Q2 2020 Xerox Holdings Corp Earnings Call
[music].
Good morning, welcome to the Xerox Holdings Corporation second quarter 2020, <unk> earnings release Conference call hosted by job design team, Vice Chairman and Chief Executive Officer.
[noise] joint by Bill Osborne, Chief Financial Officer.
During this call Xerox executives will refer to slides are available on the website at www Dot Xerox Dot Com Forex last investor.
At the request of Xerox Holdings Corporation today's conference call is being recorded.
The recording and or Rebroadcasting of this call are prohibited without the expressed permission of Xerox.
After the presentation, there will be a question answer session.
Ask your question at that time, Please press star one anytime during this call.
You can withdraw your question by pressing the pound key.
During this conference call Xerox executives will make comments that contain forward looking statements.
Which by their nature address matters that are in the future and are uncertain.
Actual future financial results may differ materially different than those express herein.
This time I would like to turn the meeting over to Mr. Byzantine.
Mr. Byzantine you may begin.
Good morning, and thank you for joining Xerox's Q2, 2020 earnings call I hope, everyone is safe and healthy.
For the second quarter revenue totaled 1.47 billion down 34.6% in constant currency year over year.
Companywide cash preservation efforts allowed us to deliver positive cash flow earnings per share and operating margin.
Free cash flow for the quarter totaled $15 million down 245 million year over year.
Adjusted earnings per share totaled 15 cents.
Down 64 cents year over year.
And adjusted operating margin was 4.2% down 820 basis points year over year.
Im proud of our team.
It was not easy to deliver profitable results and continue investing in key areas of growth, while the bulk of our markets were fully or partially shut down during the quarter.
The fact that we did speaks volumes about the progress we have made in transforming this company and culture into one of continuous improvement.
This is an extraordinary time in our lives one that has challenged each of us to be better do more and demonstrate that the situations. We face only improve when all of us are working together.
That's true for to pandemic and for the continuing battle against ratio in the quality.
Xerox has approximately 26000 employees located in more than 40 countries working at approximately 250 of our own facilities and onsite at thousands of customer locations.
Many of whom deliver essential services.
After we initially close our offices in March two all but essential workers, we stood up a dedicated team that quickly develop comprehensive safety protocols to keep employees and clients safe.
Well, taking a cautious methodical and phased approach we have now reopened roughly half of our own facilities and more than 50% of our active employees have resumed working on site and some capacity.
We continue to monitor coven 19 transmission trends to ensure employees engaged in onsite work remains safe.
A new solution, we developed Xerox teams availability App provides a real time view of each employees work location availability and compliance with the company's health and safety protocols.
Our path forward plan has been a tremendous undertaking but is one that is necessary to ensure we can continue to safely conduct our business support our partners and service our clients.
No one can control or accurately predict what will happen next independent Mick.
There is ongoing uncertainty about the spread of the virus globally.
Some places around the world up have previously not experienced outbreaks or had improved dramatically I now seeing a rise in cases.
We have model numerous scenarios to ensure that we have flexibility no matter how to pandemic continues to impact global business.
Given the uncertainty it is difficult to predict the timing and pace of the recovery and the full impact on our financial results. This year.
We're not providing financial guidance for 2020 at this time.
However, we expect we will continue to deliver positive free cash flow during the second half of 2020.
We remain a 100% committed to driving system wide efficiencies throughout the company and investing in new capabilities that allow us to capitalize on growing demands and technology. Many hastened by the seven shift to remote work.
This includes security remote T support collaboration tools and other tools that ensure employees are productive and can work securely no matter where they are.
Despite the overnight impact the pandemic had on most industries. Our Q2 results demonstrate the discipline, we've instilled in the business over the last two years, our four strategic initiatives remain at the core of our approach.
Optimizing operations drive revenue re energize, the innovation engine and focus on cash flow and increasing capital returns.
Project bone of has imparted a strong sense of ownership across the company as we streamlined and optimize the business.
As a results the company entered into this pandemic in a position of strength and was able to nimbly balance cash expenditures with investments needed to position Xerox for future growth.
We remain on track to deliver at least another 450 million in gross savings this year, which will bring the total of three years to at least 1.4 billion.
A key part of optimizing our business is investing in technologies that increase efficiency and responsiveness to customers.
One area, where investments are accelerating is automation.
Today, Botstein outperforming more than 1.2 million transactions a quarter at Xerox.
Automating processes within parts of the supply chain remote saw technical service anymore.
We are expanding adoption of this technology throughout the company and beginning to provide similar support to clients.
Today, Xerox has flexibility at its core, allowing us to scale up and down depending on market realities.
It is the reason the business could quickly respond to the pandemic immediately instituting a cash preservation plan in March and if the reason we are confident we can manage this business successfully throughout any scenario presented.
We remain intensely focused on positioning the business for continued success in printing and future success and related and entirely new areas.
Today, there was a major debate happening around the role of the office in the future will we all work remotely going forward will companies give up their offices, where good we don't see that happening.
