Good day, and welcome to the Exela Technologies; Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode [Operator Instructions] After today’s presentation there will be n opportunity to ask questions. Please not this event is being recorded. I would now like to turn the conference over to Will Maina.

Please go ahead..

Thank you, Jason and good morning, everyone, and welcome to Exela Technologies third quarter 2020 conference call. I’m joined today by Ron Cogburn, Exela’s Chief Executive Officer; and Shrikant Sortur, our Chief Financial Officer. Following the prepared remarks made by Ron and Shrikant, we will take your questions.

Today’s conference call is being broadcast live via webcast, which is available on the Investor Relations page of Exela’s website at exelatech.com. A replay of this call will be available through November 17, 2020.

Information to access the replay is listed in yesterday’s press release, which is also available on the Investor Relations page of Exela’s website.

During today’s call, Exela will make certain statements regarding future events and financial performance that maybe characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to known and unknown risks and uncertainties and are based on current expectations and assumptions. We undertake no obligation to update any statements to reflect the events that occur after this call and actual results could differ materially from any forward-looking statements.

For more information please refer to the risk factors discussed in Exela’s most recent filed periodic report on form 10-K, along with the associated press release and Company’s other filings with the SEC. Copies are available from the SEC or the investor relations page of Exela’s website.

During today’s call, you will reference certain non-GAAP financial measures. We believe these non-GAAP measures provide additional information on how management views the operating performance for our business. Reconciliations between GAAP and non-GAAP results we discuss on today’s call can be found on the investor relations page of our website.

Please note the presentation that accompanies this conference call and investor fact sheet also assessable on the investor relations page of our website. And now I would like to turn the call over to our CEO, Ron Cogburn, Ron over to you..

Good morning, and thanks everyone for joining us on our third quarter 2020 earnings call. The COVID-19 pandemic has impacted everyone to some degree, including Exela and our customers.

While some uncertainty related to the pandemic still remains, we continue to execute well against our plan for value creation in this current environment, our sequential margin expansion, improving cashflow and rising liquidity in the third quarter is further evidence of our progress.

We are very proud of the more than 21,000 members of our team who have remained committed to delivering world-class service to our customers amid this challenging time. Their hard work, perseverance and dedication during the global pandemic have been truly inspirational and motivates us all to continue pushing ahead.

To our employees we thank you for all your efforts and sacrifice. I would like to begin today by highlighting a couple of slides that help illustrate why Exela is well-positioned to weather the current COVID-19 environment and generate increased profitable growth in the future.

Let’s turn to Slide Number 5, and let’s discuss an overview of Exela’s digital foundation, what I would like everyone to take away from this page is that we are a global leader in business process automation with significant scale. Our services are focused on the automation of billings and payments by providing technology services and analytics.

We serve over 4,000 customers, including 60% of the Fortune 100 across 50 countries, by leveraging our 30 plus years of experience, we deliver mission critical services for very attractive markets. Giving us the stability in these challenging times and significant opportunity for long-term profitable growth.

Moving down a bit further into our business let’s look at Slide Number 6, where we have included a breakout of our revenue across several key categories. This slide gives you insight into the industry verticals we serve and helps to illustrate the breadth and diversity of our revenue mix across geography, industry, customers, and service offerings.

In the second column, you will see that we serve some very attractive markets with the higher growth banking and financial services and healthcare making up 26% to 24% of our revenue, respectively. Moving to the next column, you can see we have low customer concentration. 60% of our revenue is generated from our top 100 customers.

These customers include some of the world’s largest organizations, and we have significant headroom to continue growing from our top 100 accounts. With the remaining 40% of our revenue generated over from the all the other customers, we are focusing additional sales and marketing attention on accounts that have the ability to expand significantly.

We have had success with this strategy with our top 100 customers, we continue to apply these same efforts to grow smaller, high potential customers. Finally, in the last column, we have split our revenue between traditional BPA services and our digital assets. And this is important in today’s environment.

Because of the increased demand for these products and services, we are focused on fostering growth in our digital asset group, which I will discuss in greater detail shortly.

