Q1 2022 Xerox Holdings Corp Earnings Call
Operator: Welcome to the Xerox Holdings Corporation first quarter 2022 earnings release conference call. After the presentation, there will be a question-and-answer session. To ask the question at that time, please press star one at any time during this call. You can withdraw your question by pressing the pound key. At this time, I would like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.
David Beckel: Good morning everyone. I'm David beckl, Vice President and Head of Investor Relations at Xerox Holdings Corporation. Welcome to the Xerox Holdings Corporation first quarter 2022 earnings release conference call hosted by Giovanni G. Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Executive Vice President and Chief Financial Officer. At the request of Xerox Holdings Corporation, today's conference call is being recorded. Other recording and or rebroadcasting of this call are prohibited without the expressed permission of Xerox. During this call, Xerox executives will refer to slides that are available on the web at www.Xerox.com/investor and 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 here in. At this time, I'd like to turn the meeting over to Mr. Visentin. Mr Visentin, you may begin.
Giovanni G. Visentin: Good morning and thank you for joining our Q1 2022 earnings call. I hope everyone is safe and healthy. Before I get to the results, I want to start by acknowledging the humanitarian tragedy taking place in Ukraine. Our thoughts are with all those who have been affected.
Giovanni G. Visentin: As the situation began to unfold in late February, we took swift and decisive actions to ensure the safety and security of our people.
Giovanni G. Visentin: We suspended all but emergency support operations in Ukraine and provided emergency cash grants to the Ukrainian employees through our employee relief fund.
Giovanni G. Visentin: Shipments to Russia were halted as soon as the conflict started.
Giovanni G. Visentin: We continue to evaluate the situation in this region and will adapt our response Hoping for the restoration of peace as soon as possible.
Giovanni G. Visentin: We continue to evaluate the situation in this region and will adapt our response Hoping for the restoration of peace as soon as possible.
Speaker 3: Hoping for the restoration of peace as soon as possible.
Giovanni G. Visentin: In total, the percentage of our revenue exposed to the Eurasian region is in low single digits.
Giovanni G. Visentin: The operating environment was once again challenged in Q1 and will remain fluid in Q2.
Giovanni G. Visentin: At the beginning of Q1, the Omicron variant resulted in office closures in our largest markets, affecting page volumes in January and February.
Giovanni G. Visentin: Supply chains are still disrupted by COVID related factory closures in parts of Asia.
Giovanni G. Visentin: Inflationary pressure is building across our cost base, including costs of goods sold, labour and logistics.
Giovanni G. Visentin: At this point, we have continued to expect supply chain conditions to ease, beginning in the second half of the year, albeit at a slower pace than originally anticipated.
Giovanni G. Visentin: At this point, we have continued to expect supply chain conditions to ease, beginning in the second half of the year, albeit at a slower pace than originally anticipated.
Speaker 3: Return to office trends are improving as the Omicron variant receded, page volumes increased, result in March being one of the highest months of post-ale revenue since the beginning of the pandemic.
Speaker 3: The continued correlation between in-office work and print activity and strong demand for equipment and consumables confirms that employees are using our equipment and services when they return to the office.
Speaker 3: Third-party data points to momentum and increasing offset to attendants.
Speaker 3: And we continue to expect a gradual return of workers to the office in Q2 and.
Speaker 3: With momentum building in the second half of the year, barring another variant outbreak.
Speaker 3: Summarizing results for the quarter revenue of one point six seven billion declined two point a half percent in actual currency and 1% in constant currency.
Speaker 3: Adjusted EPS was negative 12 cents, 34 cents lower year-over-year.
Speaker 3: Free cash flow was five million compared to one million in Q1 last year.
Speaker 3: An adjusted operating margin of negative zpointo 2% was lower year-over-year by 540 basis points.
Speaker 3: Revenue was in line with our expectations.
Speaker 3: Equipment revenue declined 18% or 16% at constant currency as expected, with supply chain disruptions limiting our ability to fulfill demand.
Speaker 3: Total backlog grew 21% sequentially to 422 million, as demand for our equipment continued to outpace supply.
Speaker 3: Post-sale revenue grew 2% or 4% in constant currency, reflecting improvements in print activity.
Speaker 3: Our IT services business grew double digits on an organic basis and we expanded its reach with the acquisition of powerland, a Canadian IT services provider.
