Q1 2020 Earnings Call

All participants will be in listen only about should you need assistance. Please ignore conference specialist by pressing the star followed by B. Riley.

After today's presentation, there will be an opportunity to ask questions.

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Please go ahead.

Good evening, ladies and gentlemen, and welcome to conduits first quarter 2020 earnings call.

Joining me on today's call, it's clear Skelton conduit, CEO and brainwashed conduit Seattle.

Following our prepared remarks, we'll take your questions.

Well, it's also being webcast a copy of slides used during this call was filed with the US you see this afternoon those slides as well the detailed financial metric sheet are available for download on the Investor Relations section of the conduit website.

We'll also post the transcript later this week.

During this call conduit executives and they make comments that contain certain forward looking statements.

Finally, the private Securities Litigation Reform Act of 1985.

They're nature address matters that are in the future and are uncertain.

Statement reflects management's current beliefs assumptions and expectations as of today may seven 2020.

To a number of factors that may cause actual results to differ materially from those statements.

Information concerning these factors is included in <unk> annual report on form 10-K filed the FCC.

We do not intend to update these forward looking statements as a result of new information or future events or developments, except as required by law.

The information presented today include non-GAAP financial measure.

Because these measures are not calculated in accordance with U.S. GAAP. They should be viewed in addition to would not as a substitute for the company reported results prepared in accordance with U.S. GAAP.

Well my information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparative purposes. Please see our press release, which was issued this afternoon I was furnished to the S. You see on form 8-K.

I'll now turn the color.

For his prepared remarks.

Thank you Alan good evening everyone.

I hope you all staying safe and healthy these are difficult times before I start start my prepared remarks on the quarter I want to spend a minute acknowledging that throughout this corona virus pandemic. The conduit team has continued to provide critical and best in class services to our clients and their end users, while ensuring that health and safety of our greatest asset or.

Yes.

Very proud of the hard work dedication and decisiveness of all my teammates.

I had a jump into action over the last two months in a situation. Unlike anything we could have imagined.

It's in times like these were leaders lead pride in our company really shines.

Grateful to be part of the stream.

Today I'll go through a business update including the impact of the current environment and Brian will cover the financials monarchy sales metrics will then take some questions.

Let's turn to slide four to review some of the key highlights for the quarter.

Despite the impact from code, we started the year strong Q1 revenue of 1.1 billion.

It was down year over year, excluding divestitures, but higher than our internal expectations.

The strong performance was driven by increased volume.

Most prominently in our government services business, which helps to offset some of the cobot related impacts.

Q1, adjusted EBITDA was 96 million.

I'm slightly more than expected.

Merrily driven by the loss of some higher margin revenue due to cope with 19 additional cost associated with moving to work from home model and timing related to expense reduction effort.

In terms of our sales performance in Q1, we signed 324 million of new business. This is 44% more than we signed in Q1, 2019, and a 55% quarter over quarter increase.

We've seen strong traction in terms of new logos and new capabilities.

And with existing clients has been a bit slower, which we believe is due to the clients focusing on navigating the current business environment.

Nevertheless, we started Q2 with strong signings as well.

We expect to see continued progress on sales as a country opens back up and well and we're well positioned given our strong pipeline.

One third of the way through the quarter, we achieved over 70% of our quarterly target.

I'd also like to highlight that our renewal rate for the quarter was 93% backup toward targeted range.

As mentioned in previous calls quite retention goes hand in glove with improved quality, we've seen significant declines and our technology incident rate and time to resolve is much improved.

Feedback on quality, it's been very positive.

Therefore, we expect continued client retention improvement, which should positively impact the year.

Let's move on to slide five to discuss some of the specifics on a responses to the code crisis.

Our business continuity team started monitoring the virus in January and officially established a proactive plan very early on.

Been working to ensure the safety of our associates, well focusing on delivering critical functionality to our clients.

Given the rapid deployment efforts some of our clients have committed volumes to us that were previously service by our competitors.

In addition, we're supporting our associates with a number of specific initiatives.

Including making improvements to our policies to extend short term disability.

Providing extra supplemental sick leave coverage and introducing a hardship leave policy.

We've shifted approximately 75% of our workforce to work from home.

It took a coordinated effort more technology team and our site location leaders well focusing on stringent safety and security precautions.