Many surveys, including a zero future of work survey conducted in May suggest most employees will eventually return to the workplaces once it's safe.
It also found companies have gotten more comfortable with remote working than they were in the past. So we are likely to see more flexibility to work from home.
Increasingly companies articulating the drawbacks of working from home as long term solutions.
While some are keeping people home in the short term for safety reasons. We believe the office will continue to play a vital role for years to come.
It is the reason companies, bringing people together on a regular basis to build culture and community develop talent drive faster decision, making and deliver strong results.
That said, ensuring security and enabling productivity will be key in a hybrid work environments.
Hi, Tim decision makers included in our survey also said they are accelerating their digital transformations and prioritizing investments and cloud based software remote I T support and workflow automation.
This is where the industry has been headed and where our focus has been in recent years.
At the heart of the Xerox ecosystem is the hardware software and services that will help companies transition from largely paper based processes to digital ones that turn information into knowledge.
We have seen some healthcare clients, particularly hospitals accelerate digitization projects to turn paper based information into a digital format, that's easier for secure processing and follow through.
One large hospital system in the UK needed to expedite implementing a solution that would provide seamless delivery of critical patient communications, while support staff working remotely.
A solution like this integrate into our larger digital patient offering, allowing us to expand the work, we do with health care providers to address their immediate and future needs.
Other digital offerings, such as XM pie and documents are seeing stronger pickup as companies seek to collaborate digitize paper based processes and rapidly share information with the dispersed workforce.
Revenue in these areas increase year over year and they have expanding pipelines.
We have a growing pipeline for our virtual print management services launched earlier this year by allowing companies to rapidly replace expensive legacy on premise is print servers with Xerox is secure cloud infrastructure IP organizations can save up to a third of their typical print server cost.
I see services are now offered in the US Canada and the UK and we are seeing that business grow.
Outside technical expertise is especially important to the SMB community as they seek to support remote workforces.
Face growing security concerns and automate manual workflows to reduce costs.
Revenue in IP services has expanded this year and we've built a strong backlog for the second half.
While the core printer business will continue to face pressure.
The company's strong diverse portfolio continues to be competitors and winning business by offering differentiated capabilities at all levels.
In Q2, we saw renewals improved from prior year and equipment backlog increased from last quarter.
Demand in federal and healthcare remains strong with enterprise VSR growing in both strong interest in the embellishment market, where Xerox is a leader in helping clients produce higher value pieces at an affordable price remained.
The reason introduction of the adapted TM Y K kit for diverse on puts these capabilities within clients reach for reasonable price 11, Toners with 1 million possibilities provides enormous differentiation potential for reserve customers. This enhancement is now available on three entry.
Production devices.
In the workplace, we will continue to differentiate our multifunction printers with absence solutions that speed digital transformation and support workers in and out of the office.
This quarter's launch of the next generation Alto Link is one example, combined with connect key apps, including connections to the most popular cloud solutions. The ultimately can help to businesses as they shift from physical to digital enterprises.
The world of a for US is shifting to from a comp printer products to a work from home printer that provides increased capabilities security and ability to connect seamlessly into the office network.
Longer term innovations remained focused on addressing some of business and societies biggest needs in the second quarter. Our teams made progress across the innovation pillars with I LT predictive analytics AI infuse platform clean tech in Threed printing among other things.
The impact of covert 19 has accelerated needs in many of these areas. For example, covert 19 has highlighted the risk of globally. This Bruce supply chains for many businesses with many experiencing delays in getting parts and products during the crisis.
Integrating a localized threed printing solution can improve supply chain resiliency flexibility and responsiveness and can minimize the risk of disruption.
Xerox's liquid metal Threed printing solution will allow manufacturers to make production great parts using off the shelf alloys without sacrificing quality strength or safety standards. The team remains on track to deliver its first product by year end.
And I know T., we are engaging customers that are interested in our industrial asset health monitoring and predictive maintenance solutions in continuous manufacturing and the critical infrastructure markets.
Our solutions allow companies to monitor their assets Pinder maintenance operations to reduce planned and unplanned downtime and increase operational safety and efficiency.
We are testing solutions internally now and expect to start external pilots with select customers by year end.
In clean Tech the team working on our early stage technology to improve the energy efficiency of air Conditioners is on track to complete the prototype by the end of the year.
Conditioning is one of the single biggest casas of greenhouse gases and advancing a potential solution is an example of how we are reenergizing, our innovation routes to create benefits for businesses and society.
The health care initiatives stood up during the quarter, specifically hand, sanitizers in disposable ventilators are gaining traction.
We plan to double production capacity for hand, Sanitizers in September from our capacity today.
While taking longer to obtain regulatory approval to sell global markets. There is a growing interest in disposable ventilators, we're manufacturing and external distributors have signed up to sell these products globally.
The team has consistently demonstrated its ability to manage cash well. It is an area of strength and it will remain so as we maintain a strong balance sheet and liquidity throughout the crisis.
