Q4 2019 Earnings Call
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Good morning, and welcome to the Pitney Bowes fourth quarter 2019 earnings Conference call. Your lines have been placed in listen only mode. During the conference call until the question and answer segment. Today's call is also being recorded if you have any objections. Please disconnect. Your lines at this time I would now like to introduce participants on today's conference call Mr.
Mark Levin, Black President and Chief Executive Officer, Mr. stands so Tula Executive Vice President Chief Financial Officer, and Mr., Adam David Vice President Investor Relations Mr., David will now begin the call with the Safe Harbor overview.
Good morning included in this presentation are forward looking statements.
About our expected future business and financial performance forward looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections more information about these risks and uncertainties can be found in our earnings press release or 2018 form 10-K annual report and other reports filed with the FCC that are located.
On our website at Www Dot P.B. dot com and by clicking on Investor Relations.
Please keep in mind that we do not undertake any obligation to update any forward looking statements as a result of new information or development.
Also for non-GAAP measures used in the press release or discussed in this presentation you can find reconciliations to the appropriate GAAP measures and the tables attached to our press release and also on our Investor Relations website.
Additionally, we have provided slides that summarize many of the points, we will discuss during the call.
These slides can also be found on our Investor Relations website.
Now, our president and Chief Executive Officer, Marc Lautenbach, we'll start with a few opening remarks mark.
Good morning.
Thank you for joining the call.
There were a lot of moving pieces to the quarter, which stand will take you through.
From my perspective, I was pleased with a quarter.
Semtechs continued to introduce new products within at Central family.
Pretty smart business improved across its key metrics as expected and exited the year with in the long term model.
And our global ecommerce business delivered a highest service level for the delivery and return business in the quarter.
That said, we are still not where we need to be within our fulfillment business.
I will focus the balance of my remarks on the full year.
For Rice said 2019 was another important step forward.
Excluding the impacts of currency, we grew revenue over prior years substantially focus our portfolio made real progress strengthen our balance sheet and set ourselves up to drive profitable revenue growth going forward.
Howard by our growth in Commerce services 2019 marked our third consecutive year of revenue growth on a constant currency basis.
As I've indicated before revenue growth is the most as positive indication of a successful transformation.
Global ecommerce contiguous double digit growth rate in our press our business grew 3%, which is against a market that is declining.
Well, we continue to experience some growing pains in our global commerce business and invest in front of demand. There's also clearly a found an opportunity that is compelling and weve earned the right to win.
2019 was also an important air front portfolio perspective.
We exited direct operations within six smaller European markets, and our center business and completed the sale of our software business.
This is in addition to the divestiture of production mail in 2018.
Alternatively, we announced the introduction of the Wheeler financial services business.
Our vision is clear.
We're continuing to build off of our strong mail and financial services core.
Enter a logical adjacent sees ecommerce shipping in the financing of mission critical assets for our clients.
Those compelling opportunities that are growing and we have a clear right to win.
And all of our key businesses, we've made substantial announcements about new offerings and capabilities, including the launches of the Sendpro tablet.
Sendpro light and more recently Sendpro see auto in our Centex business.
Within E Commerce, we launched our new consumer connect services, which allows retailers to stay connected with the consumer post purchase.
We also recently transitioned all of our major clients to our modern label Apiay platform seamlessly and with no disruption.
Our press our business, we continue to build out our bound impact Mel capabilities and expand our network.
We exit 2019, and compelling markets, where we have compelling capabilities.
Likewise 2019 was an important year from balance sheet perspective, we reduced our debt by over $500 million and if you look at 2018 in 2019, together, we've reduced our debt by over $1 billion.
We are addressing our near term that towers and substantially reducing our refinancing risk.
The combination of repositioning the company for growth.
Focusing our portfolio invested in our capabilities and strengthen our balance sheet crave the conditions for profitable revenue growth going forward.
It is always dangerous to call inflection points of uncertain. If you don't have the right Foundation sustained long term success is impossible.
Within a 100 days of 100 year anniversary very few companies achieved a kind about ingevity Pitney Bowes has achieved.
Get to 100 years by taking the easier way short cuts are making the expedient decisions.
Our journey has not been easy and I'm sure there'll be more challenges long way, but I like how we're positioned.
Now I'll turn it over to Stan.
Thank you Mark and good morning, let me start by providing an overview of the full year results followed by the details of our fourth quarter.
I will then take you through our 2020 guidance has in the past unless otherwise noted my statements going forward will be on a constant currency basis, when talking about revenue comparisons and on an adjusted basis when talking about earnings related items, including cash flow.
Reconciliations of all non-GAAP to GAAP measures can be found in the schedules posted with our earnings press release and on our Investor Relations website.
Let me start by giving an update on IRI EWC ransomware attack in October as we noted on our last earnings call. We Havent turns to cover these events that we had been working diligently with our insurers we have seen no evidence that customer or employee data was improperly accessed. Additionally, we expect a portion of any impact.