Finally for those essential onsite employees, we've had an increase sanitation.

Checkerboard for plans and staggered break times.

We're staying connected through leadership females videos employee appreciation campaigns and fireside chats employee feedback has been very positive along the way.

The focus now needs to be honest safe migration to work from home versus work from Conduent model.

While still in the planning stages. We believe there are near term as well as longer term approaches to this new normal model and the savings associated with it.

Contact Tracy and modulating the migration will be required in order to protect our associates and prevent a resurgence of the disease.

We plan to use our own may even disease tracking tool that we sell the public health agencies as a tool to help facilitate our internal moves.

Instead, all that there will be an obvious impact to our business from the current market conditions.

Well no one can perfectly predict what's in store for the future I can give you an indication of where we expect to see puts and takes and the business over 2020 due to both business as usual conditions and the impacts of the current and post cobot market conditions.

Let's turn to slide six to discuss.

Well the cobot impacting Q1 was confined to March as Brian will discuss we expect to see greater impact in Q2 and beyond.

On the commercial side, we're experiencing some volume pressure in our transaction processing and customer experience offerings.

Finally, offset by new volume diverted our way due to a quick migration to work from home.

All right, just say or benefit wallet business will also be impacted by lower interest rates, which fall straight through to the bottom line.

However, this is largely offset from a cash perspective, as we will have lower cash interest expense for the year.

Meanwhile, we believe our commercial health care businesses will remain somewhat constant on a year over year basis.

On the government side, we're starting to see significant increases in several of the services that we provide to our government clients.

Our payments activity for supplemental nutrition assistance program, where snap women infant in children, or Wick, and especially unemployment benefits are showing significant volume increases.

We're also seeing increased enrollment activity in government health benefits and support programs.

Which we expect to continue.

In our transportation businesses, it's a bit of a different dynamic we anticipate continued declines in our tolling them parking volumes and expect delays in project delivery for some of that public safety and transit work.

Volume decreases in some of these businesses are often partially offset by portions of the business did that fixed pricing such as in our public safety business.

I mentioned some of the work we do for government clients. This is a differentiating factor for us and could helped offset volume declines in other parts of the business in a challenging economic environment.

Let's spend a few minutes digging into the important work that we do for clients and their end users on slide seven.

Our government services business provides critical services just citizens throughout the country.

In 2019 alone, we disburse more than $80 billion, just citizens for federal and state and local government support programs.

Across all of our government programs, we support over 34 states in delivering electronic payments.

We manage over 100, <unk> prepaid debit card programs 39, electronic benefit transfer program for snap in wet and seven electronic child care programs.

This activity tends to increase in times of lower economic activity and we are seeing the benefits from a few of these offerings.

The first I would call out of snap, where supplemental nutrition assistance program.

We're seeing any creation the number of cards being issued we're also working with our clients to expand support for families that may not qualify for snap, but may qualify for other programs.

We also provide prepaid unemployment cards on behalf of 11 states for which of course, we're seeing significant upswing.

You know eligibility businesses, we provide verification services to eight states.

Most of the volumes, we support are related to Medicaid eligibility for roughly 25% or in support of other government programs such as snap.

We're seeing volume increases in this area and expect this trend to continue for the foreseeable future.

Regarding Medicaid claims, while our loss or the California Medicaid contract over a year ago is creating a year over year decline in revenue, we see a real growth opportunity in this business moving forward.

Before I close let me spend a few minutes on our strategic plan and how we're implementing our transformation program.

On our last call, we discuss that we continued to be opportunistic relative to divestitures for the right valuation.

Well the M&A market isn't a wait and see mode right now we remain sanguine regarding that possibility in the near future.

Regardless of what happens on the divestiture front, we're implementing our plan to pivot our business and position the company to whether the current storm grow retain clients through improved quality and become more efficient.

In terms of investment we had said on our last call that we would target investments and growth opportunities across the spectrum of optimize enhance and expand businesses.

Well, we do continue to see growth and margin opportunities, we expect to use our capex capex budget in a more modestly paced way to realize more near term returns while longer term ROI driven initiatives continue to be examined, especially given the learning. So the code 19 situation.

The current environment has provided an opportunity for us to look at our business in a different way beginning with efficiency cast preservation revenue retention and foundational improvement.

