全錄公司 (XRX) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Xerox Corporation fourth quarter 2009 earnings release conference call hosted by Ursula Burns, Chief Executive Officer. She is joined by Larry Zimmerman, Vice Chairman and 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 the Xerox Corporation, today's conference call is being recorded. Other recording and/or rebroadcasting of this call are prohibited without express permission of Xerox. After the presentation there will be a question and answer session. (Operator Instructions).

Some of the subject matter discussed during this conference call is addressed in the registration statement on Form S4 filed with the Securities and Exchange Commission that includes a joint proxy statement prospectus. We urge investors and security holders of Xerox to read the joint proxy statement prospectus because it contains important information. You may obtain free copies of the joint proxy statement prospectus and other documents filed with the SEC by Xerox and Affiliated Computer Services through the Internet site maintained by the SEC at www.SEC.gov.

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 meaning over to Ms. Burns. Ms. Burns, you may begin.

Good morning, and thanks for joining us today. We will get started on that slide three. In a tough year, we delivered a strong close to 2009 with results that reflect our disciplined approach to managing cash and reducing costs.

Full-year adjusted earnings came in at $0.60 per share above our guidance of $0.55 to $0.57. In Q4, we delivered $0.25 per share above our expectations of $0.20 to $0.22. The results exclude a $0.05 charge for the acquisition related costs we disclosed last month.

The ACS acquisition is on track to close in early February and we are making excellent progress on our synergy initiatives. We will talk more about that after the quarter four review.

Cash from operations was very strong. We generated $967 million in operating cash during Q4 and $2.2 billion for full year 2009. That is $500 million better than our previous guidance. Total debt came down $1.1 billion in 2009. This excludes the $2 billion of ACS related notes issued last month. The Company ended the year with a cash balance of $3.8 billion which includes the financing raised to support the acquisition.

Selling, administrative and general expenses were up year over year by $23 million driven by currency and SAG as a percent of a revenue was 26.7% in the fourth quarter.

Gross margin of 39.9% includes two points in Q4. So we are pleased with our progress in delivering solid bottom-line results and operating cash, the result of heavy lifting in cost and expense management and across-the-board operational improvement.

The results also reflect the modest improvement we are seeing in revenue. Modest is the key word here. During the quarter, our developing markets improved relative to the major downturn in these geographies last year. But we have not seen a significant or consistent shift towards increased spending on document technology in the US and Europe especially in large enterprises.

While we remain quite confident in our global competitive position, we are seeing strength in services signings and in our channels businesses. We believe revenue will continue to be under pressure until there is a more sustainable economic recovery. Therefore, we remain sharply focused on sizing our business to better match current revenue levels.

We will implement additional cost reduction activity throughout the year. This gives us more flexibility in our business so we can improve operating margins while maintaining investments to drive growth. As a result, we will take a restructuring charge of approximately $250 million in the first quarter. Larry will talk more about this in a moment. He will also review our financial performance. Then we will both take your questions.

Now let's turn to slide four for a bit more color on revenue. Fourth-quarter total revenue of $4.2 billion was down 3% including a 4 point benefit from currency. Post sale and financing revenue was flat or down 4% in constant currency and equipment sale revenue declined 15% in constant currency. We saw improvement in our post sale revenue which reflects some pick up in supplies and the benefits of our customers retaining their Xerox equipment throughout this recession.

Our installed base remains stable and will continue to help boost our annuity stream as the economy improves. Post sale revenue also benefits from strong signings for Xerox's managed print services. We lead in this growth market. And we continue to see demand for Xerox's value proposition of saving clients up to 30% on their document costs.

An encouraging sign of economic stability was evident in our equipment sale revenue. It grew over 40% sequentially. That is well above the historic norms for quarter three to quarter four seasonal growth. This progress is reflected in our office business where we saw greater channel activity that supports the SMB market.

In office, our operating margin improved, supplies revenue grew and install activity was strong for the new ColorQube multifunction system launched in the US earlier this year and in Europe in September. ColorQube's solid end technology helps cut the cost of color printing by up to 62%. It is a great example of how Xerox continues to leverage innovation and customer value to maintain and grow share even in this tough economy.

Our production business is particularly hard hit by the economy but new products like the 7002 and 8002 digital color presses and our leading iGen system delivered solid performance in Q4. While maintaining our strong commitment to and leadership in the graphic arts marketplace, we will focus some of our 2010 restructuring activities on improving the operating margins in this business.