To profit to be covered by insurance and the timing of receiving the proceeds are expected to be in 2020.
The insurance proceeds will be recorded when there is a high degree of certainty regarding the amount of insurance proceeds to be received.
We will continue to work with our insurers and any potential new claims that may arise.
For the fourth quarter and full year, we are estimating that the ransomware attack impacted revenue by approximately 18 million.
EBIT by approximately 19 million and free cash flow by approximately $29 million.
This is result of business interruption, an incremental costs related to the attack.
As I discuss our results I will quantify the impact on revenue and EBIT within each segment.
With that let me take you through our full year results revenue was 3.2 billion, which was growth of 0.4% over prior year and it's a third consecutive year of revenue growth.
When market exits are taken into consideration revenue grew 2% over prior year. In addition, we have estimated the ransomware attack adversely impacted revenue growth by approximately 0.6 points.
Looking at the composition of revenue Commerce services was 52% incentivize was 48% of overall revenue.
Revenues generated by our shipping products and capabilities, which spread across both commerce services and Semtech represented 39% of overall revenue.
Adjusted EPS was 68 cents, which was within our guidance range and includes an estimated impact of eight cents related to the ransomware attack GAAP EPS was $1.10.
GAAP cash from operations was 252 million and free cash flow was $169 million. We have estimated the ransomware attack negatively impacted free cash flow by approximately 29 million.
Looking at our capital allocation and uses of cash for the year. We ended the year with just over 1 billion in cash and short term investments on the balance sheet.
For the year, we use free cash flow to return a total of 140 million to our common shareholders, including 35 million and dividends and 105 million in share repurchases.
Our capital expenditures totaled 137 million, which was essentially flat to prior year through the year, we continue to make investments in new and existing facilities, our technology platforms and products.
As part of the ongoing transformation of Pitney Bowes, We also made 27 million in restructuring payments.
Within Wheeler financial we funded 14 million in New third party financing deals for the year and are entering 2020 with a healthy pipeline.
From a debt perspective, we ended the year with 2.7 billion in total debt, which is reduction of $526 million from prior year in nearly 1.1 billion over the last two years.
We have been clear and communicating our plans to strengthen the balance sheet and with the completion of our actions to date, we have reduced our debt and eliminated all debt maturities until October 2021.
Looking at the composition of our debt today, when you take the implied debt associated with our gross finance receivables of 1.1 billion along with the 1 billion of cash and short term investments on the balance sheet into account our implied net debt position on an operating company basis is roughly 0.6 billion today.
Additionally, in December we announced that we obtained and allocated lender commitments for a 650 million secured term loan b facility, which will be used to prepay future near term bond maturities.
Let me now take you through the details of the quarter in the fourth quarter, we delivered 831 million in revenue, which is a decline of 3% from prior year, where market exits are taken into consideration revenue declined 2%.
The decline from prior years, largely due to the impact of approximately 18 million or two points from the ransomware attack.
For the quarter adjusted EPS was 14 cents and GAAP EPS was one dollarsthree.
GAAP cash from operations was 70 million in the quarter and free cash flow 66 million.
During the quarter, we used free cash flow to pay approximately 9 million in dividends to shareholders. Capex was about 42 million that we had restructuring payments of 8 million.
Turning to the BNL, starting with revenue performance by line item as compared to prior year rental revenue grew 12% and business services grew 5%.
We had declines and support services of 8% financing of 12% supplies of 14% and equipment sales of 18%.
Gross profit was 324 million with a margin of 38.9%.
This is a decline of four points from prior year, which largely reflects the shifting mix of our portfolio, the ransomware attack and lower ecommerce fulfillment margins.
She and I was 247 million or 29.7% of revenue compared to prior year SGN, a increased 3 million and one point as a percent of revenue.
R&D expense was 13 million or 1.5% of revenue compared to prior year R&D expense was down $1 million relatively flat as a percent of revenue.
EBIT was 65 million in EBIT margin was 7.9% compared to prior year EBIT declined 49 million need bit margin declined by five points driven primarily by the gross profit decline as well as the approximately 19 million impact from the ransomware attack.
Interest expense, including financing interest expense was 38 million, which was relatively flat to prior year.
The provision for taxes on adjusted earnings was 3 million in our tax rate for the quarter was 11.9%.
Average diluted weighted shares outstanding at the end of the quarter were $172 million, which is about 17 million shares lower than prior year.
Let me now discuss the performance of each of our business segments. This quarter and our Commerce services group revenue was 459 million, which was growth of 5% over prior year EBIT was 4 million EBITDA was $30 million.
Within global ecommerce revenue was 324 million, which was growth of 6.5% over prior year, we've estimated that the ransomware attack negatively impacted revenue by approximately 7 million or two points.
During the quarter volumes grew across each of our E Commerce solutions.