It's important to understand that we need to bring to bear in new ways are running our business. This may require a near term efficiency plays such as working from home for client facing associates.

The automation of certain certain functions, which may otherwise may have been years away from adoption.

Now they become more near term focal points, allowing us to lower our cost of delivering services to our clients while improving performance.

We intend to minimize the impact of the crisis through aggressive expense management approaches such as furloughs, a reduction in force vendor in lease contract revisions and project reductions, we intend to lead from the front.

Including salary reductions for senior leadership team.

And even our board of directors.

The net of it is that this crisis will have puts and takes but we intend to minimize the damage and fared better than our competition.

From a longer term point of view, we're not only looking at the continued efficiency and margin place, but we're looking to use a current situation to also reengineer, our operating model reduce staff and unnecessary management layers and established new ways to deliver not only improved operating leverage when improve service levels for our clients.

No matter, what our priorities remain growth efficiency and quality.

We're seeing is that what we must continue to invest especially where there is rest of falling behind the competition with more modest cash conscious approach.

We can continue to see the current quality instability situation get even better.

Efficiency can and will improve through automation.

And operating model changes and growth is on the horizon due to the post covino environmental changes as well as upgrades to our people and processes.

We can see that the fundamentals of this business are turning.

Our current pipeline client feedback sales execution and retention indicators give us an optimistic view toward the future. We believe our plan is taking hold.

Now before I turn it over to Brian I want to say that I'm more pleased than ever with remarkable work. Our team has done to continue to provide critical services. During this time a crisis.

Well, no one which used to have such a crisis to respond to.

We see a silver lining with a bluebird here and there and our intention is to execute our plan to take advantage of the opportunities where they surface and minimize the downside wherever possible.

I can't think of a better team of associates to be on this journey with.

Thank you.

Brian.

Thank you Cliff. These are unprecedented times and we're all proud of the team work and sense of urgency and commitment demonstrated by our team I sincerely appreciate all the hard work from our associates a partners that has allowed us to keep delivering on behalf of our clients before I begin in the financials I'll note that throughout this presentation in India exhibits the appendix.

Well provide both GAAP and adjusted numbers, which will provide a clean compare by removing the impact of the divesture that we completed in Q1, it's when you anything.

Let's start on slide 10, with a review of the impact of covert 19 out of business in Q1.

Despite the slow down in the economy throughout March do you want 2020 revenue was above our internal expectations. However, adjusted EBITDA was below expectations, we estimate that the net impact to our topline from covert 19 was approximately 14 million in Q1, all of which was in our commercial in transportation businesses.

In the commercial segment, we saw declines in volumes in our transaction processing business and in retail travel and type clients in our customer experience business.

We estimate that the net impact that our government business was roughly neutral if you one.

Well, we started to see the impact of increases in our government programs for snapping unemployment. This was generally offset by declines in child support and other non essential stay program volumes.

As Cliff mentioned, we're starting to see further volume increases in snap and unemployment and we anticipate continuing to see this trend in a more challenging economic environment.

And our transportation business well some of our revenue is fixed pricing or account based a significant portion of our totally curbside management business is the only base. These offerings have been impacted by stay at home orders and project delays, which have continued into Q2, we would expect the transportation business the declined significantly in Q2.

Given current trends this business will likely start to improve once the country opens back up.

Terms of adjusted EBITDA, the revenue declines impacted profit.

Particular benefit wallet and transportation revenues were higher margin drivers. We also had incremental spend in IP. As a result is shifting quickly to a work from home model and we incurred other expenses, including the increased clean up facilities for central workers.

Now, let's move on to slide 11, with a more detailed overview of the first quarter financial results.

Revenue for the quarter was approximately 1.1 billion down 6% compared with our first quarter results last year.

The decline for the quarter was primarily driven by client attrition in covert 19 related impacts.

Adjusted EBIT in the quarter decreased 21% year over year to 96 million with an adjusted EBITDA margin of 9.1 per site, a 180 basis point reduction one third of the decline is related to the covert 19 impact remaining reduction was driven by declining revenue and the pressure that puts on the model as well some nonrecurring impacts.

In addition, I'll note that restructuring spend was 7 million in the quarter, we anticipate restructuring to increase as we implement additional cost actions throughout the year and we now expect restructuring spend for the year to be approximately 60 million.

