Xerox Holdings Corp Q1 FY2022 Earnings Call

Good morning, everyone. I'm David Beckel, 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 John 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 from those expressed herein. At this time, I'd like to turn the meeting over to Mr. Visentin. Mr. Visentin, you may begin.

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 crisis taking place in Ukraine. Our thoughts are with all those who have been affected. As the situation began to unfold in late February, we took swift and decisive actions to ensure the safety and security of our people. We suspended all but emergency support operations in Ukraine and provided emergency cash grants to the Ukrainian employees through our Employee Relief Fund. Shipments to Russia were halted as soon as the conflict started. We continue to evaluate the situation in this region, and we'll adapt our response, hoping for the restoration of peace as soon as possible. In total, the percentage of our revenue exposed to the Eurasian region is in low single digits. The operating environment was once again challenged in Q1 and will remain fluid in Q2. At the beginning of Q1, the Omicron variant resulted in office closures in our largest markets, affecting page volumes in January and February. Supply chains are still disrupted by COVID-related factory closures in parts of Asia. Inflationary pressure is building across our cost base, including cost of goods sold, labor, and logistics. At this point, we continue to expect supply chain conditions to ease beginning in the second half of the year, albeit at a slower pace than originally anticipated. Return to office trends are improving. As the Omicron variant recedes, page volumes increased, resulting in March being one of the highest months of post-sale revenue since the beginning of the pandemic. 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. Third-party data points to momentum and increasing office attendance and we continue to expect a gradual return of workers to the office in Q2, with momentum building in the second half of the year barring another variant outbreak. Summarizing results for the quarter, revenue of $1.67 billion declined 2.5% in actual currency and 0.7% in constant currency. Adjusted EPS was negative $0.12, $0.34 lower year-over-year. Free cash flow was $50 million compared to $100 million in Q1 last year. An adjusted operating margin of negative 0.2% was lower year-over-year by 540 basis points. Revenue was in line with our expectations. Equipment revenue declined 17.6% or 16.1% at constant currency as expected, with supply chain disruptions limiting our ability to fulfill demand. Total backlog grew 21% sequentially to $422 million as demand for equipment continued to outpace supply. Post-sale revenue grew 1.9% or 3.7% in constant currency, reflecting improvements in print activity. 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. Operating costs in the quarter were higher than expected, resulting in a small adjusted operating loss and negative earnings per share. Going into the quarter, we knew supply chain constraints and investments in new businesses would weigh on our margins. What was unexpected was the magnitude and intensity of inflationary pressure across our cost base and the growth of supply chain costs. We expect the 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 Own It savings. Price adjustments are being implemented, but it will take time to realize, given most of our revenue is contractual. Despite the challenges we face, some of which are new since issuing our 2022 guidance, we are maintaining our revenue and free cash flow targets for the year, subject to our return to office and supply chain assumptions. Xavier will provide more color on guidance. We continue to focus on the same four strategic initiatives that guided us over the years: optimize operations, drive revenue, monetize innovation, and focus on cash flow. Project Own It has become institutionalized and ingrained in our culture, driving each employee to pursue operational efficiencies and excellence in everything we do to help stabilize our profitability and maintain our free cash flow target. Amidst inflationary pressures and a challenging operating environment, we plan to increase our targeted savings of $300 million for 2022 by 50%. These efficiencies will catalyze operating margin improvements as our business recovers from the pandemic and recent supply chain disruptions. Moving beyond the supply constrained environment, we are confident in our ability to grow the Print and Services business. 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. For the full year of 2021, we gained approximately 200 basis points of equipment sales market share and achieved the number one share in our markets. These share gains reflect our differentiated go-to-market strategy and broad suite of product and service offerings. Our services offerings include our leading Managed Print Services Business, integrated workflow solutions, and a growing portfolio of IT and digital services. We continue to deliver innovation relevant for our customers, most recently refreshing our low-end A4 desktop cloud-connected models and A3 entry models with significant improvement in productivity and enhanced security with McAfee Embedded Security, all of which supports our award-winning Workflow Central platform. Yesterday, it was announced that our