Good morning, and welcome to the Xerox Holdings Corporation Fourth Quarter 2020 Earnings Release Conference Call hosted by John Visentin, Vice Chairman and Chief Executive Officer. He is joined by Xavier Heiss, Chief Financial Officer. During this call, Xerox executives will refer to slides that are available on the web at www.xerox.com/investor.

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. After the presentation, there will be a question-and-answer session.

[Operator Instructions] During this conference call, Xerox executives will make comments that contain forward-looking statements, which by their nature, address matters that are in the future and are uncertain. Actual future financial results may be materially different than those expressed herein.

At this time, I would like to turn the meeting over to Mr. Visentin. Mr. Visentin, you may begin..

Good morning and thank you for joining the call. I hope everyone is safe and healthy. Times of adversity require working in unison, and I couldn’t be prouder of the way our team came together.

We put our strategy to the test in 2020, demonstrating we can deliver positive earnings per share and free cash flow, while protecting our people, returning capital to shareholders and continuing to invest in our future. The team’s discipline allowed us to turn on a dime, tightly controlling expenses while steadfastly supporting clients.

To summarize the full year results, GAAP EPS from continuing operations totaled $0.84, down $1.94 from 2019 and adjusted EPS was a $1.41, down $2.14 from 2019. Operating cash flow from continuing operations was $548 million, down $696 million year-over-year, and free cash flow was $474 million, down $705 million year-over-year.

Adjusted operating margin was 6.6%, down 650 basis points year-over-year. We generated $450 million in gross cost savings, meeting our target for the year. Over the last 2.5 years Project Own It has generated $1.4 billion in savings, freeing up cash to reinvest in our operations, targeted adjacencies and innovation.

We returned 112% of free cash flow to the shareholders in 2019. And we accomplished all of this, while revenue declined to approximately $7 billion, a decrease of 22.7% in constant currency from the prior year, as a result of office closures in practically every geography in which we operate. The impact of the pandemic continues.

We're optimistic about the vaccine distribution and advances in testing and treatments though the pace of the economic recovery and office reopens remains fluid. While we saw sequential improvement over the last two quarters, we don't expect a return to growth in the first quarter.

In 2021, we expect revenue to be at least $7.2 billion in constant currency, operating cash flow from continuing operations to be at least $600 million and free cash flow to be at least $500 million. We believe this is achievable even in the unlikely scenario businesses don't start reopening in a meaningful way in the first half.

The benefit of a solid strategy is it’s flexible in its application, yet strong in its foundation. Our four strategic initiatives, optimize operations for simplicity, drive revenue, re-energize the innovation engine and focus on cash flow and increasing capital returns remain at the center of what we do to deliver results for all stakeholders.

Let me walk through the changes we are making to the business to drive organic growth. Project Own It has been critical to fund investments by generating savings and there is more to do here. We plan to save $375 million, as a result of Project Own It in 2021.

Through robotic process automation, we have streamlined routine tasks, including managing service tickets, updating asset data and processing customer billing and vendor invoicing. In the fourth quarter bots processed more than 1.8 million transactions, up over 300% year-over-year.

RPA’s potential to deliver savings and efficiencies is now part of our go-to-market strategy. We are piloting our RPA services with clients, supporting loan application processing, targeted mail campaigns, document management for legal clients and more.

There is opportunity to offer this capability to small and medium sized businesses to help increase their efficiency and reduce costs by automating operations. By unlocking the opportunity within existing and new businesses, we will increase the breadth of our offerings, reach new customers and drive organic growth.

Our Printing business is second to none. IT services delivered organic growth in 2020 and is gaining traction with small to mid-sized businesses. Within the next 12 to 18 months, we plan to stand up three separate businesses, Software, Financing, and Innovation, as we continue to invest in them to support clients.

The Software business will bring together expanding capabilities to support client’s digital needs and will report to Steve Bandrowczak, our President and Chief Operations Officer. Late last year, we acquired CareAR, an enterprise augmented reality business that offers live virtual assistance technology.

CareAR’s initial technology is focused on modernizing field service, customer support and other IT services. Today ServiceNow is collaborating with Deloitte to integrate the CareAR platform for ServiceNow into the operations, service systems and support workflows for joint clients.