Let's move to slide 12 to discuss the segments.

In the first quarter, our commercial business revenue declined 6.5% driven primarily by the run off the lost business from prior years in covert 19 impacts.

Alluding to benefit wallet interest rate reduction.

Adjusted EBITDA was down 17.3% well adjusted EBITDA margin of 20.1% was down 260 basis points year over year. This was primarily driven by revenue pressure the impact to covert 19 in a couple of nonrecurring items, our government business declined by 10.8% for the quarter primarily driven.

By the loss of our California Medicaid contract in other lost business.

Adjusted EBITDA increased by 11.2% well adjusted EBITDA margins of 34.1% increased by 670 basis points.

The margin improvement was due to run off of the lower margin, California, Medicaid contract and reduce that keep costs.

Transportation segment revenue grew 2.7 per cent compared to the first quarter last year. This was primarily driven by the ramp up new transit business, partially offset by volume declines related to covert 19 and lost business from prior years adjusted EBITDA was up 14.3% as compared with Q1 2020, driven by increased revenue.

You can reduce that he spends adjusted EBITDA margin for the quarter was 16.9% up 170 basis points year over year.

The first quarter, an allocated shared I T. In corporate costs were higher than Q1 2019, primarily as a result prior year I T credit.

I'd now like to provide some updates anarchy sales metrics for the quarter on slide 13, we saw continued growth in the size of our Salesforce in Q1, what sales head count at its highest level since Q2 2019.

New business TCV studies for the quarter were 324 million up 44% year over year, driven by new logos and new capabilities.

Given changes in ourselves strategy, we have redefined the way we classified the business going forward, we'll report new business in two categories.

First new clients were signings of new capabilities to existing clients, which we will define as new logo new capability signings.

The second new business category, its existing IDE studies or expansion of current offerings with existing clients.

If you want 2020, the company sold to 282 million of new logo, new capability signings, representing 127% increase when compared to Q1 2019, new business wins for the quarter were driven by large wins in the customer experience transportation and government businesses.

The company signed 42 million of existing add on signings in the quarter, representing a decline compared to Q1 2019.

We're pleased with Q1 sales performance as we discussed on our last call. We signed a large deal and the customer experience base, where they client that we had previously worked with.

Signings in Q1 also included several other large deals, including an outbound sales deal in Europe. It Britain mail deal in the healthcare space and the government health care Gil among others.

As of the ended the quarter or total new business pipeline was 21 billion showing continued stabilization and ample opportunity for continued signs.

As Cliff mentioned total new business signings are off to a good start in Q2 with April comedian strong. Despite the current environment, we're seeing strong traction in both new logo, new capability and existing Adam inside means [noise].

Please turn to slide 14 to discuss the strength of our balance sheet cash flow.

Our balance sheet continues to be healthy with 430 million of cash at the end of the first quarter.

Our net leverage ratio was 2.7 turns at the ended the quarter in their long term target for net leverage remains to that you wouldn't have turns we continue to have a solid liquidity position.

As we noted in our press release several weeks ago as a precautionary measure we borrow the 150 million from our revolving credit line. The funds were immediately deposited into interest buried accounts and had no impact to our not leveraged position.

I'll note that we made her final payment related to the Texas settlement litigation in January the letters of credit associated with this payment were released in early April.

For the release of the letters of credit revolver had approximately 580 million to capacity available as of the ended the quarter.

Operating cash flow for the quarter was an outflow of 192 million, primarily driven by the final, Texas litigation payment and working capital adjusted free cash flow, which excludes the payment related to taxes was an outflow of 97 late in the quarter. This is largely flat year over year as lower operating cash flow was offset by lower cutbacks.

Overall cash flow was as expected this quarter.

Capex spend was 24 million for the quarter or 2.3% or revenue Capex came in lower than last year due to timing and lower investments as a result of reprioritization related to covert 19, we now expect to spend approximately 140 million in Capex in 2020.

Cash flow is uncertain to some extent because it covert 19, whatever we do want to mention that we will get a benefit from the cares act for deferred payroll taxes in the 2021 in 2022, which will potentially offset some of the negative kobin cash impacts this year.

