Q4 2020 Xerox Holdings Corp Earnings Call
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Good morning, and welcome to the Xerox Holdings Corporation fourth quarter, 'twenty and 'twenty earnings release Conference call hosted by John <unk>, Vice Chairman and Chief Executive Officer.
He is joined by <unk> Chief Financial Officer. During this call Xerox executives will refer to slides that are available on the web at Www, Xerox Dot com Port Slash investor.
At the request of Xerox Holdings Corporation today's conference call is being recorded other.
Other recording and or rebroadcast of this call are prohibited without the express permission of Xerox.
After the presentation, there will be a question and answer session to ask your questions at that time. Please press star one at any time. 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 be materially different than those expressed herein.
At this time I would like to turn the meeting over to Mr. <unk>. Mr. <unk> you may begin.
Good morning, and thank you for joining the call.
I hope everyone is safe and healthy.
Times of adversity require work in unison and I couldnt be prouder of the way our team came together.
We put our strategy to the test and 2020, demonstrating we can deliver positive earnings per share and free cash flow, while protecting our people returning capital to shareholders and continuing to invest and our future.
The team's discipline allowed us to turn on a dime tightly controlling expenses, while steadfastly supporting clients.
To summarize our full year results.
GAAP EPS from continuing operations totaled 84 day.
<unk> of $1 94 from 2019, and adjusted EPS was $1 41 down $2.14 from 2019.
Operating cash flow from continuing operations was $548 million down $696 million year over year, and free cash flow was $474 million down $705 million year over year.
Adjusted operating margin was six 6% down 650 basis points year over year.
We generated $450 million and gross cost savings and meeting our target for the year over the last two and a half years project on it has generated $1 $4 billion and savings and freeing up cash to reinvest and our operations targeted adjacencies and innovation.
We returned 112% of free cash flow to the shareholders in 2019.
And we accomplished all of this while revenue declined to approximately 7 billion a decrease of 22, 7% and constant currency from the prior year as a result of office closures and practically every geography, and which we operate.
The impact of the pandemic continues.
We're optimistic about the vaccine distribution and advances and testing and treatments.
Though the pace of the economic recovery and office reopens remains fluid.
While we saw sequential improvement over the last two quarters, we don't expect a return to growth and the first quarter.
And 2021, we expect revenue to be at least $7 $2 billion and constant currency operating cash flow from continuing operations to be at least $600 million and free cash flow to be at least $500 million.
We believe this is achievable even in the unlikely scenario businesses don't start reopening and a meaningful way and the first half.
The benefit of a solid strategy is it's flexible and it's application yet strong and its foundation.
Our four strategic initiatives optimize operations for simplicity drive revenue re energize the innovation engine and focus on cash flow and increasing capital returns remain at the center of what we do to deliver results for all stakeholders.
Let me walk through the changes, we are making to the business to drive organic growth.
<unk> on it has been critical to fund investments by generating savings and there is more to do here.
We plan to say $375 million as a result of project own it and 2021.
Through robotic process automation, we have streamline routine tasks, including managing service tickets updating asset data and processing customer billing and vendor invoicing.
And the fourth quarter <unk> processed more than one 8 million transactions.
Up over 300% year over year.
<unk> potential to deliver savings and efficiencies is now part of our go to market strategy.
We are piloting our RPI services with clients supporting alone application processing targeted and mail campaigns document and managements for legal clients and more.
There is opportunity to offer this capability to small and medium sized businesses to help increase their efficiency and reduce cost by automating operations.
By unlocking the opportunity within existing and new businesses, we will increase the breadth of our offerings reach new customers and drive organic growth.
Our printing business and second to none.
Services delivered organic growth and 2020 and is gaining traction with small to mid sized businesses within the next 12 to 18 months, we plan to stand up three separate businesses software financing and innovation as we continue to invest in them to support clients.
The software business will bring together, our expanding capabilities to support clients' digital needs and will rip.
<unk>, our president and Chief operations Officer.
Late last year, we acquired care AAR and enterprise augmented reality business debt offers live virtual assistance technology.
Carry ours initial technology is focused on modernizing field service customer support and other it services today.
Today services now is collaborating with Deloitte to integrate to carry our platform for service now into the operations service systems and support workflows Ford joined clients. The software business will also include <unk>, a cloud based content management system X and Pi mulch.