Managed Print Services Business was the sole winner of the Buyers Lab 2022-2023 PaceSetter Award in comprehensive NPS programs from KeyPoint Intelligence. This award reflects the breadth of our NPS offering as well as our cloud-first development path pivot to at-home workers and inclusion of dealer channel partners. IT and Digital Services will become a more significant part of our Print and Services Business over time. IT Services is a natural adjacency for Xerox, given the expansive direct sales force deployed through XPS, our unit serving small and medium-sized businesses. The SMB IT Services market is attractive as it is growing mid-single digits, competition is highly fragmented, and our IT Services business scales efficiently. In Q1, IT Services grew more than 20% on an organic basis and we expanded our geographic reach by acquiring Powerland, a leading IT services provider in Canada. Our IT Services business is experiencing strong interest in some of the newest offerings, such as robotic process automation, RPA, data solutions, and managed security. We launched our commercial RPA business only recently and are already seeing repeat business from customers wanting to add bots to improve operational efficiency. Our bots help customers with invoice processing, order entry, financial reporting, and document classification. And the pipeline of use cases continues to expand in Q2. In Q2 we will offer an AI solution that automates data extraction from high volumes of unstructured documents for our legal clients. Xerox Digital Services offerings are resonating with new and existing managed print services clients. These offerings help clients navigate their digital documentation transformation by providing intelligent document processing and personalized customer communications. For Capture and 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%. We continue to invest in FITTLE, CareAR, and PARC. In Q1, FITTLE increased its focus on providing financing solutions that extend beyond Xerox equipment and services. This quarter, FITTLE added 24 dealers and grew indirect origination by 7%, including a doubling of non-Xerox product. This growth was offset by a 22% decline in Xerox direct originations for the quarter due to an equipment shortage. FITTLE remains on track to achieve the financial targets provided at our Investor Day. As a new business within Xerox, we expect CareAR to make consistent progress on KPIs that will drive strong revenue growth for the year. In Q1, CareAR grew its pipeline by $22 million or 34% sequentially. It added three system integrator partners, 47 new customers, and expanded ACV at another 60 customers. CareAR now serves clients across 13 industries and added solutions for banking, education, oil and gas, and pharmaceutical clients during the quarter. CareAR also announced the launch of CareAR Instruct, its second major product offering and a key competitive differentiator. Instruct expands on its flagship Assist product to incorporate self-service capabilities for service agents and end users of complex devices. Instruct utilizes a full range of CareAR’s IP, including AI, AR, document storage and content creation, to provide critical insights. At PARC, Eloque, Elem, and Novity target significant market opportunities, and each continue to gain traction within their respective markets this quarter. In Q1, Elem announced partnerships with Vertex, Oak Ridge National Laboratory, and Siemens. These partners are using our 3D printers and working with Elem to expand its industrial use cases. Eloque plans to triple the number of bridges deployed in Australia during the first half of the year. It's also making headway in negotiations with several U.S. states and European countries. Novity is a newly launched company that will use PARC's IoT expertise to commercialize a predictive maintenance platform for process manufacturing. Now that it has a healthy pipeline of companies in the manufacturing and oil & gas industries, it has signed two customers, including a pilot at Pennsy Supply, one of the leading manufacturers of building materials in the U.S. We continue to fund investments and innovation and launch new products and businesses. Going forward, we will increasingly look to monetize investment and innovation through strategic transactions. These transactions can take the form of minority investments, sales, partnerships, or mergers of our businesses. We expect these transactions to create shareholder value by providing our newer businesses access to additional capital and domain expertise. We delivered positive free cash flow this quarter of $50 million based on improved working capital discipline and returned $159 million of cash to shareholders through dividends and buybacks. Notwithstanding the increasingly challenging operating environment, we expect to deliver at least $400 million of free cash flow this year while continuing to invest in new businesses. We will return at least 50% of free cash flow generated to shareholders. Additionally, cash may be used for value-accretive M&A and debt reduction. To recap, our backlog remains strong and page volumes are moving in the right direction as offices reopen. Supply chain challenges and broad-based inflationary pressures will challenge us to be smarter and more predictive as we remain committed to the guidance issued at the beginning of the year. With that, I'll hand it over to Xavier.

