Q3 2021 Xerox Holdings Corp Earnings Call

Welcome to the Xerox Holdings Corporation third quarter 2021 earnings release conference call. After the breach and there will be a question and answer session to ask a question at this time. Please press star one at any time. During this call you can withdraw your question by pressing the pound G. At this time I'd like to turn the meeting.

Over to Mr. David Bekele, Vice President and head of Investor Relations.

Yeah.

Good morning, everyone I'm, David Bekele, Vice President and head of Investor Relations at Xerox Holdings Corporation and welcome to the Xerox Holdings Corporation third quarter 2021 earnings release Conference call hosted by John <unk>, Vice Chairman and Chief Executive Officer. He is joined by Zombie a hoist chief.

Gilles Officer.

At the request of Xerox Holdings Corporation Today's conference call is being recorded other recording and or rebroadcast of this call are prohibited without the express permission of Xerox.

During this call Xerox executives will refer to slides that are available on the web at www Dot Xerox Dot com slash investor and we 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'd like to turn the meeting over to Mr. <unk>. Mr. <unk> you may begin.

Good morning, and thank you for joining our Q3 2021 earnings call I hope everyone is safe and healthy revenue. This quarter of $1 76 billion was essentially flat with the prior year's third quarter, Despite a challenging operating environment.

Adjusted EPS of <unk> 48 was flat year over year, and we generated free cash flow of $81 million down slightly from $88 million in the prior year.

Adjusted operating margin of four 2% was lower year over year by 320 basis points.

This quarter's results were negatively affected by two significant secular challenges a deterioration of global supply chain conditions and the Delta variant.

For the third quarter progressed, the challenging supply chain conditions, we highlighted on our Q2 earnings call deteriorated further specifically raw material and component shortages limited the availability of certain of our products and supplies, particularly our <unk> III devices.

Transportation constraints extended delivery times by weeks and drove unit shipping costs multiples higher than normal levels.

And when our products arrive labor shortages further delayed delivery times. Please.

Please challenges accounted for two thirds of the year over year decline in this quarter's gross margin and caused equipment revenue to fall short of our expectations.

Demand for our products remained strong resulting in further growth of our backlog of equipment and third party hardware to $265 million, which is approximately 90% higher year over year and more than 20% higher than the prior quarter.

Our backlog also has a larger proportion of high margin <unk> III devices relative to previous periods.

Post sale revenue grew one 7% year over year, but fell below our expectations as the delta variant disrupted many companies' plans to return workers to the office.

We expect vaccination rates will improve as governments encourage companies to implement vaccination mandates.

And we continue to see a strong correlation between vaccination rates of return of employees to the workplace page volumes and importantly post sale revenue, which carries a higher margin than equipment revenue.

And we are seeing improvement across each of these metrics. For example September was the second highest month since the pandemic began in terms of page volumes and services and outsourcing revenue.

Which are two of the largest components of post sale revenue and the components that are most closely tied to page volumes.

Based on what we know today, we expect supply chain challenges to continue during the fourth quarter and through the first half of 2022.

We continue to expect a return of workers to the workplace, but our expectations for a broader return has been pushed from Q4 into 2022.

For these reasons, we are reducing our revenue guidance for the year to $7 1 billion in actual currency or $7 billion in constant currency.

Importantly, we are reaffirming our guidance for free cash flow of at least $500 million.

Our focus on cash generation gives us the confidence to maintain cash flow guidance.

Pilot of the topline headwinds, we face all while continuing to invest in our strategic growth initiatives.

Throughout these challenges we have been guided by our four strategic initiatives optimize operations drive revenue invest in and monetize innovation and focus on cash flow.

In Q3, we made progress across each of these initiatives.

Project own it has made our organization more agile and efficient that agility was demonstrated this quarter as our operational team responded to unprecedented levels of disruption and uncertainty across our global supply chain.

Our team responded quickly and is working diligently to mitigate the adverse effects of the supply chain disruptions on our business.

For example, we are working to accommodate a wider array of products and materials pre purchase components and freight and selectively increased pricing to offset higher costs.