The breadth of our services across a diverse mix of geographies, industries and customers provide stability to our core business, even during these unprecedented times as a key long-term competitive advantage for us. Now, let’s move on to some more recent strategic highlights on Slide Number 7.

In the third quarter, the rebound a customer volumes varied across our industry segments and geographies. However, we are pleased to see a nice sequential uptick in our healthcare business from Q2. We remain optimistic that volumes will continue to improve across our business as companies gradually return to a new normal.

From a demand standpoint, we continue to see some very encouraging signs in Q3. Throughout the pandemic, our dialogue with customers has increased as they analyze the best way to balance reopening physical office locations with enabling work-from-home solutions on a more long-term basis.

We estimate that going forward approximately half of our customers will remain and maintain a certain level of work-from-home environments which we believe will drive greater need for Exela’s services and especially our work-from-anywhere or WFA solution. Our customers work with us to analyze multiple possible outcomes from the pandemic.

They are also seeking greater cost efficiency across their organizations through increased automation. These demand trends are perfectly in-line with Exela’s value proposition and helps us to grow our pipeline in Q3. But just in converting into some great new business wins. Let me give you a few examples.

In our healthcare segment, we recently signed new business wins with large insurance providers and healthcare systems. In the public sector, we added new wins across U.S. and European markets totaling $59 million of annual contract value, which equates to $200 million of total contract value, and has begun ramping this quarter.

Our Digital Mailroom Solution exceeded 100,000 users in the third quarter. We have high expectations for DMR. Given the strong demand that we are seeing and we expect significant growth of this product next year. Turning to our outlook for the remainder of 2020 and 2021.

First I would like to address quickly the current appraisal litigation proceedings as we may have questions about this later. While we are continuing to pursue our appeal, as you can see from yesterday’s in Q filing.

There is no material change or update in the status to report at this time, from what has been disclosed in our prior 10-Q or discussed by us in prior calls. From a business perspective, as I mentioned earlier, we continue to see signs of stabilization in the market. Even as these uncertainties caused with the COVID-19 continue.

We expect customer demand will continue to improve in the fourth quarter, and in 2021 barring another significant outbreak for lockdown. Moving forward, we are focusing our strategic investments in the solutions and target industry segments, where we see the most potential for profitable growth.

One such example is our digital assets, which represents approximately 7% of our year-to-date total revenue and includes services such as our work-from-anywhere solutions, like Digital Mailroom or DMR and DrySign, which is our eSignature platform, as well as platforms for driven by billing and payments, healthcare workflow automation, along with high speed scanning and other equipment.

Let’s turn to Slide Number 9. To help advance our digital growth strategy and more importantly, to focus on the increased demand. We recently created Exela’s Digital Asset Group or DAG. Our Digital Asset Group, which includes the support of our leading technologists, was purpose built to foster innovation and to drive growth in our digital assets.

We currently serve 245 customers with our digital assets solutions, including 50 additional that were added in October alone. And two-thirds of our DAG customers, each generate over $500,000 of annual digital asset revenue. Year-to-date, our Digital Asset Group generated $71 million of revenue.

Now the focus industries for our Digital Asset Group include banking, insurance, healthcare and public sector. Our solutions leverage digital technologies to automate business processes across our customers, human resource department, legal and finance department, and accounting functions.

Now, let’s move to Slide Number [2] (Ph) and let me touch on what differentiates Exela’s digital assets in the market. Our digital assets are supported by our strategic consulting, our product management and our professional service teams with deep domain expertise and referenceable departments across our target industries.

We offer highly flexible contract options such as one to 10-year term licenses for payment processing along with other Exela’s software platforms. Our customers can choose SaaS or per user per month contracts for solutions such as DMR, or DrySign.

And finally, our digital assets are designed to meet the needs of customers of all sizes, from the SMBs to the large enterprises, giving us a significant addressable market to go pursue.

Another critical aspect of our digital assets is our ability to sell these solutions to multiple clients with very little customization or the need for professional services. This model for the solution supports are very healthy growth margins in the digital assets which have been some of our largest in the past.

Our Digital Asset Group is one key area of continuing investment for Exela to increase the competitive advantages we experience today to drive our top line and margin growth over the long-term. In closing, we are pleased with our continued progress in the third quarter, particularly in terms of our improved profitability, and liquidity.