Delivery and returned volumes for domestic parcel services grew 10% to 37 million parcels in a quarter, we delivered double digit volume growth over prior year. Despite a shorter holiday season, which also led clients and consumers to shift a higher proportion of their parcels to guaranteed expedited delivery services. This season.
For the year, we process to 126 million domestic delivery and return parcels, which was 21% growth over prior year.
Volumes for shipping solutions and cross border offerings. Once again grew this quarter over prior year, marking three consecutive quarters of growth, resulting in growth for the year.
EBIT was a loss of $18 million in the quarter in EBITDA was essentially breakeven.
We have estimated that the ransomware attack negatively impacted both EBIT and EBITDA by approximately 6 million.
Along with the ransomware impact the loss was driven by investments for growth incremental costs associated with our fulfillment services to serve clients in a mix of business. Let me elaborate on each of these to provide some color.
From an investment perspective, we continue to expand our network primarily in major markets on east and West coast, which required operational and capital expense upfront.
These facilities are now fully operational for processing parcels and are ramping up volumes.
In addition to the new facilities, we continue to invest to support the growth in efficiency of this business, which includes investments in engineering and marketing.
Profitability in the fulfillment business was challenged in the fourth quarter, partly due to the ransomware attack, which created a significant backlog of services required additional resources with the new clients you brought in we experienced incremental volumes during the quarter to which we had to reallocate and ramp up resources to handle volumes based on the needs of those clients.
We are taking actions to improve margins in the fulfillment business, including investments enhancements to align operations with the increased volumes a review of the client portfolio to ensure we are working with the right clients based on their fit within our capabilities and targeted pricing adjustments.
From a mix perspective, we continue to ramp up volumes in our domestic parcel service with delivery and fulfillment revenue outpacing returns as we have talked about in the past our returns business operates at a higher margin, which creates a shift and the total margin as delivery and fulfillment get to scale. This mix shift impact is expected to deal.
Greece.
We are taking actions across the ecommerce business by investing in our systems, reducing costs and improving efficiencies.
While these hasnt manifested themselves in our results yet we are seeing signs of progress.
For example, within our domestic delivery returns services, we saw gross profit margins improve in the fourth quarter when compared to prior quarter and prior year largely due to the work we have done to reduce costs and drive productivity.
Our domestic personal network performed well during the fourth quarter with on time delivery metrics improving materially relative to the prior year in spite of higher volumes and we believe our network also performed well relative to competition.
Within our digital Apiay services, we recently concluded transitioning all of our clients to our modern label Apiay platform seamlessly and with no disruption. This is a major win as it provides all of our ecommerce shipping clients a high quality of service and access to new innovation and functionality the new platform continues to consistently out.
Free at a very high level and quality of service, which allows us to sunset our old platform and improves our overall economics.
Additionally, we've streamlined our organization bring us closer to the CLI and improving productivity.
We have implemented a price increase which is in line with the market and continues our commitment to our clients of providing simplified pricing with fewer surcharges in our competitors. So a lot of work being done within this business to continue to bring in new clients grow volumes reduce costs and improve efficiencies. We are seeing the benefits from these actions.
Starting to materialize and we expect them to ramp as we go through 2020.
As a result, we expect significant profit improvements year to year.
Within pre sort of services, we're very pleased with the pre store performance. This quarter revenue was 135 million, which was growth of 1% over prior year. We've estimated that the ransomware attack negatively impacted revenue by approximately 4 million or three points.
Revenue growth was driven by investments and acquisitions to expand our network along with growth in our existing clients volumes.
In total we processed 4.4 billion pieces of mail in the quarter, which was 4% growth over prior year volumes grew across all categories with the major drivers being marketing and first class mail for the year, our pre so our business set a new record processing over 17 billion in volumes, which was 3% and growth.
Over prior year.
This is growth in a market that is declining.
EBIT margins continue to improve and our pre salt business improving every quarter throughout the year. The leadership team took full measure of the obstacles facing a transportation labor markets earlier in the year and launched a major initiative to innovate around business processes that product portfolio, which delivered improved margins and importantly, a better.
Since.
Resorts fourth quarter, EBIT margins increase over prior quarter and prior year. We're also seeing benefits from synergies with our domestic parcel services, where you're optimizing routes and sharing delivery lanes. This is a strong proof point to the capability of this business and what it can do as we look ahead.
EBIT was 22 million in EBIT margin was 16.6%, which is a significant improvement from where we were under prior quarter and prior year.
But I was 30 million in EBITDA margin was 22.4%.
We have estimated the ransomware attack negatively impacted EBIT and EBITDA by approximately 4 million.
Turning to our Centex segment revenue was 372 million, which was a decline of 11% from prior year, excluding the impact of our market exits revenue declined 9%.
In addition, we have estimated the ransomware attack negatively impacted revenue by approximately 8 million or two points.
The revenue decline was driven by lower equipment sales, which was largely due to timing differential between when we ship product and when we install it.
We ended the quarter with a higher backlog of shipped but not installed orders versus prior year impart due to a higher mix of solutions being sold with our equipment, which requires a longer installation period.