And we are doing everything we can to minimize disruptions to our clients' operations.

We cannot control the pace of supply chain normalization or office three openings, but we are driving revenue growth in areas, we can control.

And our core print business, we gained share of total print devices again in Q2 for the.

Our most recent report from IDC, marking the fourth consecutive quarter of annualized market share gains.

Growth in market share as a key pillar of our strategy in print and is being driven by the quality of our product and our ability to provide secure connected workflow solutions that our clients need across their multifunction printer fleets.

Complementing our leading position in equipment, our suite of digital solutions is resonating with clients, who are increasingly digitizing document workflows and adapting to a hybrid work environment.

Global signings for our capture in content services, which help clients extract categorized and automated document routing such as our digital mailroom offerings increased 67% year over year in Q3.

By subscription based workflow central platform allows clients to manage document workflow from any device, including Pcs tablets, and smartphones with enhanced security and functionality clients expect from our leading multi function printers.

Our products and solutions are evolving to enable productivity from wherever our clients employees choose to work.

Our it services business grew double digits this quarter, despite a year over year increase in our backlog of third party equipment.

Within our it services <unk> continues to gain traction.

We now have 500 internal box performing 4 million transactions per quarter.

These transactions create a platform and set of use cases for us to deploy externally and in the third quarter, we deployed box to support our Lexmark managed services integration and enabled document classification and posting for our SMB clients.

We continue to invest in the expansion of our it services footprint to deliver a wider set of services to new and future SMB clients.

Earlier this month, we acquired competitive computing or see to a leading it services business based in Vermont.

<unk> provides us with access to a broader set of clients and capabilities that we can leverage through our it services business.

A key strategic focus in 2021 has been the standing up of the three new businesses software innovation and ex FX.

This quarter, we made progress towards our goal of standing up these businesses and monetizing our investments in innovation.

In early September we announced the formation of our software business carry our Xerox company.

<unk> is the industry's first service experience management platform and we believe it will transform service and customer experiences will live visual augmented reality and artificial intelligence driven interactions instruction and insights.

Carey ourselves a number of critical secular challenges facing field service management.

Clothing, a systematic loss of institutionalized knowledge due to the accelerated workplace retirement and the need to be more eco friendly.

Cary ourselves both challenges by enabling field workers with access to live and eventually AI driven expertise and it reduces field service visits by more frequently fixing problems. The first time around.

We estimate the total addressable market for carriers will grow to $80 billion by 2028.

We also announced that service now a leader in digital workflows invested $10 million in carry are at a post money valuation of $700 million.

This investment serves as an endorsement of carriers technology and will support its growth as carrier at a leading certified and integrated <unk> solution within service now as field service and customer service management platform.

In the third quarter, we expanded the go to market reach for carry higher by adding 15, resellers and forming a partnership with LNG technology services or L. TTS, a leading industrial manufacturing and engineering services company.

With LTE tiers, we will develop joint solutions across a range of industries, including discrete manufacturing truck and off highway vehicle maintenance and oil and gas.

Mentum in new client signings and pipeline growth gives us the confidence to reaffirm our expectation of carrier generating at least $40 million of revenue in 2021, and at least $70 million of revenue in 2022.

At Parc, we made advancements across our three primary innovation pillars.

Internet of things <unk> print and clean Tech.

In Iot, we continue to deploy <unk> bridge sensor technology in Australia.

The data being gathered by these sensors allow us asset owners and operators to monitor the health of critical infrastructure assets in real time, which.

Which is particularly useful after the events such as the recent $5 nine magnitude earthquake that.

Melbourne, Australia in late September.

Our technology deployed in Longwood, Victoria allowed immediate assessment.

We have the strained caused by the earthquake, resulting a decision that the bridge was safe to operate without needing to wait for manual inspection.

Our technology helps bridge operators optimize maintenance schedules limiting expensive field service business and ultimately lowering the carbon footprint associated with infrastructure maintenance activities.

We estimate the total addressable market of <unk> technology offering is $9 billion.

And we are currently in conversation with multiple transportation authorities around the world about deploying our technology.