While the environment remains challenging due to COVID-19, we remain positive that Exela will emerge a much stronger Company. The services we provide are mission critical, hard to replicate or take in house and deliver significant value to our customers through our proprietary digital technology, and business process automation.

We increase speed, we reduce risk, we drive greater efficiency, all critical business imperatives for today’s market. Lastly, please note that we plan to host an innovation day in the very near future.

Where our broader management team will provide an update on our business as well as greater detail into our solutions and services and our growth strategy. We look forward to providing you with more detail on that in the next few weeks. I will now turn the call over to Shrikant Sortur to discuss our third quarter results and our guidance.

Shrikant over to you..

Thanks, Ron. Good morning and thank you all for joining us. We are pleased with our third quarter execution and particularly the strong progress we have made including a profitability metric for the second quarter. In my discussion today I will refer to both GAAP and non-GAAP results.

As a reminder, reconciliation to these metrics are available in our earnings materials. Any reference to corresponding periods of fiscal 2019 includes our restated results for the interim period of 2019.

For the past three quarters, we have shared the four areas of focus and impact, namely, one managing the adverse effects of COVID-19 on customer volumes and our financial results. Two, expected impact of the transition revenue.

Three, capacity and cost structure management with a goal of achieving normalized gross margin performance and four, our capital allocation policy focused on improving liquidity and cash flow.

Despite the challenging macro and business environment, we focused on the matters within our control and delivered trans departments across each of these four areas. Our team managed to overcome the negative impact of COVID-19 and transition revenue and delivered sequential gross margin and adjusted EBITDA margin expansion.

We met our Q3 revenue guidance range we have provided on our Q2 earnings call. Let’s start on Slide 12 with the review of our third quarter 2020 results. Revenue for the third quarter totaled 305.3 million, a decline of 18.3% year-over-year. On a constant currency basis Q3 revenue was 302.9 million representing a decline of 18.9%.

Moving to our segments revenue for our ITPS segment was 234.4 million, a decrease of 19.9% year-over-year from 292.6 million in the third quarter of 2019.

Our Healthcare Solutions segment revenue totaled 54.2 million, a decrease of 12.7% year-over-year from 62.1 million in the year ago period, but up a strong 10.2% from the second quarter driven by increased quality. Our Legal and Loss Prevention segment revenue was 16.7 million a decrease of 11%.

Our year-over-year revenue performance mainly reflect negative volume impacts due to the COVID-19 pandemic and our exist from certain customer contracts and statement of work which were not a strategic [indiscernible] which we refer to as transition revenue.

Roughly 30% of our year-over-year revenue declines was attributable to reduce volume from COVID-19, with the balance of the decline from roll off of transition revenue.

We remain on track to eliminate the transition revenue by the end of first quarter of 2021 and remove the standard costs associated with the transition revenue by the end of 2021.As a reminder, we will continue to see a delayed positive impact on our gross margins from declining transition revenue, as costs take a bit more time to the business.

When excluding faster postage and postage handling revenue with either zero or nominal margin, our total revenue was 254.4 million in Q3, up approximately 1% sequentially, from 252.5 million in Q2 of 2020.

Our gross profit margin for the third quarter was up 237 basis points year-over-year, and 190 basis points sequentially to 23.3%, primarily due to better costs and capacity management, as well as a reduction of stranded costs associated with transition revenue.

SG&A expenses for Q3 totaled 42.8 million, down 11.4 million year-over-year, and represented 13% of sales driven primarily by lower professional fee, travel expenses and other costs. We recorded a gain on the sale of our physical record storage business of 9.8 million in the third quarter of 2020 and it is reflected under sundry or other income.

Operating income for the third quarter of 2020 was 4.8 million, compared with the operating loss of 93.9 million in Q3 of 2019. The year-over-year increase in our operating income was attributable to our gross margin improvement, lower SG&A expense and lower depreciation and amortization expense versus a year-ago period.

Additionally, there was no impairment of goodwill and other intangible asset cost in Q3 of 2020, compared with the 97.2 million in the third quarter of 2019. Turning to EBITDA and adjusted EBITDA. In Q3 of 2020, we generated EBITDA of 37.7 million compared to 69.4 million in the prior year period.