To sum up the revenue picture for Q4, we saw some signs of stability specifically in developing markets, our distributors, OEM channels and Canada and through demand for our new color technology and Xerox managed print services. We are maintaining our investments in key areas that will have long-term benefits. In fact, we launched 34 products in 2009 and continue to expand our distribution around the world. And through our acquisition of ACS, we will be the world leader in business process and document management.

As important, we are making additional operational improvements to align our business with the dynamics we are seeing in the marketplace. These actions position us well to deliver a strong 2010.

Now I will turn it over to Larry who will share more detail about our financials. Larry?

Thank you, Ursula, and good morning. 2009 presented our business and management team with significant challenges, a worldwide recession driving down demand and volumes, a credit crisis impacting access rates and creating liquidity pressures on our channels and customers and the negative effects of currency changes on our revenue and costs. We reacted by taking actions on cost and expense and cash management which enabled us to deliver above expectations given the economic realities. As we go forward, we intend to keep the same discipline in place to ensure positive returns for our shareholders.

Fourth-quarter and full-year earnings are very positive. Our revenue trends have stabilized and we did see some improvements. Currency had a positive effect on revenue and the general trend of decline moderated. With our focus on cost reduction all year we delivered solid gross profit margin for the quarter and the year almost 40% and grew gross profit dollars by $25 million in the quarter. The strength of the yen continues to pressure our cost but our actions have been successful in containing them.

We continue to manage our expenses, RD&E and SAG with full-year declines at constant currency of $414 million excluding bad debts. Fourth-quarter improvements are consistent with the full year's performance but appear lower due to currency and a year-over-year one time adjustments.

Operating margin was 7.9% in the quarter, 6.8% for the year driven by our cost and expense actions. Other net was adjusted by $63 million or $0.05 a share to recognize the acquisition related costs associated with ACS. We had previously forecasted $0.06. We saw improvements in our equity income driven by Fuji Xerox as a result of their restructuring. They also had modest restructuring in the fourth quarter worth about $0.01.

Our fourth-quarter adjusted tax rate was 20% same as last year driven by -- driven down by the geographic mix of our results. Our adjusted EPS was $0.25 versus our guidance of $0.20 to $0.22 and $0.60 for the year versus our guidance of $0.55 to $0.57.

Next slide. Given the 2009 environment, we challenged our management teams around the world to manage cash as the number one priority. They did and delivered cash from operations of almost $1 billion in the fourth quarter and $2.2 billion for the year versus a forecast of a $1.7 billion.

Achievements were where we wanted them to be, profit and working capital. Fourth quarter working capital improvements were $489 million and $758 million for the year. In addition, we managed CapEx to only $193 million for the year. We reduced our debt by $1 billion and access to capital markets for $2 billion at attractive rates to finance our acquisition of ACS. This allowed us to close out our bridge facility loan commitment. We ended the year with a $3.8 billion of cash.

This performance reinforces the cash flow strength of Xerox. Year after year our annuity-based business model has delivered on a consistent basis free cash flow that yields significant cash flow per share. Even if I leave out this year of 2.29 or $2.29, the free cash flow per share average is over $1.40 for the past few years.

We expect our performance to continue going forward. The addition of ACS will further strengthen our performance as their business model is annuity-based and delivers strong cash performance.

Next slide. Four topics I will quickly cover. Currency. With the euro versus the dollar at about 1.48 in the fourth quarter 2009 versus 1.31 in Q4 2008 we have reached the point where translation currency is now helping us on revenue. Transaction currency primarily yen although flattening out at 89 to 90 to the dollar and 132 to 134 to the euro, it is still challenging to our cost base. However, we are starting to lap the sharp rise in the yen. We continue to focus on cost actions to enable us to maintain and improve our gross profit margin.

Receivables. Both write-offs and provisions remain stable at less than 1% of receivables. Year over year bad debt provisions had nominal impact on the quarter which is an improvement sequentially.

The bottom part of the slide addresses our financing dynamics to give a perspective and context in understanding our debt and our commitment to maintaining an investment-grade credit rating.