<unk> print early feedback of our liquid metal printer LMS has been positive, resulting in a healthy pipeline in our target verticals of manufacturing in defense.

We are working to add additional materials, which will expand our addressable use cases in clean Tech. We are optimizing the performance of the alpha prototype for our energy efficient air conditioning technology.

This will inform the design of our beta prototypes, which we plan to complete by the end of 2022.

This technology can help reduce energy consumption and air conditioners by up to 80%.

We look forward to sharing more about this groundbreaking technology in the coming quarters.

Our work in clean Tech is just one example of how we are working to reduce our impact on the environment.

In our recently published 2021 global corporate Social responsibility report, we announced a roadmap to reach net zero by 2040.

At XFX originations grew approximately 10% year over year.

We further expanded XFX penetration within Xps and began offering leasing solutions for it services.

The quality of our book of loans remains high with loss provisions below one 5% despite the ongoing pandemic.

During the quarter, we generated $81 million of free cash flow only a slight decline from the prior year levels. Despite the effects of supply chain constraints on our operating profit.

Our focus on free cash flow has served us well and we have delivered positive free cash flow every quarter during the pandemic.

And that focus gives us the confidence to reaffirm our guidance of at least $500 million of free cash flow. This year. Despite the reduction to our revenue outlook and while continuing to invest in our strategic growth initiatives.

That focus along with our strong balance sheet also gave us the confidence to request that our board authorized a new $500 million share repurchase program.

Before I hand, it over to Xavier.

I would like to emphasize a few points.

The third quarter presented us with an unprecedented level of supply chain disruption and further delays in company's plans to reopen offices.

I would like to commend our team for its resiliency, while facing these challenges.

Revenue and margins have fallen below our expectations for the year, but demand for our products and services remained strong our backlog is growing and our new business remains on track to deliver future growth and our strategic Optionality for Xerox.

Through it all our focus on delivering cash flow has not changed and the buyback authorization allows us to deploy that cash.

Highly accretive manner.

We also continue to look at M&A transaction, both small and large that are accretive to our business.

I will now hand, it over to Xavier to cover our financial results in detail.

Thank you John and good morning, everyone as John noted significant disruption to global supply chains on that Atms or retail and so if you walk us through the workplace negatively affected our financial results in quarter three.

Despite these challenges our revenue were essentially flat year on year as gradual improvements in page volumes on <unk> growth in postage for me, an offset lower equipment sales.

Which were negatively affected by component shortages on logistic constraint that affected boost cost on capacity.

However, underlying demand for our equipment remained strong as evidenced by our growing backlog, which is almost two times higher than normal level.

Higher supply chain costs less profitable mix of equipment sales on lower margins on post sale revenue drove our profitability lower.

We're growing year.

Gross margin declined 440 basis points around 290 basis points of the decline is attributable to supply chain costs on capacity restrictions.

<unk> significantly higher freight on shipping costs on constrained availability of higher margin equipment.

<unk> basis point of the declines related to investment to support future growth. So the remainder of the decline reflects lower government subsidies net of project <unk> settings on lower royalties from the <unk> business innovation.

We expect supply generally keep pressure on gross margin to dissipate over time as you play churn normalized but this pressure will likely continue to weight on gross margin in Q4 on into the first half of 2022.

Adjusting operating margin of four 2% decreased 320 basis points year on year, reflecting lower gross profit lower abdomen ship dd's on.

R&D investment to support our targeted growth how are you.

Indeed, we maintain this investment despite unfavorable operating environment.

These headwinds were partially offset by lower bad debt expense on savings from project own it.

Sag expense of 400 on Cherokee median decrease 31 million year on year, primarily driven by savings from project own it lower bad debt expenses, which include a 14 million finance receivables reserve reduction on lower sales and marketing expenses.

These were partially offset by lower government subsidies investment in new businesses.

Prior year of 401, K much really assault on negative effect from countries and currencies.

<unk> was 82 million in the quarter or four 7% of revenue, which was an increase of 40 basis points as percentage of revenue year on year.

This reflects increased investment in population towers on a four one K much for their surgeons are sales quarter last year.