Adjusted EBITDA for the third quarter was 48.7 million up 13% quarter-over-quarter. Our adjusted EBITDA margin for the third quarter of 2020 was 16% up 200 basis points sequentially from 14% in Q2 reflecting strong execution of our cost saving initiative and essentially flat year-over-year.

Excluding pass-through revenue, our Q3 2020 adjusted EBITDA margin was 19.1% up to 200 basis points quarter-over-quarter. Moving to Slide 13. This slide illustrates a strong phrases sound progress we made them third quarter improving our margins. Setting the stage for a continued upward trajectory.

As we discussed with you on our last call, our gross profit and adjusted EBITDA margin squeeze a low point in the first quarter of 2020. In Q2, we delivered 148 basis points of sequential gross margin improvement and 190 basis points of adjusted EBITDA improvement, despite a sequential 58 million reduction in our revenues.

In Q3, we generated an incremental 190 basis points of sequential gross margin expansion and 200 basis points of adjusted EBITDA margin lift. Furthermore, despite the 68 million year-over-year revenue decline, we delivered 237 basis points of gross margin expansion and kept our adjusted EBITDA margin stable versus Q3 of 2019.

This positive result our margins is a direct result of our continued laser focus on our ongoing cost saving initiatives.

As we mentioned previously, we also have additional cost saving initiatives that are currently under examination such as work-from-home policies that will extend beyond the COVID-19 pandemic driving reduction in our facility costs as an example. Let’s move to Slide Number 14 to discuss a strategic of that features and our liquidity.

As in the past, the company had originally targeted 150 million to 200 million of sales proceeds from certain non-core assets. Since then we have completed divestitures of 15 million to-date as part of that plan. We will continue to explore and implement additional actions to improve our liquidity.

This includes our plan to complete additional assets sales as targeting, activating the alignment of our businesses to our traditionally working capital light model and executing against our planned cost initiative, including current strategy since it is associated with our transition driving.

We have a plan in place to achieve our near-term liquidity target of 115 million, our total liquidity - 2020 was 77 million. And our total net debt was 1.477 billion. I would now like to close by discussing our fourth quarter and full-year 2020 revenue guide.

For the fourth quarter of 2020, we expect total revenue to be in the range of 300 billion to 310 [billion] (Ph) on a sequential basis, a fourth quarter revenue guidance reflects higher volumes from Q2, 2020 offset by reduction of transitions revenue elimination.

On a year-over-year basis our Q4 revenue is expected to be negatively impacted by lower volumes compared to the fourth quarter of 2019, primarily as a result of COVID-19 and approximately nine million of decline attributable to the revenue contribution from the non-core assets, as well as the aforementioned exit of transition revenue.

For the full-year of 2020, we expect total revenue to be in the range of 1.28 billion to 1.29 billion. I would like to thank you very much for your time today. With that operator, please open the call for questions. .

Hi. Thanks for taking my question, first when I look at the 4Q guidance and the year-over-year decline rate in that quarter versus 3Q, it looks like it is a little bit lower. Could you explain some of the drivers behind that if it is seasonality or maybe just kind of like the lumpiness, the transition revenue, that would be helpful..

Sure Alan, Shrikant here. Let me take that. I would start off, there is still the uncertainties of the COVID environment. Q4 usually we see an uptick with the higher healthcare volumes, we need to wait to see how that will unfold for Q4, that is being factored in for the uncertainty that has.

And then the transition revenue rate we said and it was there in my prepared remarks. We are actually expecting higher volumes, including some of the ramps that we discussed briefly in Ron’s presentation, that is going to be potentially offset by the transition revenue decline for Q4. So we kept it fairly steady with Q3..

Got it. Going to the queue on the cashflow statement, I noticed there was I think a $9 million payment this quarter for the acquisitions made in early 2019.

Can you just go into a bit more detail on what those were and if there is any similar pending potential payments outstanding?.

That particular transaction was related to the software asset that we purchased, back in the day, it was a staggered payout and in Q3 the next installment was due and we settle down. At this point in time, there is nothing that we are aware of in a similar nature from a cash outflow perspective..