The software business will also include DocuShare, our cloud based content management system, XMPie, our multi-channel marketing software, and other software offerings such as the Xerox Content Hub, we launched late last year. This new offering integrates XMPie and turns Xerox multifunction printers into content creation stations.

SMBs are seeking enterprise level content management systems that allow easy access to documents, no matter where a person is working. Our newest release DocuShare Go is designed for the SMB. It's multi-tenant infrastructure offers automatic capabilities, and a SaaS, pay-as-you-go model for single or multiple users.

Also launched was a new version for enterprises, offering more capability for on-premise users and addressing their need for increased controls and security. Xerox Financial Services or XFS, will become a global payment solutions business with a new leader, Nicole Torraco, reporting to me.

XFS previously provided financing mostly for Xerox equipment to support our sales team. Looking ahead, it will offer financing for technology, office equipment and more for third parties as well. Fully utilized, XFS will expand our customer base, create potential cross-selling opportunities and position us to support SMB.

We've previously shared our focus on the SMB, a large and growing part of the business community whose needs for IT services increased with the shift to remote and hybrid working environments. Our IT services business, now operational in the US, UK and Canada delivered organic revenue growth in 2020.

We see increased opportunity here as we enhance offerings with new security and automation capabilities, and leverage new and existing partnerships, including expanded partnerships with Dell and Lenovo, allowing us to grow our geographical coverage and IT services offerings.

Despite global office closure and widespread economic impact of the virus, Xerox regained the top spot in total equipment sales revenue market share in our territory, held the number one position in both mid and production segments and took share in entry.

Demand within government accounts has been a key driver, resulting in year-over-year equipment sales growth in the US Enterprise business. We believe the capability, security and broad selection of apps on Xerox devices puts them ahead of competitors, providing clients with a seamless experience that increases their efficiency.

In the fourth quarter, the production portfolio had major updates across all segments, addressing professional print shops need to extend their business to new customers and enhance productivity. One example is the Baltoro’s new color accelerator add on that allows for more applications, while saving ink.

The Baltoro holds a top market share in the cut-sheet production inkjet class. Digital print enhancement increased profitability, providing clients with higher margins through increased offerings. Our suite of production products offers the widest range of colors and embellishments.

And we're making it easier to take advantage of this opportunity with a new A3 device, the C8000W, introduced late last year that represents the most affordable entry point into this lucrative print market.

In 2021, we are continuing to innovate in this portfolio, adding workflow automation, machine learning, artificial intelligence and remote services to make our clients, employees more efficient, while maintaining security. For example, machine learning will enable devices to recognize individual patterns and make timesaving recommendations.

In Innovation, we have made some strong progress over the last 2 years, developing disruptive technology that we are beginning to commercialize. That gives us the confidence to stand up a separate innovation business that will be named [Technical Difficulty].

This new business will include the innovation teams in Palo Alto, California, Webster, New York, Cary, North Carolina and Toronto, Ontario. The PARC business will be led by our Chief Technology Officer, Naresh Shanker. Our 3D metal printer is a breakthrough technology.

Localized 3D printing can improve resiliency, flexibility and responsiveness of supply chains, by enabling localized production of end use parts. And their liquid metal technology uses off the shelf wire, which is safer, more cost effective and requires less post-processing than metal powders.

In December, we reached an important milestone with the first installation of our Xerox Element X 3D [ph] liquid metal printer at the Naval Postgraduate School, in Monterey, California.

The Xerox solution will be a key component of the school's efforts to use additive manufacturing to sustain the Navy's mission-readiness, agility and reach across at sea, land and air operations. This is a strategic partnership for NPS, which is looking to lead large scale adoption of additive manufacturing throughout the US Navy.

Similarly, with industrial IoT, the combination of low cost sensors, cloud computing and data analytic software has the potential to advance sustainable practices, limit equipment downtime, improve safety through predictive maintenance and provide increased situational awareness.

These are the areas where PARC developed fiber optic sensors and solutions are gaining traction. PARC has worked with VicTrack, a state-owned enterprise in Victoria, Australia, to pilot a new technology that remotely monitors the structural health of critical infrastructure, such as bridges in real time.

The initial trial of our solution proved successful, and Xerox is planning broad commercialization, given the increasing risk profile and safety issue caused by aging infrastructure across the globe. Other IoT sensors built by PARC are part of a groundbreaking project by the US Defense Advanced Research Project Agency to study the oceans.