Speaker 3: Operating costs in the quarter were higher than expected, resulting in a small adjusted operating loss and negative earnings per share.
Speaker 3: Going into the quarter, we knew supply chain constraints and investments in new businesses would weigh on our margins.
Speaker 3: What was unexpected was a magnitude and intensity of inflationary pressure across our cost base and the growth in supply chain costs.
Speaker 3: We expect a margin-dilutive effects of supply chain costs and new business investments to subside as constraints ease and our new businesses scale. The effect of inflationary pressure is more difficult to predict, but we plan to offset most inflation-related cost growth with price adjustments and additional project OneD its savings.
Speaker 3: Price adjustments are being implemented, but it will take time to realize, given most of our revenue is contractual.
Speaker 3: Despite the challenges we face, some of which are use. Since issuing our 2022 guidance, we are maintaining our revenue and free cash flow targets for the year, somesubject to our return to office and supply chain assumptions.
Speaker 3: zabvi will provide more color on guidance.
Speaker 3: We continue to focus on the same-four strategic initiatives that guided us over the years.
Speaker 3: Optimize operations, drive revenue, monetize innovation and focus on cash flow.
Speaker 3: Project owner has become institutionalized and ingrained in our culture, driving each employee to pursue operational efficiencies and excellence in everything we do.
Speaker 3: To help stabilize our profitability and maintain our free cash flow target. A misinflationary pressures in a challenging operating environment.
Speaker 3: We plan to increase our targeted savings of three million for 2022 by 50% and.
Speaker 3: These efficiencies will catalyze operating margin improvements as our business recovers from the pandemic and recent supply chain disruptions.
Speaker 3: Moving beyond the supply constrained environment. We are confident in our ability to grow the print and services business.
Speaker 3: Growth will be driven by factors largely within our control, including market share gains and a greater strategic emphasis on secular growth verticals such as it and digital services.
Speaker 3: For the full year of 2021. We gained approximately 200 basis points of equipment sales market share and achieved a number one share in our markets.
Speaker 3: These share gains reflect our differentiated go-to-market strategy and broad suite of product and services offering.
Speaker 3: Our services offerings include our leading managed print services, business integrated workflowor solutions and a growing portfolio of it and digital services.
Speaker 3: We continue to deliver innovation relevant for our customers.
Speaker 3: Most recently refreshing our low end a four desktop cloud connected models and a three entry models, with significant improvement in productivity and enhanced security with magcafeum embedded security, all of which supports our award winning workflow central platform.
Speaker 3: Yesterday it was announced that our management services business was a sole winner of the buyers' lab 2022- 2023 caseace center award in comprehensive MPS program from key point intelligence.
Speaker 3: This award reflects the breadth of our MPS offering.
Speaker 3: As well as our cloud first development path, pivot to add homeworkers and inclusion of dealer channel partners.
Speaker 3: It and digital services will become a more significant part of our print and services business over time.
Speaker 3: It services is a natural adjacency for Xero, given the expansive direct sales force deployed through XPS, our unit serving small and medium-sized businesses.
Speaker 3: The smbit services market is attractive as it is growing mid-single digits and competition is highly fragmented and their IT services business scales efficiently.
Speaker 3: In Q1, it services grew more than 20% on an organic basis.
Speaker 3: And we expanded our geographic reach by acquiring powerland, a leading IT services provider in Canada.
Speaker 3: Our IT services business is experiencing strong interest in some of the newest offerings, such as robotic process automation RPA, data solutions and manass security.
Speaker 3: We launched our commercial rpaa business only recently and are already seeing repeat business from customers wanting to add bots to improve operational efficiency.
Speaker 3: Our bots help customers with invoice processing, order entry, financial reporting and document classification, and the pipeline of use cases continues to expand.
Speaker 3: In Q2, we will offer an AI solution that automates data extraction from high volumes of unstructured documents for our legal clients.
Speaker 3: Xerox. Digital services offerings are resonating with new and existing managed print services clients.
Speaker 3: These offerings help clients navigate their digital documentation transformation by providing intelligent document processing and personalized customer communications.
Speaker 3: For capturing content, which includes digital mail room, data extraction and processing services. Signings grew 72% in the quarter, with new business signings growing more than 100%.
Speaker 3: We continue to invest in fiddle carryar in Park and Q1 fiddle. Increase its focus on providing financing solution that extend beyond Xerox equipment and services.