The cash preservation plan put into effect in March allowed us to close the quarter with approximately 2.3 billion, a cash and cash equivalents and a 1.8 billion undrawn revolver.
This month, we find that 340 million of debt and approximately 740 million of debt maturing in the balance of 2020 that we also expect to refinance core debt levels remains within an investment grade credit metric range.
We remain committed to our shareholders return policy, including the current dividend rate and plan to return at least 50% of annual free cash flow.
There is a 700 million a share repurchase authority outstanding and we currently plan to complete at least 300 million of share repurchases in the second half.
I covered many of these frequently asked questions in my earlier comments, so I will quickly recap a few key points.
The company's strategic initiatives have prepared us as best as possible for this unprecedented situation.
No one had a pandemic baked into their outlook this year or any year that said the hard work. This team has done in recent years to transform Xerox proved instrumental in moving quickly to respond.
We have evaluated numerous recovery scenarios to ensure we are prepared for whatever happens next.
Today, Xerox's nimbler and more efficient.
The southern move to remote work revealed technology gaps in many industries Xerox is well positioned to help address.
We have the technology, the long term relationships and the trust to help clients speed their digital transformation from paper digital while also powering up a flexible workforce.
We remain focused on growing the business through a mix of organic and inorganic investments using the same disciplined approach we have in the past.
Now I'd like to hand, it over to build to cover our financial results in detail.
Thank you John as we stated during our Q1 earnings call, we assess the impacts on our business under numerous recovery scenarios and we expected Koby 19 had a significant impact on our business in Q2 based upon the impact that we experience from the one month a business closures in the first quarter and the expectation that closures.
We continue through most of Q2.
We saw signs of recovery later in the quarter is parts of the us in some countries in Europe began to lift lockdowns, thereby allowing businesses to reopen offices and our current base case scenario reflects a slow gradual recovery in the second half of the year.
Our focus on cash and expense management as only intensified as we manage through the crisis.
In order to mitigate the impact on our revenue from the crisis, we implemented cost reduction actions focused on cash preservation beginning in mid March.
Third project own it we have developed not only a strong cost discipline, but also a more flexible cost structure that allows us to scale up or down quickly Fisher the strength of our business, which enabled us to deliver positive earnings and free cash flow in the second quarter.
The cash preservation actions in response to cope with 19 are aimed at discretionary items and are incremental to the initiatives under our project older program and both programs are continuing.
The speed with which we are able to identify discretionary areas of costs that could be caught without impacting our future develop accident and execute on those actions is a testament to our team and the disciplined developed through project out it.
Under our cash preservation program, we also identified opportunities to use certain temporary government assistance programs through cost relief, while enabling us to thus far minimize financial impact on our employees.
Although our revenue declined approximately $800 million in the quarter compared to the same quarter. In 2018, we were able to generate $15 million of free cash flow in the quarter and $165 million of free cash flow in the first half of this unprecedented year.
Importantly, our balance sheet remains strong and we have sufficient liquidity, including an undrawn 1.8 billion dollar revolving credit facility that matures in August of 2022, and approximate $2.3 billion of cash cash equivalents in restricted cash at the end of the quarter.
Now looking at our financial results.
Total revenue in the quarter declined 34.6% a constant currency the decline reflects sustained business closures during the quarter that delayed purchasing decisions and installations of orders in hand, as well as the impact of lower print volumes as people were not in the office printing.
Turning to profitability all the ratios and measures presented here were significantly impacted by the decline in revenue, resulting from the pandemic. Let me start with adjusted operating margin, which was 4.2% in Q2 or 820 basis points lower year over year.
The impact of lower revenue was partially offset by cost reductions from our project owner program and from the actions implemented to mitigate the impact of Copel 19, including cost relief from temporary government assistance programs.
Gross margin of 38.5% decreased 60 basis points, which is primarily from lower revenue in particular from lower wholesale revenue, which carries higher margins as well as headwinds from price reductions that are inline with prior quarters transaction currency and tariffs.
Benefits from project own and actions and other incremental actions taken to mitigate the impact of Copel 19, partially offset the impact from the decrease in revenue and other headwinds Sag as a percentage of revenue increased 630 basis points year over year, reflecting lower revenue, which was partially offset by pro.
Tivity benefits from project I want it and savings from the incremental cost reduction actions, we put in place.
Also it is important to note that in the first quarter, we increased our bad debt provision by $61 million to cover the potential impact to our customers from the pandemic.
During the second quarter, we reviewed our bad debt reserve indeterminate to be sufficient and consistent with future expectations regarding the impacts from the Kobin 19 price. Therefore, no incremental reserves are required and bad debt expense for the second quarter of 2020 of $13 million was effectively flat and some.
Paired to the second quarter of 2019.
We will continue to monitor developments regarding this crisis in future periods to ensure appropriate reserve levels.