We went through formal guidance last month, given the uncertainty that covert 19 brings we aim to bring back guidance in a more normalized unstable environment. However, I will note a few things we expect to see a fairly meaningful impact to our transportation business well stay at home orders or thought we could also see lower volumes in.

Some of her other businesses as well.

Offsetting some of these headwinds as cliff discussed our government business is where we expect to see increased volumes. This won't entirely offset the negative coven impact, but it should provide a partial offset.

Additionally, we're taking a temporary cost actions to offset the cobot impact are transforming the business via permitted actions that will strengthen the company as we come out of this crisis, although we can't provide guidance today, we feel confident in our future I'll note that we also have a modeling consideration slide that provides insight into some of the other drivers.

Before we move on to today I want to take a minute to again think all of our associates for their continued hard work and our shareholders for their continued support we're making significant progress during a challenging time and we hope that every Wednesday safe and remains healthy we'll now open up the lines for some questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your touched on so if you're using a speaker had he picked up your handset before passing the keep.

The withdraw from the question could you. Please press Star then too.

Please limit yourself to one question and one follow up.

The first question comes from Puneet Jain of JP Morgan. Please go ahead.

Hey, Thanks for taking my question I'm, a black did he Oh, your voice and that you're safe.

So what's nice to see improvement in new business signings in Buck walked Oh.

Let me give 'em tactic was driven by new logos or can you provide more color on type of work that you're seeing are these long term contracts. What are these near term project driven by clients need to respond to go get 90.

It's a preneed that's cliffs great to hear your voice as well, yes. The a the Q1 signings were essentially all long term contracts, we had a big call center contract a transportation contract and a large government health care contract and as Brian had mentioned that represented some too.

On an 80 million or so and then another whatever $40 million to $44 million in sort of expansion businesses.

The majority of Q1 is dominated by a long term five to seven plus you're kind of contracts, mostly in the government space, but not entirely in the government space as I said, we had a commercial call center, but deal as well that shifted slightly in Q2, where we're starting to get more expansion business, but we still had another.

George deal that we signed in the government health care business and we can send it continue to see Q2 is pretty positive with respect to long term opportunities.

Not only related though to be more direct we did we did get some volume increases associated with coded as you would expect but those are all retained within our current contracts scenario, where we expanded what we already had things like snap and.

Unemployment insurance cards.

Right right and I and I know you talked about a they'll be looking back to school. They don't Q1 revenue was I think well into have both thing something right right, but how should we think about impact on due to a supply doesn't seem to be much a frac thing.

But should we expect high demand impact in sum up the yards in transportation.

I'm going to pick Molly like you talked about and not are you seeing improved trends from Endo Moscow only up there so now.

It's a good question. So the benefit wallet impact is sort of a continuum based on insurance I'm. She's me interest rates and you know that's not going to vary a month to month until the until those rates start changing the dominant your 10, if you fail or downside for Q2 is really in transportation, we think its.

Modulating somewhat with the increase in volume and the government space, We think based on a roughly what consensus said before and you can sort of interplay from what our previous guidance was that it's about a 10%.

Downward a implication on revenue in Q2 compared to what we would have expected ordinarily I'm slightly worse than that.

On on EBITDA, just because a lot it up a lot of the a revenue reduction in transportation has some fixed cost associated with it.

Okay. Thank you you bet.

The next question is from Bryan Bergin Cowen. Please go ahead.

Hi, Good evening. Thank you I hope, you're all done well one of the ask here on on the supply impacts you quantify some of the costing one Q how should we be thinking about the cost impacts into Q and just saw a clear what type of supply capacity are you. Currently at you know considering you have from our remote.

From home, but I assume some delivery centers still up as well.

Yes, so that sort of the complexion on the work from home work from work unable to work, but sort of percentages right now 75% of our workforce is working from home.

Roughly 20% is working from work as you know we've got lots of business that you can't really do from home, we got printers, and we've got scanning machines and in some countries excuse me you can't.

It's really not it's not a capability to be working from home and then we've got roughly four ish percent or so couple of thousand people that are just sitting at the ready waiting to get back into a facility, where they where they can work from work and so that's really the downside, it's about a 4% impact of 4% to 5% impact on workforce that they can't meet.

The demands.

What we're finding is the supply attribute of the demand supply situation is pretty strong we're getting good feedback in fact, our migration to work from home helped us to get some new business just due to the the speed at which we got to to two to working from home. So we're pretty optimistic on on the performance and.