Or are there expenses net was 18 million lower year over year, primarily driven by high yield gain on asset sales a reduction in non service retirement related costs on lower net interest expense.

Third quarter adjusted tax rate was negative three 5% compared to 21, 1% last year to.

So 24, 6% year over year decrease reflected nonrecurring change to our tax positions on re measurement of detailed tax asset.

Adjusted EPS of <unk> 48 cents in the third quarter was flat compared to the same quarter last year.

The year over year reduction in pre tax income was offset by lower tax season on a reduced share count.

GAAP EPS of <unk> 48.

We're seven high year on year over year due to a decrease in adjusted items.

Treating lower year over year, non service retirement related costs and lower restructuring charges.

Turning to revenue supply chain disruption upscaled underlying strengths in our business as evidenced by our growing backlog on post sales revenue both of which grew sequentially on year on year.

Demand for our equipment remained strong but in the time since our quarter two earnings call a challenging supply chain on Dr. Munn deteriorate right, Charles there, causing shortages in product on logistic delays on cost.

As a result, our backlog expanded in the quarter to 265 million almost two times normal level.

Equipment sales of $387 million in Q3 decreased seven 6% year over year or eight 4% in constant currency grew primarily to supply chain disruption, specifically component shortages on logistic capacity constraints, which affected.

The Americas region moves in EMEA.

In EMEA equipment sales grew year over year led by our indirect channel on developing markets.

At the product level supply chain constrained most negatively affected installation of our higher priced corridor equipment in both the mid range on and causing a negative mix effect on equipment for our new on margin.

So when you get these mixed effect was partially offset by lower installation of eight four black on white equipment.

Which faced difficult comparison against last year work from home demand.

Post sale revenue of $1 4 billion increased one 7% year over year or <unk>, 5% in constant currency.

We continue to see strong correlations between vaccination rate workplace attendance homepage volume.

Page volume increased sequentially this quarter, but thats, a slower pace than we expected due to the delta volume.

Nonetheless, we are seeing a pickup in petroleum as workplace gradually reopened on school welcome back students.

As John mentioned September was a simone highest months for page volume since the beginning of the pandemic. Additionally.

Additionally, page volume are correlated well to service an outsourcing revenue both of which are key component of our <unk> revenues.

We continue to expect gradual improvement in process review.

Employees return to the workplace.

<unk> revenue also included unbundled supplies, which grew significantly due to rising page volume and to a lesser extent general release.

<unk> sales, which are included in OSA offsets also grew this quarter.

Last new business signings for our <unk> business grew in the quarter as indeed that will renew order win rate on services revenue in the SMB space.

Yes.

Next turning to cash flow.

We generated $81 million of free cash flow in Q3 down from $88 million in the prior year.

Our strong focus on cash flow Richard keyed in only a mild decline year over year. Despite lower gross profit on an increase in investments in targeted revenue growth scenarios.

We generated <unk> billion of operating cash flow in the quarter compared to 106 million in the prior year as working capital improvements offset lower profit.

Working capital was a source of cash this quarter of 46 million, which was on top on the 1 million better than the prior year on year.

This reflects year over year improvement in inventory accounts payables.

Accounts receivable.

Investing activity were a source of cash of 18 million due to a net sales of $38 million.

Actually offset by Capex of $19 million.

Capex, primarily support our strategic growth program on investment in it infrastructure.

Financing activity consumed $46 million of cash.

Net proceeds from additional debt contributed 76 million of cash unrestricted new securitization proceeds of $175 million.

Actually offset by securitization.

We expect to complete additional securitization and Chipotle ex FX in Q4.

Net proceeds from debt were offset by $87 million of share repurchases and 49 million in dividends Richardson in a total return of cash to shareholders each quarter.

<unk> 36 million share count under 70% of quarter three free cash flow.

The 87 million of share repurchase in the quarter completed our remaining share repurchase authorization of $500 million.

As a result, new share repurchase authorization of $500 million was requested on approved by our board.

Will be used to opportunistically repurchase shares.

Next looking at profitability.