Last ardine as a percent of revenue increased 130 basis points, reflecting the lower base of revenue Ardine expense declined $12 million year over year, partially due to cost reductions on older generation products consolidation of core R&D activities in the prior year and the timing of.
Investments and as John mentioned, we continue to make progress and our five innovation areas.
Below operating profit other expenses net of $7 million was $31 million better than the prior year due to lower non service retirement related costs of $18 million and lower non financing interest expense of $8 million the lower non service retirement related costs were driven by lower.
We are losses from pension settlements in the us and lower non financing interest expense is the result of lower average debt balance.
Our second quarter adjusted tax rate of 23.4% compared to 26.6% in the prior year, the lower tax rate year over year is primarily due to the geographic mix of profits as well as the impact of discrete items on lower pre tax income.
Adjusted EPS of 15 cents was down 64 cents compared to the same quarter last year, driven by the impact of poker 19 at our operations, which more than offset the benefit from cost reductions lower interest expense lower tax rate and lower shares.
GAAP EPS of 11 cents per share was 49 cents lower year over year, including the aforementioned 64 cents decline in adjusted EPS, partially offset by net benefit in non-GAAP adjusted items, primarily from lower restructuring and related costs lower non service related pension expense.
And lower tax on these adjustments.
Non-GAAP adjustments Cts include restructuring related costs, the amortization of intangible assets non service retirement related costs and transaction and related costs net as well as the income tax on those adjustments.
In Q2, we reported $3 million of restructuring and related costs, which includes a $9 million reversal from prior period estimates.
Moving to slide seven I'll discuss cash flow.
In Q2, we generated $34 million of operating cash flow from continuing operations, which was $242 million lower than prior year due to lower net income Andy use from cash from working capital that was partially offset by lower finance assets and lower cash taxes.
Working capital cash was $68 million worse than prior year due to increased use of cash from inventory and accounts payable, which was partially offset by increased in cash from accounts receivable.
Inventory reflects lower sales volumes and reduced purchases by indirect channel partners, we're managing their inventory levels to predict liquidity during the crisis and accounts payable reflects decreased spending and the timing of payments to vendors, while accounts receivables primarily due to lower revenue.
Restructuring payments of $70 million were in line with prior year.
Capex was $19 million in the quarter and free cash flow was $15 million, we expect capex will be aligned with our prior guidance for full year 2020, supporting the programs to drive our strategic growth plan, including continued investments and our infrastructure.
There were no acquisitions in the quarter. However, we continue to assess our pipeline of tuck in acquisitions is strategic M&A, we spent $193 million in Q1 to expand our SMB strategy internationally, and we expect full year spend for tuck in M&A will be in line with prior guidance.
Within financing cash flows we repaid at $313 million senior unsecured bond with cash in the quarter and effectively refinanced respond to July through a finance receivable securitization.
We returned $57 million and dividends to shareholders and we did not repurchase shares in the quarter.
We manage capital conservatively this quarter, given the uncertainty of the pandemic and the expected impact it would have on our business, we executed on our cost management initiatives and preserved our cash ending the quarter with $2.3 billion of cash cash equivalents and restricted cash.
Let's turn to slide eight for more detail on our revenue.
Second quarter revenue declined 34.6% at constant currency and reflects the impact of widespread business closures that extended through the quarter and caused delayed customer purchasing decisions and lower print volumes.
Geographically, we saw a larger revenue declines in Europe, where more of our sales are through indirect channel partners, who are protecting their liquidity and managing their inventories in response to lower demand.
In North America, we have more sales through direct channels and there's a higher percentage of large enterprise customers, including government and healthcare customers that continued to operate through the crisis.
Equipment sales revenue was down 38% in constant currency.
While we saw improvement in North America in Europe in June as countries and certain offices began to reopen we're cautious in projecting a trend that based upon June given the recent outbreaks of the virus in certain parts of us and developing markets. Although we do expect performance to improve gradually in the second half.
In the us our large enterprise business continued to see growth in sales to federal government and healthcare customers, who have been operational through this crisis also.
As we mentioned last quarter, we were unable to install approximately $100 million of purchase orders as a result of business closures in March approximately 40% of those orders were installed in the second quarter and we expect to install another 45% in the second half of this year with the remainder either canceled or delayed.
Beyond 2020.
Looking at product categories mid range was most impacted by office closures as this category of products is mostly used in offices and shared workplaces.
Mid range sales decreased in indirect channels, which as I mentioned impacts Europe more than North America. However, the US was also down significantly reflecting delays in purchasing decisions.
In the high end, we had good activity in black and white production supporting transactional printing applications, but production color sales were down reflecting primarily lower sales of our versado entry production color system and iridescent production press due to the impact of the crisis on our distribution channels.
And lower demand caused by the pandemic.
Net revenue from energy products, both black and white and color was down reflecting the impact on our indirect channel partners and continued lock that mix in Latin America the.
The decline was partially offset by higher sales in the low end of the portfolio, which supports work from home offerings.