<unk> channel and marketing software and other software offerings, such as the Xerox content hub, we launched late last year.
This new offering integrates ex Empire, and turned and Xerox multifunction printers into content creation stations.
Smbs are seeking enterprise level content management systems that allow easy access to documents and no matter, where a person is working our newest release Doc you share go is designed for the SMB.
It's multi tenant and infrastructure offers automatic capabilities and a SaaS pay as you go model for single or multiple users.
Also launched was a new version for enterprises offering more capability for on premise users and addressing their need for increased controls and security.
Xerox financial services, or <unk> will become a global payment solutions business with a new leader Nicole <unk> reporting to me.
<unk> previously provided financing mostly for Xerox equipment to support our sales team.
Looking ahead, it will offer financing for technology office equipment and more for third parties as well.
Fully utilized excess first we will expand our customer base create potential cross selling opportunities and position us to support SMB.
We've previously shared our focus on the SMB, our large and growing part of the business community, whose needs for it services increased with the shift to remote and hybrid working environments.
Our it services business now operational and the U S U K and Canada delivered organic revenue growth and 2020.
We see increased opportunity here as we enhance offerings with new security and automation capabilities and leverage new and existing partnerships, including expanded partnerships with Dell and Lenovo, allowing us to grow our geographical coverage and services offerings.
Despite global office closure and widespread economic impact of the virus Xerox regain the top spot and total equipment sales revenue market share and our territory held the number one position and both mid and production segment and took share and entry.
Demand within government accounts has been a key driver, resulting in year over year equipment sales growth and the U S enterprise business.
We believe the capability security and broad selection of apps and Xerox devices puts.
Puts them ahead of competitors, providing clients with a seamless experience that increases their efficiency.
And the fourth quarter the production portfolio had major updates across all segments addressing professional print shops need to extend their business to new customers and enhance productivity.
One example is a bulk <unk> new color accelerator add on that allows for more applications, while saving Inc.
The Baltar holds the top market share and the cut sheet production inkjet class.
Digital print and enhancement increased profitability, providing clients with higher margins through increased offerings. Our suite of production products offers the widest range of colors and embellishments.
And we're making it easier to take advantage of this opportunity with the new <unk> III device. The C. 8000 W. Introduced late last year that represents the most affordable entry point into this lucrative print market.
In 'twenty and 'twenty, one we are continuing to innovate and this portfolio, adding workflow automation and machine learning artificial intelligence and remote services to make our clients' employees more efficient while maintaining security.
For example machine learning will enable devices to recognize individual patterns and make time saving recommendations.
And innovation, we have made some strong progress over the last two years developing disruptive technology that we are beginning to commercialize.
That gives us the confidence to stand up a separate innovation business that will be named <unk>.
This new business will include the innovation teams and Palo Alto, California, Webster and York, Cary, North Carolina, and Toronto, Ontario.
The parts business will be led by our Chief Technology Officer, and the Rush Shanker.
Our <unk> metal printer is a breakthrough technology localized three D printing can improve resiliency flexibility and responsiveness and supply chains by enabling the localized production of end use parts and our liquid metal technology uses off the shelf wire, which is safer and more cost effective.
And requires less post processing and metal powders.
In December we reached an important milestone with the first installation of our Xerox element X three D liquid metal printer at the Naval postgraduate school in Monterey, California.
And the Xerox solution will be a key component of the schools efforts to use additive manufacturing to sustain the Navy's mission readiness agility and reach across it and see land and air operations.
This is a strategic partnership for N. P. S, which is looking to lead large scale adoption of additive manufacturing throughout the U S. Navy.
Similarly, with industrial Iot and the combination of low cost sensors cloud computing and data analytics software has the potential to advance sustainable practices limit equipment downtime improves safety through predictive maintenance and provide increased situational awareness.
These are the areas where park developed fiber optic sensors and solutions are gaining traction.
Park has worked with Vic track, a state owned enterprise and Victoria, Australia to pilot, a new technology that remotely monitors the structural health of critical infrastructure, such as bridges and real time. The initial trial of our solution proved successful and Xerox is planning broad commercialization given the.
<unk> and risk profile and safety issue caused by aging infrastructure across the globe.
Other Iot sensors built by park are part of a groundbreaking project by the U S Defense Advanced Research project agency to study the oceans.