We're seeing really very very minor <unk> really know west delay issues at all client feedback has been very strong so from a supply perspective, it's a warm we're in pretty good shape.

In terms of the cost I assume that second part or your question was what are we doing on cost reduction is that right Brian.

Well I'm just trying to frame how how much it it's going to cost you in the second the impacts right that are you going to caution I guess, the you know you're gonna have some net reduction against that so I'm just trying to frame how from a margin standpoint, how is how we should be thinking about that so we're doing everything we can to a two to mitigate any any of the.

EBITDA effects through a round to 100 million dollar cost initiative, how about half of that is what we'd call temporary it get goes hand in glove with a volume decreases specifically in the transportation business.

And that of course will come back as things modulate back to the new normal up the other half of that we consider to be long term cost reduction efforts that will stay through 2021.

So you know obviously, what we want to impact the the margin that EBITDA impacts of Q1 in Q2. So we want to continue with some permanent cost reductions as well not just temporary cost reductions in the second half of the year and it it adds up to about $100 million.

Okay. That's helpful.

And just as we think about.

The range of potential scenarios for two Q1 revenue.

Just want to confirm that that doesn't last answer you gave some typically that was on 10% on just the transportation why not the overall.

So it was overall, but that wasn't the overall I got that impacts large and that that that's in a that's over and above what we would have already anticipated for Q2 that was could have been interoperability interpolating from guidance as well as consensus.

It'll be higher than that on a year over year basis, obviously.

Okay. Okay makes sense as to what extent do you think the tailwinds that you're experiencing in government can offset some of those you know tougher areas.

Well I mean, we built in the tail winds up a modest portion of the tailwinds in the that 10% answer, but obviously it depends on how long this last and how long unemployment last how much more it Scott you know ratchets up.

Et cetera, but we do see what could be in the neighborhood of <unk>.

$20 million to $40 million in revenue kinda plus up associated with the government services business over the course of the remainder of the year to offset any revenue degradation, we get in the transportation business.

Okay. Thank you bet.

Your next question is from Mayank Tandon of Needham. Please go ahead.

Hey, good evening.

Like how Peterson on for my outlook.

Thanks for taking my questions I'm supposed to start a little on 'em some of the new D. signing as I've said good to see.

The momentum falling through <unk>, how should we think about some of these deals kind of going from a pipeline to generating revenue, particularly in this kind of virtual environment is that's kind of a late.

Late this year type of timeline or where is this more kind of looking into next year. It helps the 21 momentum just kind of want to.

See how these kind of parlay in revenue.

That's a great question <unk> and it varies right. This is the answer is not perfect because it varies if you look some of the commercial call Center business.

That revenue prints pretty quick I mean, the migration conversion timeline in fact, it's already happening.

And one of the sales we made in Q1, if you look at some of the activities in government healthcare you know eligibility claims processing, where we're migrating from a different provider.

There was conversion time buildup time some of those things one of the contracts for example from Q2, it's gonna take probably five to six months before we start realizing that revenue. So it varies transportation somewhat in the middle of those two so you know it's a blend across the board. The these are all not back loaded.

To answer your question, but they're all they're also not all front loaded. So we'll start seeing someone that revenue as early as Q2 and then some of the we won't start see until Q4.

Okay. That's helpful. And then I guess just to follow up and they get the clarity on a the transportation business and it's a lot of moving pieces. There I know you mentioned.

The 10% revenue headwind is right Jeff on the is that just on the transportation business or is that on the total piece sort of high.

I'm, including some of the office actually increased government volumes just want to make sure we're thinking about <unk>.

<unk> alright bye.

The transportation had one's going to be more than 10% the 10% a blended number which would include the off of a modest amount of offsets from government revenue.

The it'll it'll be higher in its higher at a couple of key areas. You know obviously it depends right. If this if this sort of staying off the road stand out of the toll road to stand off the subways kinda phenomenon last well into late summer into the fall.

The number the number starts to get a little worse, if we can start to see some modulation come back in June which is what we're hoping and what we're starting to see especially in some states, where where people are starting to get back on the road already.

