Q1 2020 Earnings Call
No.
[music].
Good morning, and welcome to the Pitney Bowes first quarter 2020 earnings Conference call. Your lines had been placed in a 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., Marc Lautenbach, President and Chief Executive Officer, Mr. stands to 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.
During this presentation are forward looking statements butter 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.
2019 form 10-K annual report.
Other reports filed with the FCC that are located on our website at www Dot PV backhaul and by clicking on Investor Relations.
The please keep in mind that we do not undertake any obligation to update any forward looking statements as result of new information our 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 in the tables attached to our press release and also on our Investor Relations website.
Additionally, we have provided slides, let's 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.
I hope everyone is staying safe and then good health.
Clearly we are all operated precedent time and unchartered territory.
The cobot 90 pandemic has increased uncertainty around the world impact in the economy.
Supply chain and customer demand.
It's important to note that business is engaged in mailing and shipping, which obviously includes pitney Bowes have been designated essential service by the department of Homeland Security descendant of mail and parcels that's critical to our economy.
In the first quarter through the disruption distractions Pitney Bowes processed about 34 million domestic parcels in our ecommerce business and 4.6 billion pieces of mail increased shorts.
Some of that came at a higher costs, but we understand how vital it service. This is for our clients.
This morning, I'd like to discuss our first priority, which is right on the health.
Well being and safety about workforce.
Yes partners and suppliers.
Then I will take you through where we stand today as a company financially and operationally.
And we'll then take you through how we are addressing the impacts till the 19 throughout the business.
First quarter results.
And where we are through the end of April.
For our part we continue to take the necessary and required steps to ensure our work environment from employees are safe and healthy.
We have business continuity plan in place that are designed to address various threats and vulnerabilities.
Included in response to pandemic.
Hi, absenteeism and an emergency response methodology.
We have specific protocols in place.
But employee becomes infected with or exposed to the virus.
Adjusted our separately policies. So employees can you get paid but do not have to use their sick time. If there are asked to support team.
Our senior leaders are communicating with their teams on a daily basis.
Openway available to address concerns.
Importantly, each of our businesses have been up and running through the situation.
Employee that can work remotely are doing so.
Within our facilities, we're providing protective maps and conducting temperature checks and higher risk locations.
We're also enforcing safe social disappointing and sanitizing equipment and the facilities multiple times a day.
Let me now turn to the federal business, where we stand today.
As we have consistently communicated pitney bowes continues to be committed to maintaining strong balance sheet.
Throughout 19 and earlier this year, we took a series of actions to strengthen our balance sheet by reducing debt and improving our liquidity.
In 2019, we executed the sale of our software solutions business reduced our debt by over $525 million.
And renewed our revolving credit facility.
Today in 2020, we have reduced debt by an additional $110 million and refinance our near term debt maturities, which materially reduced our debt towers through 2024.
Collectively these actions combined with the underlying strength in our Semtech cash flows have made our debt structure more manageable in the upcoming years and we're performing comfortably within our covenants.
Certainly the not forget this crisis, we took these actions precisely to de risk and de leverage the business and to ensure our balance sheet held up in the case, though as an economic downturn.
While we are maintaining a strong liquidity position. We're also taking other actions with our capital structure to preserve cash during that time.
We are reprioritizing, our capital needs around the essential and necessary investments.
We will continue to invest in our shipping capabilities platform homes, and ecommerce facilities as well as necessary investments in new product technology that will continue to support our long term objectives.
However, I reprioritizing, we can differ a portion of our discretionary capital spend in 2020.
Given the economic environment, we are taking a prudent in sound approach to building out our financial services business.
In addition, we will limit M&A and I'm sure our variable spend that's in line with demand.
Assumed in our cash flow scenario planning for the year is maintaining the annual dividend and we don't plan to repurchase shares in 2020.
Let me spend a moment here to frame our operational business model.
Our segments play in different markets.
Three commonality is among them.
First each provides an essential services to their clients and is a critical part of their operations.
Helping to either deliver important documents.
Invoices.
Payment.
And our parcels.
Second.
We have made significant investments in each segment to improve the products and services we offer.
And finally.
We offer different financing options and services across all of our levels to help our clients manage their cash flows which is vital especially during times like these.
Within our legacy business or Centex, we've invested in our Sendpro family of products, which operate on a modern open platform and use of technology that positions us well to serve our clients for their mail and shipping needs.
We continue to see our new offerings resonate with Cline.
Our sendpro online and Sendpro enterprise products enable clients to continue interest and bills statement and parcels, even as they need to work remotely.
In addition.
Just introduced to the market our Sendpro mail station.
And this solution for both small office fine and large enterprises with distributed or home based workforces.
It was the first and only meter device in the industry to utilize postage and the cloud capabilities and as a part of an integrated mailing and shipping solution that extends defensepro family of products.