Revenue is also negatively impacted by the business interruption related to the ransomware attack.
Financing support services and supplies revenues decline, but were partially offset by higher rentals and business services.
The growth and business services is being driven by the new shipping capabilities and our seven pro product family.
EBIT was 112 million in EBIT margin was 30.1% EBITDA was 122 million EBITDA margin was 32.7%.
Margins were impacted this quarter by the lower equipment sales margins, primarily due to cost related to tariffs. In addition to cost related to the ransomware attack.
We have estimated the rents maritech negatively impacted EBIT and EBITDA by approximately 8 million.
We continue to bring innovation to the marketplace. We recently launched the seven pro tablet to Sempra late in December So see auto. These products are the next generation and our Sendpro family of products in the upcoming months. We will also introduced new products to address the low end of our semi pro product line essentially over the course.
First of 2020, we will complete the refresh of our entire line of mailing and shipping products and we will rollout certain products internationally.
Let me now update you on our 2020 annual guidance for the full year, we expect revenue on a constant currency basis to be in the range of a 1% decline to 1.5% of growth over prior year.
Adjusted EPS to be in a range of 60 cents to 70 cents and free cash flow, none of our investment Wheeler financial to being a range of $140 million to $170 million.
Let me drill down on each of these to provide more color starting with revenue.
Our revenue guidance reflects an ecommerce clients decision to remain with Pitney Bowes for labeling and tracking services through our shipping Npis, but has elected to no longer take advantage of our guaranteed delivery service.
As such we no longer take the risk associated with guaranteeing the delivery and therefore, the treatment moves from gross to net revenue recognition. While this impacts the company's total year to year revenue by approximately two points. It has minimal impact on our 2020 earnings and free cash flow.
As a result, we expect global ecommerce revenue to grow into mid single digit range in 2020, but returning to double digit growth longer term.
We expect research continued grow faster than the market at a low single digit rate instead tech to decline in the mid single digit range all on a constant currency basis.
With regard to our 2020 adjusted earnings per share guidance. There are several items to take into consideration.
We expect adjusted EBIT dollars to grow and that double digit range in 2020, when compared to 2019, there's some puts and takes from year to year, but let me take you through how we see the operational performance of the business segments contributing to the EBIT dollar growth in 2020.
Within ecommerce, we expect significant year over year improvement EBIT dollars, which will be driven by continued growth in volumes to get to scale bundling of offerings pricing actions, along with organizational and operational efficiencies within our network, we expect to see improvement through the year as a result of these actions this improvement supports aren't.
Recent thesis around profitable revenue growth going forward.
We expect pre sort revenue and EBIT to grow the proof point here is the progress we made throughout 2019, where the actions we have taken around labor and transportation cost synergies with our domestic parcel services and pricing have started to materialize and RPL.
Partly offsetting the year to improvement Commerce services EBIT dollars will be a decline incentives EBIT dollars driven by the mid single digit revenue decline, but holding margins in a long term range of 30, 35%.
Well, you expect centex EBIT dollars to decline it will be at a lesser rate than 2019.
We expect to further streamline operations and reduced spend particularly across our shared services functions to align with our simpler business model and improve expense to revenue ratio.
And dps level the growth in 2020, EBIT dollars will be offset by a tax headwind of approximately 20 cents. When you compare to the midpoint of our 2020 tax rate to 2019.
We expect that 2020 tax rate on adjusted earnings to return to the 23% to 27% range.
To a lesser degree EBIT dollars will also be offset by slightly higher interest expense due the timing of debt repayments in a higher rate on the new term loan.
Looking at free cash flow for 2020, excluding the investment in our third party financing initiatives through Wheeler, we expect to generate free cash flow in a range of 220 to 250 million, we expect to use free cash of approximately 80 million for new originations through Wheeler.
Net of the growth in Wheeler, our free cash flow guidance is $140 million to $170 million.
Looking at the timing through the year, our portfolio continues to shift to markets that are growing particularly around shipping.
As a result, the fourth quarter will continue to be our largest revenue quarter for the year.
Assuming the midpoint of our annual guidance, we would expect first quarter revenue team into the full year to be inline or slightly above prior years first quarter attainment.
As a result of improved margins, we expect first quarter is adjusted EPS attainment to the full year to be approximately three points higher than prior year again, when assuming the midpoint of our annual guidance.
So let me wrap up.
In 2019, we made progress in our transformation by streamlining our portfolio strengthening balance sheet investing in capacity, new products, and innovation, which leaves us well positioned for 2020.
In 2020, we will continue on our transformation journey with a major focus shifting to profitable revenue growth expanding margins, which result in EBIT dollar growth. This coupled with an improved a manageable debt profile gives us confidence to achieve our longer term goals with that we'll now take your questions. Operator. Please open the line.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press one zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again if you ever question you made press one zero at this time then one moment. Please for your first question.