Got it.

Just two more from me, I guess first, can you talked about any progress on stranded costs removals in the quarter and any actions or particular lines of service, you might have exited or starting to rationalize in the third quarter?.

Sure Alan. We continue to go down the path of identifying, eliminating whether it is transition revenue or stranded cost. But to be fair, you also saw the announcement round DAG, continued focus on our DMR and all of the other positive things that is happening in the business. Coming back specific to your question.

The transition revenue is at the run rate that we expect it to be related to the stranded costs, yes, we assumed the cost coming up. That is one of the driver for the quarterly increase in gross margins. Obviously, like I said, we do tend to see offsets to some of these costs there.

But coming back to this transition stranded cost once again, yes, we are slow and steady with transitions or the stranded costs are coming out of the system..

Got it.

Did you guys say that the strength for the transition revenues at the kind of ultimate run rate, or did I miss hear you there?.

That is correct. Ultimate run rate..

Okay, so in quarter going forward, there should be a minimal impact on the year-over-year comparison by transition revenue going away..

Correct. Wouldn’t you look at it from a sequential perspective, from a minimal impact. Think about it 2019 versus 2020, there is going to be a bigger impact related to transitions revenue right. Q3 versus Q4 not as pronounced. .

Right, right. I guess my point is by the second quarter you know first quarter, second quarter 2021, it will be gone. But the year-over-year impact should be sequentially less each quarter now..

Correct, yes..

So like what is in the 4Q and in 1Q the transition revenue comping year-over-year will be less impact..

Yes..

And the last question I saw in the queue, I think there is 77 million of liquidity, also in your presentation. So, one, how is that facility availability split up between the AR facility and the RCF? And I have one question after that..

Sure. I think it is very much on Q2 if you notice that 37 or so million, approximately availability of borrowing capacity on all of our global availability. Okay. four million of that is on the AR at this point in time as of that particular date, so not yet. [Multiple Speakers]..

Right. I think I also saw there is letters of credit on the revolver. So it is indeed….

We are netting that our. We are not factoring in any availability under revolver..

Okay, so if it is, the 37 minus four is not available on the AR facility and it is not available on the cash flow revolver where is it coming from?.

We have available on our global facility, sort of the AR we have other availability..

Got it. So what facilities are those, is there anyone that accounts for the majority of that? Kind of like accordion or some other kind of like equipment that….

No, we have available on our international facilities..

Okay..

Yes..

Just quickly on the debt footnote where would I see that, is that just in other..

You will not see the break up, that is why I’m hesitant to give an exact, like I said, you will not see - it is availability. It is not on the debt, but no, you will see it in the growing concern footnote, the net total..

Okay. Got it. I was trying to find where that is in the financial statement..

Yes 30.5 billion is the right number, not 37..

Okay.

But it is not going to show up in the debt, but noted, it will just be kind of off balance sheet basically?.

Correct..

Okay. So off balance sheet availability. Okay, so then starting from 77 million of liquidity as of early November, I know there is disclosure about the minimum liquidity covenants.

So could you just kind of roll us forward on getting the necessary liquidity hurdles to pay the January coupon will also being in good standing with those minimum liquidity covenants? Do you anticipate that all just being kind of like operating improvements maybe some additional liquidity sources externally or maybe like the asset sale or kind of rolling a score to that moment in time would be helpful..

Sure. Given the probable importance of the question. Let me give you a more detailed answer here right. Let me pull it back to our original plan. Of course, this has been on improving liquidity and cash flows. We have covered that in multiple prior earnings call, we have told what the plans are.

We are focused on one, we have a plan in place to achieve near-term liquidity target of 150 million or so right. The focus is also on gross margin in expansion that comes in multiple forms profitable revenue growth, controlling SG&A costs, when it comes to EBITDA margins, not gross margins obviously and that focus has not changed.

In terms of your question around next bond payment. One thing that I can say is, we are certainly operating at a very heightened awareness as we have discussed many times in the past, right. We manage the business almost on a weekly basis, including having a possible liquidity.