It was important to note that approximately two thirds of centex revenue as recurring in nature and highest margin.
Sometimes makes up the majority of the company's cash flow and the nature of its recurring revenue that's an important contributor.
I appreciate our business as an example of how our enterprise clients come to rely on us to process. The first class and marketing mail letters and flat as well as they are bound printed matter is timely and efficiently.
We are growing this business over the last few years against the market that is in decline, which is testimony to our strong value proposition and market position.
The bulk of our producer business has been first class now which comprises bills statements and similar business communications.
Although we are seeing modest declines there the more dramatic declines that are marketing.
And E Commerce, we continued to bring value to our retail and marketplace clients to satisfy their shipping days.
Over the last several years, we've invested in built this business to now be over 1.1 billion of revenue, which has been critical to Pitney Bowes overall transformation and has moved us solidly into the adjacent shipping space.
It is difficult to predict with any accuracy, how ecommerce demand will play out during this time.
But we will continue to ensure that we are delivering this essential service to our clients.
What might expect an accelerated shift to ecommerce sales.
On the other side of the letter I think as fair to expect cross border transactions to be negatively impacted in near term due to severely restricted flights.
We may also see consumer purchasing DIGIPASS for a period of time due to the economic uncertainty.
Over the past several years, we've made significant investments in our products.
Forms people and portfolio.
It was investments where major transform our portfolio.
It services, we provide that allow our clients to recognize the value brings to the business.
Well, let me leave you with us.
In April Pitney Bowes marked a major milestone by reaching 100 years.
We've certainly seen our fair share of times of crisis offset.
And many more times our prosperity.
The covert 19 pandemic has disrupted every aspect of life and our commitment to supporting our communities has never been stronger.
And is challenging times, our team is working through ways to support those in need.
They're supporting the business round tables effort in addressing this public health crisis with a donation to project hope to source personal protection equipment from global vendors.
Project scope will then work with nonprofit health care rent.
I'd to allocate the PPS to the medical community in conjunction with the Federal Emergency Management Agency.
We have donated reimage laptops for online learning and have committed funds to our partners at the United Way Garfield committed foundation as well as the Stanford Hospital.
During this time doubled the women men prostate and those are playing a critical in the economy by keeping now and parcels moving that keep our clients equipment running and by keeping our supply chain flowing.
I want to take us moment to acknowledge and thank our employees for their incredible work. They each are performing under very difficult circumstances.
And the same way, we salute the many south central workers that are helping our country through this difficult period.
Through the last time. It your occurs we are proud as a company by having a clear vision and strategy, but what if sustained pitney bowes because our character.
There's a certain rezoning engraft to this company, which enabled us to endure.
The grants is built on a culture of innovation that has created in recurring this company. Many times over in is helping us recreate accompany again today.
Likewise.
Our country as it always does.
Demonstrating resolving innovation.
Get us to the other side it was incredible challenges.
The timeline is when our true grip and ingenuity are tested during these times I'm proud of how our team rises the occasion to keep moving forward.
Pitney Bowes two effects hundred years with that let me turn it over to Stan.
Thank you Mark and good morning.
I sure Mark sentiments and hope everyone is staying safe and in good health and while there are a large number of things going on our primary focus is the health well being and safety our employees our client partners and communities remain our highest priority. During these uncertain an unprecedented times.
Before I turn to the quarter I'd like to first spend some time drilling down into some of the area as Mark discussed.
First our liquidity position.
We ended the first quarter with 730 million in cash and short term investments on our balance sheet.
Total debt is 2.6 billion, which is down 625 billion from a year ago.
Of our total debt 1.1 billion is associated with our finance receivable.
Taking this fall into consideration our implied net debt position on an operating company basis is roughly 0.8 billion.
We have taken several actions and made significant progress and strengthening our balance sheet over the last few years, but especially over the last nine months.
Since the beginning of 2018, we've reduced our debt by 1.2 billion renewed our credit facility and utilizing cash on hand, and do insurance proceeds we materially reduce our debt towers through 2024, putting our debt that very manageable position over the next several years, but no bond maturity to address until October 20.
21.
We also performing within our covenant and as stress tested these ratios under multiple scenarios to ensure we maintain access to adequate liquidity.
We have turned down 100 million of our revolving credit facility. We continue to have access to the remaining balance of 400 million and our incompliance with all the financial covenants contained in our credit facility.
We believe the draw down with the prudent thing to do at the time and there are no immediate needs for the fun.
Such drawdown will be invested in short term instrument.
Looking at our capital allocation and uses of cash we're reprioritizing, our capital needs around the potential and necessary investment to support our long term objective.
Hi, Reprioritizing, we are estimating that we produce our discretionary capital spend by 30 to 40 million, which is about 20% to 30% lower than our original plan.