Speaker 3: This quarter filled added 24 dealers and grew indirect origination 7%, including a doubling of non-xerox products.
Speaker 3: This growth was offset by 22% decline in xeroxs direct originations for the quarter due to an equipment shortage.
Speaker 3: fidle remains on track to achieve the financial targets provided at our Investor Day.
Speaker 3: As the new business within Xerox, we expect carriar to make consistent progress on KPIs. That will drive strong revenue growth for the year.
Speaker 3: In Q1 Carr grew with pipeline 22 million or 34% sequentially.
Speaker 3: It added three system inte grater partners, 47 new customers and expanded ACV at another 60 customers.
Speaker 3: Care IR now serves clients across 13 industries and added solutions for banking education, oil and gas and pharmaceutical clients during the quarter.
Speaker 3: Carrier also announced the launch of carriry ER instruct.
Speaker 3: Is second major product offering and a key competitive differentiator.
Speaker 3: Instruct expands on its flagship toassist product to incorporate self-soloft capabilities for service agents and end users of complex devices.
Speaker 3: Instruct utilizes a full range of carryars IP, including aia, document storage and content creation.
Speaker 3: To provide critical insights.
Speaker 3: At Park Q LM. addedive manufacturing and novevty targets significant market opportunities and each continueed to gain traction within their respective markets this quarter.
Speaker 3: In Q1, allum announced partnerships with VERTEX, oakreid national laboratory and seieens.
Speaker 3: These partners are using our three D printers and working with LM to expand its industrial use cases.
Speaker 3: lloq plans to triple the number of bridges deployed in Australia during the first half of the year.
Speaker 3: It's also making headway negotiations with several U's States and European countries.
Speaker 3: novee is a newly launched company that will use Park's IoT expertise to commercialize a predictive maintenance platform for process manufacturing.
Speaker 3: novee has a healthy pipeline of companies in the manufacturing and oil and gas industryes and has signed two customers, including a pilot at pensy supply, one of the leading manufacturers of building materials in the U? S.
Speaker 3: We continue to fund investments in innovation and launch new products and businesses.
Speaker 3: Going forward, we will increasingly look to monetize investments in innovation through strategic transactions.
Speaker 3: These transactions can take the form of minority investment, sales partnerships or mergers of our businesses.
Speaker 3: We expect these transactions to create shareholder value by providing our newer businesses access to additional capital and domain expertise.
Speaker 3: We delivered positive free cash flow this quarter- five million based on improved working capital discipline- and returned to 159 million of cash to shareholders through dividends and buybacks.
Speaker 3: Notwithstanding an increasingly challenged operating environment, we expect to deliver at least four million of free cash flow this year, while continuing to invest in new businesses.
Speaker 3: We will return at least 50% of free cash flow generated to shareholders.
Speaker 3: Additionally, cash may be used for value-accretive MA and debt reduction.
Speaker 3: To recap, our backlog remains strong and page volumes are moving in the right direction as offices reop.
Speaker 3: Supply chain challenges and broad-based inflationary pressures will challenges us to be smarter and more productive as we remain committed to the guidance issue at the beginning of the year.
Speaker 3: With that, I'll hand it over to zabvi.
Speaker 4: Thank you John , and good morning everyone. As John mentioned, operational challenges cussisted this quarter.
Speaker 4: We continue to face constrain on our ability to deliver on installre order, on the cost of fulfilling zeous order as increased.
Speaker 4: Additionally, we alit shipment to Russia, a market that comprised a low single-digit percentage of our prevenueian profit in two million and 21, and we are seeing infashionary pressure across our cost base.
Speaker 4: On the other round, revenue was in line with our expectation on demand for our product. On services, remains strong, as dividendced by another increase in our backlog to formed on 22 million in quarter 1, which is close to three times higher than prior year levels.
Speaker 4: Post sales grew in a aterural on constant currency due to growth in IT services, on growth in's supplies on paper which reflect higher printed pages.
Speaker 4: We also benefited from growth in our Page grow driven contractual business which continued to correlate with the return of worker to the office.
Speaker 4: Turning to profitability, similar to recent quarters. Lower equipment sales, a less profitable mix of equipment in store, higher supply chain Coast, lower margin on poort sales from new and incremental cost associated with new businesses drove our profitability lower year-over-year.
