where few three is similar to you too and you know hopeless quarters being worse than than I think you. One and then you for his where things started to Puerto later start getting better and even in that.
Hum, we hear model positive precast low for the year.
But you know it is hard to predict but in all of our mind with Q2 was working through one and two four we're getting closer to plan, but were clearly not have plan.
Okay. Thank you some x.
Okay.
<unk> and then that's the question time time, Matt <unk> quite place for my Name's not open.
Thank you very much I know you guys aren't giving explicit guidance, but I was hoping you just walk through your free cash flow dynamics little bit and in particular, how we should think about the the flip through of lower net income versus potentially offsets be working capital the input from financing receivables just across the balance of the year.
Hey man, it's a it's bill so obviously lower net income will continue to be a a negative into into cute too just as if it was in Q1.
We do expect 'em similar dynamics on the on the working capital as far as receivables as a result of oil revenues being a source, we hope to manage argument Tories better you know was unexpected what happened at the end of Q1, which resulted in a higher level.
Inventories and then expect cause we expected those inventories to be sold which is I know during the prepared remarks, you know delayed about $100 million in E.S.R.
That we still expect to occurred display during the year when businesses reopen and then we as I note on the prepared remarks continue to manage payables as closely as probably the purchases, what we're actually buying and making sure. There's nothing discretionary that doesn't need to be bought and then man to the timing of of those payable she'll be expect.
That can be a source.
Got it and then the thing about the cost structure. It it sounds like you're still on track for the 450 million gross target you guys laid out coming into this year I'm going to be just talking about putting takes two potentially do a little bit more in and if there's any potential to bring forward <unk>. What you had sort of laid out and the plan going into 2020.
Into this year.
Yeah, so the the border and $50 million initiatives pretty much by the beginning of the year was mostly lined up we knew what we're doing the actions. We were taking if you notice you know the restructuring charges for the year at some of that winds up with those initiatives. We've held it filled $175 million. So we're very competent and achieving the 450.
A million in addition to the 640, we did last year, but then it'd be noted on the on our prepared remarks. Once we solve what was happening with the pandemic in the March timeframe, we took additional initiatives from a cost control perspective.
Look at things such as like all our contractors and said, our what really necessary versus not necessary. It's the first variable component you go to you look the overtime hours other various initiatives that we looked almost took a blank sheet with expenses and analyze every one of them and said in this environment. What is really what is really.
Necessary would that said one of the key things is that we wanted to make sure. We continued investing in key areas, whether it was in R.I.T. services initiatives or whether it's in E.S. them be marketed noted by our investments I'm in multi branded resellers expanding R.S.M.B. strategy over to the U.K. end into Canada.
<unk>.
Thing <unk> and then next question contention see that as can be creeping back and okay.
Thank you very much John you've mentioned, you're doing now disposable Ben Raiders and hospital greed, Sanitizers, which you know it's great for everybody as well, yeah first responders and.
<unk> widely.
When you think about though for shareholders can you talk a little bit about our our profitability. These kind of at your normal corporate average or they take a investment.
A few faces to get going and then my concern is in you know six months from now is they're going to just be an oversupply oh stretch materials <unk>, Jim Yeah, well first and foremost what we did as we've long stews initiative to address the needs of patients in front line health workers, So saving lives.
It was extremely important that's we took a disciplined approach what we can manufacture once the minimal cab pegs required assuring that we don't have inventory that's leftovers should the needs decline whether it's in ventilators hand, Sanitizers. We also looked at math I want.
Point, and I think and we did quite a bit on.
So we didn't do this the only for the financial gain this is really contributing against the pandemic, but I would tell you about our focus is will <unk> manufactured as long as required.
<unk> and if it's not require than we can stop it quite quickly.
Yeah, Jim minimal upfront investment on these initiatives and it sounds sad.
Yeah, we're not going to build up a lot of June 20, unless we're certain that the demand in the sales will be there.
Great. Thank you so much for your details and it's greatly appreciated jealous.
[noise] Oh Hell at our next question comes from <unk>.
I. Thank you very much I wanted to ask about what you've seen so far into Montana April and and that's particularly I'm. Just curious it's the conversations that your sales people are having with any customers have changed now that some of that states and.
Some of the country certainly in Europe are starting to look at opening up cell has has there been any <unk> <unk> telling her are interested in sort of free starting at this point <unk>. Thank you.
Hey, Hey, sand and it's still so you know the the paint vine declines we saw you know starting in in March.
The continued into the April timeframe, not giving give specific numbers, but you know as I mentioned before we are expecting to to to be worse than if you won an interesting from sales perspective as you mentioned on the call you know <unk>, we had the highest rated.
Renewal in in Q1 over two years and new business signings, although down slightly we still had a very low rate and then actually a very good quartering few one and the the sales process is still going on especially in the large enterprise area.