Within Wheeler financial given the economic environment, we are taking a sound approach to building out our financial services business.
We expect new origination to be no more than 25 million in 2020 as compared to our original plan of 80 million.
This is the right thing to do at this time and will improve our free cash flow for this year.
We remain committed to building out our financial services over the long term.
And we will continue to be prudent when it comes to committing capital.
Assumed in our cash flow scenario planning for the year is maintaining the dividend at an annual run rate of 34 million.
We are limiting M&A transaction and will not repurchase shares in 2020.
We are focusing on working capital, specifically receivables inventory and payables.
We anticipate and impact on collection as we work through payment terms with some of our client and our managing our inventory levels and the timing of our pain.
Let me now provide some color on how this is impacting each of our businesses.
Within Semtech, our clients rely on our products and services to help them tend to central invoices statements documents and parcels.
Centex recurring revenues are high margin and materially contribute the companys overall cash flow.
However, the onetime revenue largely around equipment sales and to a lesser degree a portion of our supplies financing services are negatively impacted as they are more closely linked with demand and usage.
Within our lease portfolio, approximately 40% of our clients, our middle market large cap and municipal account.
And the other 60% our small business.
Which roughly two thirds is comprised of professional services healthcare finance and insurance.
Having it broadly diversified client base across multiple industries is an important factor when managing through these economic cycle.
We have experienced an economic downturns with this portfolio and during the last financial crisis, we adjusted payment terms and services to further help our small and medium sized clients with their cash flow neat.
During that period, we thought write off rates within our youth financing portfolio increased to between a two and 2.5% range, which is up from our normal trend of around 1%, but well below the industry average, reflecting the strength of our portfolio and essential service, we provide to our clients.
We are monitoring delinquency rates daily at this point too early to determine the impact or potential write off level.
We're working with certain clients to offer hardship program, where just other terms in order to help them with a cash flow need maintain our relationship.
Also in Centex, we're managing our supply chain to prioritize what we need to receive and when it's on demand.
We saw a minor impacts our revenue in first quarter as result of this but expect supply to improve in the second half of this year.
Our common services businesses are more demand driven within pre store. We are tracking first class of marketing mail volumes daily on average 80% of the volumes, we process increase or our first class mail, which we are now starting to see a low single digit decline from prior year levels.
The remaining 20% is mostly related to marketing mail, which we are seeing significant decline the clients react to market demand and reduced fat.
Within E Commerce, there are different dynamics to domestic in cross border demand.
Domestic demand primarily around delivery and fulfillment along with digital volumes held up in the first quarter.
However, the timing of demand for our domestic deliveries from our Chinese client changed in the quarter as result of the coated prices.
These dynamics create a different mix and negatively impacted margins in the quarter, partly due to the difficulty in predicting client demand, hence adapting staffing levels accordingly.
Within our cross border business, we experienced a decline in demand along with higher transportation costs due to the restrictions on international shipments.
And our drive to improve profitability and our E Commerce business, we have taken in number of action.
We implemented a general price increase entering plate funny are taking targeted pricing actions, where possible continue to improve our yield.
We are driving a series of productivity actions across the business, including the consolidation of facilities to take advantage of the flagship building. We opened at the end of 2019, New Jersey in California.
Testing and automation within our facilities and in our transportation management system, which will improve our cost per unit. We are seeing some of the benefits for the structural actions. We took late last year and continue to take incremental actions to improve rest DNA.
These actions are critical on our path to profitability and are needed to address the continued shift in market opportunity along with the productivity challenges around coated bank team.
We expect these actions to improve our efficiency and effectiveness, but continuing to bring value to our clients.
Within both our pre store in ecommerce businesses, we have some flexibility to adjust variable costs, primarily around temporary labor based on demand.
There's a certain level of fixed costs related to our facilities fulltime employees and transportation thats required to maintain regardless of demand.
We actively manage all variable components, including working with clients on service time, and consolidating facilities in certain markets to help with productivity and reduce costs.
Within both businesses Cobot 19 is impacting labor productivity as the health safety and well being of our employees as a top priority.
When necessary, we are able to redirect mail and parcel to different facilities within our network, which also come that an increased costs.
Overall as a company we are aggressively managing all discretionary spend naturally things like travel conferences third party Ben unfilled non essential positions are frozen and we will get save thinks there.
We're also reducing marketing programs and taking staffing actions across the company.
We continue to address our spend based on market conditions and are evaluating this on a weekly basis.
As previously mentioned, we also have actions in place around Capex, we're limiting M&A do not participate in any share repurchase.
And our limiting new originations through Wheeler financial in addition to taking actions ramp temporary labor.
Cobot 19 impact us in different ways in each of our businesses and we are monitoring metrics regularly that being said based on the level of uncertainty around the depth and duration of Coca 19. In addition to the impact on client consumer demand and suppliers and how they ultimately impact each of our businesses, we're suspending guidance for the current financed.