On our quarter two earnings call, we expect supply chain disruption to continue into Q3.

<unk> of the impact on our business was greater than anticipated.

First of all a deterioration in supply chain condition on that agents or return of Walker to the workplace how can keep for nearly the entire key of the year over year decline in adjusted operating income margin.

Lower royalty revenue and savings from government assistant program will largely offset by lower bad debt expenses and savings from project own it.

We are actively working to mitigate the incremental cost associated with supply chain disruption, but we do expect these costs to weight on profitability again in Q4 on into the first half of 2022.

<unk> duration of supply chain on capacity constrained on the period of time for which it will affect our profitability remains untapped in our labor cost efficiencies associated with project own it improvements in page volume so clearing of our backlog on growth of our new.

Our business is expected to positively contribute to operating profit going forward.

Turning to Xerox final short services <unk> grew origination almost 10% year over year driven by growth in origination at UBS.

We are also actively offering lease solution for our <unk> businesses, a waiver global finance asset of three points. We didn't in Q3, we are down slightly compared to Q2 due to equipment availability constrained, which reduced equipment sales and associated new lease origination.

On loan repayments.

Next I will comment on our capital structure. We ended September with a net cash position of around $900 million slightly below quarter two levels.

$2 9 billion of the $4 3 billion of our outstanding debt.

He is allocated to support the XFX lease portfolio.

So remaining debt of around $1 4 billion is attributable to the core business.

That mainly consist of senior unsecured bond on finance assets equally easy shifts we have a balance bond maturity ladder with no bond maturing in 2021 on 300 million maturing in 2022.

Year to date, we have returned $650 million cashback to shareholder.

170% of free cash flow, which contributed to the 400 million decrease in net coal cash since the end of 2020.

Finally, I would add the rest of the revised guidance, we presented our business with a number of expecting challenges, including a rapidly deteriorating global supply chain on the prolonged impact of the volume.

Production outage.

Shipment delays on cutting crazy on the delays our retail and our forecast was a workplace resulted in a lower level of Costar suite.

We expected just one quarter ago.

Given the continued uncertainty associated with global supply chains on the daily in many companies plan to return to work places until 2022, we are lowering our revenue guidance to circa $7 1 billion in actual currency or $7 billion in.

Constant currency.

Our focus on cash gives us confidence to reaffirm our free cash flow guidance of at least $500 million, while continuing to invest in our targeted growth initiatives.

We have also decided to postpone our investor day to February of next year tweak point, we'd be in a better position to provide 2022 guidance along with our long term financial projections.

We also look forward to sharing additional financial detail about our new businesses at that time, which we believe will be more meaningful within the context of our 2022 guidance.

I will now hand over to John.

Thank you.

Operator can you please open the lines for questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one our first question comes from the line of Katy Huberty from Morgan Stanley. Your question. Please.

Yes. Thanks, good morning, how much of the $200 million lower revenue guide at constant currency is a function of the backlog build versus the slower recovery in page volumes in just connected to that how much do you expect backlog to build in the fourth quarter and then I'll.

A follow up.

Good morning, this is exactly so.

Regarding the backlog.

200 million revised guidance there the vast majority of what we see is related to weight equipment backlog, so that we face here.

We quoted here, we ended with $265 million of backlog, which is close to 60% 59% of <unk>.

Total revenue of quarter suite.

We expect backlog to grow based upon the supply outlook that we have for quarter four at this stage.

Okay. So backlog grew about $50 million sequentially.

The September quarter, if most of that $200 million guide down is related to backlog that would imply that you would expect even more backlog build in the fourth quarter is that the way to think about it.

This is correct.

Okay, and then I know, it's really early but do you have any initial thoughts as to you know.

How are you.

How are you contemplating fiscal 'twenty two as it relates to the increased supply chain costs and revenue impact that carry into the first half of the year does that set up for potentially.

Flattish or even pressure on EPS and free cash flow relative to 2021 or is it too early to tell.

It's.

As we indicated during your call here, we expect the supply chain impact to carry on on that have some impact during the first half.

During quarter three we have been surprised by the size of the supply chain.

