Welcome to the Xerox Holdings Corporation First Quarter 2022 Earnings Release Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions] At this time, I'd like to turn the meeting over to Mr. David Beckel, Vice President and Head of Investor Relations.

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 than 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 strategy 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 receded, page volumes increased; result 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 of a 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 flow was $50 million compared to a $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 and 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 growth 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 services 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 a 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 a 100%. We continue to invest in FITTLE, CareAR and PARC. In Q1 FITTLE increase its focus on providing financing solutions that extend beyond Xerox equipment and services. This quarter, FITTLE added 24 dealers and grew indirect origination 7%, including a doubling of non-Xerox product. This growth was offset by 22% decline in Xerox direct originations for the quarter due to an equipment. 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 $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 to assist product, to incorporate sell-soft 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 Park, Eloque Elem additive manufacturing 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 and negotiations with several U.S. states and European countries. Novity is a newly launched company that will use Park'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 and 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 investment, 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 the main 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 dividend and buybacks. Notwithstanding and increasingly challenge our 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 constraint on our ability to deliver and install order on the cost of fulfilling those order have increased. Additionally, we altered shipment to Russia, a market that comprise 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 expectation and demand for our product and services remain strong as evidenced by another increase in our backlog to $422 million in quarter one, which is close to 3 times higher than prior year levels. Post sales grew in actual and constant currency due to growth in IT services on growth in sole supplies on paper, which reflects higher printed pages. We're also benefited from growth in our page-volume driven contractual business, which continued to correlate with the return of worker to the office. Turning to profitability, similar to recent quarter’s lower equipment sales or less profitable mix of equipment installed, higher supply chain cost, lower margin on per sales revenue and incremental cost 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 point in the first quarter, 280 basis point of this decline is attributable to supply chain cost and capacity restriction including higher freight and shipping cost and constrain availability of higher margin A3 devices. 110 basis point of the decline related to investment to support future growth, lower royalty revenue from Fujifilm business innovation on lower government subsidies. We continue to expect supply chain headwinds to moderate beginning of second half of the year. Adjusted operating margin of minus 0.2% decrease 540 basis point 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 Project Own It savings. SAG expense of $455 million, increased $7 million year-value-year. The increase was primarily driven by investment in new businesses, prior year benefit from temporary government subsidies on furlough measure, higher bad debt provision resulting from the geopolitical environment in Eurasia on acquisition. These increases were partially offset by savings from Project Own It, lower sales on marketing expenses and currency. RD&E was $78 million in the quarter or 4.7% of revenue which was an increase of 40 basis point 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, on IoT businesses at PARC. Other expenses net was $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. So charge reflects a payment of a contractual consolation fee plus interest on related legal fee, which we expect to more than make up for over time via lower supply cost. Additionally $30 million of the increase related to higher non-service retirement related interest cost due to an increase in interest cost associated with higher discount rates on higher settlement losses. And $5 million related to increase in non-financing interest expenses reflecting a higher allocation of interest to the non-financing or core debt. 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 benefit from additional tax incentives on the lower indefinite reinvestment tax liability due to the recent acquisition. Adjusted EPS of minus $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 minus $0.38 was $0.56 lower year-over-year due to lower GAAP net income. Turning to revenue, total renew was in line with our expectation albeit with a less favorable product mix with equipment sales decline offset by modest improvement in post-sale revenue. The underlying fundamental of our business remain strong. Equipment orders once again outpaced supplies resulting in a community backlog this quarter of equipment on IT hardware of $422 million, a 21% increase of quarter four and close to 3 times higher than prior year level. For a context, our backlog is now larger than four quarters worth of equipment on our sales. Despite continuous growth in our backlog, the quality of our backlog remained high. Close to half of our backlog is less than 60 days old. We have seen minimal consolation of orders thus far as customers are often willing to extend their existing leases, we are waiting for new equipment. Further we saw an uptick in page-volume on page-volume-driven post sale revenue in March, as un-prior return-to-office following the Omicron variant. So continued correlation between page-volume and workplace attendance and strong growth in usage-based post sales 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 description, which limited our ability to fulfill demand, installation were down year-over-year across all product type. And high margin mid-range product continued 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 fluctuate was printing volume. We saw modest growth interim driven 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 commission. In services new businesses signing grew roughly 10% year-over-year led by strong double-digit growth in signing of our capital on 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 including investment in our new businesses on lower royalty payments were offset by working capital improvement and lower restructuring payment. 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 activity were use of cash of $75 million compared to a use of $17 million in the prior year due to an increase in cash used for acquisition on venture investment. CapEx of $16 million was slightly lower year-over-year. CapEx primarily support our strategy growth program on investment in IT infrastructure. Financing activity consume $149 million of cash. During the quarter we utilize the remaining $113 million of our buyback authorization and pay dividend totaling $46 million. We also repaid $300 million of maturing senior notes with $322 million of net sequelization proceed. For the year we remain committed to returning at least 50% of our free cash flow to shareholder. Next, looking at profitability. As noted earlier adjusted operating income was negatively affected this quarter by incremental cost associated with supply constraint, inflation on investment in our new businesses, which had the negative impact to adjusted operating income margin of 470 basis point. We expect supply chain on new business cost to normalize our supply chain condition improve on our new businesses scale. Inflationary pressure may persist for some time, but we expect to pass on most of the effect of inflation through pricing action albeit by delayed basis. Further offsetting this cost pressure will be additional saving generated through Project Own It. Last quarter, we announce $300 million of targeting gross savings in 2022, which were reused to offset plan cost increase 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 around the year, but the realization of this improvement will largely depend on macroeconomic factor. Turning to segment, we are now providing segment level operating detail from Print & Other and financing or FITTLE. We provide this information to help investor understand the Print & Other business excluding financing as well as 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 reflect lower equipment installed. Segment profit was lower by $1 million of 5.6% as higher gross profit were offset by incremental cost associated with funding of 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 pickup, driving increases and commission. 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 constrain. In direct origination, which includes third-party dealers or non-Xerox vendor growth 7% year-over-year due to growth in new dealer relationship on non-Xerox originations volume. Print & Other revenue declined 2% in Q1 primarily due to equipment sales partially upset 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 cost, 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 on support the FITTLE lease portfolio. So, remaining debt of around $1.4 billion is attributable to the core business that primarily consist 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 shareholder return with acquisition on 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 attached to our currency and free cash flow of at least $400 million. Our free flow guidance exclude cash cost associated with this quarter, product supplies termination charge, as it is a one-time in nature on upscale the true cash generation potential of our operation. Our business face significant challenges that present the degree of risk to our outlook, but we continue to expect supply chain improvement on the broader return of employee to offices in the second half of the year. Additionally, we are implementing counter active measure in response to geopolitical uncertainty on inflation rate pressure, including a relocation of equipment and supplies from Russia to market facing significant backlogs on additional project on it saving to offset inflationary pressure. We will now open the line for Q&A.