Thank you, John. And good morning, everyone. As John mentioned, operational challenges persisted this quarter. We continue to face constraints on our ability to deliver and install orders and the cost of fulfilling those orders has increased. Additionally, we altered shipments to Russia, a market that comprises a low-single digit percentage of our revenue and profit in 2021, and we are seeing inflationary pressure across our cost base. On the other hand, revenue was in line with our expectations and demand for our products and services remains strong, as evidenced by another increase in our backlog to $422 million in quarter one, which is close to three times higher than prior year levels. Post sales grew in actual and constant currency due to growth in IT services and growth in supplies on paper, which reflects higher printed pages. We're also benefiting from growth in our page-volume driven contractual business, which continued to correlate with the return of workers to the office. Turning to profitability, similar to recent quarters, lower equipment sales, a less profitable mix of equipment installed, higher supply chain costs, lower margin on post sales revenue, and incremental costs associated with new businesses drove our profitability lower year-over-year. In addition, we are seeing the effect of higher inflation across our cost base. Gross margin declined 390 basis points in the first quarter, with 280 basis points of this decline being attributable to supply chain costs and capacity restrictions, including higher freight and shipping costs and constrained availability of higher margin A3 devices. 110 basis points of the decline related to investment to support future growth, lower royalty revenue from Fujifilm business innovation, and lower government subsidies. We continue to expect supply chain headwinds to moderate beginning in the second half of the year. Adjusted operating margin of negative 0.2% decreased 540 basis points year-over-year, reflecting lower gross profit, higher bad debt expense, prior year benefit from temporary government subsidies on furlough measures, and investment associated with our new businesses. These headwinds were partially offset by lower selling expenses resulting from lower sales volume on Project Own It savings. SG&A expense of $455 million increased $7 million year-over-year. The increase was primarily driven by investment in new businesses, prior year benefit from temporary government subsidies on furlough measures, higher bad debt provision resulting from the geopolitical environment in Eurasia, and acquisition costs. These increases were partially offset by savings from Project Own It, lower sales and marketing expenses, and currency fluctuations. R&D was $78 million in the quarter or 4.7% of revenue, which was an increase of 40 basis points as a percentage of revenue year-over-year. The increase was driven primarily by continued investment in our new businesses, this quarter specifically CareAR and 3D, Cleantech, and IoT businesses at PARC. Other expenses net were $53 million higher year-over-year. The increase was primarily driven by a $33 million charge associated with the termination of a product supply agreement. This charge reflects a payment of a contractual consolation fee plus interest on related legal fees, which we expect to more than make up for over time via lower supply costs. Additionally, $30 million of the increase related to higher non-service retirement-related interest costs due to an increase in interest costs associated with higher discount rates on higher settlement losses. The first quarter adjusted tax rate was 52.9% compared to 27.7% last year. Since we generated a pre-tax loss, the higher tax rate reduced our tax obligation. This reduction was driven by benefits from additional tax incentives and the lower indefinite reinvestment tax liability due to the recent acquisition. Adjusted EPS of negative $0.12 in the first quarter was $0.34 lower than in the prior year. This decline was primarily driven by a year-over-year reduction in adjusted income. GAAP EPS of negative $0.38 was $0.56 lower year-over-year due to lower GAAP net income. Turning to revenue, total revenue was in line with our expectations, albeit with a less favorable product mix, with equipment sales decline offset by modest improvement in post-sale revenue. The underlying fundamentals of our business remain strong. Equipment orders once again outpaced supplies, resulting in a community backlog this quarter of equipment and IT hardware of $422 million, a 21% increase quarter-over-quarter and close to three times higher than prior year levels. For context, our backlog is now larger than four quarters worth of equipment sales. Despite continuous growth in our backlog, the quality of our backlog remains high. Close to half of our backlog is less than 60 days old. We have seen minimal cancellation of orders thus far, as customers are often willing to extend their existing leases while waiting for new equipment. Further, we saw an uptick in volume on page-volume-driven post-sale revenue in March, as we returned to the office following the Omicron variant. The continued correlation between page volume and workplace attendance and strong growth in usage-based post-sale revenue, such as paper and supplies, suggest workers are printing as they return to the office as we expected. Equipment sales of $314 million in Q1 declined roughly 18% year-over-year or 16% in constant currency. The decline was primarily driven by continued supply chain disruptions, which limited our ability to fulfill demand, as installations were down year-over-year across all product types. High margin mid-range products continue to be the most impacted by supply chain issues. Post-sales revenue of $1.35 billion grew 1.9% year-over-year or 3.7% in constant currency. Growth was driven by IT services which increased more than 20% year-over-year, excluding two months of revenue from our recent acquisition of Powerland, as well as