And clean Tech the team is developing a solution that has the potential to cut energy consumption of air conditioners by up to 80%, reducing greenhouse gas emissions and improving indoor air quality.
At the end of 'twenty and 'twenty. The team completed a proof of concept prototype and validated its operational principle.
Now we are working to build the first alpha unit by the end of 2021.
Serving as a sample for potential partners to assess and provide product requirement for our beta units to be completed by the end of 2022.
Technology, such as AI augmented reality and virtual reality and develop that park also will be rolled into care and <unk> product roadmaps and other parts of our portfolio.
To enhance our innovation ecosystem and further capitalize on the deep knowledge of experts at park, we are establishing a $250 million corporate venture capital Fund. This fund will invest and startups and early and mid stage growth companies aligned with our innovation towers and targeted adjacencies.
Such as services software and AI.
The corporate venture capital Fund and will act as a bridge between internal and external innovation and commercialization efforts building an ecosystem that drives growth through investments commercial partnerships and co development of new technologies.
Our strong cash position provides flexibility to explore a wide range of M&A opportunities invest and existing business and return capital to shareholders.
Over the last three years, we returned 89% of cumulative free cash flow to shareholders exceeding a commitment to return at least 50% annually.
The majority of returns came through share repurchases and 'twenty and 'twenty and we returned over 100% of free cash flow to the shareholders.
We view share repurchase as an investment and the business, we have a $500 million repurchase authorization for 2021 and plan to be opportunistic and how we use it.
We shared a lot with you today, so let me take a moment to sum it all up.
Like many others depend emmick hit us hard.
We got up dust, it ourselves and got to work transforming Xerox for the future.
We're taking market share and investing in existing and new technologies and regularly sourcing and evaluating M&A opportunities and our three year plan and force with initiatives remain our roadmap.
Our strategy and hard work over the last few years are paying off.
We delivered positive EPS and cash flow and returned capital to shareholders. We are positioned to return to growth in 'twenty and 'twenty, one and expand into new markets. We plan to stand up three separate businesses software financing and innovation by 'twenty and 'twenty two to provide greater focus flexibility and.
And visibility.
We plan to identify the right long term structure for each of these unique businesses, which may include utilizing the holding company structure.
We bolstered our software offerings with the acquisition of Kara, we are integrating existing capabilities to offer a broader suite and expand beyond existing clients.
Our RPM technology has moved from optimizing our business to doing the same for clients.
Our investments are aimed at technology is targeted for double digit growth in coming years.
These actions along with the corporate venture capital fund demonstrate the priority we are placing on building a strong future.
We are confident and our strategy and our team, whose tireless commitment to Xerox and its growth will always be the key to our success.
Yeah.
Now, let me hand, it over to Xavier to cover the financial results and more detail.
Thank you John and good morning, everyone as John mentioned, we're making changes to our business to drive organic growth and after I review, our Q4 financial results I will expand on our plans for our financing business exercise an hour.
Aviation business Park.
In Q4, we sequentially grew revenue adjusted EPS and cash flow of Emc's Q3, consistent with or slightly improved economic condition, we upsell.
The year over year comparison shows that our financial results continued to be impacted by business closure, resulting from COVID-19.
And we reported $1 $93 billion from us this past quarter.
Year over year, and declining constant currency of 19, 8% when excluding the OEM and licensing fee of $77 million debt was paid to us by Fuji Xerox in Q4, 2019 or 22, 3% weighted.
Adjusted operating margin of nine 5% in the quarter, representing sequential improvement of 210 basis points over Q3 on a year over year decline of 460 basis points, excluding 270 basis point impact of the onetime OEM fee from Fuji Xerox.
So year over year decline and operating margin was caused by lower revenue, resulting from pandemic her and ETF business closure, which was partially offset by savings from project, who need on participation and government assistant programs, the impact of which was significantly less than in prior quarter.
Gross margin was 36, 2% in a quarter, which is down 350 basis point year over year, excluding the onetime OEM fee from Fuji Xerox over down 540 basis points.
So the year over year decline in gross Martina was caused by lower revenue, coupled with less profitable and our revenue reflected lower sales on supplies on higher equipment sales.
Services revenue, which were partially offset by benefits from project own it.