The equipment that we financed for our customers represents about $7.6 billion in finance assets. This is a committed stream of cash that our customers pay us over the life of their contract with Xerox. We leverage these assets seven to one to derive the $6.6 billion of financing debt on the slide. The remaining $2.7 billion is core debt, approximately $2 billion of the core debt represents the debt we took on in December to finance the ACS transaction.

The debt ladder shows how we manage the debt maturities and balance with operating cash flow. As is shown by the chart, we maintain these maturities at about $1 billion a year, contrast this to our cash flow from ops over the last seven years which has been $1.5 billion to $2.2 billion. As debt matures, we typically go to capital markets to maintain our seven to one ratio.

So our debt has increased to pay the ACS acquisition, remaining debt supports the financing of our customer equipment. Our cash flow and financial flexibility are strong and we will focus on significant debt reduction in 2010 to quickly pay down the incremental ACS debt and enable a return to other cash usages such as share repurchase during 2011.

Next slide. Post-sale revenue has shown improvement in the fourth quarter particularly in supplies. Unbundled supplies and other sales were flat year over year. This is an improved trend even considering weak results last year.

In addition, developing markets showed improvement in the quarter with almost no impact on post-sale versus previous quarters were represented a third of the impact. Service and rental and outsourcing which represents 65% of post sale I would characterize as consistent with what we saw in previous quarters.

Throughout this downturn this has been the most stable of the streams, down this quarter $59 million on a base of $2 billion and I anticipate steady improvement.

Our machines in the field remain a positive indicator of growing at 17% for color and 1% for total digital. Pages continue to show pressure driven by mono production declines. So overall a modest improvement in the post-sale revenue trend.

Next slide. Our full-year guidance of both earnings and cash will be based on a Xerox ACS combined company. Our adjusted EPS for 2010 of $0.75 to $0.85 and $2.6 billion for cash from operations is consistent with the guidance we gave at third-quarter earnings even though we will only have about 11 months of combined operations.

We will differentiate between GAAP earnings and adjusted earnings for guidance and actuals reporting -- for guidance and actuals reporting in order to give transparency into the fundamentals of the business. 2010 earnings on an adjusted basis will exclude amortization of intangibles, restructuring and asset impairment costs, acquisition related costs including direct transaction costs and specifically defined integration costs and any discrete unusual items. The major differences between adjusted earnings and GAAP EPS are an estimated $280 million in restructuring charges, $75 million in acquisition related costs and $375 million in amortization of intangibles.

In addition, there is one discrete item that will affect first quarter and full year 2010. In January, Venezuela devalued its currency. As a result we expect to report a $22 million charge in Q1 for the remeasurement of the impacted assets. Other than this charge, we don't expect this to affect our results as Venezuela is less than $75 million of our revenue.

The restructuring charge is consistent with ensuring that our cost and expense structure is in line with our current business model. For the full year we expect $280 million of restructuring which includes the $250 million in the first quarter plus an estimated $30 million balance of the year. Of the $250 million, $210 million is severance and $40 million is non-cash asset write-offs. We expect annualized savings of $205 million, $140 million of which the majority will benefit us in the latter part of 2010.

In addition, we anticipate Q1 Fuji Xerox restructuring of approximately $25 million which we will include in our adjustments. So in summary, we continue to manage our Company with discipline, exceeding earnings and cash commitments while positioning our business for strength going forward.

Now back to Ursula.

Thanks, Larry. That is a good lead in to a status on our acquisition of ACS. As I mentioned earlier, we are on track to close the transaction early next month. The shareholder meetings for both Xerox and ACS are February 5. And our acquisition operations office is making significant progress on the revenue and cost synergy projects we outlined last quarter.

We have delivered over 60 -- details, I'm sorry -- over 60 initiatives that are managed across four teams, corporate governance, delivery and infrastructure, sales and innovation. Through these initiatives, we remain confident that we will deliver $100 million in profit synergies during year one ramping to over $375 million by year three.

Here is a quick snapshot of our progress to date. Our corporate governance team has created new organizational models to support the combined governance structure. Our delivery and infrastructure team has prioritized the areas where we can achieve productivity improvements through outsourcing and implementation of ACS's proprietary activity-based compensation.

The sales team has focused on everything from the sales process to compensation to customer engagement and is prepared to implement cross-selling opportunities for our client relationship managers. More than 90% of ACS's business is in North America and only 20% of our customers overlap. We are ready to start pursuing this major market opportunity as soon as the deal closes.