higher sole supplies on paper revenues, which fluctuated with printing volume. We saw modest growth in recurring contractual revenue corresponding with growth in printed pages. Post-sales revenue growth was partially offset by lower Fujifilm business innovation royalties on lower HBS financing commissions. In services, new business signings grew roughly 10% year-over-year led by strong double-digit growth in signing our capital content digital services. We generated free cash flow of $50 million in Q1, down from $100 million in the prior year. Lower cash earnings, which included investment in our new businesses and lower royalty payments, were offset by working capital improvement and lower restructuring payments. We generated $66 million of operating cash flow in the quarter compared to $117 million in the prior year. Working capital was a source of cash of $93 million this quarter, $50 million higher than the prior year, mainly driven by accounts payable. Investing activities were a 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 and venture investment. CapEx of $16 million was slightly lower year-over-year. CapEx primarily supports our strategic growth program and investment in IT infrastructure. Financing activities consumed $149 million of cash. During the quarter, we utilized the remaining $113 million of our buyback authorization and paid dividends totaling $46 million. We also repaid $300 million of maturing senior notes with $322 million of net securitization proceeds. For the year, we remain committed to returning at least 50% of our free cash flow to shareholders. Next, looking at profitability. As noted earlier, adjusted operating income was negatively affected this quarter by incremental costs associated with supply constraints, inflation, and investment in our new businesses, which had a negative impact on adjusted operating income margin of 470 basis points. We expect supply chain and new business costs to normalize as our supply chain conditions improve and our new businesses scale. Inflationary pressure may persist for some time, but we expect to pass on most of the effects of inflation through pricing actions, albeit on a delayed basis. Further offsetting this cost pressure will be additional savings generated through Project Own It. Last quarter, we announced $300 million of targeted gross savings in 2022, which were used to offset planned cost increases as well as investment in innovation across our offerings. Due to incremental inflation across our cost base, we are now planning a 50% increase in our targeted savings amount for the year. We're expecting quarterly sequential margin improvements throughout the year, but realization of this improvement will largely depend on macroeconomic factors. Turning to segment performance, we are now providing segment level operating detail for Print & Other and financing or FITTLE. We provide this information to help investors understand the Print & Other business excluding financing, as well as the FITTLE financing business, which, in the future, is expected to become less dependent on Xerox for origination growth. FITTLE revenue declined 12.2% in Q1, primarily due to a reduction in financing income on operating lease revenue, which reflects lower equipment installed. Segment profit was lower by $1 million or 5.6%, as higher gross profit was offset by incremental costs associated with funding the business. Segment margin of 11% was higher than our full-year estimate of 8% to 9%. We expect FITTLE margin to normalize as volume picks up, driving increases in commissions. In Q1, FITTLE finance assets were down slightly quarter-over-quarter as portfolio runoff outpaced origination. FITTLE origination volume declined 10% year-over-year due primarily to a decline in Xerox product origination of 22%, which were negatively affected by product availability constraints. In direct origination, which includes third-party dealers or non-Xerox vendor growth, there was a 7% year-over-year growth due to new dealer relationships and non-Xerox originations volume. Print & Other revenue declined 2% in Q1, primarily due to equipment sales partially offset by modest improvement in post-sale revenue as previously discussed. This segment generated a loss due to lower equipment sales, less profitable mix of equipment installed, higher supply chain costs, lower margin on post-sale revenue and incremental cost associated with new business. Regarding capital structure, we ended Q1 with a net core cash position of around $400 million. $2.9 billion of the $4.3 billion of our outstanding debt is allocated to support the FITTLE lease portfolio. The remaining debt of around $1.4 billion is attributable to the core business, primarily consisting of senior unsecured bonds and finance asset securitization. We have a balanced bond maturity ladder and no unsecured maturities for the remainder of the year. In the first quarter, we returned $159 million of cash back to shareholders. Acquisitions and investment comprise the majority of the $200 million quarter-over-year decrease in net core cash. Finally, I will address guidance. We are maintaining our guidance of at least $7.1 billion of revenue at constant currency and free cash flow of at least $400 million. Our free cash flow guidance excludes cash costs associated with this quarter, product supplies termination charge, as it is a one-time nature that skews the true cash generation potential of our operation. Our business faces significant challenges that present a degree of risk to our outlook, but we continue to expect supply chain improvements and the broader return of employees to offices in the second half of the year. Additionally, we are implementing counteractive measures in response to geopolitical uncertainty and inflationary pressures, including relocation of equipment and supplies from Russia to markets facing significant backlogs and additional Project Own It savings to offset inflationary pressures. We will now open the line for Q&A.