Here.
Let me now take you through our first quarter's results discuss some of the trends we're seeing through April.
As in the path unless otherwise noted by statements going forward will be on a constant currency basis been talking about revenue comparison and on an adjusted basis been talking about earnings related items, including cash flow.
Reconciliations for non-GAAP to GAAP measures can be found in the financial statement posted with our earnings press release and on our Investor Relations website.
Before I get into the details of the quarter. It's important to note that similar to banks and other companies with the financing arm, we increased our credit loss reserve to be in compliance with the new Cecil accounting standard.
Effective January Onest. This resulted in a 25 million dollar increase to our credit reserve, which was recorded at the cumulative catch up to retained earnings.
In addition to reflect the rapidly changing macro environment conditions, resulting from corporate 19, we updated to a 100% recessionary case, an increased our provision for credit losses, resulting in a negative impact of 11 million for five cents EPS for the first quarter.
Let me take you through the quarter in more detail for the first quarter revenue totaled 796 million, which was flat to prior year you take into consideration to market exits, which we completed in the first quarter of last year revenue grew 1%.
Adjusted EPS was five cents for the quarter GAAP DCF was a loss of $1.22 and includes a 16 cents charge for the extinguishment of debt two cents restructuring costs and the benefit of six cents for discontinued operations.
In addition, GAAP EPS includes a noncash dollar 15 goodwill impairment charge related to the global ecommerce business as a result of the macro environment condition, along with our recent operating experience.
Also as I discuss the Coca crisis had a negative impact throughout our business in the quarter. In addition to the five cents charge related to our increase in credit loss provision.
Free cash flow with the use of 47 million and GAAP cash from operations for the use of 66 million compared to prior year. The decline of free cash flow has driven by higher accounts payable and accrued liability of which roughly two thirds of this with timing related in part due to the acceleration of interest payments related to the tender offer.
For completed in the first quarter.
Free cash flow versus prior year was also impacted by lower runoff of finance receivable.
I discuss our capital position at the onset of my remarks, but let me briefly recap where we are through the end of the first quarter.
At the ended the quarter, we had 730 million in cash and short term investments on our balance sheet.
During the quarter, we use free cash flow to return approximately 9 million to our shareholders in the form a dividend.
The mid 6 million restructuring payments instead of 26 million on capital expenditure.
We their financial funded 3 million the new originations in the first quarter, bringing the total funded to 17 billion since the inception of Wheeler last year.
From a debt perspective, we lowered debt by 110 billion from prior year and ended the quarter with 2.6 billion in total debt, which is 625 million lower than prior year.
As I discussed earlier I implied net debt position on an operating company basis was 0.8 billion at the end of the quarter.
Turning to the PML, starting with revenue performance by line item as compared to prior year.
This is services grew 9%, we had declines and support services, the 5% financing of 8% supplies of 10% rentals of 14% and equipment sales at 15%.
Gross profit was 306 million, but the margin of 38%. This does the decline of four points from prior year, which largely reflects the shifting mix of our portfolio and decline in E commerce margins in the quarter.
SG enables 248 million or 31% of revenue, which was the decline of 13 million and nearly two points as a percent of revenue from prior year.
R&D expense was $12 million or 1.5% of revenue, which was slightly down from prior year. EBIT was 49 million an EBIT margin was 6% compared to prior year EBIT declined 17 million and EBIT margin declined by two points driven primarily by the gross profit decline, which was partly offset by the improvement in SGN that.
Interest expense, including financing interest expense was 38 million, which was slightly down from prior year.
The provision for taxes on adjusted earnings was $2 million and our tax rate for the quarter was 18%.
Which includes the resolution of certain tax examinations and a quarter weighted average shares outstanding at the end of the quarter were 171 million, which is about 15 million shares lower than prior year, reflecting the share repurchase completed in 2019.
Let me now discuss to performance of each of our business segments. This quarter and what we are seeing through April and our Commerce services group revenue was 433 million, which as growth of 8% over prior year EBIT was a loss.
The 14 million EBITDA was 12.
Within global ecommerce revenue was $292 million, which was growth of 10% over prior year, we entered the year with strong momentum generating revenue growth of 12% through February which slowed to 6% in March.
Delivering return volumes for domestic parcel services grew 11% to 34 million parcels in the quarter driven by the strong growth than deliveries offset by a decline in return by.
As such the revenue growth continues to be driven by delivery and fulfillment.
Our digital shipping apiay volumes more than doubled from last year, and we continue to see a strong take rate on this offering.
Cross border revenue grew for the quarter. This was largely driven by a large client utilizing our cross border logistic services to a since suspended shipments in mid March due to covert 19.
Our borderfree retail marketplace volumes were relatively flat through February but for a sharp decline to March at the corporate crisis ramp, resulting in lower demand higher transportation costs due to restriction on international shipments.