And our innovation team has tested and validated Xerox technology that will help ACS automate current manual based work processes and create differentiated new offerings to help their clients reduce cost. So I'm very pleased with our progress to date and remain confident in the great value this acquisition brings to our business, our customers and our shareholders.

Let's turn to slide 11 to wrap up, then Larry and I will take your questions.

During a very challenging year, we focused our priorities on generating strong operating cash flow, reducing costs and generating and strengthening our competitive position through breakthrough innovation like ColorQube and value-based offerings like managed print services. We delivered, even exceeded on our commitments in these areas and more.

At the same time, we took a hard look at the fundamentals of our business and made the strategic decision that even in tough times we must change and invest to grow. Our acquisition of ACS is designed to do just that and is a natural evolution for our business. We will expand from being not just a leader in document management but also a leader in business process outsourcing, helping to simplify and automate document driven work. It opens new opportunities for our brand, for our business and for our customers -- for the customers that we serve.

In 2010, our objectives are very clear, ACS is a top priority. As important, we will continue to focus on maintaining leadership in our core document management business bringing new innovation to market and expanding distribution channels around the world. In fact, we are set to launch differentiating technology in both our office and production businesses this year.

Through cost and expense management and restructuring, we will size our business right to drive improved margin. And we will continue to generate strong cash flow while reducing debt.

We are starting the year with first-quarter guidance of adjusted earnings per share of $0.11 to $0.13. This excludes $0.24 in adjustments for the first quarter and reflects only a partial quarter of ACS results. We expect full-year adjusted earnings per share of $0.75 to $0.85.

Thank you for your time. And now Larry and I will be happy to take your questions.

(Operator Instructions) Shannon Cross, Cross Research.

Good morning. Ursula, can you talk a little bit about -- can I get some more color on revenue during the quarter -- linearity, geographic trends, trends on verticals, comments from customers, just any color you can give us. Just clearly it was good from a sequential standpoint.

Yes, it was okay from a sequential standpoint. We did see some strengthening of revenue particularly in DMO where the revenue, as you know in the previous quarters, particularly in quarter four of 2008 and quarter one of 2009 were significantly pressured by the downturns in the economy. And we did see improvement in just about every country in DMO, from a revenue standpoint an activity standpoint for sure. So that was a good sign.

We also did see an improvement in supplies. Our SMB business channels that cover our SMB marketplace improved slightly as well. We still see pressure in the US and in Europe particularly in large enterprises. And we still see pressure almost across the board in our black-and-white high-end production business.

Color, by the way, color at the high end especially with the new 7002 and 8002 and in the office with the ColorQube is trending better. And so overall kind of a balanced picture in some geographies picking up some not so much and color the place that we are investing a lot of energy on doing a lot better.

I know this quarter kind of always runs into December anyway because you are trying to close out the year. But was there any difference in terms of linearity this year versus other years?

There was. We've generally -- quarter four is always sequentially better than quarter three but this quarter four was better than a normal quarter four over quarter three. Particularly in equipment, we saw it across the board but equipment improvement was strong. Generally quarter four is about let's say about 20% higher than quarter three but we did see this quarter about 40% so 20 additional points of improvement.

So it was not a normal quarter four for us, stronger quarter four on a lower base though, but a stronger quarter four.

Okay, great. And then Larry, can you talk a little bit about sustainability of cash flow? Clearly some of the working capital improvements probably won't necessarily repeat themselves. But how should we think about cash flow both from a core Xerox standpoint? And then is there anything we should keep in mind with regard to cash flow as we look forward through the year as you incorporate in ACS?

Thank you, Shannon. Well, first of all, I think the first thing is to look at the last seven years. And we consistently every year that we have a good year with cash the question comes up about sustainability. And so I think sustainability of this cash model after seven years speaks for itself, number one.

Number two, we are committed to the $2.6 billion that we forecasted back in October. We are reconfirming it now, which is the combined companies. And I see improvements across the board. Obviously we had tremendous working capital improvements in the fourth quarter. So you would expect the skew of 2010 to be delayed towards the end of the year. And if you look at 2009, if you looked at the first quarter, you wouldn't have projected $2.2 billion for the year.

So I think we are going to see a build up and a skew of cash in 2010 especially as we take on ACS for the 11 months of it. But we are confident we can make our projections here.

Great, thank you very much.