In terms of you know I'm getting deals negotiated is obviously the issue is recognizing the revenue in getting the installs associated with those deals.
Okay, and then <unk> more specifically on what you're doing in terms of helping customers with work from home and I I'm just trying to think about how like what products software services you have that.
You're able to my partner with our customers 'cause clearly you know there and number of I.C. hardware companies that are well in San Francisco companies that are trying to help out that customers. So I'm just curious.
Okay, I can start pulling out.
Yeah, one of the things, we're working with clients and implemented for some clients is like we got a unique suite of soft whereas in service enough.
Oh really allows us to get the desktop experience for our planes in the workplace from home and beyond security because absolutely key for them. So we have offerings, whether it's I.T. services for remote workers, a digital hub and Bob friend or virtual print management services and I can go on and on and what we've done as we.
Whip examples you know, whether it's a large hospital, where we're helping them with the whole registered daily health and availability of there's thousands of essential employees for sure business kind of continuity, we're working with some different banks, where we've lunch programs that allow them to equip they're critical.
Would not just printers multi function devices and the key is security the biggest concern right now with everyone working from home is security and work flow of documentation and the world pull that goes back and forth not just I need to print. This is how do I keep it secure and some of these offering using our accent.
Using our dog your share of black is allowing us to help these crimes to it.
<unk>.
Thank you and ask questions <unk> can change <unk>.
Hi, Thanks. This is Paul Chung onto her costs, Sir Thanks for taking my question. So.
If you could kind of expand on.
Is it looks like you're you know you plan on for a broader range <unk> <unk> to customers like a bar distributor.
Is this capability client device only or do you tend to offer arrangements no on Cramming club, Dave enterprise structure <unk>.
Thanks.
I'm not sure I understood, but I consider the offerings that we drift described the we're putting in places we're looking to also offered them a cloud big solution.
Offering a poor our clients and four partners.
Somewhere implementing as we speak.
Okay.
Oh, yeah and on that question concerns.
<unk> okay.
Hi, Good morning Guide <unk>, Thanks for all the detail and and have you gotten you're allowed to keep the classroom.
Is there anything from build from from sort of.
Sensitivity perspective.
With regard to set rather human operating margin that you can provide you on this is we think about you know to keep going into T. <unk> three needing to keep score.
We could use as a as a guide <unk> and then anything else in that regard and then I have a follow up with two thing.
Yeah, or as I said, they're prepared remarks, or Q1 operating margin or gross margin was down due to the the the loss of the both E.S.R., but also the higher margin post sale operating margin Q1 note taker was hit by the 60.
A million dollar on bad debt charge, obviously there'll be true up to that as we update our estimates, but the initial impact you know was likely to be the greatest charge would be in in Q1. So you wouldn't expect that to repeat at the same magnitude in future quarters says you're <unk>.
Upon on new data within said you have the the post tail, having more of an impact I'm, starting a cute too versus Q1 word tailed off you go into March timeframe, you're having a for the full quarter and posted tends to be higher margin versus versus E.S.R.. So you <unk>.
Back to have in in offsetting or a more negative impacting cute to Danny Q1 for that so I would look at it you don't have to repeat the bad debt charge.
Two quite the magnitude you had into one but you also have a greater a negative impact of <unk> being impacted for the the full border versus what happened to Q1.
That's that's really helpful. I appreciate that and then just to follow up on the on how to think about the cash flow model through the year I I may have missed it but any comments on on pay a bones and you're bad debt expenses, you going up that much but I'm also wondering if you're expecting delays containments enterprise customers yeah. It sounds like you've been.
Having a lot of conversations with with key customers. So would love to get your thoughts around that one and think about timing of cash flow paint boats.
Sign receivables receivables, yeah, Yeah, <unk> yeah exactly.
Yeah. So yeah, we put in a process you know starting in March for work with our customers and go as I mentioned, the we have long standing relationships with these customers we want to work through the you know this this pandemic with them.
Often times, we're able to negotiate solutions with them <unk> be extending the term of the contract Yo forgiveness of a of a payment for a month or two and just adding it onto the back and it's really on a case by case basis, but we are clearly working with our customers on the s. and besides.
And we point out what's available from a from a government subsidy perspective, and making sure that they're getting you know all that they can get from a from if somebody perspective, but we are getting their requests were working through it with our customers both Marge enterprise an S.M.B.
Preaching Dalai go there I can I get the rest of the follow up on my call back. Thanks.
Okay.
Oh, Yeah <unk>, Okay, I question and answer session I now I think from a call over can Sean plenty claim freimark.
Okay. Thank you paint well this isn't the year. We planned for you know this is the one we have.
I'm really proud of his team we moved quickly to help ensure that Xerox and its stake holders will come out of this crisis in a position as surprising.
Thank you and be safe and be well.
<unk> Oh, thank you <unk>, we now.
Yeah.
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