Looking at EBIT recorded a loss of 29 million in the quarter EBITDA with a loss of 11 million.
The loss was primarily driven by the mix of the business.
Within our domestic parcel services, we continue to see delivery and fulfillment revenue outpace return.
Where returns operated at a higher margin and therefore, the overall margin is shipping. Additionally, we are seeing a shifting the mix within our delivery volumes, where we're processing a higher percentage of lightweight parcel, which tend to be at a lower margin that some of the heavier parcels.
In addition to mix, we have higher cost as result of our continued investment.
Our new flagship facility is on the east and West Coast are now fully operational for processing parcels ramped up volumes throughout the quarter.
These are large facilities that we did not have an operation. This time last year, we are proud system consolidating volumes and other site into these new facilities, but in the meantime are incurring incremental costs versus prior year in quarters.
As mentioned Cobot 19 impacted revenue and drove lower productivity in the quarter, which was in part due to the difficulty in accurately predicting demand by client conflicting labor accordingly.
In addition, we implemented CDC guidelines around social distance thing at each sorting facility and incurred higher cost related to sanitizing facilities dagger break and shift scheduling as well as health and temperature screening.
We also increased our credit reserves as a result to covert 19 and to comply with the new seasonal accounting standard.
As we look ahead, there is still uncertainty around consumer demand and the impact of volumes due to the unknown severity and duration of the cobot crisis in April domestic personal deliveries are growing in excess of 40%. We continue to see a higher percent of lightweight parcel.
Digital deliveries continue to grow at strong double digit rate our fulfillment volumes with the addition of several large clients has more than doubled.
However returns and cross border volumes are declining approximately 20%.
We've adjusted our temporary labor based on demand, but we're also addressing a higher level of absenteeism related to co that we continue to drive productivity in pricing improvement in our facilities continue to practice states social distancing sanitize regularly which comes at a cost productivity to help them well being of our employees remains a top priority as we.
Thousands of employees working these facility.
But then pre sort of services revenue was 141 million, which has growth of 4% over prior year.
The revenue growth was driven largely by the investments, we made and acquisitions in 2019, which drove three points, but the growth in the quarter along with higher revenue for Pete.
It was 16 million EBIT margin was 11% EBITDA was 23 million EBITDA margin of 17%.
This represents flat margins versus prior year.
EBIT EBITDA growth versus prior year for negatively impacted by 4 million from unrealized losses on certain investment securities driven by changes in financial markets.
Moving past the margins would have been higher by two points over prior year.
We remain focused on our productivity initiatives and as a result labor cost per unit improved by 3%.
Compared to prior year, the disciplined management actions, we've taken the best since we have made over the last two years continue to yield positive results compared to the prior year, we improve pieces thats, where our equipment per hour, resulting in 115000 less hours to process 143 million more mail piece.
Our prefer business saw a significant impact on marketing nail volumes from cobot 19. During the first quarter first class mail volumes are minimally impacted in part due to the timing of volumes are rescheduled to be process. As you recall the first quarter is to.
Typically our largest processing quarter as any are typically sees an increase in statements and important documents.
There was some impact our productivity our facilities for the same reasons, we saw an E commerce.
Similar to E commerce, this difficult to predict how client demand will evolve as that coated prices continue.
Through the end of April 1st Press mail volumes are declining at a low single digit rate in marketing they'll volumes are down from prior year in the 30% to 40% range.
We will continue to drive productivity. However, this was partially offset by our actions to ensure the safety of our workers within our facilities and as we re direct mail between sites when needed due to the covance situation.
Turning to our Centex segment.
Revenue was 363 million, which with the decline of 7% from product every year, we entered the year with good momentum in the business through the end of February our global shipments, which is the leading indicator for equipment sales with down only 2% from prior year in March as the cobot 19th situation ramped up we saw a steep decline of nearly 40%.
Global shipments.
This resulted in equipment sales being down 15% for the quarter.
We indicated our last call supply chain was impacted by Cobot 19, which was also a contributing factor to the lower equipment sales, mostly as we are unable to source certain components for a higher and product.
Surprise through the end of February down, 7% from prior year, but ended up being down 10% for the quarter again as we saw a steep decline in the month of March rentals financing of support service revenues declined but were partly offset by higher business surfaces.
EBIT was 107 million EBIT margin was 29%.
EBITDA was 116 million EBITDA margin was 32%.
EBIT and EBITDA margins were negatively impacted by 10 million as result of the increase in credit loss provision to reflect the current macro environment conditions, resulting from covert 19th in connection with the application of the diesel accounting standard.
We continue to see the impact Dakota 19, particularly on the transactional flight of our business rape roll you're seeing the equipment sales trend from March continue with US written business down approximately 30% and continued delays and installations, which will impact revenue recognition.