Ben Reitzes, Barclays Capital.

Thanks a lot, good morning. With regard to your slide show from actually three months ago, I just wanted to go back to a couple of things you said. You've reiterated your view for the combined company of $0.75 to $0.85. But then at that time you also laid out $0.95 to $1.05 for 2011 and $1.10 to $1.20 for the combined company in 2012.

So given that you overachieved in the fourth quarter, how do you feel about the numbers for 2011 and 2012 now that you have overachieved in the fourth quarter and you have got more of the planning process under you?

I remain -- we remain extremely confident about our 2011 and for that matter 2012. I know it's a little bit far out. EPS numbers, earnings numbers, cash numbers, the model that we laid out three months ago and even five months ago actually is doing nothing but strengthening as we work more and more with ACS and we manage our business on a daily basis.

So the $0.95 to $1.05 and $1.10 to $1.20 and the $2.6 billion in cash in 2010 and $2.8 billion in '11 are numbers that we remain committed to and are confident in.

So just obviously when ACS reports tonight, no surprises and kind of steady as she goes?

We expect none but they should report.

Okay. Then I just wanted to go through something with regard to your core gross margin. Obviously the yen hurt you on the cost side. But is the yen causing your competitors to price more benign in this environment when they have to bring back overseas sales for them it's a hit. So, you know, is the yen actually causing the pricing environment in the market to be more benign than it usually is? And is that keeping gross margins stable at all and can you talk about the pricing environment as it relates to that?

Ben, it's interesting that we've seen stability over -- throughout this recession in the pricing environment. We see price pressures of around -- price declines of around 5% to 10%. And this is kind of in the range that we have seen for every quarter in 2009 up or down a little bit on the edges. But we have seen no significant change in trend in pricing in the marketplace.

Okay. And then just one modeling question for Larry. Blended tax rate for the combined company, what is your best view of that? And blended --

32%

Okay, and blended gross margin? Just a little higher than the average?

Blended gross margin is between 33% and 35%.

Okay. Thanks a lot.

Ananda Baruah, Brean Murray.

Thanks, guys, and congrats on just a real solid fourth quarter. Ursula, if you could maybe give us a little bit more detail for what you guys saw in the small medium business, the improvement there and the supplies as well? I guess where did you see it specifically?

And then maybe on the supply side since it sounds like it's more SMB related, do you think that the sell-in that you saw is indicative of what true end demand is or do you think there could be some channel sale there?

So, I will start with DMO first. I mean DMO is a market that is essentially a small and medium business market and we did see improvement in our product set and our activity levels as I said in just about every country in DMO. That was a good indication for the indicator for the small and medium business market in that segment of the world.

In our North American and European countries, we did see strength and our channels, stronger performance in our channels business -- it's hard to say strength but stronger performance in our channels business. So this is our resellers.

We did see a stabilization of the stocking levels that our channels have. So as you know through 2009, we went through a significant destocking in the channels. And where they are at now, and where they were at actually in quarter three as well, is a level that has been maintained. So we expect for that to grow as the economy improves, don't expect a significant additional degradation of that.

We do believe that some of it is sell through not only sell in. The economy is still fairly cautious out there and our resellers are very aware of cash and so we do not believe that they are buying ahead of the curve. They are buying to supply customer demand.

So we think that there is a real pick up in business there, a real pick up in activity there, in end user usage.

Thanks. And then on the enterprise, you are not feeling -- it sounds like you are not feeling much better. But are you feeling -- it also sounds like you are not feeling any worse. Are you more optimistic going into 2010 about potentiality of enterprise spending? Are you getting any anecdotal feel as in your customer base (inaudible)?

I think what we are seeing is a continued pressure on the black and white business and large enterprises and in the graphic arts segment. But we are seeing some good news in color as we continue to push the envelope in better, newer and better technologies, our 7002/8002 is doing extremely well in the marketplace. IGen4 interestingly enough in quarter four had a really good quarter, page volumes, activities, etc.

So I do believe that we are seeing a little bit of loosening but the pressure is still there particularly in the very large geographies in the US and in Europe. So it is mixed, black-and-white is still down, color stabilizing, seeing some bright spots in the marketplace.