In Cleantech, the team is developing a solution that has the potential to cut energy consumption of air conditioners by up to 80%, reducing greenhouse gas emissions and improving indoor air quality. At the end of 2020, the team completed a proof-of-concept prototype, and validated its operational principle.

Now, we are working to build the first alpha unit by the end of 2021. Serving as a sample for potential partners to assess and provide product requirements for our beta units to be completed by the end of 2022.

Technologies such as AI, augmented reality and virtual reality developed at PARC also will be rolled into CareAR as product roadmaps and other parts of our portfolio. To enhance our innovation ecosystem and further capitalize on the deep knowledge of experts at PARC, we are establishing a $250 million corporate venture capital fund.

This fund will invest in start-ups in early and mid stage growth companies, aligned with our innovation towers and targeted adjacencies such as IT services, software and AI. The corporate venture capital fund will act as a bridge between internal and external innovation and commercialization efforts.

Building an ecosystem that drives growth through investments, commercial partnerships, and co-development of new technologies. Our strong cash position provides flexibility to explore a wide range of M&A opportunities, invest in existing business and return capital to shareholders.

Over the last 3 years, we returned 89% of cumulative free cash flow to shareholders, exceeding a commitment to return at least 50% annually. The majority of returns came through share repurchases. In 2020, we returned over 100% of free cash flow to the shareholders. We view share repurchase as an investment in the business.

We have a $500 million repurchase authorization for 2021 and plan to be opportunistic in how we use it. We shared a lot with you today. So let me take a moment to sum it all up. Like many others, the pandemic hit us hard. We got up, dusted ourselves and got to work transforming Xerox for the future.

We're taking market share, investing in existing and new technologies and regularly sourcing and evaluating M&A opportunities. Our 3 year plan and four strategic [ph] initiatives remain our roadmap. Our strategy and hard work over the last few years are paying off. We delivered positive EPS and cash flow and returned capital to shareholders.

We are positioned to return to growth in 2021 and expand into new markets. We plan to stand up three separate businesses, Software, Financing and Innovation by 2022 to provide greater focus, flexibility and visibility.

We plan to identify the right long-term structure for each of these unique businesses, which may include utilizing the holding company structure. We bolstered our software offerings with the acquisition of CareAR. We are integrating existing capabilities to offer a broader suite and expand beyond existing clients.

Our RPA technology has moved from optimizing our business to doing the same for clients. Our investments are aimed at technologies targeted for double-digit growth in coming years. These actions along with the corporate venture capital fund demonstrate the priority we are placing on building a strong future.

We are confident in our strategy and our team, whose tireless commitment to Xerox and its growth will always be the key to our success. Now, let me hand it over to Xavier, to cover the financial results in more detail..

Thank you, John. And good morning, everyone. As John mentioned, we are making changes to our business to drive organic growth. And after I review our Q4 financial result, I will expand on our plan for our financing business, XFS on our Innovation business PARC.

In Q4, we sequentially grew revenue, adjusted EPS and cash flow versus Q3, consistent with a slightly improved economic condition we observed. But the year-over-year comparison shows that our financial results continue to be impacted by business closure resulting from COVID-19.

We reported $1.93 billion of revenues this past quarter, a year-over-year decline in constant currency of 19.8%, when excluding the OEM licensing fee of $77 million that was paid to us by Fuji Xerox in Q4 2019, or 22.3% with it.

Adjusted operating margin of 9.5% in the quarter, represent sequential improvement of 210 basis points over Q3 and a year-over-year decline of 460 basis point, excluding the 270 basis point impact of the one-time OEM fee from Fuji Xerox.

The year-over-year decline in operating margin was caused by lower revenue resulting from pandemic-related business closure, which was partially offset by savings from Project Own It on participation in government assistance programs. The impact of which was significantly less than in prior quarter.

Gross margin was 36.2% in the quarter, which is down 350 basis point year-over-year, excluding the one-time OEM fee from Fuji Xerox, or down 540 basis point with it.

The year-over-year decline in gross margin was caused by lower revenue, coupled with less profitable revenue, reflecting lower POS sales and supplies on higher equipment sales and IT services revenue, which were partially offset by benefit from Project Own It.