Your first question comes from the line of Kartik excuse me Anthony Lebiedzinski. Please go ahead.
Yes. Good morning, guys. Thank you for taking the questions.
So first I just looking at the Fourq you.
You mentioned that the there was the impact of a shorter holiday season.
I was wondering if you guys have any estimate as to what the that could have been as far as impact and the looking at your.
Partial increase of 10% the just wanted to get a.
Better sense.
As to.
The breakdown between existing clients than any new clients. It obviously, you know a tougher somewhat was a deceleration from from prior quarters I know some of that was because of.
The ransomware attack, but if there's anything else that the.
That happened in the quarter, certainly we would love to hear you your thoughts on that.
Sure. Good morning, Anthony Thanks for the question. So first a question on shorter holiday as you've seen from the press. This impacted a number of retailers out there as well as logistics players and it did have an impact on us let me put a little bit of context around so in the fourth quarter global ecommerce revenue.
Who grew 6.5% as reported I'm going to use right you can ransomware malware interchangeably, but that did have an impact in this business and we estimate that's about two points. So on an operational base roughly 9% growth and all lines of business grew.
To your point volumes grew 10% it is a shorter holiday season, some of the clients, we're doing more expedited shipping given the proximity to to the holiday. In addition, some of our retail clients had a slower holiday season, you've seen that in some of the press and we did have one client declare bankruptcy, but I think it's important to put that in context with the full year.
These are going to be ebbs and flows as she goes or any various quarter, we pull back to the full year revenue grew 13% within the long term model and volumes grew a healthy 21%.
Underlying that as an improved delivery performance on a year to year basis.
Significantly benefited us and I think brings confidence on a go forward basis. So yes. The shorter holiday period did have an impact, but when you look cutting context for the full year, we're still pretty comfortable at 13% revenue and 21% volume growth.
Got it okay. Thank you for that and.
It was stand you gave some color as far as a Q1, how we should think about that.
As far as the rest of the a and kind of high high level thoughts as to how we should model. The rest of the year I know for instance, Christmas is going to shift from a Wednesday to a Friday and the holiday season actually will.
Two days longer because of an earlier Thanksgiving, so and you sort of high level thoughts about the.
Q2, Q3 in Q4 as to how we should think about modeling those quarters.
Yeah, and as you think about that we talked a little bit about Q1, if you kind of look at the through the rest of the year again, we're going to see a slightly heavier weighting towards fourth quarter as ecommerce. We told you that the commerce services, making up a larger proportion of our overall business. So you're going to continue to see a slight.
Skew back towards the fourth quarter and at peak holiday season, the magnitude of that I think will be a little bit lower than prior years be should still expect that fourth quarter would be a little bit higher than this past year in particular with the change in a holiday.
On a profit from I think you should think about more of this being towards the back ended the year as we ramp up our efforts to improve global ecommerce profitability, that's going to ramp through the year similar tweets on pre sort this year.
Got it okay. So is that consistent with my.
I think marks or thoughts about the.
The growing pains that you saw in the fourth quarter as you give more scale you should see more profitability in that segment.
Correct.
As I said I mean, all the businesses continued to add clients and that's a great thing.
And as they add volume.
A invest slightly in front end and no kind of work through the operational.
Issues I think to your point about the shorter.
Season, there was those products more than three points of growth correct me. If that's estimated I mean, it's hard to tell on out exactly but thats probably in a ballpark.
All right well, thank you a best of luck.
Thank you.
Your next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.
Hey, good morning, more can stand.
Just on global ecommerce Big picture It sounds like 2020, you still anticipating an operating loss for the year.
Yes, if you could just told me if thats true or not and secondly, as you look at towards the back end of the year do you anticipate global ecommerce to be positive from profit standpoints towards the end of the year.
Kartik why don't I start off I'll, let mark give some color around it.
So let me start a macro level, our 2020 guidance has EBIT growing double digits. There's about a pause there has been a long time since that's happened here and globally Commerce is certainly a part of that and as we develop this guidance there are multiple ways to achieve our objectives. You know obviously its february so a lot of unknowns for the year, which is why we lay out internally a plan a a plan.
Et cetera.
As it pertains to global ecommerce, specifically, we're going to make significant progress and profitability in 2020, and some of the contributors to that growth in volumes, obviously going to need yield scale benefits and transport warehouse and labor, we're increasingly bundling our offerings, we've taken additional pricing actions in a number of areas and we streamline the Oregon.
As a nation.
We also have a long list of productivity actions around things like site consolidation process improvements in labor scheduling candidly, we have specific investments for the team on delivering a profitability.
Now some of these actions are done some are underway and some are going to occur later in the year. So the momentum will build through the year back to your point about exiting the year at our profitable rate, but it's an uncertain or less certain macro environment economic conditions trade, China current affairs virus and the retailer performance, but this business has come a long way.
I mean, if you step back and look at 15 million or revenue in 2012 to over 1.1 billion in 2019, our models are evolving toward profitable revenue growth and we're confident that these actions will help us progress and you'll see significant improvement in global ecommerce.