We're seeing a similar decline and supplies largely as a result of lower consumption.
We continue tomorrow delinquency rates on a daily basis, and I've seen a slight uptick through the month of April.
Most of our Santana clients are built quarterly, but the last month of the quarter typically being our largest billing cycle, making it too early to draw any conclusion on delinquency and write offs.
Our supply chain is prioritizing fulfillment based on demand, but still operating on a delay through the month of April we're working closely with our partners and suppliers and anticipate this will normalize in the second half of this year.
Before we take your questions. Let me briefly recap the exit the first quarter was 730 million in cash and short term investments our balance sheet.
We have drawn down 100 million against our credit facility and have access to the remaining balance of 400 million.
We have no bonds coming due until October of 2021.
We're also taking actions within our capital structure and across the business to preserve cash during this time.
As I mentioned at the onset of my remarks based on the level of uncertainty around the depth and duration of Coca 19. In addition to the impact of each rubber businesses. We are suspending guidance for the current financial year.
We are monitoring operations metrics and trends on a daily basis in order to take the appropriate actions in a timely manner.
With that we will 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 and anytime 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 have a question. Please press one than zero at this time and one moment. Please for your first question.
Your first question comes from the line of Kartik Mehta. Please go ahead.
Hey, Mark good morning.
I wanted to dig I know you gave some thoughts about what happened in what's happening in April and Im just wondering if you could give maybe a little bit more granularity around businesses at least trends you saw in April.
I know you provided some for global ecommerce, but I'd be interested in what else are witnessing out there.
Yes.
Two.
So if you start with centex.
I would say that.
Customers are starting to be a little bit more accessible. So if you think about.
What is required to consummate a sale and given that many of our.
Clients were working at home the first is going to be able to find them.
So I would say.
In March what we saw the last couple of weeks, because youre contact rate with clients read that is.
Telephone calls that actually reach plant were.
Pretty low.
In April.
Those contact rates.
We're.
Kind of backup.
Reasonable levels at or above.
Pretty conservative.
If you look at.
Contracts out.
It was slightly below average.
But again stronger than March level.
If you look at how that comes to either.
I would say.
Our.
Written business, which is doing customer.
Agreement.
Was.
Better than end of March are shipped was better than end of March.
Installed was consistent with the end of March and Thats simply because the difficulty of getting service people.
On site too.
Two installed equipment.
So thats kind of how you know April laid out versus March let me pause there and if that makes sense, though.
Pretty short.
Yes, I know that makes sense I was just wondering more could be in the syntech business is the biggest issue net adds for you currently just because we might see increase in small businesses, Unfortunately going out of business.
No the biggest.
That's a combination with our actually if you look at our net ads.
First quarter as well as April read that as new customers because of some of the new products that we have introduced read that as some.
Online products, which certainly.
Our.
Appropriate given the number of clients that are working from home as well as or low end products.
Oh, we're adding a fair amount new customer so no problem there.
Concern.
Over time as what you said kind of bedded in the second half of your question is.
Customer bankruptcies.
So far if you look at.
It's kind of unpack, let's dance at about delinquencies in the number of clients that were talking about in terms of different terms I would say it's de minimis.
Amount relative to the size of the balance sheets that being said we're.
We're early stages in this so I.
I think it's the biggest vulnerability to answer your question is our install base.
And.
Customer bankruptcies, but again, so far so good and if you look back on 2008 2000 I understand referenced.
We we performed better than the industry.
Centex pre sorry, I would say is 10 characterized it.
Reasonably well if you look at the mix of our business its first class.
80% and that was kind of down.
Single digits.
Which is.
It is better than you Sps by.
A reasonable amount and then marketing mill.
Which was down fairly substantially resentenced, 40% to 50%.
So those trends.
Yes.
Then the same.
March to April not it not a huge difference.
I think the interest you want it and.
If you look at global ecommerce if you look at our domestic.
Network, its operating at peak levels or so.
[music].
Think of you know.
October through December the holiday season, and all of the.
Stress and strain.
And.
Commerce networks, and that's the kind of volume, we're staying right now and that volume continues.
You know to be.
Grow and so it's the domestic network.
At capacity, if you looked at the digital.
Yeah.
Business read that as the pie.
Business, we're continuing to see triple digit.
Year to year increases.
Which again mix sense, where we're struggling a touches on cross border what was.
Probably not generally known as a lot of our cross border traffic wise on commercial flights so of commercial flights aren't going.
And you have to go to a different kind of current which is more scarce and more expensive. So.
That's kind of though the April to marry trends and I don't know could add anything.
Yes, the only thing I'd add Kartik is you know we saw returns are also down and obviously that creates a mix issue. When you go through each bid.