Sag expense of $414 million decreased $72 million year over year on what in line with quarter three saga expense of wound up from $44 million, so year over year improvement to reflect benefits from cost savings and restructuring associated with project own it.
Bad debt expense of sales team and median was $5 million high yields and prior year on 3 million lower and quarter suite.
Current bad debt reserve for our trade and finance receivable in line, we have a prediction.
And any other personal touch off revenue was 10 basis points higher year over year on lower revenue.
We continue to increase investment in our innovation focus areas, while reducing spend on our print technology by simplifying our portfolio.
Or was there and expenses net of $30 million was 22 million high yield year over year. As a result of action, we took to improve our long term liquidity position in quarter, three and quarter four whereby we used proceeds from new debt financing to prepaid $1 1 billion of bonds.
That would have matured in May 2021.
Payment resulted in a net loss of 26 million, but it certified virtually all our near term bond maturities.
Our fourth quarter adjusted tax rate was 29, 8% compared to 25000 tons of prior year, So 480 basis points year over year increase in adjusted tax rate resulted primarily from the change in the geographic mix of our earnings.
Adjusted EPS increased sequentially 10 cents over a quarter sweet home towards 75 cents lower than the same quarter last year GAAP.
GAAP EPS of <unk> 36 was 81 cents lower year over year.
Non-GAAP adjustments include even and increasing the amortization of intangible assets, reflecting new acquisition in early 2020 on the last of early extinguishment.
Our net debt directly on to and momentum growth.
This increase and were partially offset by lower restructuring and related cost in Q4, we recorded $29 million of from a strict touring and <unk> costs compared to $53 million in the fourth cluster last year.
And our focus on expense control on working capital drove positive earnings and cash flow in the fourth quarter.
We generated $235 million of operating cash flow from continuing operation in the quarter, which was $129 million of growth quarter suite and down $163 million from prior year, primarily driven by lower net income.
For the year, we generated 548 million of operating cash cash from working capital of $123 million was 118 million and higher than prior year due to inventory management on strong connection net.
Only partially offset by an increase in accounts payable.
Finally, due to the timing of payments to vendors.
Capex was 14 million in the quarter on 74 million for full year, which was slightly higher than prior year, reflecting spending in high tech infrastructure on strategic revenue initiatives.
For 2021, we expect Capex of 100 million supporting our strategic growth program and continued investment in our it infrastructure.
Infrastructure.
We spent 203 million of cash from the acquisition in 2020, including our quarter four acquisition of cash.
From 2021, we are modeling spend of 100 million for picking acquisition.
I'm really focused on further penetrating the SMB space.
Our target agencies, we also continue to evaluate larger M&A opportunity that cash.
And accelerate growth diversify our revenue base on ore expense our company.
Within financing cash flow and in line with strategic actions, we took to improve our long term liquidity, we prepaid $1 1 billion of bonds, so that food and materials in May 2021, with proceeds from a combination of senior unsecured bond issued and quarter suite on a new 500 million private.
Securitization of <unk> finance assets that closed in December.
We have no bond maturing in 2021, and only $300 million of bonds maturing in 2022.
We repurchased $115 million of sharing a quarter, which completed the $300 million of share repurchases that we guided to for the full year.
We also paid $54 million in dividend and quarter, four and $230 million in dividends and full year, we generated $221 million of free cash flow and the quarter on $474 million for the full year, we are confident and our ability to generate cash on web and strong balance sheet.
<unk> reported shareholder return of $530 million, and 2020, which was under 12% of our total free cash flow for the year.
We ended the year with $2 7 billion and cash cash equivalents unrestricted cash on our $1 8 billion revolving credit agreement is undrawn.
Turning to quarter from a revenue equipment sales of $510 million declined 18, 8% and concerns guarantee when.
While COVID-19 was impacting our equipment sales on installs in the quarter activity in government accounts in both the U S and EMEA was Kroger.
Our U S enterprise business had another quarter of year over year equipment since growth to government customers will have sustained strong demand into 2021.
Also in the U S equipment sales to rapid communication customer grew sequentially.
Reflecting strong demand for our bike a rocketship inkjet system.
In EMEA and logical and <unk> deals.
Directional improved sequentially and we saw higher install of entry more new devices as well as strong demand for our recently launched Prime link light prediction module devices.