It's a little better scenario that the two businesses. The the biggest business. It's a feeling this is a tolling business and then second the you know the parking business believe it or not the enforcement business has been reasonably flat less people on the road, but more people speeding up and then the you know the transit business somewhere in the middle So.

We'll see we'll see a good.

See more than 10% of revenue degradation that transfer loan business through Q2, and we were modeling a though you know sort of <unk>. The last after Q2 of a recovery in the transportation business.

Okay, and then I guess just to clarify you're talking a that 10% that's the sequential based on the old your number I'm correct.

Yeah, the 10% it it's a little misleading that's gonna be higher than 10% in terms of straight revenue readout revenue reduction in the transportation business. So we in Korea.

Yeah. So it's basically to think about it is we already were down 60% year over year in Q2 or gotten this would be a 10% on top of that.

Okay.

Awesome. That's helpful. Thank you you bet.

The next question is from Shannon Cross with Cross Research. Please go ahead.

Thank you very much hi, So my question you talked about the opportunity to reduce Realestate overtime, then and it sounded like sort of rethink how you how you structure your workforce and why they're working and maybe the bigger picture kind of question, but I'm I'm wondering you know.

<unk> sort of what lessons you've learned in the last few weeks and if you had any thoughts on I don't know about the workforce of the teacher might look like and how that could benefit margin. Thank you yeah. Yeah. It's a great question in it and it varies a little bit whether its onshore offshore.

So you know specifically onshore. It's you know we've got 150, some sites and some of those are pretty small most of these sites or more than 50% working from home and so the way we're looking at <unk>. The way. We're looking at this new model Shannon is is a a short term meaning 2020.

No longer term game plan in Threeq components to the short term attribute one is.

Where can we continue to work from home and shut down some sites and save some lease expense now where the easy ones, where there are 100% out we have no contractual issues. It's it's an easy plug and play shut it down work from home.

Where do we need to migrate back in two working from work, where we have some government contracts in some cases, we have government contracts with a mandate is you have to have a site and it has to be at our state.

And you can't work from home, so where are those and and when do we start moving those back into place safely. So that you can keep the right social distancing and and the right a other cleanliness spoke protocols that we think we need to have and so you need a meter that slowly and then a third leg of that store was contact Tracy how do we.

How do we monitor.

The situation across all hundred 50 sites and the other 70 or 80 sites off shore to make sure that we can manage this crisis and not see a resurgence and and do something that we really shouldn't be a <unk> you know a lot of have happened that's all 2020.

I think in the during the remainder of the year, we're going to migrate to work and consider migrating to a more holistic a heavier work from home kind of environment, where we can continue to save a real estate dogs, we spent over $200 million year and lease expense. We think there's at least a 20% improvement we can get there over the long.

Hall, and maybe more but we want to you know we've gotta inventory every one of those sites look at every contract look at every client expectation.

And look at whether the work ethic is degraded by working from home. Thus far we're not seeing huge degradation in performance. So we think there's there's real opportunity here over the long haul into 2021.

And they see that's helpful. And then internationally can you talk a bit about what you're seeing on your side that Philippines, and Jamaica and not just in terms of I don't know employees willingness to <unk> I guess I'm, assuming that none of them are obviously working from home, but I'm curious you know given some of the shutdowns and in some of those regions how.

It's impacted your business or if it's starting to turn back on yeah. Yep. So it did you know it's on a on a a gradient. So on the on one end of the spectrum, you've got Guatemala in Mexico.

We've got four or 5000 people were 97 between 95 and 98% of our associates are working from home and doing fine in fact, we're migrating volume that direction.

On the other in into spectrum, you have Jamaica, where they've got a lot a tough government rules, where it's not quite so easy a in that space, we've got a little bit less than 50% working from home and 46% range.

About 11% in the in the office working from work and then the rest of 'em that are just waiting they can't and so what's happening. There is the reason we're okay. There is some of the input it volume our clients, whose call volume are way down is way down and where we are getting the call volume. There. We can migrate some of that over to watch them.

All of that to cover it. So that's the other end and then somewhere in the middle is the Philippines, where we've got about 70% working from home about seven seven or so less than 10% any office because the transportation is so different difficult from somebody outlying areas in the Philippines to get into the into Manila and say boots alone.

The harder and so we've got some some 20 or so percent in the Philippines. They can't get in a yet it all up and we've got roughly 3000 or so of our associates that can't get and they're waiting.