Thank you. [Operator Instructions] 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 like the pacing of the margin recovery as we move through the year, and maybe for both gross margin and operating margin and OpEx?

Yes. So, hi, Ananda. Good morning. So as you have seen it, we face some inflation rate cost pressure during quarter one. And as we mentioned it, the macroeconomics environment, we are expecting them to improve over time. This is driven by two-driver. 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 on back to office. This is as well signaled by external data point 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, 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 it in our call in Q4 during Investor Day, we were expecting to have gradual improvement during the second half of the year. On the – we are still monitoring, 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-mix – 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 total half – the first half.

Okay, got it. That's helpful. And just on supply chain, was it tougher than, I know with increased fuel cost that 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 the supply chain availability relative to your expectations as you went through the quarter?

So the supply chain is two element. One element is capacity, the second element is cost. So from a capacity point of view, we were impacted in quarter one as I mentioned it on you, so that the equipment revenue was done year-over-year, and we have not received a mix of equipment at that high margin, A3 product equipment 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 customer and having this backlog being installed over time. So quality of the backlog is also strong. We are currently monitoring how long it take in average to install product and I would say close to 50% of our backlog is less than 60-day old. So we turn it, but at the end of the day, we don't have the equipment we're expecting in order to close the gap in the equipment revenue. So high touch capacity. Regarding cost, we have had during the first half, it started last year as you know. But during the first half, cost pressure, inflationary pressure and specifically container cost but also in country it could be, I would say, freight, truck, train cost pressure here. We are expecting these to ease. You read, as we read as well, some information regarding that consumer demand could decrease in the second half of the year. It should give more capacity on potentially price reduction for the type of demand on container cost 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 reaction. So am I correct in saying that? And maybe can you just parse that out maybe one level further, just in terms of what that could actually mean in terms of potential actions you could take or timing or anything along those lines? And then I have a follow up.