Flavor SMB channel and in the US hone in EMEA, we are more challenging quarter four compared to quarter three due to increased restrictions caused by the pandemic.
Total sales revenue of $1 42 billion and quarter four declined 21% and constant currency adjusted for the OEM fee impact, which was in line with quarter sweet trend, including the OEM themes and prior year post central was down 23, 5% and constant currency.
Our post sales from news largely contractility and most of our contracts include a minimum seek child on a valuable challenge Babe upon print volume.
<unk> also includes unbundled supplies paper on the audience.
Which are largely sold through our indirect channels on a more transactional.
Strong year over year growth and 19 services in our EPS channel and the U S. On sales from recently acquired dealers outside the U S. Enabler of 13, 6% year over year revenue decline in constant currency and supply paper on <unk> compared to 'twenty two.
And declining quarter swing.
So growth and 1970 sales was driven by demand for remote working learning solution as well as security reinforced requirement Xerox services revenue in quarter, four declined 19, 4% year over year and constant currency compared to a 21, 3% decline last quarter.
While activity remain challenged as a result of COVID-19, our new business signings and our renewal win rate grew year over year in the quarter on.
And on a full year basis global enterprise signings were higher which provides confidence in our business recovery post COVID-19.
Looking at our profitability trend clearly shows the impact of the pandemic on our business, particularly in the first half when revenue declined 24, 4% as a result of the widespread global locked down on business closure.
Nonetheless, we generated positive cash flow needs to enable quarter due to the speed, which reach and we were able to react to the impact of the pandemic.
Our ability to react quickly come from project own it which has created a more flexible cost structure on discipline expense management, allowing us to identify temporary cost savings measures to help manage through the pandemic.
Under project own it and we have achieved approximately $1 4 billion of gross cost savings since late 2018, including $450 million and 2020.
We expect 375 million of growth cost savings from project own it in 2021.
So progression of improvement in the second half of the year is indicative of the modest global economic recovery, particularly in quarter three quarter. Four is typically our largest quarter on it was again this year. However, our business was impacted by the redemption of Lockdown later in the quarter.
As a result of COVID-19.
Now onto capital structure.
Our pension and <unk> annually on as of December 31st 2020, our net unfunded pension liability was $905 million, which includes $851 million of unfunded pension liability for planned debt by design and attended.
So $307 million year over year reduction and our net unfunded pension liability reflect contribution on strong asset return set were partially offset by decreased discount rate.
In 2020, we contributed 139 million to worldwide pension plan and expect 2021 contribution to be in line with 2020.
As our debt primarily support our financing business Etfs and we'll take a few minutes to discuss some of the structural announcement John spoke to earlier, which include standing up XFX on innovation are separated businesses.
<unk> has a long history of providing financing to our customers supported by our strong balance sheet is a key business enabler, providing customers a one stop shopping experience on allowing us to maintain and longstanding customer relationship.
Customer financing ox will provide additional post sales revenue such as secondary market equipment sales on evergreen payment debt extending.
And the initial lease term and carry strong margins.
We will now expand excess activity beyond financing on legal and ox equipment to provide more context on excess.
And as of year end 2020, Etfs balance sheet asset consisted of $3 5 billion of finance receivable on equipment on operating lease.
We leveraged juice asset at a 7% to one debt to equity ratio of two day. Therefore 3 billion of the $4 4 billion of our total reported debt was allocated to ex FX.
So remaining debt balance, which we call core debt was $1 4 billion.
After netting the $2 7 billion of cash cash equivalent unrestricted cash on our balance sheet and a year and our 'twenty 'twenty and being net cash position was $1 3 billion.
In order to more strategically on economically fund each surface financing activity, we raised $840 million and securitization of U S finance assets in 2020, which provide much funding at attractive all in rates.
With respect to innovation, we are encouraged by the progress we have made and developing new technology within our focus area that will result in becoming not only world class Research center, but the growth engine trucks and rocks, we expanded our investment and innovation in 2020, and we'll continue to do so in 2021.
Also as John mentioned, we are allocating $250 million of our excess cash to create a corporate venture capital fund, we expect to deploy Zeus fund over the next five year to further enhance box innovation ecosystem.
We are advancing innovation on our zone, we are expecting modest revenue from back in 2021, these disruptive innovation and significant long term and revenue growth potential from Xerox.