Yes, I guess from our phone Big picture as you look at global E Commerce.
If you look over the next few years, what's your expectations for kind of profit margins for that business.
Yeah, I'd say, our long term view is still in that 8% to 12%.
And there's nothing that's changed about that.
As you look at.
The arc of that growth, we still think get into 250 million parcels as Keith if you kind of do the math from where we are 125 to 100.
30 million parcels. So I mean, I think that kind of gives you the trajectory of kind of gives you a sense of when we get to the long term model and that will will make progress as we go long I would just highlight what let's dance that we expect significant progress. This year, we've got multiple ways to.
Got to the full year planet I would underline that the the team has.
Important financial incentives to get this business to profit.
This year, but.
Long haul from weather.
And then Stan just one last question on the debt.
As you look good for towards your dad anymore refinancings anticipated in 2020, or so are you kind of done for now and new reassess the portfolio at a later point.
Yeah, a card say, it's good it's a good question. So you've seen we've been very busy over last several months you know back in September we repaid the balance of the term loan for 200 million November we did a new term loan aid for 400 million repaid 150 million and 300 million respectively. Another term loans did a new revolving credit facility and then in December.
We redeemed 300 million of notes now in December you saw that we obtained commitments for 650 million term loan b and that we intend to use a portion of the remaining softer sale proceeds together with this term loan to prepay future near bond maturities. So that obviously, we haven't done that yet I'm not going to give you exact specifics.
But I think if you step back you know this is resulting in a healthier balance sheet lower leverage currently no maturities until October 2021, and then as we addressed in new term debt maturities that debt profile. The towers out in time, I think is going to improve significantly.
Thank you very much.
Your next question comes from the line of Shannon Cross from Cross Research. Please go ahead.
Thank you very much for taking my questions.
Can you talk a bit about that customer that client that decided to stop using the settlement service I'm. Just curious is this a trend you expect or just sort of a one off and then.
How should we think about that business sort of from a longer term standpoint not profile. Thank you.
She and just to clarify the client didn't leave the fulfillment business. The client currently is on a using our shipping a T.I.s for labels and printing those and they were taking advantage of our guaranteed delivery service just as a reminder, this guarantee delivery service was really born out of our analytics, where we have enough history and confidence look.
King at the two and are from locations to guarantee delivery when we guarantee that delivery, we take the risk of any claims. This client has elected not to participate in that guaranteed delivery anymore. So hence we don't have the risks. So that's the revenue impact was too in that treatment now the clients still PB client.
This offering in general has had great take up since its start we believe that it continues to bring a lot of value in a market in particular to small and midsized retailers and I wouldn't see this as a trend I think this was an economic decision for the one client yeah I would just add if you look at global ecommerce broadly and you look at the churn rate a little bit to kind of.
The broader theme of your question.
The churn rate on a year to year basis 2019 to 2018 of the terminate was half in 2019 as that was in 2018.
No substantial progress in reducing churn I think that speaks to the team's progress in providing outstanding service delivery and we saw it clearly in the fourth quarter, where the network.
Performed by any measure.
No.
At above market rates.
Sorry.
In general, we like power position from a client retention.
Does that make different choices it affects.
Some aspects of the.
Revenue recognition, but in general we like like weren't possessions, and though we don't sort of the trend.
Right.
Okay. That's that's very helpful. And then I'm curious and that was that the churn you were seeing sorted out of the old logistics business and and so youve been able to improve because I know they had some customer service issues over time or was it in other areas. That's a significant improvements I'm, just wondering what where specifically principally out on an adjusted.
But also our APC business. So if you go back a couple of years.
Introduced that product.
And I would tell you had some growing pains. When we first introduced so it's really across global commerce, but to your point, it's principally and adjustments.
Okay, and then in terms of third party leasing business.
You know that that east obviously gotten some traction there. So can you talk a bit more about how you're seeing that business, how big it could be over time just.
It seems to make it easier as cash at this point. Thank you.
Sure I'll take that one Shannon so liquid Wheeler, we told you that when we created this we were going to do this with purpose, meaning third party platform the REIT industry talent and the right approach and we ramped up through the year. So in 2019, we signed 14 million unfunded 14 million and deals little bit a color.
That's roughly a 70 30 split between loans and fair market value leases in total we signed roughly 50 transactions. So you can get to feel for the structure of the deals as we look at that and we're gaining momentum as we look into this year, we said that the net impact of Wheeler would be a use of cash of roughly 80.
A million dollars, we're confident with the pipeline that we can build into that level now for the longer term how big of this business get you look we have aspirations to grow at responsibly, but we'll look at this will measure that rate and pace of progress also at the macroeconomic and environment, but we like how we're positioned we think are bringing value to our CLO.
Science, and we think that this business is getting some legs. So let me just had what's stance and so if you think about.