Thank you. The first question comes from Ananda Baruah with Loop Capital. Your line is open.

Hey, good morning, guys. Thanks for taking the question, and good to see the revenue is continuing to trend as expected as well. I have just a few for me if I could. Xavier, how should we anticipate the pacing of the margin recovery as we move through the year, and maybe for both gross margin and operating margin and OpEx?

Yes, hi, Ananda. Good morning. As you have seen, we faced some inflation cost pressure during quarter one. And as we mentioned, the macroeconomic environment, we are expecting them to improve over time. This is driven by two factors. Number one would be the back to office; in quarter one, January and February activity was impacted by Omicron in some of the geographies, but we saw March recovering. So we're expecting a gradual recovery back to the office. This is also signaled by external data points showing that employees are going back to the office. March was a good data point, and we're expecting this to continue in quarter two and gradually improve in quarter three and quarter four as well. So that's regarding back to office and print volume. Regarding supply chain, we are monitoring this very closely. As we mentioned in our call in Q4 during Investor Day, we were expecting to have gradual improvement during the second half of the year. We are still monitoring and see some improvement in this situation, but this has impacted strongly our equipment gross margin because the mix of products that we have recognized or installed during this quarter was not the traditional high-margin mix of products that we could have installed. So in summary, we expect gradual improvement in margin. Quarter two will be an improvement over quarter one, but we are expecting that the second half will be better than the first half.

Okay, got it. That's helpful. And just on supply chain, was it tougher than, I know with increased fuel costs that was certainly incremental, but just in general, make sure excluding the fuel costs and maybe sort of transportation as that was impacted by that. With supply chain – how was the supply chain availability relative to your expectations as you went through the quarter?

So the supply chain has two elements. One element is capacity, and the second element is cost. So from a capacity point of view, we were impacted in quarter one. As I mentioned, equipment revenue was done year-over-year, and we have not received the mix of equipment at that high margin, A3 product that we're expecting. You saw the strengths 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 are here. So we are quite confident in our ability to get orders from customers and having this backlog being installed over time. The quality of the backlog is also strong. We are currently monitoring how long it takes on average to install products, and I would say close to 50% of our backlog is less than 60 days old. So we turn it, but at the end of the day, we don't have the equipment we are expecting in order to close the gap in the equipment revenue. So high touch capacity. Regarding cost, we had cost pressure during the first half, starting last year. But during the first half, cost pressure, inflationary pressure, and specifically container cost, but also freight, truck, and train cost pressure here. We are expecting these to ease. You read, as we read as well, some information regarding consumer demand could decrease in the second half of the year. It should give more capacity for potentially price reductions for the type of demand on container costs that we're expecting.

That's really helpful. I'll cede the floor there. Thanks so much.

Thank you, Ananda.