We expect to begin providing investor with additional financial information on both ex FX and innovation within the next 12 to 18 months.
I will wrap up by addressing our guidance as John mentioned, we are guiding to at least $7 2 billion in revenue and 2021 onto free cash flow of at least $500 million.
In our modeling, we expect a modest recoveries from loans a year, but we also expect quarter one to remain challenged due to the COVID-19 Lockdown on business closure, we are seeing today.
We are confident and our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to share organic.
Thank you and now back to John.
Thank you as avia.
Now, let's open the line for questions.
Thank you to.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
First question comes from Ananda Baruah with loop capital markets. Your line is open.
Hi, Good morning, guys happy new year. Thanks for thanks for taking the question and by the way.
Not enough and you guys and consistently looking at creative ways debt.
I think that create the bolts and paint volume.
Debt to pointed out and day Youre aware, but its what its worth mentioning and on this call.
Could you guys just walk through and look you need good job and sort of teasing out a lot of the details around the day.
And from separation.
But at the highest level could you walk through John.
Really what what.
And the philosophy behind doing that and I know youre going to say things like.
Operating efficiency drive and perform and optimizing optimizing and potential and things like debt.
But like in addition to that.
Driving visibility.
Potential for sort of a spinning them out anything else you can give us there would be super helpful. And then and then I have a follow up.
Yeah, Hi, and under what I would say the revenue trajectory and the market opportunity and we see and these three areas. It gives us confidence to stand them up as a separate business and.
To become a separate business it'll allow each area that would be more focused and flexible in responding to the demands of the market.
We're working to identify and long term structure for each of these businesses, which may include the use of the holding company structure for financing and innovation and we're looking to share more information in the coming quarters.
Okay, Great that's helpful.
And I guess this is and this is maybe from Zavvi, when we think about sort of the norm.
And the structure of what free cash flow generation will look like.
And normalized fashion, yes, so over the next couple of years.
And is there anything that we should keep in mind with what you guys are doing strategically to materially alter.
And what the cash cycle might look like.
Once the model you get into guidance for 'twenty, one or others, we think about sort of our past 'twenty one model.
And yes, good question here so.
And I generate Thunder as we mentioned it in and Coke zero. So we are returning to growth.
Obviously revenue will be and key driver here on the same time, we want to maintain the investment debt.
We're making currently on innovation. So if you look at the free cash flow here and we received net income driven by revenue is.
Really our key area and focus on where we are currently driving on the putting ally product at the same time on working capital.
And obviously as you know, we will focus on inventory and payables.
And revenue.
And I could draw, even all wheel drive and overheated and.
And revenue trajectory is positive here will drive.
The scope and scale downside on debt and working capital element.
So nothing on working capital that way.
That could change it would be an incremental headwind.
And this.
If you keep it simple between net income on the working capital and.
Our regional and specialty guidance revenue is a key items that we want to drive here.
Thank you guys appreciate it.
Okay.
Thank you. Our next question comes from Matt Cabral with Credit Suisse. Your line is open.
Yeah. Thank you.
I wanted to dig a little bit and the cost side of the equation and in 2021, and I guess project and that you guys are talking about $375 million and savings, which I think is in line with the original target that you guys gave a few years ago I guess, if we take a step back revenue dynamic and changing meaningfully versus that period of time and youre guiding for 'twenty and 'twenty one.
And that's about 25% below where you ended up in 2018.
Guess, what that and Mike why not look to target cost more aggressively and maybe just talk about levers you have to adjusted cost base. Both this year and maybe as we think about 'twenty and 'twenty two and beyond.
Hey, Matt Hey.
And so predictable it is a three year program that we put in place and.
Currently these programs and deliver 60 from successfully more than one 4 billion savings here.
Perfect, Tony and although towards the foundation during COVID-19 to readjust, our cost base and we did it successfully as well. So we keep this foundation on and we'll build on these there. So if you look at the next year.
And you look at the overall margin our margin sequentially improved quarter over quarter and speaking about operating margin.
And some of the outcome is.
Relative to the savings driven by project to and it next year with more revenue coming in towards a base here is what is giving us confidence and our free cash flow and guidance that we can grow it yoga year owned and generate.
This management team and have you done from demonstrated.
Commitment on the cost reduction here.
Got it and then.