SAG expense of $440 million decreased $72 million year-over-year and was in line with quarter three SAG expense of $444 million. The year-over-year improvement reflect benefit from cost savings and restructuring associated with Project Own It.

Bad debt expense of $13 million was $5 million higher than prior year and $3 million lower than quarter three. Current bad debt reserve for our trade on finance receivables are in line with our projection. The RD&E as a percentage of revenue was 10 basis point higher year-over-year on lower revenue.

We continue to increase investment in our innovation focused areas, while reducing spend on our print technology by simplifying our portfolio.

Other expenses net of $30 million was $22 million higher year-over-year, as a result of action we took to improve our long-term liquidity position in quarter three and quarter four, whereby we used proceeds from new debt financing to prepay $1.1 billion of bonds that would have matured in May 2021.

Pre-payment [ph] resulted in a net loss of $26 million, but it satisfied virtually all our near-term bond maturities. Our fourth quarter adjusted tax rate was 29.8% compared to 25% in the prior year, so 480 basis points year-over-year increase in adjusted tax rate reserve primary from the change in the geographic core mix of our projects.

Adjusted EPS increased sequentially $0.10 over quarter three and was $0.75 lower than the same quarter last year. GAAP EPS of $0.36 was $0.81 lower year-over-year.

Non-GAAP adjustment included an increase in the amortization of intangible assets, reflecting new acquisition in early 2020 and a lot of early extinguishment of debt that I referred to a moment ago. This increase were partially offset by lower restructuring on related costs.

In Q4, we recorded $29 million of restructuring and related costs compared to $53 million in the fourth quarter last year. Our focus on expense control and working capital drove positive earnings on cash flow in the fourth quarter.

We generated $235 million of operating cash flow from continuing operation in the quarter, which was $129 million above quarter three and down $163 million from prior year, primarily driven by lower net income. For the year, we generated $548 million of operating cash.

Cash from working capital of $123 million was $118 million higher than prior year, due to inventory management on strong collection that were only partially offset by an increase in accounts payable, primarily due to the timing of payments to vendors.

CapEx was $14 million in the quarter and $74 million for full year, which was slightly higher than prior year reflecting spending in IT infrastructure and strategic revenue initiatives. For 2021, we expect CapEx of $100 million supporting our strategic growth program and continued investment in our IT infrastructure.

We spent $203 million of cash from acquisition in 2020 including our quarter four acquisition of CareAR. For 2021, we are modeling spend of $100 million for tuck-in acquisition, primarily focused on further penetrating the SMB space on our target adjacencies.

We also continued to evaluate larger M&A opportunity that can accelerate growth, diversify our revenue base and/or expand our capabilities.

Within financing cash flow and inline with strategic action we took to improve our long-term liquidity, we prepaid $1.1 billion of bonds that would have material in May 2021 with proceeds from a combination of senior unsecured bond issued in quarter three and a new $500 million private securitization of U.S. finance assets that closed in December.

We have no bond maturing in 2021 and only 300 million of bonds maturing in 2022. We repurchased 150 million of share in the quarter, which completed the 300 million of share repurchase that we guided to for the full year. We also paid $54 million in dividend in quarter four and $230 million in dividend full year.

We generated $221 million of free cash flow in the quarter and $474 million for the full year. We are confident in our ability to generate cash and we have a strong balance sheet that supported shareholder return of $530 million in 2020, which was 112% of our total free cash flow for the year.

We ended the year with $2.7 billion in cash, cash equivalent and restricted cash and our $1.8 billion revolving credit agreement is undrawn. Turning to quarter four revenue, equipment sales of $510 million declined 18.8% in constant currency.

While COVID-19 was still impacting our equipment sales on in-store in the quarter, activity in government account in both the US and EMEA was strong. Our US enterprise business had another quarter of year-over-year equipment sales growth to government customers who have sustained strong demand into 2021.

Also in the US equipment sales to graphic communication customer grew sequentially, reflecting strong demand for our Baltoro cut-sheet inkjet system.

In EMEA, large government deals [Technical Difficulty] directionally improved sequentially and we saw higher install of entry mono devices, as well as strong demand for our recently launched PrimeLink light production mono devices.

However, SMB channel in the US and in EMEA were more challenging in quarter four compared to quarter three due to increased restrictions caused by the pandemic.