Your next question comes from Erik Woodring with Morgan Stanley. Your line is open.

Hey, good morning, guys. Thank you for taking my questions. I have two here as well. Maybe just to start, maybe John, this would be for you. In the FAQ part of your earnings deck and you alluded to it here in the prepared remarks. I felt like there was a bit of a tone shift in your comments on monetizing or realizing shareholder value from some of your investments in innovation, just talking about increasingly looking to do strategic transactions. 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 potential actions you could take or timing or anything along those lines?

Yes, Eric. I don't think there's a shift. We're continuing to fund the investments in innovation. We know it’s margin dilutive in the quarter. We're launching new products in businesses. We've spoken about what we're doing at Eloque and Elem and Novity being the latest one in predictive maintenance where we have already two clients and we have a pilot going with Pennsy Supply. Going forward, we're going to continue to look at monetizing these investments, like we said, through strategic transactions, and it could take the form of a minority investment, a sale, a partnership, or a merger of our businesses. We stated that we want these transactions to create shareholder value by providing new businesses access to capital and speed, a little bit what you and I spoke about also at the Analyst Day.

Okay, great. That's really helpful. And then maybe, Xavier, one for you and just a follow-up on Ananda's question. I appreciate the color that operating margins or margins in general should improve sequentially through the year, second half better than first half, but we're now starting obviously off of a lower base in 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 margin, realizing that there are some macro factors that could impact that? And that's it for me. Thank you.

Yes, Eric, that's a good point. We are monitoring very closely the macroeconomic environment. So far, the leading indicators we have on page volume are positive based on what we have seen. The key point for us would be to address the supply chain challenges that we face in quarter one and being able to address the cost pressure. As you have certainly noted, we have increased our internal, I'll say, goal around Project Own It. We have Project Own It with a goal of $300 million of gross cost savings this year. We have increased it by 50%. Project Own It is much more than a cost-cutting type of program; this is more the DNA on how the company is addressing the cost base and some of the challenges we face to ensure that we can still deliver the guidance on revenue and free cash. Assuming the macroeconomic trends are in line with what we're commenting here, we should see gross margin improvement and have the ability to achieve or be close to our goal this year.

Great. Thank you, Xavier.

Thank you.

Thank you. Your next question comes from Samik Chatterjee with JPMorgan. Your line is open.

Hi, thanks for taking my question. And good morning. I guess if I can just follow up on the last question there, Xavier you talked about the additional savings coming from Project Own It. It really is a difficult time particularly where inflation is to drive additional savings. So maybe if you can give us a bit more color, are these sorts of projects that were sort of far away commercialization that you are trying to pull back on? Like what is the source of these additional savings that you are targeting, particularly at a time where it does look a bit tougher for the environment to drive those savings? And I have a follow-up. Thank you.

Yes, good morning, Samik. We will look at the entire scope of the cost base, but have a specific focus on what we call infrastructure cost and also the ability to negotiate or renegotiate some of the costs. I mentioned the freight cost and the ability to see versus the costs we see today if these costs will decrease during the second half of the year, but also other items that I did not touch upon. Project Own It is not specifically directed to cutting corners one by one; we look at the entire cost base. We scrub it, and as I mentioned, the infrastructure costs are currently the focus, plus freight costs.

Okay, got it. And for my follow-up, I think, at the Analyst Day you had mentioned that your target in terms of where page volumes can get to sort of and the recovery is like an 80% number, and you talked about improvement here in post-sale revenue driven by some of the return work. So maybe if you can ballpark where you are in terms of page volumes relative to the 80% 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 mix is or whether equipment demand is coming in higher end, lower end compared to pre-pandemic through your backlog? Thank you.