Speaker 4: In addition, we are seeing the effect of higher inflation across our cost spase.
Speaker 4: Gross margin declines round on 90 basis point in the first quarter, prtaled on 80 basis point. Of this decline is attributable to supply chain cost. On capacity restriction, including higher freight. On shipping cost. ared constrained availability of higher margin basthree devices.
Speaker 4: Other than 10 basis point of the decline relate to investment to support fuuture growth, lower royalty revenue from Fuji fin business. Innovation on lower government subsidies.
Speaker 4: We continue to expect supply chain headwinds to moderate beginning of second half of the year.
Speaker 4: adjustic operating margin of minor zero- 0%, decreased five than 40 basis point year-over-year year, reflecting lower gross profit higheryear but debt expense prior year. Benefit from temporary government subsidies on feurllow measures on investment associated with our new businesses.
Speaker 4: This end wind were partially offset by lower selling expenses resulting from lower sales volume. On project owned savings, such expense of fronout 55 million increased seven million year-over-over-year. The increase was primarily driven by investment in new businesses. Prior year benefit from temporary government if the ies on fellow measure higher but debt provision resulting from thegepolitical thevirnmentt in Eurasia on acquisition.
Speaker 4: These increases were partially offset by savings from project on it lower sales on marketing expenses. On currencyade was 78 million in the quarter, or 5% of revenue, which was an increase of 40 basis point of the percentage of revenue year-go-year.
Speaker 4: The increase was driven primarily by continued investment in our new business in this quarter, specifically care air on swedd, cltech on i- businesses at Park.
Speaker 4: Quarter expenses net was five million higher year-overgo-year.
Speaker 4: The increase was primarily driven by a circuit-three million child associated with a termination to offer product supply agreement.
Speaker 4: So chart reflects the payment of a contractual conservidation fee plus interest on related legal fee, which we expect to more than makeup for auga time by a lower supplycos.
Speaker 4: Additionally, certain million of the increase relate to higher nonsavice retirement rated in interest cost due to an increase in interest cost associated with higher discount rates on higher settlement losses.
Speaker 4: On five million relate to increasing nonfinancing interest expenses reflecting a higher allocation of interest to the nonfinancing or core debt.
Speaker 4: First quarter logistic tax rate was 53% compared to 28% last year.
Speaker 4: Since we generated the pretax lawlowss, the higher tax rate reduced our tax obligation. This reduion was driven by benefit from additional tax incentives on a lower indefinite reinvestment tax liability due to recent acquisition.
Speaker 4: Adjusted EPS of minus 12 cents in the first quarter was 34 cents Al we than in the prior yearthe decline was primarily driven by a year-over-year rediction in adjusted income.
Speaker 4: Gaap EPS of minus shty-eight cents was 56 cents lower year-over year due to lower GAAP net income.
Speaker 4: Turning to revenue, total revenue was in line with our expectation, albited with a less favorable product mix with equipment sales decline offset by modest improvement in process revenue.
Speaker 4: The underlying fundamental of our business remains strong.
Speaker 4: Equipment orders once again outpay supplies reting in a communumulative backlog. This quarter of equipment on it outware of formed on 22 million, a 21% increase of a quarter fourall on close to three X higher than prior year level.
Speaker 4: For a context, our backlog is now larger than in four quarters worth of equipment on our sales.
Speaker 4: Despite continuous growth in our backlog. So quality of our backlog women eye.
Speaker 4: Close to half of our backlog is less than 60 days old. We have seen minimal consolidation of orders as far as customer are often willing to extend the existing leases. We are in waiting for new equipment.
Speaker 4: Further we saw an uptick in pageroulum on pagero and driven post sales revenue in March as emlo year returned to offit following the Micron buyant.
Speaker 4: The continued coration between page volume and workplace attendance on strong growth in usage base. All sales revenue, such as paper on supply, suggest workers are printing as they returned to Z office, as we expected.
Speaker 4: Equipment sales of strandard on 14 million in Q1 declined roughly 18% yearover-over-year of 16% in concerned currency.
Speaker 4: The decline was primarily driven by continued supply chain disruption, which limited our ability to fulfill demand.
Speaker 4: Installation work down year-over-over-year across all product type on high-margin meidter-rangech product continue to be the most impacted by supply chain issues.