We come into At&t's, mainly related to some material.

Shortages, but also so factset chips on the processor becoming.

We have to put city, we're facing paucity of help this year, we've put in place a lot of friction, including redesigning some of the waste from our boards are currently implemented on our product, but it will take time to recover so chevron Australia is not only.

Scarcity of captain.

And here, it's all towards the overall supply chain.

It should not be new news here.

The challenges that a lot of companies are currently facing with company our shipment, but also up to the last point up to the delivery to the end customer. So we expect some of it to step into.

The first half of 2022.

Clearly our backlog is a strong evidence.

Our customer asked here when you wouldn't see equipment.

Also as we mentioned at arena.

We grew market share. So we're still growing market share we did it in quarter, one we did it in quarter two as well.

And clearly the orders that we are reaching from our customer have you have you done that.

Steve has strong demand here. So we will manage it it's a little bit early to provide guidance on that.

As we mentioned it we will.

All done.

Manoj, we hope the phase II <unk> Investor day in February where we'll be able to provide you more information.

Thank you.

Thank you. Our next question comes from the line of Ananda Baruah from loop capital. Your question. Please.

Hey, Thanks, guys for taking the question.

I apologize if this has been address I have a couple of calls and then of that going on this morning, but.

Yes to that to what you guys are seeing.

Demand wise revenue wise.

And.

Any sort of incremental feedback you've gotten from your from your.

Enterprise customers as you as you move through the quarter that might be different from what you had been communicated Josh yes over the last couple of quarters or so thanks, Ananda what we've been seeing is demand is strong.

The other thing that we've noticed is returned to the office has slowed down from what we anticipated. So we are anticipating more early next year being pulled back to the office because of the Delta variant a lot of the corporation's we've spoken to have delayed their openings have slowed them down but demand for our product because.

Strong and again with the supply chain constraints, that's become an issue for us.

I appreciate the context and then let me just ask a follow up in that regard any could you guys are pretty deep in the weeds with your conversations with your enterprise customers.

Strategically from their perspective have you seen anything change.

Turns of long terms intention.

For sort of how they're thinking.

King about.

Back to the office or the use of your products in the context of those strategies.

No we haven't seen a change from what we've expressed in the past.

They are focused on bringing their employees back to the office in a safe manner and they are using our products more for product both for productivity and for security and in some cases with our software to utilize a hybrid environment in which when their employees to work from home, but not really much of a change there I think.

Slowed that down or so delta variance and everybody is being careful in getting their employees back safely to the office.

There is no doubt.

Okay.

And some of that if I may add as well.

We have seen as well on our.

Global document solution businesses, some good traction on offerings, enabling.

To work from home and Watkins <unk> as an example in capturing content services here, we have seen significant double digit growth of signings, which show that the enterprise.

Supporting these type of offerings, but also willing to enable this on demand.

Yeah.

That's helpful. Thank you guys I appreciate it.

Thank you. Our next question comes from the line of semi challenging from Jpmorgan. Your question. Please.

Hi, Good morning. This is Angela on first on metallurgy.

Thanks for taking my question. The first question I had was so HP at their Investor day.

That they're expecting a low to mid single digit decline in supply next year, which we thought was interesting are you seeing similar trends there given that you are also forecasting greater return to office in 'twenty, two and then I have a follow up.

Yes. So good morning, so as you know our business model is slightly different from the one that I should pay ahead, we are less dependent on what we call. It.

Consumable model.

Model is based on subscription.

We do not see this trend our trend is mainly related to page volume on how customers are using our equipment, but not only to print, but also to drive to close.

Our equipment on a much more than the device on support.

Those.

Customer are using here. So we if you want to know like at that point, a proof point of what we have faced we saw some increase in quarter three of.

We'll just source supplies from you on.

We are positive on pricing.

A gradual recovery of page volume.

However, the time.

Great. Thank you and then for my follow up.

Just thinking about your product mix on <unk> III.

It seems like the industry is that a horrible.

Come more popular over time as offices migrate toward smaller.

Hunter spread out more evenly or are you seeing a shift in strategy toward a four printers and if so will that result in a structural margin decline.