Yes, two good questions, Samik. So actually, we are seeing some gradual improvement; just as a data point, March was one of the highest months that we have had since the pandemic. We still see the number we monitor very strongly or very directly, the correlation between vaccination rates or the presence of COVID vaccinations and the presence in the office on page volume. This correlation will persist, and clearly after the Omicron wave in January and February we saw people going back to the office; we saw the direction of management and CEOs asking employees to be back to the office. We see that day-to-day with customers. And we are monitoring this and see positive trends in this direction. As I mentioned, we expect quarter two to improve regularly, more directly, and then just in second half as well here. So, that's for your page volume. At the same time, we are also gaining market share, which means our revenue here is also increasing, leading to additional revenue from the market share gains that we have. Commenting on the backlog, just to share with you, the data point is $422 million, more than a 20% increase quarter-over-quarter, close to, I would say, two to three times the usual backlog. And I would say, good sanity; good quality of the backlog with a little bit less than 50% of the backlog being less than 60 days old. So that means we are installing it quite quickly. Regarding the mix of the backlog and profitability, this was one of the key drivers of the gross margin erosion. Usually, we have around 50% of the backlog being on our A3 product. Here, we are much higher. This is one of the reasons the mix and the margin mix that we have been able to generate and install have been impacted in quarter one. So again, it's a very fluid situation; the main driver of the backlog is still the shortage of some components, specifically certain chips that we're waiting for.

Okay, great. Thank you. Thank you for taking my questions.

Thank you, Samik.

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

Thank you. Both of you mentioned additional actions under Project Own It; this program has been quite successful. So can you maybe explain to us or give some examples of what some of these additional actions are because I just kind of want to get a grasp or understanding of what the new actions are for Project Own It, because it's been so successful in the past. I'm just kind of wondering where else did you find some more savings?

Yes, Jim, I wouldn't use the term where we find more savings. You're right; we've been very successful. We beat our Project Own It targets every year, and it's a philosophy where we promote continual process improvements. What we plan to do is this additional $150 million in gross costs savings comes through the flow-through of our in-flight initiatives. Is there more we can do there? Is there more investment in IT that we can do to drive cross-functional operational efficiency projects? These are all things that are in flight that we're going to look at growing faster. Of course, there could be some labor actions involved, overhead infrastructure, and then investments in our products and services, and even internally, and we look at them and say, are there things that we can hold off as the supply chain eases as it gets better going forward? The plans are in place to go after it, and you will definitely see some of it in the second half of the year, but we don't look at it as something new; it's always continuous improvement.

Okay. And then a follow-up maybe for Xavier. Xavier, can you talk a little bit about the change in the interest rate environment? Xerox is a very big and complicated company, whether it be debt obligations, your financing business, or even your company pension accruals. I know those rules have all changed a lot. But how should we think about a rising or higher interest rate environment to the impact on that on your company or cash flows? Thank you.

Thank you, Jim. Good question. Regarding interest rates under pressure in our environment, I say it is quite simple. The first thing is, as you know, we have debt; the vast majority of the debt is related to the financing business, FITTLE. This debt is associated with the leasing contracts of financing contracts with these customers. The majority of this, as you know, we are now securitizing this debt, which means that the cost of capital will be aligned with the market cost. But we also have the ability to pass the price back to customers. So, when rate costs are increasing, we are able to pass those costs up. Regarding the core debt, the remaining part of the debt we have, as you've seen in our debt ladder, no obligations for this year. So, we covered our $300 million debt obligation in quarter one. For the second part of the year, we have $1 billion, and we have at this stage no concern on how we will be able to fund and drive the debt here. I would say it's not my primary concern currently regarding interest rates, mainly driven by the fact that we can pass some of the cost increases back to customers.

Okay. And the impact of pension funding?

Yes. You have an impact, but at the same time, when interest rates increase you have the double effect; one effect is that your obligation could grow, but at the same time, the return on your investment is growing. The vast majority of our pensions are, I would say, aligned or connected with derivative instruments that manage or have a way to derisk the environment, especially from an interest point of view. I don't see this as an immediate cost pressure as well or a driver of cost pressure and debt pressure on Xerox.

Thank you so much for the details.

Thank you.

Thank you. Ladies and gentlemen, this does conclude the Q&A Session. I would now like to turn the call over to John Visentin for any closing remarks.

Thank you. And thank you for being on the call. Our focus remains on executing the strategic roadmap that we presented on Investor Day, including a return of print and services to growth and monetization of our investments in innovation. Be safe and be well.

Well, ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.