Post sales revenue of $1.42 billion in quarter four declined 20.1% in constant currency, adjusting for the OEM fee impact, which was in line with quarter three trend, including the OEM fee in the prior year, post sales was down 23.5% in constant currency.

Our post sales revenue is largely contractual and most of our contracts include a minimum fixed charge and a variable charge based upon print volume. Post sales also includes unbundled supplies, paper and other sales which are largely sold through our indirect channels and are more transactional.

Strong year-over-year growth in IT services in our XBS channel in the US on sales from recently acquired dealer outside the US enabled a 13.6% year-over-year revenue decline in constant currency in supplies, paper, and other sales, compared to a 20.2% decline in quarter three.

The growth in IT services sales was driven by demand for remote working, learning solution, as well as IT security reinforced requirement. Xerox Services revenue in quarter four declined 19.4% year-over-year in constant currency, compared to a 21.3% decline in last quarter.

While activity remain challenged as a result of COVID-19, our new business signings and our renewal win rate grew year-over-year in the quarter. On a full year basis, global enterprise signings were higher, which provides confidence in our business recovery plus COVID-19.

Looking at our profitability trend, it clearly shows the impact of the pandemic on our business, particularly in the first half when revenue declined 24.4% as a result of the widespread global lock down and business closures.

Nonetheless, we generated positive cash flow on earnings in every quarter due to the speed with which we were able to react to the impact of the pandemic.

Our ability to react quickly come from Project Own It which has created a more flexible, cost structure on disciplined expense management, allowing us to identify temporary cost savings measures to help manage through the pandemic.

Under Project Own It, we have achieved, approximately $1.4 billion of gross cost savings since late 2018, including $450 million in 2020. We expect $375 million of gross cost savings from Project Own It in 2021.

The progression of improvement in the second half of the year is indicative of the modest global economic recovery, particularly in quarter three. Quarter four is typically our largest quarter and it was again this year. However, our business was impacted by the resumption of lock down later in the quarter as a result of COVID-19.

Now, on to capital structure. Our pension funded status is updated annually on as of December 31st, 2020. Our net unfunded pension liability was $905 million, which include $851 million of unfunded pension liabilities for plan that by design are not funded.

The $307 million year-over-year reduction in our net unfunded pension liability reflect contribution on strong asset return that were partially offset by decreased discount rate. In 2020, we contributed $139 million to worldwide pension plan and expect 2021 contribution to be in line with 2020.

As our debt primarily support our financing business, XFS, I will take a few minutes to discuss some of the structural announcement John spoke to earlier, which includes standing up XFS on innovation as separated businesses. Xerox has a long history of providing financing to our customers, supported by our strong balance sheet.

This is a key business enabler providing customer a one-stop shopping experience and allowing us to maintain long-standing customer relationship. Customer financing also provide additional post sales revenue such as secondary market equipment sales on ever-green payment that extend beyond the initial lease term and carries strong margin.

We will now expand XFS activity beyond financing on lead Xerox equipment. To provide more context on XFS, as of year-end 2020, XFS balance sheet asset consisted of $3.5 billion of finance receivable on equipment on operating lease.

We leverage used asset at a 7:1 debt to equity ratio to date, therefore $3 billion of the $4.4 billion of our total reported debt was allocated to XFS. The remaining debt balance which we call core debt was $1.4 billion.

After netting the $2.7 billion of cash, cash equivalent and restricted cash on our balance sheet at the year-end, our 2020 ending net cash position was $1.3 billion.

In order to more strategically and economically fund XFS financing activity, we raised $840 million in securitization of US finance assets in 2020, which provide much funding at attractive all-in rates.

With respect to innovation, we are encouraged by the progress we have made in developing new technology within our focus area that will result in PARC becoming not only the world-class research center, but the growth engine for Xerox. We expanded our investment in innovation in 2020 and we’ll continue to do so in 2021.

Also, as John mentioned, we are allocating $250 million of our excess cash to create a corporate venture capital fund. We expect to deploy those fund over the next five year to further enhance PARC’s innovation ecosystem.

We are advancing innovation and although we are expecting modest revenue from PARC in 2021, the disruptive innovation had significant long-term revenue growth potential for Xerox. We expect to begin providing investor with additional financial information on both XFS on innovation within the next 12 months to 18 months.