Wholesale revenue declined 33.6% in constant currency, our wholesale revenue is largely contractual and our context generally include a fix minimum charge as well as a variable component for services supplies is based upon print volume historically on average the variable component is up.
Proximately, 50% of our contractual revenue stream.
The widespread business closures due to the pandemic had a significant impact on page volumes, which is evident in the decline in our wholesale revenue this quarter.
We saw the greatest impact in April and May and moderation in the rate of decline of pages from contractual agreements in June unbundled supplies paper and other sales, which are largely sold through our indirect channels also decreased approximately 50% in the quarter, reflecting lower demand caused by the crisis.
Which is driving channel partners to reduce their inventory purchases also in order to protect cash.
Xerox services revenue declined approximately 28% year over year in constant currency.
With new business signings down due to delays in customer purchasing decisions.
We had growth in services renewals in the quarter, which is a second consecutive quarter of higher renewals, although the rate of increase was lower in the second quarter as we experienced customers delaying renewable decisions and extending existing contract signing the uncertainty of the environment.
We have a building pipeline, which gives us confidence that our business will continue to improve as the economy rebounds.
Last our investments in IP services software and digital services are gaining traction.
Expansion of IP services within Xps channel in the U.S. and through recent acquisitions in Canada in the UK contributed to increased sales in the second quarter compared to the first quarter.
Even with restrictions to enter some of our customers locations.
These offerings, which also support a flexible work environment are resonating with customers and our IP services pipeline is growing.
Next turn to slide nine and our profit in earnings.
Adjusted operating margin was 4.2% in the quarter, which was 50 basis points lower than the first quarter. We expected the pandemic they have a sizable impact on our business in Q2 and in March we quickly began to implement actions to manage costs and preserve cash focusing on discretionary spend.
As I mentioned these actions are incremental to the planned actions under our project own it transformation program and among other areas targeted marketing expense and reducing the use of contract employees across the organization.
In addition, we use certain temporary government programs in the US, Canada and Europe provide costs relief without further use of cash while minimizing the impact on our employees.
We are continuing actions to reduce cost and preserve cash through the second half.
We were able to act quickly in response to the pandemic as a result of the progress on our project own. It transformation program through this program. We have developed a disciplined approach to cost management and a more flexible cost structure project own. It initiatives are continuing and the program is on track to deliver at least 450.
Million dollars in gross cost savings this year.
Adjusted EPS of 15 cents declined 64 cents year over year and as discussed earlier reflects the impact of cobot 19, our operations, which offset the benefits from cost reductions lower interest expense lower tax and lower shares.
Moving on to slide 10, and a review of our capital structure.
We ended the quarter with $4 billion of debt of which $3 billion supports customer financing activities and therefore, we break down our debt between financing debt important financing debt is allocated by applying a seven to one leverage to our finance receivables and equipment under operating lease which to.
Together comprise our total finance assets.
Core debt was approximately $1 billion and we ended the quarter with approximately $2.3 billion of cash cash equivalents and restricted cash which puts us in a net cash position of approximately $1.3 billion when netting cash against core debt.
In May we repaid a 313 million dollar senior unsecured bond with cash which is why our debt is approximately $300 million lower than year end. However in July we effectively refinanced the may bond with a $340 million finance receivable securitization.
This was an attractive transaction that provides match funding for portfolio of us finance receivables.
For the balance of 2020, we have approximately $740 million of bonds maturing, which we plan to refinance our liquidity position remains strong with approximately $2.3 billion of cash cash equivalents, a restricted cash and a 1.8 billion dollar bank revolver, which is fully available to us.
Yes.
Our pension funded status is updated annually and as of December 31, 2018, our net unfunded pension liability was $1.2 billion, which included approximately $815 million of unfunded pension liabilities for plans that by design are not funded.
In 2018, we contributed $141 million to worldwide pension plans and expect 2020 contributions will be in line with prior guidance.
Let's turn to slide 11 for some thoughts on the balance of 2020.
For the second half under our current base case scenario, we're expecting a slow gradual recovery our outlook considers that continuing impact from the virus, particularly in certain areas of the U.S. and in developing markets and the current pace of business reopenings and capacity limitations within offices and others.
Shared workplaces accordingly, we do not anticipate a recovery in our revenues of pre poker 19 levels. This year. Although it is expected we will continue to deliver positive free cash flow in the second half of 2020.
While we are planning for a gradual recovery in the second half we've evaluated our business under numerous scenarios to be ready to manage through a more elongated recovery if required as we demonstrated in the second quarter. We are resilient and we are prepared to execute on additional levers to manage through longer recovery scenarios.
Given what we know today it is difficult to predict the timing of recovery and the full impact on our financial results. This year. Therefore is John advised we're not providing financial guidance for 2020 at this time.
On capital allocation, we remain committed to our dividend and our policy of returning at least 50% of free cash flow to shareholders and we plan to repurchase at least $300 million of our shares during the second half of this year.