Just on the situation with Fuji.
Wondering if you could just give us and an update on where that stands and if your guidance for 2021 and include them exercising the option or not and maybe just more broadly how we should think about your approach and the Asia Pac region and longer term.
Okay.
And our ratio will remain at year end and so we had and are we.
We negotiated this transaction last year and.
And a ratio and chip remain a relationship with <unk> one of our main supplier and provide you with some of our lineup of equipment and we have good relationship from this one.
The second item on from it.
We have negotiated.
Your T related towards the usage of the Bronx, Fuji Xerox uptick tool and this royalty this will translate into.
Net cash payment in 2020 and will depreciate it over a two year period, which is a failure that we use here. So could you get it wrong and I will say so far in the wrap up.
And relationship from a supplier point of view is going as expected on our financial model in line with what we're expecting.
Thank you.
Yeah.
Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is open.
Thank you very much for taking my questions. My first is just I am curious given the stay at home situation and and changes and work.
Mark and the office and ask how are the conversations going with customers.
And that perhaps the contracts up for renewal or that your sales people are talking to and maybe if you could talk sort of from a segment basis.
As well as geographic and then I have a follow up thank you.
And Shannon and what we saw in 2020 was an increase and our signings and increase and our retention and the conversations with the clients are focused on security and document workflow and transfer of course, there are industries.
We've done very well and like and the government industry. The healthcare industry those are industries and and the essential services industries. While there are others debt still remains quite calls overall and <unk>.
Had positive conversations with them and we've been working well. We've also through at all has been able to increase market share and all our product lines given the focus that we've had on our clients.
Okay and.
And I'm curious Xavier and maybe you can chat about that.
The $375 million savings and from.
From project own it what are some of the offsets.
And from the standpoint that you're maybe not and there is much austerity as you were last year, given higher revenue expectations and there was some of our companies have talked about and increase in opex and and returns have certain expenses. So maybe if you could address where we're xerox is relative to that thank you.
Yes so.
And as I mentioned it earlier in the year.
And in the core lateral and too.
We are permanently from case on our cost base here and we.
We have done and will do what is required in order to ensure two element here. So we'll facing sales gross margin and into gross margin and looking at the gross margin expansion on the second element is to protect the investment we're making to support our future.
And the central government business.
That's the reason of the.
And three business and that we just mentioned before.
And as a.
More focused more visibility as well.
Flexibility for these businesses.
So product or need to 375 is what we have included currently.
But depending on the condition on the hull.
No you know what will happen with COVID-19, but in our model currently with project own. It on the met other engagement tools that we're using we are planning to ensure that we will deliver the final debt.
And free cash flows and we have mentioned and our guidance.
Okay. Thank you very much.
And you.
Thank you. Our next question comes from Paul Coster with J P. Morgan Your line is open.
Hi, This is Paul Chung on for Costa and Thanks for taking my question. So.
First question is can you just talk about the <unk>.
Health of your var and distribution partners are you seeing any consolidation in the space and once.
And then comes back.
Our senior partners can ramp quickly as is the case and.
Do you expect any changes and pricing just anything you can mention on the health of your channel partners. I know you mentioned from the channel inventories there to kind of shore up liquidity and then I have a follow up.
Yes so.
So as you know.
We don't have a.
Specific concentration in distribution partner by James held here. So what we see currently and I will tell you so quiet.
And I won't say normal, but a healthy situation our relationship with our distribution partner specifically in the SMB market on the <unk>.
<unk> had been I would say quite positive during the year.
We went through and we leverage yet.
FSC in order to support some of them and their activity at the top of the crisis last year, but at the same time.
And we'll tell you and I was pleased with the outcome from our cash situation here, where we finished the year from the receivable cash flow positive situation on the DSO improvement desktop so no no specific tension.
I could mention here with our distribution partners as of now.
Okay and then my follow up is on your shareholder return guidance of at least.
200.
$50 million for 'twenty, one so I assume your dividend doesn't change.
Kind of leaving.
Lower pace of buybacks in 2020 is that the right way to think about it and then when free cash flow and kind of normalize and its more so and fiscal year 'twenty two maybe.
That percentage goes back to kind of historical norms.
Yeah, I would look and as we've committed to 50%.
But we've also and approved to acquire back $500 million of our stock Opportunistically and 2021.