I will wrap up by addressing our guidance. As John mentioned, we are guiding to at least $7.2 billion in revenue in 2021 on to free cash flow of at least $500 million.

In our modeling, we expect a modest recovery throughout the year, but we also expect quarter one to remain challenged due to the COVID-related lock down and business closure we are seeing today.

We are confident in our ability to generate cash and plan to continue our capital allocation policy of returning at least 50% of our annual free cash flow to shareholders. Thank you. And now, back to John..

Thank you, Xavier. Now, let’s open the line for questions..

Thank you. [Operator Instructions] And our first question comes from Ananda Baruah with Loop Capital Markets. Your line is open..

Hi, good morning, guys. Happy New Year. Thanks for taking the question and by the way, not for nothing, you guys are consistently looking at creative ways to - looking for creative ways to create value. So I just wanted to point that out and that you're aware of, but it's worth mentioning on this call.

Could you guys just walk through and look, you did a good job of sort of teasing out a lot of details around the business separation.

But at the highest level, could you walk through John, really what the sort of the philosophy behind doing that is? I know, you're going to say things like, operating efficiency, driving performance, you know, optimizing - optimizing potential and things like that.

But like, in addition to that, you know, driving visibility, potential for, you know, sort of spinning them out, anything else you can give us there would be super helpful. And then I have a follow up..

Yes. Hi, Ananda. What I would say is the revenue trajectory, and the market opportunity that we see in these three areas, it gives us confidence to stand them up as a separate business. And to become a separate business, it will allow each area to be more focused, and flexible in responding to the demands of the market.

We're working to identify and long term structure for each of these businesses, which may include the use of the holding company structure for financing and innovation. And we're looking to share more information in the coming quarters with you..

Okay, great. That's helpful. And I guess this is maybe for Xavier.

When we think about sort of norm - like the structure of what free cash flow generation will look like, you know, in a normalized fashion, you know, so over the next couple of years, is there anything that we should keep in mind with what you guys are doing strategically, that could materially, you know, alter what the cash cycle might look like? As we model - you're giving good guidance through ‘21.

But as we think about, you know, sort of out past ‘21 in modeling?.

Hi, Ananda. Yeah, so good question here. So as you know, it, as we mentioned it in call there, so we are returning to growth. So obviously, revenue will be a key driver here. And at the same time, we want to maintain the investment that we're making currently on innovation.

So if you look at the free cash flow here, obviously, net income driven by revenue is you know, clearly our key area of focus on where we are currently driving on putting our effort. At the same time on working capital, obviously, as you know, we will focus on inventory and payables.

Revenue with AR could drive or will drive, you know, if the revenue trajectory is positive there will drive you know, some slowdown side on the working capital element..

So nothing on working capital that would - that could change, it would be an incremental headwind?.

At this stage, no. If you keep it simple between net income on the working capital, the regional specific items. Revenue is a key item that we want to drive here..

Thank you, guys. Appreciate it..

Thank you. Our next question comes from Matt Cabral with Credit Suisse. Your line is open..

Yeah, thank you. I wanted to dig a little bit into the cost side of the equation in 2021. And I guess Project Own It you guys are talking about $375 million in savings, which I think is in line with the original target you guys gave a few years ago.

I guess, if we take a step back, revenue dynamic have changed meaningfully versus that period of time, and you're guiding for 2021. That's about 25% below where you ended up in 2018. I guess with that in mind, why not look to target cost more aggressively.

And maybe just talking about leverage, you have to adjust the cost base both this year and maybe as we think about 2022 and beyond?.

Hey, Matt. As you know, so Project Own It is a three year program that we put in place and currently this program has delivered successfully more than $1.4 billion savings. Project Own It was also the foundation during COVID-19 to readjust our cost base and we did it successfully as well. So we keep this foundation and we'll build on it.

So if you look at the next year, obviously you look at the overall margin, our margin sequentially improved quarter-over-quarter and speaking about operating margin, and you know, some of the outcome is directly related to the savings driven by Project Own It.

Next year with more revenue coming into the base here, this is what is giving us confidence you know, in the free cash flow guidance that we can grow it year-over-year, and you know it, we have this management team as evidence and demonstrated hard commitment on the cost reduction here..

Got it.