They're not they're not getting paid but they're waiting to get to work and we're starting to meter that slowly, but surely and then of course, India's in the middle but we don't have call centers in India as a lot of the work we have in India scanning work and technology working right now it's over 90% in a work from home environment.

It was getting can happen at work from home.

Scanning can happen at work from home, it's not it's not it's it's really more indexing and taking files and re crafting the file unsentimental fall back out and the claims world. It's not it's not an LCR scanning I'd say, probably misspoke, it's not an LCR scanning machine, it's more of indexing work.

Okay, great. Thank you so much.

<unk>.

The next question comes from Ashwin Shirvaikar from Citi. Please go ahead.

Thank you I quit I've done it.

Hey.

Could it presentation I hope you and your families that are staying safe.

It was well yeah. Thank you.

I guess my first question is it [laughter] regards to.

Yeah, the context that you signed.

This quarter at Pratt quarter.

And the ramp associated with it and ordinary lead you know it [laughter] some of these contracts might be quiet a.

A tougher than it involves the you know sitting down with the client things like that do you have anything like that.

Affect the pace of to them [laughter] de have you see any changes in the speed at each client Uh huh.

That being signed work [laughter].

I can comment on that.

Yeah. Its interestingly, there's <unk> Senate sorta to kinda avenues to your question.

On ramp.

Prior experience on ramp in Q1, what we found one of the reasons. We were we thought a revenue was pretty positive compared to expectations, where we had much faster ramp with new sign signings in Q1.

Then we might have had otherwise.

And in some of the ramp down on previously lost business that we've already discussed with you is a much slower ramp down in fact, we hope we can break that down drank that along even even further so it's funny it and it depends on the industry and so again under new business.

We signed in Q1.

We see really rapid ramp on call centers, we signed a very large.

Deal in the call center space in Q1, and it's ramping very quickly.

And then we signed a government business of a pharmaceutical benefit business and the government space.

That's the longer ramp ER and so we're looking at it our initiative planning process to to optimize that ramp schedule to get a that revenue that impact revenue on the board as fast as possible and leveraging our relationships with clients sort of drag.

Our feet in any previously lost business that doesn't have to be ramp down right away that we can can sort of retain as long as possible due to solid performance.

But I think if at all that detail. The second question I had was with regards to cash flow.

No you don't have a formal oh put out there, but but if he can walk through some of the puts and takes says the.

As you kind of look at the current I'm, having a situation in broad terms the cost actions, you're taking and some of that might also have cash implications, but if he can talk about the.

Ability to generate a positive cash flow over the next few quarters.

Good brand Yep.

Yes, Brian.

So whatever they first is that our free cash flow [laughter] excuse me was inline with expectations in quarter one.

As we think about the rest of the year, it's hard to give guidance given all the dynamics in the <unk> 19 issues, but a couple of points one on the carrier that is going to provide about a 70 million dollar benefit.

This year.

I believe that is from differing payroll taxes into 2021 is when he's when you and about 5 million isn't a permanent cash tax benefit and we also in our Muslims like you know, we're taking down capex to 145 million, which will help weird way do you have a 10 million higher restructuring.

I believe but we'll also have lower cash interest and so those things are you know on it.

Hello, and then obviously, there's even a impact from Covidien and you know how much of that we can offset versus not in you know so we'll have to you. Obviously give you updates as we progress that that's how we're looking at it right now we can get pretty big benefit from some of those other items.

Got it.

Thank you very much.

Thank you Ashley.

This concludes our question and answer session I would like to turn the conference back over to click Scouting for closing remarks.

Well listen thank you all for joining today, it's certainly been a quite an interesting journey for all of US I know you all are experiencing that I hope everybody's a family is safe.

Here at condo, we're very proud of our teammates and how hard everybody's working in these difficult times and taking care of their own families at the same time.

We're very optimistic a we're seeing the rightsides from the pipeline from sales.

Quality.

And from Klein impact, we just need to keep the pedal down and we're looking forward to the new normal and getting there as soon as possible like everybody else. So I'd Wanna state everybody stay safe. Thank you for joining and we look forward to seen you on the next call. Thank you very much.

The conference has now concluded. Thank you for attending todays presentation you may now disconnect.