We have a strong balance sheet and liquidity, which supports our dividend policy and the resumption of our share repurchases in the second half.
Ill now turn it back to John before going to acuity. Thank you Bill now, let's open the lines for questions. Thanks, John before we get to the key Rene with John and Bell I would point out that we had in the appendix too material additional supplement for a reconciliation.
Posted on our Xerox Investor Relations website of perfected the earnings materials.
Operator, please open the line for question Mark.
Ladies and gentlemen, if your question or comment at this time. Please press the star than the one key on your touched on telephone. If your question has been answered already we're still yourself from the Q. Please press the balance sheet.
Our first question comes from an under Baroque with loop capital.
Hi, Good morning. Thank you, taking the question and Hey, congratulations guys on on solid execution in in a really caught by anymore.
Yes, just the theme for me if I could.
So you're talking about some gradual improvement through the balance in the do you feel as if where we sort of like June quarter is then sort of the new sort of bottom in the revenue stream and and I really would like to get incentives. If you think that we can consider this to be kind of like the baseline business and then I have.
A.
Couple of quick follow on swaps long term Sina high and with our base scenario is for a slow gradual recovery and but we're modeling numerous scenarios. So that we have the flexibility no matter. How this pandemic continues to impact us.
And.
John and Dell as well.
You made a handful of remarks.
So with regards to Capex and some of the initiatives around model optimization.
Yes. She leaves you think of that as being sort of the core cost structure.
Going forward I'm familiar with the owners initiatives and that sort of thing.
I guess, we'll have that I'm asking in it sounds like.
Well could you guys do something more significant from a cost structure perspective or is.
Is it more going to deal on the line, but you've been doing over the last couple of late.
And then I would say that the again, we're we're modeling and we have additional levers to rightsize our expense structure, if necessary that are more long term, but we'll consider it as required yes, I guess I'd only add is that as we said the prepared comments project own. It has given us a disciplined to be able to be flexible with respect to our costs.
Turning to right size them I think we showed in Q2 with you at 800 million dollar revenue hit being able to adjust our cost structure in a relatively short period of time to mitigate a at least a portion of that generate.
Positive free cash flow and adjusted EPS during the quarter and Yo scenarios going forward as John said, we're modeling those and we believe that we have levers to be able to adjust and right size as appropriate.
Thanks, and then the last one from me three castle question.
So you give us the metrics around share buyback and we can back into what dividends for the year in the also made mention.
Of still targeting year original tuck in M&A targets that we seem to suggest that was the while he is really my question.
Should we assume that youre going east free cash flow for all of those.
And then so I guess, we can take then being year minimum free cash flow expectation.
Yes, I guess the way I would look at vizio year to date hundred $65 million, the free cash flow, including positive 15.
In the on a very difficult second quarter, and we've said the second half of the year that we anticipate having.
Positive free cash flow vehicle to generate that in the.
The second half and.
So that no.
165, plus essentially is what we're looking at for the full year and.
Our guidance that we did Capex, we said in line with prior which was approximately 100 million pension or 135 million or so with our prior guidance and the M&A is mainly the tuck in type M&A, we did 100 and.
$90 million. So in Q1 of tuck in SMB types in the UK in Canada, and we gave guidance last quarter of two to 300, but that just depends at the right deals are there, but just to go back and reemphasize. What we said in our prepared comments is that you know very fourth we have a very strong balance sheet.
The company overall, the $2.3 billion.
And in cash and cash equivalents on hand, and the Undrawn 1.8 billion dollar revolver that gives us flexibility.
That's really helpful. Thank you guys.
And from them.
Our next question comes from back to grow with credit Suisse.
Yes. Thank you you guys talked about trends improving through June wonder, if you could spend a little bit more and what that looked like in just broadly linearity through the quarter and also uses comment on if you've seen that momentum continues so far through July.
Yes so.
Said in the prepared comments April and May.
Youre clearly the most difficult months of the quarter, we saw some improvement in the revenues.
In the in the June timeframe as businesses began to reopen.
At this point, we're predicting a slow gradual recovery.
The rest of the year.
But not go confident enough you'd be exact yo percentages or what that looks like.
Got it and then.
You touched on this briefly in your prepared remarks, but I'm wondering if you seemed a little bit more on just what cobiz means for the business longer term both in terms the steady state outlook for office printing, even once the health crisis is behind us and in the rear view mirror and more broadly how we should think about that impacting xerox's operating model.
Yes, Matt.
If you think of where companies are doing their accelerating their digital transformation, the prioritizing investments, but what's important to them as they are focused on cloud based software remote I T support work flow automation in a secure matter.
And as we've seen over the last few years, we've been investing in these areas. So if you think of our IP services that we now have ideas services available in the UK in Canada and into US our technical expertise. It's important to this SMB community because as they have workforces and workflows.
We it's a growing so it's a growing concern for them, especially in security on how to automate their workflows. If you think of our software whether its dock you share where we're going to now I believe kind of the collaboration we've been investing in dark you share and also dock to share in the cloud hardware, even though folks will be working.