And then just on the situation with Fuji, I was wondering if you just give us an update on where that stands, if your guidance for 2021 includes them exercising the option or not? And maybe just more broadly how we should think about your approach to the Asia PAC region longer term?.

Okay. So, Fuji relationship you know remain at [indiscernible] So we had - you know, we negotiated this transaction last year and you know, it was a relationship - remain relationship with Fuji is one of our main supplier and provide, you know, some of our line of equipment. And we have good relationship on this one.

The second item on the Fuji, as you know it, we have negotiated royalty related to the usage of the brand, Fuji Xerox opted to have this royalty this will translate into $100 million cash payment in 2020 will depreciate it over a two year period, which is a period that we'll use here.

So Fuji Xerox I will say so far in wrap-up relationship from a supplier point of view is going as expected, and our financial modeling are in line with what we’re expecting..

Thank you..

Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is open..

Thank you very much for taking my questions.

My first is just I'm curious, given the stay at home situation and changes in work, work in the office? And that - how are the conversations going with customers that perhaps have contracts up for renewal or that your salespeople are talking to? And maybe if you could talk sort of from a segment basis, as well as geographic? And then I have a follow up? Thank you..

Yeah, Shannon, what we saw in 2020 was an increase in our signings and increase in our retention. And the conversations with the clients are focused on security, document workflow and transfer.

Of course, there are industries that we've done very well in, like in the government industry, the healthcare industry, those are industries, and in the essential services industries while there are others that still remain quite close. Overall, we've had positive conversations with them. And we've been working well.

We've also through it all has been able to increase market share in our product lines, given the focus that we've had on our clients..

Okay. And then I'm curious, Xavier, maybe you can chat about, the $375 million savings from Project Own It.

What are some of the offsets from the standpoint that, you know, you're maybe not under as much austerity as you were last year, given, you know, higher revenue expectations? I know, some of our companies have talked about, you know, an increase in OpEx and return to certain expenses.

So maybe if you could address where Xerox is relative to that? Thank you..

Yeah, Shannon. So, as I mentioned it earlier on the - in the call as well. So, we are permanently focused on our cost base here and we have done on will do what is required in order to ensure two elements here. So first things is gross margin, maintaining the gross margin and looking at gross margin expansion.

On the second element is to protect the investment we are making to support the future - the future of business. And that’s the reason you know, three business standups that we just mentioned before, we would have more focus more visibility as well on the flexibility for these businesses here.

Project Own It is 375 is what we have included currently, you know what we get, but depending on you know, the condition on how - that no, you know what will happen with COVID-19.

But in our model currently with Project Own It on, you know, the methodologies or tools that we're using, we are planning, you know, to ensure that we will deliver the $500 million of free cash flows that we have mentioned in our guidance..

Okay, thank you very much..

Thank you..

Thank you. Our next question comes from Paul Coster with JPMorgan. Your line is open..

Hi, this is Paul Chung on for Coster. Thanks for taking my question.

So first question is, can you just talk about, you know, the health of your VAR and distribution partners? You know, are you seeing any consolidation in the space? And, you know, once demand comes back, the senior partners can ramp up quickly, is this the case? And, you know, do you expect any changes in pricing? Just anything you can mention, on the health of your channel partners? I know you mentioned some leading channel inventory there to kind of shore up liquidity? And then I have a follow up..

Yeah, So as you know, it, we don't have a – I call that a specific concentration in distribution partner by themselves here. So what we see currently, I will say so quite, I won't say normal, but a healthy situation.

Our relationship with a distribution partner, specifically in the SMB market on the reseller had been, I would say, quite positive during the year. As you know it, you know, we went through on, we leverage XFS in order to support some of their activity at the top of the crisis last year.

But at the same time, I will tell you when I was pleased with the outcome, you know, from a cash situation here, where we finished the year from receivable, cash flow positive situation and DSO improvement as well. So no, no specific tension, I could mention here with our distribution, as of now..

Okay. And then my follow up is on your shareholder return guidance of at least, you know, $250 million for ‘21. So assume your dividend doesn't change, kind of leaving no lower case of buybacks in 2020.

Is that the right way to think about it? And then when free cash flow kind of normalizes more so in, you know, fiscal year ‘22, maybe that percentage goes back to kind of historical norms?.