Okay, thanks. And just if I could ask on the March quarter guidance. Given the -- I guess I'd say through the organic or secular strength in the core business, for December it feels like there is maybe -- I just want to make sure there is nothing built into the March quarter guidance that kind of implies maybe some softening of the core business. Because it seems like you guys if you wanted to you could have maybe guided a little bit higher. I'm not saying you should have or --. I just want to make sure the pushes and pulls -- there is nothing that we are not clear on in the March quarter guidance.

Well, I can assure you that we are going to try to get the highest actuals in the first quarter that we can. But when you look at the combined companies and you look at getting two months of ACS, when you look at the fact that the synergies come later in the year when you look at the fact that the restructuring helps us later in the year, I think it is a really good representative guidance.

Okay, thanks, Larry. And then if I could, Larry, maybe for you just one quick follow-up on that. More of a clarification. It feels like there's a couple of things that have happened that could serve as tailwind at least on the margin that probably weren't baked into the original 2010 combined company EPS guidance. I guess one would be a little bit lower financing cost.

And it seems like after today's report and your comments about what to expect from the JV perhaps a little bit of an incremental benefit there that wasn't baked in. Is that a correct assumption?

Well, I think you are pointing out positive things but whether or not they were baked in -- I mean we bake in a lots of assumptions, some get a little better, some get a little worse. And our expectation is that we can -- these are again projections out in time. Our expectation is that we need those kind of improvements as part of the numbers because there is always something going the other way.

Okay, well let's hope not. Okay, thanks a lot, guys. I appreciated it.

When you find a business that only has the bluebirds, let me know.

You will be the first one I call, thanks.

Chris Whitmore, Deutsche Bank.

Thank you very much. Larry, are you still comfortable with the $22 billion revenue target for the combined company in 2010? And what is implied for core Xerox growth rate baked into that number?

Yes, the first question I am comfortable with the $22 billion. You know some of this is adjusting for currency here so we have to be careful who knows where the currency goes. But the two businesses together will be around $22 billion for sure, so I'm comfortable, number one.

Number two, I think we can assume that from a core business standpoint we expect to see modest improvement going forward that hopefully will get better as we go through the year and the economy gets better.

Do you expect core Xerox to grow constant currency basis in 2010?

Yes.

Okay, secondly, I wanted to get more color on restructuring. How many heads are coming out? What are the primary areas of focus in terms of headcount reduction? And can you split that between restructuring of the core Xerox business and integration or restructuring related to the combination?

Of the $250 million that we referred to that is happening in quarter one, that is all core business restructuring, Xerox restructuring, it's about 2500 people. It splits about a third of the benefit. The cost line is in R&D. A third will be in profit -- in gross profit and then a third in SAG.

The areas that we are focusing on are the supply chain obviously manufacturing the supply chain is something that we continuously focus on. Back-office function, technical service and managed services and that is driven primarily by efficiencies, technology efficiencies, machines break [glass] and so on and so forth and we become more efficient. And then we have done a pretty big infrastructure change in Europe and that will allow us to reduce some of the heads there as well. And then obviously in development and engineering cost on the R&D side.

I guess I'm kind of trying to reconcile the relatively positive outlook for revenue with incremental restructuring. Why isn't then incremental restructuring flowing through into better earnings guidance going forward?

First of all, we did, if you looked at our guidance that we did, we did contemplate significant cost reductions in 2010. The restructuring is a way to get at those cost reductions. The reality is that we are about a $2 billion plus company, smaller than we were when we entered 2009. And the restructuring is to assure that we can do some of the good things that we should be doing, which is invest a little bit more in our people, invest a little bit in the business, keep our margins strong, keep our earning strong and size the business for a $15 billion revenue stream growing versus a $17.5 billion revenue stream. That -- it's that simple, that's what we are trying to do.

Thank you very much.

Keith Bachman, BMO.

Thank you. I have a couple if I could. Just a follow on from Chris. Larry, did you say that the $250 million restructuring or $280 million in restructuring this year for core Xerox that that would translate into $200 million in annual savings? Did I hear that right?

Yes.

Okay. And so then --

That is correct, that is correct, it's $250 million for core Xerox --

Yes.

$30 million when we join the companies together. That will be from the core Xerox and from ACS, the additional $30 million.

Okay. But it is $200 million in annual savings. And what I really want to try to get to, Ursula, that is -- that $200 million in annual savings is in addition to the $100 million identified from the synergies, correct?

Absolutely.