Well, we hit the the volume numbers, we don't normally share this but let me do a little bit on the month of April was some preliminary kind of revenue and as you saw the globally Commerce has some good growth in domestic parcels, that's driving revenue and we expect that revenue for the month of April.
Be roughly double digits.
And priests or a first class as Mark said the volumes are down low single digit, but marketing mail is certainly feeling an impact in remember marketing model makes up roughly 20% of our volume we expect that preserved for the month of April be down about 10%.
Then semtech.
As you go through the impact on the volumes for particularly equipment sales and supplies and that has an impact in the quarter I want to emphasize a couple of things, though so when you look at send tech.
He then a written business so when you're signing new deals we are doing new deals, but until you can get an install them. Some portion of our portfolio requires installation for revenue recognition. So we have roughly about $10 million higher than where we were at this point last year at the end of the quarter last year.
Revenue Thats under contract that will be installed at some point in the future as those sites open up but we expect semtech driven primarily by equipment sales to be down roughly about 20%. So you kind of put that all together for PB for the month of April were kind of looking at down high single digits.
As as we would have expected from the volume mix.
Thanks, Dan that's really helpful and just one last question.
Mark on globally Commerce.
As you continue to grow revenue. Unfortunately, the rents are not going the right direction in terms of profitability I realize this quarter had some unique aspects to it because of cobot 19 in some of the increase in expenses, but you know where do you stand in terms of what you need to get into profitability in the past you've talked about number parcels.
I don't know Thats, how you still think about it or if there's another metric you're looking at.
To.
I have an idea as to when it gets to profitability.
Yes, I mean number of parcels is the still the ultimate.
Measure of getting to profitability.
Underneath that you know as Stan mentioned the mix.
Of the kind of parcels is becoming increasingly.
More important.
So we have kind of a sweet spot in terms of.
For our network it tends to be.
Smaller.
Parcels.
But not too small so you know, there's six or seven different metrics, but far and away the most important.
As far as number of parcels, but.
Embedded in that is a lot of productivity measures within minutes.
Within the distribution centers in the Stan mentioned because.
Things like temperature check social distancing.
Moving.
Moving volume around and candidly we had two sites that we brought on line and we still have dual type.
During the first quarters or there was a lot of moving pieces in them.
In the quarter, but we we expect the profitability that business to continue improve this year and I'm still very optimistic.
Thank you very much really appreciate it.
Your next question comes from the line of under Birla. Please go ahead.
Hey, good morning, guys. Thank you taking the quite good.
Hey, good good to hear that you guys are grade.
If you get this can be facility at should lead to think QB and appreciate the April detail Dan It that's really helpful.
I know, you're not giving guidance site.
Does it make sense or would it not make sense right not the is April quote a trend as we think about the June quarter.
And then you guys.
Mark you think it into your opinions in June quarter will be the softest quarter for the year to add a couple of follow up after that thanks.
So let me let me start with the last question.
I certainly expect the second quarter to be.
More challenged in the first.
In terms of how the rest of the year.
Unfolds.
Your guess is as good as mine in a lot of it depends on the state's opening up and how the virus.
It was able to be contain so as we do our internal modeling we just into the second quarters at trough, but that's precisely the reason we suspended guidances.
Our ability to.
Give responsible.
Guidance this point.
As well.
In terms of.
The.
Color on April.
I'm not going to tell you how to do your models.
So in this particular moment or that.
Transparency was important for our investors.
So.
You know, it's it's a data point.
Comp.
All right I have a reasonable amount of confidence and our data points. A couple of wait for the time when you get into to June It just becomes too hard to.
Predict.
Taking it that's totally fair.
Yes.
You guys, making during the prepared remarks.
30 to 40 million.
In lowering of the discretionary spend.
Like the moving parts, but.
Is it is it does it make sense right.
As we move that from the cost they.
Yeah that that a an under that comment was around capex explicitly so as we look we've we've told you that capex runs about 140 million and we think within that Theres, a discretionary component now I want to reemphasize, we're still going to invest in the business and you see us doing that but we're going to be prudent about.
So we may make different decisions on cash versus lease, but we believe that within that framework, we can extract about $30 million to $40 million, which will preserve cash as we go through now there are a number of actions. We're taking overall that will help us also conserve cash and reduced spend so.
Obviously, we're four Reprioritize capex, we talked about certainly travel conferences. All that is done we have hiring freezes and some other and some other headcount actions, we're going to manage our marketing spend to align with where we see the demand and obviously, we're doing things like consolidating facilities.
Within E Commerce and dealing with third party spend all designed to reduce span and preserve cash until we get some better clarity on how this will play out.
Got it at that is helpful and M&A Stanley through your one lend more and it goes look like it.
Any anecdotal business collected in the context of.
You guys aren't giving guidance in July.
It is as you guys laid out is it still possible for the E commerce margins in the December quarter to be positive.