From home. We're realizing is it's not just the printer it's got to be secure there are companies today that are putting good companies I've spoken to today that they are putting ebix, but you can't Prince from home.
If there is the fifth not on a secure network. It's not it's now part of a whole secure workflow you're unable to print from works or how do we start connecting seamlessly to the office and Thats, what weve been investing in and our cloud for groups workplace. So we just announced another announced we have the virtual print applications and it allows us our clients the print anyway.
There any time in a secure matters. So we've been investing in these area, where we see a going but we don't we also and I want to reiterate that we don't believe that no one's returning back to the office.
We believe that a lot of employees will be returning back to the office and for all the reasons productivity is one of them securities. Another one education and new can go on and on but more importantly, we believe everyone will be good working going back to the off the ones. It's considered safe and that's where we've been spending a lot of time even without.
Our organization with our path forward to assure that as we get our employees back to the fifth it's done in a safe and consistent matter.
In Q.
Our next question comes from Shannon Cross with Cross research.
Thank you very much a couple from me My first one is with regard to the high speed monochrome installs, which were actually strong during the quarter.
And just in general I'm curious, what youre seeing in sort of the high end.
Is this China coming back to your question.
Following through so do you there, but but clearly the gentry Fuji is there anything there.
I'm just curious.
How that market is the line and then yes.
And it's still yet as you point out in the high end.
Mano, we did grow.
Year over year, primarily related to transactional type printers financial institutions for statements et cetera, and our nuvera.
Did well in the high end black and white on the color side it was talent.
Delayed decisions clearly is the bar preserving their cash during the the pandemic and it impacted.
In particular, our mid and high end high end.
Sales, but.
We do believe that those will recover once the path to pandemic.
Okay and then the 84 business also was pretty strong and black and white was that effectively your ability to sell hey for into people who are now working from home or was there are some yes.
Yes, I think I had prepared one of my prepared comments that you on the lower end of the boards in the in the black and white.
So does serve your work from home purpose and that did help mitigate some of the declines in our the declines into the mid and higher end of the entry segment.
Okay and then just my last question in the release and I think you mentioned that during your comments I think you got about 60 million from government programs during the quarter.
Im curious how much of that is recurring how we should think about it.
Justin.
I know there are new plans and stimulus and who knows but.
Just when Youre thinking about your forecasting and budgeting for remainder of the year are you incorporate in anything in there. Thank you again, so yes, I mean those programs Oreo from around the World European countries. Obviously, you guys care that came out of that et cetera, and those have varying timelines when the incentive but we factored into our since.
Areas, even without the extension of those yellow, we believe that we'll be able to generate positive free cash flow in the second half of the year.
Thank you.
Our next question comes from Paul costs from JP Morgan.
Yes. Thanks for taking my question I was just wanted to follow up.
The cash flow.
Situation it sounds like well first where you're not reinstituting guidance, but you all reactivate same buyback. So is suggests to me, though there is a little of uncertainty out there, it's a lot less than.
Quarter ago when.
Suspended the share buyback can you just comment on that I mean are we starting to attenuate very uncertain, saying do you think will be reinstituting guidance by year end.
Well, we as we said in our promise we managed our cash conservatively.
During the second quarter, the more evaluating the impact of the pandemic on the company, we implemented the incremental cost actions over and above project I wanted and by the end of the quarter, we got comfortable enough.
With no, but we're doing from a cash perspective to be able to state that we expect positive free cash flow.
In the second half in addition to the 165 million free cash flow.
Year to date based upon all of that we are comfortable enough and instituting reinstituting, our share buyback and.
At least $300 million during the second half of year.
Okay.
And then John I Wonder if you could just give us a little bit of color around sort of maybe anecdotal color around the conversation with enterprise customers 'cause. It just seems so compared to the moment you go to movies. This causation process is playing out which extends to in some ways.
But some of your new businesses.
The occupancy rate is going to improve but maybe not so where we were.
And it also go up.
Probably glossy budgets, probably down 5% year on year anyway.
How are they talk into what happens at the end of the contract. So those sort of just delaying.
Just give us some color around a couple of conversations you're kind of up yeah, Paul the car and through it's exactly what you just said all of the above sort of conversations are we're looking to get our employees back it's going to be in a safe manner and I will take time and as we take time, we need to get them as productive as possible in a secure matter on what are some of the low.
Levers that you can help us with in these levers in these situations and that's where we're focused on our workplace cloud our software Ts services.
Every CEO I've spoken to and it's not just the Ceos I don't think anyone believes we're not going back to the offices its really at what rate in pace and that's why we've we've we even modeled our own gradual recovery than we're modeling numerous scenario because we need to have the flexibility no matter what happens going forward, but.
If I look at our businesses and our idea is our software and cloud workplace, while they're not large businesses for us the well grown during this brand dynamic and that gives us even more reason to put more work behind that and focus on that with our clients.