Okay, so you've got $300 million in potential savings that you are looking at. Thanks. I just wanted to clarify that.

And Larry, in terms of the EPS guidance that you provided, could you give us what you think -- the deal hasn't closed yet -- what core Xerox is in terms of the EPS guidance?

Well, I don't think that is a productive thing to do, personally. We are going to be a combined company and to split EPS, when you put two companies together, it's just not a productive thing to do. So our guidance is with both companies together. You just can't go forward when you start to mix companies and break out what somebody's EPS would have been had you not been together. It's just not productive, is the best word I could use there. So.

Okay.

The savings that we have, just to make sure that we are clear on this, is $140 million of the savings --

In this year.

-- in this year. $200 million is the going rate, is the full flight savings of the restructuring.

On an annualized --

On an annualized basis.

Okay, thanks. And then, that is helpful, Ursula, thank you. The machines in the fields and pages, Ursula, how do you see page growth in particular unfolding during the course of CY10?

Yes, we saw -- let me just give you some color about what happened in CY09. Total pages were -- digital pages were down in line with what we had spoken about in the previous three quarters around 8%. And we've got 6% in the previous quarters.

And color pages were up in this quarter and were up throughout the year. So I expect the trend to remain the same improving slightly in the black-and-white space but not significantly and improving in the color space. So more color pages, color page growth in quarter -- in 2010 versus 2009.

Machines in the field are stable, color MIF is growing, digital MIF is growing so we expect the pages -- even though we are pressured on the black-and-white high-end business, we expect the pages to stabilize at a slight decline and color pages to continue to grow.

So total pages a slight decline for CY10, Ursula?

Yes, for CY10, yes. I think total digital pages will continue to decline in CY10.

Okay, and then the last one for me for Larry, is during the Q4, your factoring receivables went up quite a bit. I think year-over-year it would contribute about $257 million of incremental cash flow. How does that -- how does that relate to the target for 2010? In other words, does the factoring receivables go up or stay about these levels? And how do you think about that transition? And then that is it for me. Thanks.

Okay, thank you. Well, the factoring year-to-year helps us $100 million in the fourth quarter and $100 million for the year. We were about even for three quarters. It's not $250 million year-to-year improvement.

Yes, that is not what it says in the footnote in terms of the amount factored. But perhaps --

You said year-to-year, right?

Yes, I'm just looking for it now. The factoring receivables, we sold $600 million of accounts receivables -- right, sorry, in third quarter 2009. So, yes, it was about $257 million -- you are right sequentially.

Yes. So, well, sequentially is a different subject. We always do more, there's more receivables in the fourth quarter. But year-to-year, we did increase $100 million in the fourth quarter and that same $100 million is for the full year.

And for 2010, we are going to have program consistent. Whether or not it ends up $50 million more than the year before or $50 million less, we will have to see how it goes. These programs are done quarter by quarter. But my expectation is it will be around the same kinds of numbers that we did this year (multiple speakers).

Okay, that is fair enough. Thanks very much, guys.

I just had one other point I wanted to make. When I was asked about the gross profit margin of the combined companies I said 33 to 35. And that includes keeping the core business in the range of 39 to 40. ACS has a margin in the services business, they have a lower SAG and they have a lower gross profit margin and they actually end up with a very good operating margin. Their gross margin is around the 18% to 20% range.

So when you weight the profit dollars, you get the 33% to 35%. So there is no decline really in the base business or the others, they just have a lower SG&A as it relates to gross profit margin.

Next question please.

Mark Moskowitz, JPMorgan Securities.

Thank you, good morning. I wanted to follow up on Chris's and Keith's questions earlier. Larry, if I could regarding the incremental restructuring for the core business for 2010, I just want to get a sense since you are not going to really update the EPS guidance, does the incremental cost savings -- are you going to reinvest that in sales coverage? Is there something we should think about in terms of maybe trying to get a little more out of the gate in terms of momentum when you close ACS in terms of getting out there and spreading the word?

Or is this more of a signal that you are still a little cautiously optimistic about the large enterprise coming back this year?

No, it is none of the above. You just have to go back to 2009. We entered 2009 and we tried to do as many cost and expense actions that we could that would offset revenue decline and not use up cash. So they generally were not associated with restructuring, they were things like reducing the 401(k); they were things like having no salary increases; they were things of not giving raises to people, cutting travel, all those kinds of things that generally are not sustainable forever.