This business broadly there's a couple different dimensions. One is the level of placements. We have so think about that as new loans that we originate or new leases.
And then second is how big do we want the balance sheet.
Good so is this business gets bigger.
It's fully expect to that well.
We'll have options in terms of syndicating.
These assets.
Or other types of activities. So it's it's right in those two dimensions and the way, we think about that Shannon no surprise to us.
We have a.
We have a source of funds that is.
Economically advantaged.
We tend to consume.
Our intent is consumed those funds and then we'll begin to think about how does that we are thinking about the balance sheet going forward.
Great. Thank you that was very helpful.
Yeah.
Your next question comes from the line of Allen Klee from National Securities Corporation. Please go ahead.
Yes, good morning.
Looking at Centex supposed to meet our business.
You said you thinking about.
Mid single topline declines in 2020.
That would be an improvement from from what we've seen.
Can you kind of help us understand.
Where do you get what actions you're taking on your confidence in getting there. Thank you.
Sure. Thanks, Alan So let me talk up briefly about San Tech. So the revenue for the quarter was down 11% as reported recall that we had market exits here earlier in the year. So.
When you adjust for that down 9%, but right you had an impact on this business as well and it normalize died down to roughly 7%, but I think it's important to look at a full year. If you do the same market adjustments in impact to the ransomware revenue is down about 5% and that's in our long term model range and with that as we look going forward we.
Aspect that we will see improvement if you recall from my prepared remarks in the script, we had some issues around installs here in the fourth quarter. That's all recoverable I mean that is as we go out and install those that is items that we can pull back and as we look forward, it's really bringing the new offerings, we talked about in the prepared.
Remarks, new product rolling them out internationally, and then importantly shipping so we're seeing improvements and activation, we're seeing improvements and take up in throughput remember we're very early days into this business on shipping through this platform. So we're excited about that opportunity and we think that the combination of those can be a help as we go.
Through our profit point of view this business operated the full year, 32% as reported in about 32.5% when you adjust for for the malware so rate in the middle of the long term model and we expect and keep in mind that includes 10 million a tariff impact as well. So as we look forward, we like the positioning of send tech we think there go.
Gaining some momentum here and can operate at a profitable level and improve that level of profit on a year to year basis still declined but at a lesser rate. So I mean at various simplistic level. If you think about 2019 as a baseline and you make the adjustments that Stan.
What about for right because well as the market adjustment that was minus five ish, so think about entering into.
2020.
With that as kind of a baseline except.
You've got a completely replenished portfolio that moves around the world.
And increased traction on on service.
Shipping services. So that's kind of I mean, how I think about of the very high level.
Okay. Thank you then then maybe some smaller modeling type of questions.
In terms of.
Your your actions to continue to focus on operating operational excellence, how do you think about how much you.
Our planning to cut out of expenses in 2020.
Look we're going to improve our SGN, a but you're going to see this actually ripple through the the income statement in multiple areas because keep in mind. How this operate so our shared services functions. You know if you step back and look at part of the transformation has been simplifying this business model into shipping and mailing underpinned by finance.
Thing we've gone from six segments, a couple of years ago to three segments and really two groups here commerce incentives. So you look at that we continue to adjust our support services to align to that new model. So as that alignment will yield a savings now some of those savings you'll see at the top and some of those savings will rippled through the business.
We'll also hit and different line items, depending on the source of the spend so we're going to tackle that corporate structural spend we're still going to make investments in other areas and so you're going to see that manifest itself in different areas on the income statement now the operational excellence also goes not just from a pure dollars by improving the support of.
The business. These two businesses are moving and new directions, with new product new offerings and were morphing to support that as well and so as I think about where we ban and where we're going you know we set a couple of years ago, we're going to take out over 200 million to spend and we executed that so I think you should have confidence in our ability to execute this go forward.
Okay and can.
Can you take a stab at what do you think the interest expense will be in 2020, yeah. When weve modeled out the interest expense and if you think about I rattled off all that activity that we've had I think you should think about the interest expense being just very modestly higher than what it was last year.
Single digit million.
Okay. Thank you so much.
You're welcome next question.
Your next question comes from the line of Nada Baru from capital. Please go ahead.
Hi, Good morning, guys. Thanks, taking my question to you, yes, Yes, a couple from me can you Oh, yeah, both blackouts and maybe describe the demand tempt, though.
As you saw it going into the December accordingly, they listen you got a lot of great contacts and bar.
Hi.
And the moving parts in demand.
Yeah, with with sort of constant currency decline being a little bit stronger.
Well declines in you know said a decline denied and centex and.
<unk> growth paper, which you have walked you need the dynamic and ecommerce.
But just sort of across the board lumpy just get a sense. It if you think its business environment.
It's holding up or something is considering its incremental headwind that you guys. There are also seems to have it hasn't yet descried.
And that as a follow up to that as well, let me start at a micro level and then I'll move to a macro level. So.
Text that you asked the question in terms of the trajectory throughout the quarter keep in mind to some extent.