Speaker 4: Post Al revenue of one point 35 billion grew 2% year over the year of 4% in constant currency.
Speaker 4: Growth was driven by it services, which increased more than 20% year-over-year, excluding two months of revenue from our recent acquisition of power L, as well as ier SRE supplies. On paper revenues, which triicuate with printing volume, we saw modest growth in pejulum driven contractual revenue corresponding with growth in printed pages.
Speaker 4: Post sales revennew growth was partially offset by lower Fuji film business innovation royalties on lower ITBS financing. Commission in services, new businesses signing grew roughly 10 percenty of our year, led by strong double-digit growth in signing of our capture on content: digital services.
Speaker 4: We generated free cash flow of five million in Q1, down from hundred million in the prior year.
Speaker 4: Lower cash earnings which, including investment in our new businesses on lower royalty payments, were offset by working capital improvement on lower restructuring payment.
Speaker 4: We generated 66 million of operating cash flow in the quarter, compared to qutrter than 17 million in the prior year.
Speaker 4: Working capital was a source of cash of 93 million this quarter, five million higher than the prior year, mainly driven by accounts payable.
Speaker 4: Investing activity were use of cash of 75 million, compared to a use of 17 million in the prior year, due to an increase in cash used for acquisition on venture investment.
Speaker 4: Capex of 16 million was slightly lower year-over-year CapEx primarily support our strategic growth program on investment in' nine infrastructure.
Speaker 4: Financing activity consume hundred to 49 million of cash.
Speaker 4: During the quarter we utilized the remaining under seteen million of our buyback autoorization on paid dividend totallling 46 million. We also repaid three million of maturing senior notes. We 300 on 22 million of net sequization proceed.
Speaker 4: F ER. We remain committed to returning at least 50% of our free cash flow to shareholder. Next, looking at profitability, as noted earlier, adjusted operating income was negatively affected this quarter by incremental cost associated with supply constraint, inflation on investment in our new businesses, which had a negative impact to adjusted operating income margin of 400 seventey basis pointints.
Speaker 4: We expect supply chain on new business costs to normalize our supply chain condition, improve on our new business scale.
Speaker 4: In flanuary. Pressure may be IST for some time, but we expect to pass on most of the effect of inflation through pricing action elbebit by a delayed basis.
Speaker 4: Further offsetting this cost pressure will be additional saving generated to project on it.
Speaker 4: Last quarter, we announced three million of targeting gross savings in 2022, which we will use to offset planned cost grase, as well as the investment in innovation across our offerings.
Speaker 4: Due to incremental inflation across our cost base, we are now planning a 50% increase in our targeted savings amount for the year.
Speaker 4: We are expecting quarterly sequential margin improvements throughout the year, but the rization of this improvement will largely depend on macroeconomic factor.
Speaker 4: Turning to segment, we are now providing segment level operating detail from print-on oder on financing offital.
Speaker 4: We provide this information to help Investor on the sun of print on oer business excluding financing, as well as fedtal financing business which in the future is expected to become less dependent on Xerox for original shown growth.
Speaker 4: Peter revenue declined 12% in Q1 primarily due to rediction in financing income on operating lease revenue, which reflect lower equipment in store.
Speaker 4: Segment profit was lower by one million of five per centpoint. 6% higher gross profit were offset by incremental costs associated with standing up the business.
Speaker 4: Segment margin of 11% was higher than our full year estimate of a percent to 9% and.
Speaker 4: We expect fedter margin to normalize as volume pickup driving increases in Commission.
Speaker 4: In Q1 fittdtal finance asset well down slightly quarter of-a quarter. Our portfolio run-off outpace origination.
Speaker 4: fedter origination volume decline 10% year-over-over-year, due primarily to a decline in Xerox's product origination of 22%, which were negatively affected by product availability constrained.
Speaker 4: Indirect origination, which includes SER. partaterialas on non-xerox vendor grew 7% yearover-overliyear due to growth in new deiorationship on non-xerox originations volume.
Speaker 4: Print on oer. Revenue declined 2% in Q1, primarily due to equipment sales, partially offset by modest improvement in post-sales revenue, as previously discussed.
Speaker 4: The segment generated a loss due to lower equipment sales, a less profitable mix of equipment in install, higher supply chain cost, lower margin on postlessales revenue on incremental cost associated with new business.