People -- our people have done a great job. They deserve to get raises, they deserve to have some of their 401(k) come back. So there is a lot of positive things that have to be done here.

In addition to this, a little bit of what Ursula said, when we did these cost and expense actions, we didn't know the revenue was actually going to end up $2.5 billion down between currency and demand. And so when you look back at what we did to make 2009 a really good year in this environment, we have to make trade-offs now going forward to get our going forward cost base consistent with $15 billion of Xerox business.

And so there is no -- we still have 100% of the cost actions we took and all this restructuring some of those cost actions are going to back into a normal cycle and then we needed these restructuring to downsize ourselves consistent with the revenue. So that is pretty much the story. You have to tie 2009 actions to 2010.

I appreciate those details, thank you. The other question revolved more around the install activity, the longer-term contracts that you've (inaudible) in the recent months. Ursula, could you talk about the economics of years two, three and four? Are you having to throw in more goodies to get folks to sign on for multi-year engagements?

Or are you kind of holding the line there in terms of the economics? I'm just trying to get a sense of the margin outtake in terms of years two, three, four and five.

So the way I'd characterize it for our service -- management service business and then I'll do our equipment business -- by the way they are not two distinctly different from each other. Is that we have not needed to change a normal practice that we have with the client. And that by the way that normal practice is that when you renew a contract that you renew it, if it is the same exact business at a lower price then we did when we first signed on. Generally when we renew, we add more services to that contract and so the total price and total cost, total price of the contract actually does not change significantly materially.

But we have not seen a change in trend at all, we have not had to lengthen our signings or throw in more goodies, as you say. It's a pretty normal business environment from that perspective. We sell equipment for three to five years, they take it, we manage it for that long and we set a price over the years.

Same thing with managed services contracts. When we renew, we have to give them more value and with that more value comes either the same price or a slightly higher price.

Thank you.

Shannon Cross, Cross Research.

Thank you. Just a follow up. I'm curious, Ursula, can you talk a little bit about the competitive environment, what you are seeing out there from the Canon Oce deal? And Ricoh, IKON and anything HP is doing? I'm just kind of curious as to how you are thinking about market share and shifts in the different segments?

Good question, thank you. Good question to close on as well. What we are seeing from competition -- let me take it into the segments that you have kind of divided it into. I will start with the Japanese competitors, Ricoh and IKON the combination has put, as you know, quite a bit of pressure on Canon, and Canon and Ricoh therefore are kind of duking it out to fight for the old Canon MIF that IKON used to cover. That is not really impacting us differentially.

We do sometimes see some pricing -- aggressive pricing between those two. When we come in we have to actually be engaged in that price. We are increasing coverage. We have a great set of offerings, not just the ColorQube but a whole color fleet that was launched in 2009. So our activity and our participation in that market is stronger, was stronger in 2009 than even in 2008.

And you will see in both black and white office and in color office that we have even maintained or grew share. So I am pretty pleased competitively how we are positioned in that space.

At the higher end, we had some weakness as you would recall at the low end of the entry production color space. And actually at the high end, we refreshed the entire product set at the high end, the 7002, the 8002 just hit the market not too long ago and iGen4 is going very, very well. So our share in those segments of the market place should be strong, particularly in quarter four and quarter one of 2010.

Competition there is not any more aggressive than it has always been. It has been fairly aggressive but our product set, our coverage, etc., puts us in good stead.

Oce Canon, we really haven't seen anything on Oce Canon. It hasn't closed and if anything, it has been an opportunity for us as they are trying to figure out -- the Oce guys are trying to figure out who they belong to. Our continuous feed products continue to gain share, continue to do very well from an installed base and a page volume base and continue to gain share. So from a competitive standpoint fairly good.

HP, we don't really see them a whole lot across the board. I mean they are obviously out there, they are a very good company, very large, but most of our battles on an equipment base is with the Japanese competitors and not with HP that much.

And in the services side, we are doing extremely well in managed print services. Gartner just gave us yet another accolade as being the number one provider in this space. So our services signings are higher signings level in quarter four time for the whole year, services are doing well.

So believe it or not from a competitive position, we are doing -- I think we are holding our own or do better.

Great. Thank you.

So that closes our review of fourth-quarter earnings. My thanks to all of you for joining today. Have a great day.

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