Thank you.
Thank you. Our next question comes from Jim Suva with Citigroup investments your line is open.
Thank you very much.
John You mentioned about the separation of businesses and then you mentioned the term stand up the business holds off I'm not overly from all looked at term stand up.
Our commodity.
Like tax free spin outs, IPO Sparks and distribution to shareholders like what happened with.
Conduit and carve outs and then and I also realize we do have a shelf stocked hold at the holding company shelf structured also so I didn't know.
Are some of those vehicles more likely and others less or are they all on the table I'm, just trying to kind of figure and.
What do you mean.
Jim we're looking to identify the right long term structure for each of these businesses and.
We expect to share more information and the next few months, but.
As of now you could argue that they are all on the table.
Gotcha, Okay and ahead of debt are you looking at like <unk>, New headquarters for all of them on board of directors and executive slate and all of that or is that just kind of a little premature to talk about.
I think it's premature to talk about it and stay tuned.
Okay. Thank you very much and the last point in this and Pablo.
CFO question potentially.
And the standing up and while these businesses are there additional cash.
Costs that we should be aware of our cash flow debt.
Earmarked for these actions or is it that will come when net.
Decisions are kind of more put into the country.
So thats also something and as John mentioned, it and we are currently assessing what does that mean.
And we'll do this and depth.
And.
The cost that will be associated to this will be communicated later on.
We plan and during an investor and day to share with you more information.
Gotcha, Okay, well. Thank you very much from the details it's greatly appreciated.
Thank you again.
Thank you we have a question from Katy Huberty with Morgan Stanley. Your line is open.
Thank you and good morning, and the third quarter I believe you benefited from some replenishment of channel inventory can you comment on in <unk> weather channel inventory with a tailwind or a headwind and then have a follow up.
And sorry, sorry, it was a <unk>.
And instrumental and if you can.
Can repeat and channel inventory.
Okay.
No no no no no.
Net.
Jennifer.
And I will give you the sequence here quarter to quarter, three and what we saw is that the.
Channel partner for cash from use reasons and manage our inventory and I say channel partner is a two tier distribution and researchers in quarter. Four we did not see strong improvement in the situation.
We have I would say and a higher set of wet and cold week of inventory, but well below the norm on debt.
And other inventories currently.
Pfizer tenant.
Sure.
And call that lowest level, but at a low level.
And then just as a follow up some business as we speak to are saying that they're not going to ask their employees to come back and tell sometime between say July and labor day of this year and does your $7 2 billion.
At least revenue forecasts contemplate a scenario like that or are you, assuming some improvement and.
And returned to office and the calendar second quarter.
So we are looking at this and when do we model. This Kathy we look at.
I'll call that modest improvement during the year, specifically Corp connect.
Connected with and vaccine.
The vaccine will be spread zone <unk>.
But other people to be back to work. So this is more like a second half revenue expectation and quarter. One as you know it will be certainly very similar to quarter four the vaccine does not get impacted and.
We see modest improvement in some of our leading indicator, but we do not expect corporate and want to be a strong improvement versus quarter four.
Okay, and then lastly, how are you thinking about post COVID-19 normalized print volume and a world where there is more of a note and hybrid we're kind of this came up and some other questions. How much flexibility is there for you to adjust the cost structure and same volumes are permanently.
Lower by say 10, or 20% versus pre COVID-19 levels.
So.
And two two points continues and first one as you know.
We have evidence that we can address and cost structure of the company to the situation and we did it during a COVID-19 and will keep this focus so.
And more tool and driver of that team is still the same here. So one point on print volume what we see is clearly new ways of working on the <unk>.
Interestingly enough, we see that when people are working from home day use as well some of our solution. So.
And we should not look at this financing, it's only <unk> printing from owned and become personal and printing zone.
Some of the Xerox solution, including software solution here, so with your balance and revenue coming to you with the print volume be similar to 2018 2019. It is very early to assess currently.
We are watching this and we.
We see impact from Covid.
2020, and we see as well quarter over quarter, how print volume grew sequentially.
Great. Thank you.
Yeah.
Thank you, ladies and gentlemen that does conclude our question and answer session I would like to turn the call over to James <unk> for any closing remarks.
And thank you for your time today, and I'll, just ask that everyone be safe and we will be well.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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