Speaker 4: Regarding capital structure, we ended Q1 with a net core cash position of our around found hundred million. two point nine billion of the four point three billion of our outstanding debt is allocated to on supports the fedtal lease portfolio.
Speaker 4: The remaining debt of around one point four billion is attributable to the core business.
Speaker 4: That primarily consist of senor unsecured bonds on finance assetts sequitisation.
Speaker 4: We have a balanced bond majority ladder on no unsecure majorities for the remainder of the year. In the first quarter will return under 59 million of cash back to shareholder whichreturnnal with acquisition on investment comprisise the majority of the two million quarter of the quarter decrease in net co cash.
Speaker 4: Finally I will address guance. We are maintaining our guidance of at least seven point one billion of revennew ATT to currency and free cash flow of at least fourhundred million. Our free cash flow guidance exclude cash costs associated with this quarter product supply termination charge, as it is a onetime in nature on obscure the true cash generation potential of our operation.
Speaker 4: Our business faced significant challenges that present a degree of risk to our outlook, but we continue to expect supply chain improvement on the broader return of employee to offices in the sum half of the year.
Speaker 4: Additionally, we are implementing contrroactive measure in response to geopolitical uncertainty on inflationaryrate pressure, including a reallocation of equipment on supplies from erussia to market facing significant backlogs on additional project on saving to offset infationaryrate pressure.
Speaker 4: We will now open your line for you, UN it. Thank you, And ladies and gentlemen, if you have a question, simply press star one on your telephone. To withdraw the question, press a pound or hash key. First question comes from Ananda bara, with lo capital. Your line is open.
Speaker 5: Good morning guys. Thank taking the question and good to see the revenue is continuing the trend that's expected as well.
Speaker 5: I have just a few for me. If I could Zvi, how should we anticipate the pacing of the largerin recovery as we move through the year, and maybe for both gross margin and operating margin and OpEx?
Speaker 6: Yes high and on that, good morning. So, as you have seen it, we facehas some inflationary cost pressure during quarter one on, as we mentioned it, macroeconomics on the government. We are expecting them to improve time. This is driven by two driver. Number one would be the back to officee. In quarter 1, generanuary and febru activity was impacted by ommicron in some of the geograpoffice but we saw marked recovering. So we are expecting a gradual rocovery on back to aoffice. This is as well signal by expon data upon showing that employees are going back to the office. March for the good data point on, we were expecting this to continue in quarter two on gradually improving quarter three quarter for as well, So that regarding back to aoffice and print volume, we are getting supply chain. We monitoring this very closely. As we mentioned it in our code in Q4 during Investor, we were expecting to have gradual improvement during the second half of the year on. We are still monitoring see some improvement in the situation.
Speaker 6: But this has impacted strongly our equipment growth margin because a mix of products that we have recognizede or installed during this quarter was not the traditional high mix, high margin mix of products that we could have in the total. So, in summary, we expect gradual improvement in margin. Quarter two will be an improvement of our quarter 1, but we are expecting that the second half will be better than the Tal, the first half.
Speaker 5: Okay got it. That's helpful. And just on supply chain, was it, was it tougher than know? I know with increased fuel RO costs that was certainly incremental, but just in general they sort of excluding the fuel costs and maybe yes, So the transportation that was impacted by that. The supply chain: how supply chain availability relative to your expectations as you went through the quarter.
Speaker 4: So the supply channe to element one element is capacity, element is cussed. So from a capacity point of view we were impacted in quarter 1, as I mentioned it on new, So that the equipment revenue was done, or year-over-year on we have not achieved the mix of equipment, I course at high margin, a three product equipment that we are expecting. You saw the strength of the backlog as well. Our backlog is still growing 22% quarter over quarter, close to now more than a quarter of revenue that we have here. So we are quite confident in our ability to get orders from customer on having this backlog. The in all of our timeso quality of the backlog is also strong. We are currently monitoring you how long it take in abverage to ininstall product and I would say close to 50% of our backlog is less than 60 D or so we turn it, But at the end of the day we don't have the equipment we are expecting in order to close a gap in equipment revenue.
Speaker 6: So it touch capacity adding cost. We have add during the first half- it started last year but during the first half- cost pressure, infineral pressure on a specifically continany cost, but also in country it could be I would say freight truck train cost pressure. Here we are expecting this to ease- you read as we read as well- you some information we regardgetting that consumer demand could decrease in this small half of the year. It should give more capacity on potentially price rediction for the type of the amount of continany costs that we were expecting.