My answer Datas color by the fact that we had the right you confident from October 12 October 20, so that.
That affected.
How we sell demand that being said.
If you look at every one of the businesses I think the demand environment was actually reasonably strong semtech. If you look at what we call written.
Sales, which is the amount of business for life versus their installed that was.
Pretty strong if you look at pre start again.
You know is strong and improving our demand throughout the quarter. If you look at the GFS business Wheeler.
Shannons earlier question.
Strong demand and then a global ecommerce good and I would point out.
As you think about as I think about all those businesses I like kind of how their position for the.
The first half of the or they've got some.
They've got some good deals that are we thinker.
Encouraging we'll see how they unfolding from a macro environment.
No I wouldn't say there's some.
Some good things and some things that are a little concern in so clearly I think you SMC is a positive thing that should help trade. The first phase with China is a good thing we're encouraged by that we're hopeful about burn second phase.
On the other side of it you know the.
The virus him down across their current Abbas.
In China is there's concern in our heart goes out to all the people that have been affected by that.
But it obviously has kind of an uncertain impact on trade. So I would say, we're cautiously optimistic about the macro environment that were.
Dealing with an particularly the trade as you know I feel better about trading today than I did a 120 days ago.
The other thing I'd I'd add an idea is if you step back.
Unfortunately is its impact from the malware incident, it it's real Ray a happened, but it kind of cloud some of the underlying performance. If you go to the macro view Mark highlighted and for Q. If if you look at the impact of exiting the market exits and at constant currency and the malware incident were roughly flat and if you look at the full year.
We grew just over 2% on those same adjustments at constant currency. So third consecutive year revenue growth and I think it sets us well heading into 2020 any kind of put that in contact mean that 2% or 19, and you'll get the guidance the sciarrino adjustment for the.
The client issue that we're talking about what's kind of in that same.
Trajectory, even though that I think GDP is probably a little bit.
More modest growth in 20 is one of the 19, but but overall you know we're paying attention but.
Nothing too.
Be terribly concerned about right now.
And let me just want to buy my second question, which looks like.
All the talk to take even growth.
Yes.
Flattish clots models and 28.
He.
It's really the key personnel costs.
I'm goals from this client that really but yes.
Throughout 2009 pool.
Separately, Stan hits me over the headline start talking about guidance, but a little bit further away from them on the table salt I'll take a risk.
Yes, one plus one of the house that you know slightly positive at the midpoint.
Think of you know 60 or $70 million for that client. That's a couple points. That's kind of that same same zip code that we're in and that's I think oh.
A prudent view of guidance.
Okay. That's helpful. I appreciate it guys. Thanks, a lot thanks none.
Your next question comes from the line of Allen Klee from National Securities Corporation. Please go ahead.
Yes, Hi, just a follow up related to the Corona virus I believe you do some of your manufacturing in China for your equipment.
How do you think about how that could impact your you're having enough inventory or or maybe another way to think of it is.
If the issues there lasted for what time period would it can become a concern.
Yes, I mean again I go back to what I said I mean, it were really.
We're very focused on all the people in China in an hour or heart goes out all those are affected in terms of the substance of your question. It's it's really hard to speculate remembering that.
This is kind of unknown territory as we sit here today I'm not worried about any impact on the supply chain I mean, we're kind of watching cross border trade and how that works out so we're concerned but.
We don't know enough to give you a responsible answer to your question I just keep in mind I mean with a tariff situation. We've also been working our supply chain over the last 18 to 24 months on improving that position, but it's early days here, we're taking care of our people and a and watching this closely with our partners just asked plant.
Part of our supply chain has moved from China as well. So we're we're a little bit more geographically diversified that we were 18 months ago.
Thank you.
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All right, let me conclude so as I look at 2019 just to finish it off.
Yeah, I would say.
A decent year not a great your but a decent year, 2% revenue growth third consecutive year of growth as I said, that's the most as positive.
Indicator of a successful transformation and we take that.
You know we picked up quite seriously. It's the same time and much more focused on narrowed portfolio in markets that are growing end markets that we have a right to win and we are winning and you see that in the global ecommerce business you sit in service levels are providing us it and reduce churn.
You see it and the 20% increase and.
Volumes on a year to year basis, and us since you know point about the balance sheet or the balance sheets and I.
A much stronger placed and if you look at them that that overall in the company or you.
Pick out the finance receivables and cash.
You know from my perspective, that's not only very improve but also very manageable looking forward, we see continued growth.
We see continued growth and how it go back to what Stansted profitable revenue growth going forward. So that's one thing to have increasing profit. That's another thing to have increased revenue growth, but to have both of those.
The same time, there's the next phase of the transformation and double digit profit growth at that so as always a uncertain environment and have some things from a macro perspective that ER and we're paying attention to but we like to demand posture throughout the the fourth quarter and as we enter into first quarter and we're optimistic about the or.
So with that thank you for your time, we'll talk to a 90 day.
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