Now, we believe in our ability to execute, number one, we have [indiscernible]. But there is another important thing that I want to kind of cover. We need to see the margin dollars to come through those transitions revenue that is exiting. We can take out the stranded cost, improve our cash flows, we are scaling profitable revenue.

What I would like to say is between now and the bond payment we have sufficient runway that we think we will make to get additional liquidity..

The next question comes from David Foropoulos from Unum. Please go ahead..

Thanks for the color guys. Hey just a follow-up on that. To get the sufficient liquidity.

Can you maybe just give us a color on - I know this is a non-coupon payment order, but any color on expectations or free cash flow here in the near-term?.

I think the best indicator is, if you look at our adjusted EBITDA back out O&R that gives you a good indicator of free cash flows. In the non-cash and other charges there is an element of cash payout, but it is not 100% maybe something like severance as part of that.

But adjusted EBITDA less O&R can give you a good indicator of the free cash flow for a quarter. .

So the O&R that the prior guide was 40 million to 45 million for the year. I think you are about 36 year-to-date.

So is that still the best way to think about it?.

Yes..

Okay. So kind of moving on to the divestitures, I think about a year ago, you guys talked about this two your strategy. You have done two - I guess run rate get 150 million to 200 million of proceeds. I guess you are 50 million there thus far.

Is that timeline - in light of the pandemic backdrop are in here and such as that timeline, which gives you only another year, is that still intact here? Or is there any - is that going to be pushed out a little bit?.

No, at least again, we have talked about it enough, but giving a very specific answer, at this point and time we see no reason for the timeline to be pushed out. We are on target, we are staying on track. So when we have more details we will certainly provide but we feel confident about where we are right now. .

Okay. And then another question on the transition rev. That you talked about.

Did you say that was going to - the runoff is complete in Q2 or Q1 of next year?.

Q1 of next year 2021. .

And did you quantify how much I mean, I know you did this quarter, but how much they hit will be and then how much have left to run off there?.

We are looking at annual run rate of 150 million right when we started the year. The Q1 run off was lower than what it was in Q2 and Q3. You can do the math, you will see you know we said the shortfall of whatever 70% came from....

Okay gone back into it there. And traditionally Q4 has been on kind of a heavy if - I remember correctly, heavy software license quarter.

Is that going to be the case this year that kind of expect - could that - I know you kind of said margins are going to be a little bit better is that one of the tailwinds there?.

Yes. The margin being better is obviously we are talking about near-term, not specifically to Q4, I will come back to that in a minute, but you are right David, Q4 traditionally is a strong quarter for us. We see the software sales come through, we see all - there is a seasonality associated with Q4.

We would love to have that back this quarter before as well. But given that we live in interesting and uncertain times, we are unsure as to how that will play out. But there are things in the pipeline that we are hopeful that will come aboard in Q4..

With the uptick that we have seen in COVID cases, have you seen any commensurate hit to the uptick in volumes that you have seen since April, May lows?.

Not yet. Interestingly, not yet. I think with healthcare as you saw there was a quarter-over-quarter pickup in our revenues, right. It is all fueled by additional volume. Again, very uncertain, we don’t want to put something out there.

Let’s say Q4 traditionally is higher healthcare volumes, people are trying to run off of all of your claims, or get done with all of urine procedures. We don’t know how that will pan out this year. Right So that is where it is great and watch.

But coming back, healthcare, in Q3, in particularly in Q3, healthcare, payment processing and DMR our areas where we definitely saw a much higher uptick in volumes, if anything that the -print orders that were potentially down but then we are moving to e-presentment and then customer on-site wherever we serve we are still seeing softness of when then that is dependent on the customer strategy versus bit something being in our control..

Alright. Well I will jump back in the queue here. Thanks for the color I appreciate it..

Yep. No problem. Thanks David..

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Ron Cogburn for any closing remarks..

Thanks, operator. I want to thank everybody for participating today in the quarterly call.

Look forward to seeing your next on call, but in between now and then look forward an invitation from us for Innovation Day, Product Services Day and look forward to talking with everybody then, we would be showcasing all of our solutions and services with a big emphasis on our digital asset group.

Thanks everyone, and we look forward to seeing you next quarter. .

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..