Speaker 5: That's really helpfulwell, I'll see the loy. Thank much, Thank you, I don't know. Your next question comes from every doing with Morgan sany, your 90 open take morning guys. Thank you for for taking my questions I to here as well, maybe just to start. Maybe hn this, this would be for you. You know, in the- I think you- part ofyourearnings deck and you alluded to it here in the prepared remarks, I felt like there is a bit of a tone shift in your and your comments on monetizing or realizing shareholder value from some of your investments in innovation, just just talking about increasingly looking to do strategic reaction. So am I correct in saying that and maybe can you just parse that out, maybe one level further, just in terms of what that could actually mean in terms of, in terms of potential actions you could take or timing or anything along the FS and not I would follow yeah Don,' if there was a shift. That paall, I don't think there's a ift. youknow we're continuing to fund the investments and innovation.
Speaker 3: We know it's margin dilutive in the quarter. We're launching new products and businesses. We spoken about what we're doing at lq and LM and at novelity, novelity being the latest one in predictive maintenance where we have our- we have already two clients and we have a pilot going with how to supply. Going forward, we're we're going to continue to look at monetizing these investments, like we said, through strategic transactions, and it could take form of a minority investment, a sale of partnership, a merger of our businesses. We stated that we want these transactions to create shareholder value by providing our new businesses access to capital and speed a little bit of. We see you and I spoken about also the Analyst Day.
Speaker 7: Okay great, that's really helpful. And then maybe maybe a one for you. And just to follow up on onondjust question, I appreciate the color that operating margins, or margins and generally, should improve sequentially through the year- second half better than first half, but we're now starting obviously off of a lower base Q1 than was expected. So is it possible that operating margins could be down year-over-year? I know you guided them to grow last quarter, So just any color that you can share on how we should maybe think about the year-over-year change in margins, realizing that there are some macro factors that could impact that. And that's it for methankyou.
Speaker 6: Yes So that the good point hereic here, which is OK macroeconomics, environment- is something that we are monitoring very closely. So far, the leading indicator we have on the page volume, are positive, based on what we have seen. keepy point for us would be to address the supply chain challenges that we are facing, quarter 1, and being able you to address the cost pressure. As you have certainfin ly noted it, we have increased our internal of the goal around projectct. On it, where the proct only as a goal of roundhundred million of cost, gross cost savings, this year we have increed by 50%. So if you numberber of projectct only, it is much more on cost cutting type of program. This is more the DNA on how the company is addressing the cost based on some of the challenge when we face them and ensuring that we can still deliver the guideance on whatadvenue on free cash flow. So so far.
Speaker 4: Assuming the macroeconomic environment trend kane- we did not comment too much- had a limited impact here on- we will also be able to redirect some of the products outside of the trend on Russia towards our geographies. So I will say, assuming this economic environment on macroeconomic trend lineed with what we are commenting here, we should see the gross margin improvement on zabidd to achieve or being close towardsas the goals that we for this year.
Speaker 8: Great Thank you are. Your next question comes from seamic strategy where J P Morgan your line open. Thanks for taking my question and good morning, I guess, if I can just follow up on the last question. There you talked about the additional savings coming from project own it, but really is a difficult time, particularly where inflation is to drive additional savings. Maybe, if you can give us a bit more color, are the sort of projects that were sort of far away from commercialization that you are trying to pull back on, like what is the source of these additional savings that you are targeting, particularly the time where it does look a bit more tougher of an environment to drive those savings and have a follow up, Thank you.
Speaker 6: Yes we will. Good morning, some ex. So we will look at the on tiioscope, the cost base, but specific focus on what we call infrastructure cost. On also the ability to negotiate. We renegotiate some of the costi mentioned: the freight cost, on the ability to see VIS and also cost. We see today if this cost will decrease during the second half of the year. But also another items that I did not touch around: the IT's. You have project only. You addressthink the cost point, but some of the inflation that we are seeing here we as it, we pass that back to customer. So we have done last year some price increases on what we are doing currently as well, these to plan on certain product, on the services that we are here, additional price point So we can offset some of the inflation in ation or cost pressure to customer as well.