Yeah, I would look at it as we've committed to 50%. But we've also been approved to acquire back $500 million of our stock opportunistically in 2021..

Thank you..

Thank you. Our next question comes from Jim Suva with Citigroup Investments. Your line is open..

Thank you very much. John, you mentioned about the separation of businesses. And then you mentioned the term stand up to businesses a lot.

I'm not overly familiar with that term stand up, I am more familiar with, you know, like tax free spinouts, IPO, SPACS, distribution to shareholders, like what happened with Conduent and carve-outs but then I also realize you do have a shell structure - holding company shell structure also.

So I didn't know, you know, are some of those vehicles more likely, and others less or they all on the table? I'm just trying to kind of figure out what you mean. Thank you..

Yeah, Jim. We're looking to identify the right long term structure for each of these businesses. And we expect to share more information in the next few months. But, you know, as of now, you could argue that they're all on the table..

Got you. Okay.

And headed that? Are you looking at, you know, like, three new headquarters for all of them and board of directors and executive slates and all of that, or is that just kind of a little premature to talk about?.

I think it's premature to talk about it. Stay tuned..

Okay. Got you, very much.

And the last point, probably a CFO question potentially, ahead of you know, the standing up of all these businesses, Are there additional costs that we should be aware of, or cash flow that needs to be earmarked for these actions? Or is it - that will come when the decisions are kind of more put into concrete?.

So that - that's also something and as John mentioned, we are currently assessing you know, what that means, and how we will you know, do this conduct [ph] and the cost that will be associated to this will be communicated later on. We plan during an investor day to share with you more information..

Got you. Okay. Well, thank you very much for the details. It's greatly appreciated..

Thanks, Jim..

Thank you, Jim..

Thank you. We have a question from Katy Huberty with Morgan Stanley. Your line is open..

Thank you. Good morning. In the third quarter, I believe you've benefited from some replenishment of channel inventory.

Can you comment on in 4Q whether channel inventory was a tailwind or a headwind? Then I have a follow up?.

Sorry, It was a replenishment of?.

If you can repeat the question?.

Of channel inventory..

Okay. No, no, no, so I will give you the sequence here, quarter to quarter three what we saw is that the channel partner for cash obvious reasons, have managed your inventory. And I say channel partner is a 2-tier distribution on resellers. In quarter four, we did not see you know, a strong improvement in the situation.

We have, I would say higher set of what we call week of inventory, but well below the norm on the channel inventory is currently are held by the channel partner at the - I won't call that lowest level but at a low level..

And then just as a follow up, some businesses we speak to are saying that they're not going to ask their employees to come back until sometime between say July and Labor Day of this year, does yours 7.2 billion, at least revenue forecast contemplate a scenario like that, are you assuming some improvement in return to office in the calendar second quarter?.

So we are looking at this on when we model this Kathy, we look at, you know, I’ll call that modest improvement during the year, specifically connected with vaccine on how the vaccine will be spread and enable people to be back to work. So this is more like a second half revenue expectation here.

Quarter one, as you know, it will be certainly very similar to quarter four. The vaccine has not yet impacted on. We see modest improvement in some of our leading indicator, but we do not expect quarter one to be strong improvement versus quarter four..

Okay.

And then lastly, how are you thinking about post-COVID normalized print volumes in a world where there is more remote and hybrid work? And this came up in some other questions, how much flexibility is there for you to adjust the cost structure of say volumes are permanently lower by say 10% or 20% versus pre-COVID levels?.

So two point Katy, the first one, as you know it - we have evidence that we can adjust the cost structure of the company to you know the situation and we did it during COVID-19 and we'll keep this focus. So moto on the driver of the team is still the same here.

So one point on print volume, what we see is clearly new ways of working and interestingly enough, we see that when people are working from home, they use as well some of our solutions. So we should not look at this by saying it's only you know, printing from home become personal printing.

They use, you know, some of the Xerox solution, including software solution here. So we see a balance in revenue coming here. Will the print volume be similar to 2018, 2019? It's very early to assess currently. We are watching this. We see the impact of COVID in 2020. And we see as well, quarter-over-quarter how print volume grew sequentially..

Great, thank you..

Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the call over to John Visentin for any closing remarks..

Thank you for your time today and I just ask that everyone be safe and be well..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day..