It is the is the purchase of delaying or are you.
I'm just wondering how much.
Thing.
No I would say that a lot of the purchasing.
Either delaying or not open we theres not much though we can say that's been we're not doing it.
We havent has the menu in fact, we have we would continue to get quite a few competitive ones as well in large wins and renewals and would flow through are focused on in some cases, just when not if boat win so when we're not at this stage.
Im not seen enough of where the clients are just canceling capex, where we believe it's more on the delay and we actually still see strong pipeline in these services area in both the Americas and in EMEA, we had double digit growth in our pipeline in those areas would sort of points to also not cancellation, but just more delays in.
In decision, making.
Gotcha. Thanks, so much.
Our next question comes from June Super with Citigroup.
Thank you very much.
Bill and John you guys, both talked a little bit about the innovations are coming out with whether it be liquid metal printing hand, sanitizers ventilators silica, which was very encouraging is the goal eventually to have that just be kind of part of xerox's core recurring normal business or I know.
So I think it was about six months ago, you legally changed some of the reporting not reporting the legal entity structure.
Does that make it. So you are kind of looking at some point than monetizing that through like divestitures or standalone businesses or how should we think about that because it seems like you're actually.
Positively, bringing out some pretty innovative stuff out of research Park.
Yes so.
Hey, Jim it's still a couple of things the Holdco Yo is when we put that in place about a year or so ago. It clearly does give us flexibility to do things like you talk about the things and the separate legal entity under the Holdco potentially spin it off partially sell et cetera, but no specific plans at this time with respect to any of our innovations but you've.
Brought up the healthcare things, we're doing the hand sanitizer area and in the disposable. Then later is the hand sanitizer is gone very well for us back we're going to be doubling production here starting in the second half and it is a good business. We feel like we're doing good as a as a part of being in that business and.
Ended some profitable for us.
And on the ventilator side, we're starting to see more interest, we're getting partners and distributors qualified to be able to sell.
Those ventilators and we're optimistic on that also as far as a long term of the healthcare really we're taking it you know just really quarter to quarter and seeing if it makes sense. We're doing our part we believe of doing a good thing here being in those businesses.
Whether its long term is still to be decided.
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Great and then as a quick follow up on the air Conditioner side is that something that you would like the licensing like some intellectual property and trademark and patents on it or is it you would like subcontracted out or actually build it or how should we think about that as it because essentially starts to gain some pretty.
Positive reviews, given the energy efficiencies and environmental friendliness.
Yes, Jim I would say everything's on the table when we talked about all or innovation, even two years ago, we talked about looking at what we would do with it and what would be best to monetize good for Xerox and clean Tech. So we're at the early stage and now we're focused really on completing a prototype by the end of the year and.
We'll be focused on all the scenarios going forward.
Great. Thank you, it's quite innovative and encouraging I appreciate it.
Thanks.
Our next question comes from your body with Morgan Stanley.
Thank you good morning, given the accelerating shift from paper to digital based processes can you talk a bit about what percentage of your revenue today comes from digital products and services and then as you look to increase that mix over time do you see it more coming from growing the existing offerings.
Or more so looking to launch our acquire more digital services increased Pemex.
Yes, the the digital services and offerings include the IP services, we haven't quantified those numbers exactly they are both growing even during this quarter. They grew the IP services grew from Q1 Q2, the digital services grew.
Year over year, so even a very challenged environment. Those both were growing at the appropriate time in sizing will start.
Quantifying that but.
As far as organically they are growing and we also would look at potential M&A in those areas as we did in Q1.
Some of the tuck in M&A is in the in the UK into Canada on both did IP services already and you know we rolled on IP services to our whole xps portfolio companies.
Earlier this year, so organically and M&A will be involved in that and at the appropriate time, we'll start breaking out in quantifying the exact amounts, but they are growing piece.
And Kt will continue to be opportunistic on M&A, and we're going to follow our disciplined approach.
Our ROI CN all others as we look at possibilities that hasn't changed.
And then as a follow up on cash flow Bill you mentioned that payables and inventory, where where I use of cash.
What actions can you take and how quickly do you think that reverses in the back half.
Yes inventory, we clearly see.
There was a use here in Q2 that the OE managing down those inventory levels.
During the second half that normally as the case with the company as we get towards the end of year, but even more so this year, we expect inventory to be more resource payables really was a uses assort, where they use because we just we're doing less overall purchases a more anything and we expect that to be also less of it.
In the in the second half.
Great. Thank you.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like turn the call over to John for any closing remarks.
Thank you and thank you for your time today now this year is challenged of and it's only half over.
In challenge assumptions about our business and those of many of our clients and while there remain questions about the near term future. We're confident in our strategy and we're positioned well to come out of this even stronger.
Today's xerox's better able to serve our clients and deliver modern workplace experience, both the employers and employees.
These safe and be well thank you again.
Ladies and gentlemen concludes todays conference call. Thank you for your participation you may now disconnect.
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