Speaker 4: But the produject on is not, you know, specifically directed to. I would say, how ask 1, why 1? We look at the out ire cost B, which credit I mentioned, infrastructure cost, co press fight cost and for my follow up, I think at the Analyst that you mentioned that your target in terms of where bid volumes can get to sort of in the recovery is the is like 80 pocent number and you talked about improvement here in bothst sale driven by some of the don't work. So maybe if you can ballbark where you are in terms of be volumes related to the 80 pocent target today and the follow up there is, you also have a big backlog on the equipment side, like: can you, are you able to get a sense of how that maikes is or whether equipment demand is coming in higher and a lower and compared to prevent them IC through your backlog?
Speaker 6: Yes So 2, good question. I So peally we are ING of gradual improvement. Just as, at the point, March was one of the IR smalls that we have had since the pandemic. So we still see the number. We monitor very strongly or very directly of correlation between vacination rate of the presence of coit, vacination rate, presence in the office on paid volume. This correlation still stick and clearly, after omomeicron wave in general, February was over, we saw people going back to the office. We saw direction of manager on CEO asking ATE to be back to the office. We see that day today with customers and we are monitoring this on. So see positive trend. What in the direction? So, as I mentioned it, we are expecting water two to improve gradually, modirectly and then just going to half house. Well there.
Speaker 4: So that's for the page volume. At the same time as we are also gaining market share, which means our me for presence here is also increasing, which give also additional revenue coming from the market share gains that we have.
Speaker 6: Commenting on the backlog just to share with you. So the data point is for than 22.00002 million, more than 20% increase, quarter of quarterclose to I would saytwo cent three time the usual backlog on. I was say: good sany, good quality of the backlog, with a little bit less than 50% of the backlog being less than more sorry, less than 60 or so. That means we are installing it quite quickly. Regarding the mix of the backlog on the profitability on, this was one of the key driver of the gross margin erosion. Usually we have around 50% of the backlog being on our a threeree product where much higher. So this is one of the reason the mix of the margin mix that we have been able to generate on the installed had been impacted in a quarter one So again, very fluid situation. Main driver of the backlog is still.
Speaker 6: You know we see a shorttage of some compent on speically, specifically seven chips that we're waiting for. Thank you, Thank you, Thank questions and your's Thank you. And your next question comes some Jam soa with City Group. Your line is open. Thank you. Both of you mentioned additional actions on the project on it. You know this program has been quite successful, So can you maybe be explained your us or give some examples of what some of these additional actions are? Oc my just kind of want to get a graph for understanding what the new actions are. Project on it, because the examinples, because on the path and just kind of wondering, we're off, do do find and more savings Jim, I wouldn't you the term where we find more savings. That you're right. We've been very successful and usually we readat our project on a targets every year and it's a philosophy where we promote continual process improvements.
Speaker 3: And what we plan to do is this additional 15 million and gross cost savings and where it comes through is flow through of our in flight initiatives. If there more we can do, there is are more. There are more investments in it that we can do to go get it cross functional operating, operational efficiency projects E all things that aren't light that we're going to and we're looking at growing and we're looking at going faster. Course there could be some labor actions that are involved: overhead infrastructure and then investments in our products and our services and even internally- and we look at them in- there's things that we can hold off as supply chaine is as it gets better, going forward, but the plans aren'in place to go after it and definitely you'll be seeing some of it in the second half of the year. So but there's no, we don't look at as something. It's always continuous improvement.
Speaker 9: Okay then the follow-up maybe for hobair B. can you talk a little bit about the change interest rate environment? You know zerox is a very big and complicated company, whether it the debt obligations, your financing business or even your company pension accruales. I know those rules have all changed a lot of how should you think about a raising or higher interest rate environment that impact on that on your company or cash flows? Thank you.
Speaker 4: Thank you Jim. So good question. So regarding interest rate on the pressure on our own envirnment sociated is quite simple. The first thing is as you know we have thatbt the vast majority of the debt. leveal C is ready to the financing business to fiture on this det is associated to the leasing or track of financing contract with this customer. So the vast majority as you know we are now securityizing. Securitizing is debt which means that debt will be. A line of the cost of the capital will be aligned with the market cost. But we have also as well the ability to pass the price back to customer. So when rate cost are increasing whereable as well to pass the costregarding core thatt. So the remaining part of the debt we have as you seen it in our debt plder. No obligation for this year so.