If we look at our third quarter, our backlog 43 went up from Q2.

We're gaining market share and we're seeing a strong demand NDA III and we've also gained market share NDA for market.

Great. Thank you so much.

Thank you as a reminder, ladies and gentlemen, if you do have a question at this time. Please press Star then one our next question comes from the line of Shannon Cross from Cross research.

Thank you very much I was wondering about the pricing environment, both on the short and long term for hardware as well as pages.

Obviously, given all the supply chain challenges certain other industries have been able to raise prices.

Inkjet printers for instance, theres less promotions Im curious what youre doing there.

And then when you talk to canon and Theyre thinking long term theyre going to see some price pressure on pages. So I'm just kind of curious how you think this plays out both in the next few quarters and then maybe long term and then I have a follow up.

Thank you Sean good morning Shannon.

It's a good question here, what we see on the pricing environment, mainly related to the supply demand dynamic here is.

The ability of raising prices and this is some things that we started executing we started recruiting already on west plan in order to reflect some of the costs that we're facing here specifically on supply chain on some of the raw material costs that we have to deal with.

Getting page volume one there was a price per page here is I would call that an unusual business as usual negotiation, we have not seen an increase competitive Andrea on this.

We are quite stringent and managing pricing and also protecting with minimums annuity volumes.

Okay, and then SG&A is at the lowest level that I have in my model, even after incorporating the $14 million going back.

Clinton and I am assuming <unk> <unk> as a bigger company back then.

How much further can you cut SG&A what did you take down how much of SG&A is.

One time versus recurring in nature, just trying to understand given the gross margin pressure you're facing how much flex you have in some of your other expense lines. Thank you.

Yes Shannon.

G&A, we quoted the only I would say one of substance.

Sure.

Is it related to the <unk> that we have which is by the way good news, which shows that the business is recovering in light of last year or two years ago, starting with the impact of COVID-19 here further.

For the risk that we have project own it in place unpredictable and it is much more than a pure cost cutting type of activity. It's also.

Ingrained in the DNA of the company on how we adjust our cost base based on I would say J&J or months here so flexibility.

It was in the cost base, we will ensure that we can reflect some of the gross profit decline on gross margin declines that we have in our fixed cost base. That's one.

Do you think you can get down below $300 million I'm, sorry $400 million.

Yes, it's.

It's a little bit too early here.

Because we're going through the planning cycle here, but clearly on it as I mentioned it on OLED is not only SG&A <unk>, Ontario, a cost base of the company and.

We look at any opportunity we have here you know that we have had the benefit of last year, when we call. It <unk>.

The amount on this year all at once so we had the benefit of our government subsidies. These governments <unk> integration on you can see that in our cost base specifically in G&A were able to offset these cost actions that we're taking to fix EBITDA into cost base.

Okay. Thank you.

Thank you Shannon.

Thank you. Our next question comes from the line of Jim Suva from Citi. Your question. Please.

Yes.

Thank you.

Thank you for being so open and transparent about the.

Taking the outlook down a little bit and.

Can you help us understand.

Do you fully believe or can you know as this supply chain issue driven or I know of course going back to the office has been delayed or is it actually structurally people are printing less and how should we think about.

That if it's if it's the case or not the case or how do we actually know thank you.

Jim we've seen a strong demand for our product and in fact, you saw in third quarter that our backlog has increased again to record levels. So we are seeing the demand we're increasing market share.

Even in September is a direct correlation with vaccination and going back to going back to the office and volumes and we saw an uptick in September.

Our belief is that going back to the office is a question of when not if and the delays that have happened for again safety of employees.

That's how we're seeing it right now.

Great. Thank you so much for the details.

Thank you.

And this does conclude the question and answer session of today's program I'd like to hand, the program back over to John <unk> for any further remarks.

Okay. Thank you look we cannot predict.

With precision when supply chains will return to normal, but we expect they will normalize over time. We also believe a broader return of employees to the workplace as a matter of when not if and office work will be different but we are prepared to meet workers evolving print and document management needs.

Safe and be well.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect good day.

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