Yes. Eric, I don't, if there was a shift I apologize. 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 form of a minority investment, a sale, a partnership, 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 generally should improve sequentially through the year, second half better than first half, but we're now starting obviously off of a lower base in 1Q 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. So that's a good point, Eric, here, which is, okay, macroeconomics environment is something that we're monitoring very closely. So far the leading indicator we have on the 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 it, we have increased our internal, I'll say, goal around Project Own It. We have a Project Own It as a goal of $300 million of gross cost savings this year. We have increased it by 50%. So, if you remember Project Own It is much more than cost cutting type of program. This is more the DNA on how the company is addressing the cost base on some of the challenge when we face them and ensuring that we can still deliver the guidance on revenue and on free cash. So, so far assuming the macroeconomics environment trend, Ukraine, we did not comment too much, had a limited impact here, and we will also be able to redirect some of the product outside of Ukraine and Russia towards other geographies. So, I will say assuming this economic environment on macroeconomic trend are in line with what we're commenting here, we should see the gross margin improvement on the ability to achieve or being close to the goal that we have or 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 faraway 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 more tougher for environment to drive those savings? And I have a follow-up. Thank you.

Yes. Good morning, Samik. So, we will look at the entire scope of the cost base, but specific focus on what we call infrastructure cost and also the ability to negotiate some or renegotiate some of the cost. I mentioned, the freight cost and the ability to see versus the cost we see today if these costs will decrease during the second half of the year, but also other items that I did not touch around there. It's, you have Project Own It addressing the cost point, but some of the inflation that we are seeing here, we as you know it, we pass that back to customer. So, we have done last year some price increases on what we are doing currently as well is to plan on certain product on the services that we have here, additional price point. So, we can offset some of the inflation interest rate cost pressure to customer as well. But the Project Own It is not specifically directed to, I would say, [indiscernible] one by one, we look at the entire cost base. We scrub it on the, as I mentioned it, infrastructure cost currently is the focus plus freight cost.

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 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. So, 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. So, we still see the number we monitor very strongly or very directly the correlation between vaccination rate or the presence of COVID vaccination rate presence in the office on paid volume. This correlation will still stick on the clearly after Omicron wave in January, February was all over we saw people going back to the office; we saw direction of Manager and CEO asking employees to be back to the office. We see that day-to-day with customers. And we are monitoring this and see positive trend in this direction. So, as I mentioned it, we are expecting quarter two to improve regularly, more directly and then just second half as well here. So that's for your page volume. At the same time as you know we are also gaining market share, which mean our [indiscernible] here is also increasing which give also additional revenue coming 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 20% increase quarter-over-quarter close to, I would say, two to three time per 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 – sorry, less than 60 or odd. So that mean we are installing it quite quickly. Regarding the mix of the backlog and profitability, this was one of the key driver of the gross margin erosion. Usually, we have around 50% of the backlog being on our A3 product. We are here much higher. And 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, very fluid situation, main driver of the backlog is still the shortage of some compounds on specifically certain chips that we're waiting for.

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

Thank you, Samik.

Thank you. And 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 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. And usually, we beat our Project Own It targets every year. And it's a philosophy where we promote continual process improvements. And what we plan to do is this additional $150 million in gross costs savings, and where it comes through is flow through of our in-flight initiatives. Is there more we can do there? Is there more investments in IT that we can do to go get it cross-functional operational efficiency projects? These are all things that are in flight that we're going to, and we're looking at growing and we're looking at growing faster. Of course, there could be some labor actions that are involved, overhead infrastructure, and then investments in our products and our services and even internally, and we look at them and say, are there things that we can hold off as supply chain ease as it gets better going forward. But the plans are in place to go after it. And definitely, you'll be seeing some of it in the second half of the year or so. But we don't look at it as it's 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 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 raising or higher interest rate environment to the impact on that on your company or cash flows? Thank you.

Thank you, Jim. So good question. So, regarding interest rate under pressure on our environment, I say it is quite simple. The first thing is, as you know it, we have a debt; the vast majority of the debt [indiscernible] is related to the financing business to Fidel. And this debt is associated to the leasing contract of financing contract with this customer. The vast majority, as you know it, we are now securitizing, this debt, which means that the debt will be aligned, or the cost of the capital will be aligned with the market cost. But we have also as well the ability to pass the price back to customer. So, when rate costs are increasing, we are able as well to pass the cost up. Regarding the core debt so the remaining part of the debt we have, as you have seen it in our debt ladder, no obligation for this year. So, we cover our $300 million debt obligation in quarter one. And 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 on the drive the debt here. So, I would say it's not my prime concern currently interested here, mainly driven by the fact that buy our FITTLE we can pass some of the cost increase back to customer.

Okay. And the impact of pension and funding?

Yes. You have an impact, but at the same time, I mean, when interest rates are increasing you have the double effect; you have one effect where you have your obligation that could grow at the same time the return on your investment is also growing. The vast majority of our pension are, I would say, align or connected with – I call it derivative instrument, instrument that manage or have a way to derisk the environment specifically from an interest point of view. So, I don't see this as an immediate cost pressure as well, or driver of cost pressure and debt pressure on Xerox.

Thank you so much for the details.

Thank you.

Thank you. And 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 investment’s 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.