And I'm just I'm, just trying to develop a framework right here.
Kind of broad stroke tend to think about that.
No offense.
And I appreciate the question I mean is very difficult to predict what's going to happen here given the uncertainty which is exactly why we withdrew the guidance. So why we're seeing strong volume growth here, particularly into delivery side of the business. We believe that will get better at fulfillment and candidly we saw.
Signs of that you know our margins improved versus last quarter through February and then as cobot head is a very labor intensive business as an outsized effect in the month of March.
The team there has.
Opex is actually down year to years, a number the actions that they've taken are taking root we expect the contribution from their productivity actions to more more than double in Q2, but the uncertainty around what's going to happen out in particularly a lot of our clients our retail clients and you're seeing what's happening every day when you open up.
On line and look at what's happening in a press makes it difficult to predict whether or not that will be positive exiting the year. When I am confident telling you is that those actions I think we'll take hold and will deliver improvement I think we need to see the macro environment. How that settles out is this are you a D or some other shape of recover.
Great.
That's okay I appreciate it build on that point I mean, it's.
In the wildcard all this particularly in the retail sector.
How that shakes out.
Broadly what we're saying you know is.
Those that are for those clients that are kind of born on that that have digitally native businesses.
There are thriving.
You know and Conversely.
Clients and have a more of a brick and mortar.
Huh.
Business model and use it.
Lines every morning.
Our struggling so.
Last apart I mean, I can kind of tell you how it feels inside of our business but.
The the broader customer environments really hard to predict right now.
Thank you thanks guys.
Thanks, none.
As a reminder, if you'd like to ask a question. Please press. One then zero next we'll go to the line of Shannon Cross. Please go ahead.
Hi, Thank you very much for taking Mike.
Question and.
Thank you for all like Europe Pleasingly, Inc.
There was involved in the postal dream, rather than the workers at the U.S.P.S. or companies like yours are incredibly important right now and.
And doing a lot of things that are sort of Gary behind the scenes now again thanks.
Yeah.
The question I had I guess, maybe more for Stan just on cash flow I know you give details, but I'm curious as we think about you know the potential for benefit from finance receivables or how we should think about in general working capital.
To the extent you can talk about it over the next few quarters, whether or not you think it'd be a source or use of cash and what the various.
Segments. Thank you. Thank you.
Sure Shannon Thanks.
So as we looked at first quarter you know we view the majority of this is timing 17 million versus prior year, but 30 million is timing within twentytwenty. So we expect that we're going to get that back I think as you consider free cash flow. It's important to keep in mind at one of our strengths is the recurring nature of our revenue.
And the resulting cash flow in particular in Centex Semtech revenue is roughly two thirds recurring in nature and that recurring stream is actually highly profitable. So roughly three quarters of their profit is recurring in nature and equipment sales would be impacted and I'll get to your point on finance receivables because it important one and supplies to a lesser.
A degree, but those streams provide good reliable cash flow.
Pre sorting E commerce or more volume dependent when you look at priests or we talked earlier about there's clearly an impact a marketing mail, but first can smell remember most of our clients are large banks insurance companies, they still need to get those invoices and statement. So in first class mills down low single digits and as I think about the year, let me go into kind of Uh huh.
Headwinds Tailwinds and let me start with the Tailwinds. So that 30 million of timing, we expect ticket back through the year and then the Capex. We have a good line of sight on 30 to 40 million dollar of reduction and that will also improve free cash flow and then as you saw from Wheeler, we originated just around $3 million in for.
This quarter and we see obviously, a challenging economic environment given that we expect that those new originations for the year will be no higher than 25 million or so so that's over $50 million of a benefit to cash flow, obviously that cash stays at the bank can camp these repair and preparing purposes, but it's still deliver.
There's incremental free cash flow now to your point, what we saw in the last recession was a run off of the financing portfolio. So this finance receivables and we expect that that will occur to a degree here as well and that would become a tailwind not exactly I want to generate cash, but there's going to be a balance here as we right now.
New business is covert goes on longer that install cycles longer. So it's more likely that we're going to see run off coming in before we see the installs get to go and start to backfill them.
And then another tailwind that I would highlight if you recall, we have insurance coverage for last year's cyber attack and we disclose that we received about $4 million, thus far and if you remember that claim is obviously a lot larger than that and we expect that we'll get some of those proceeds as we go through the year.
Now the Tailwinds side of this is that there will be offset from lower profit performance within the business units given the challenges we're going through now because cobot really ramped up through March, but we expect a greater impact and the second quarter and then I mentioned in our prepared remarks, we do anticipate an impact on part of our working capital per day.
Permanently around our accounts receivable and collections and while we havent seen a material impact yet we believe that that will increase and we're working on the other side of of working capital on driving payables and inventory working with our partners. So that kind of step back I give you a flavor for the headwinds and Tailwinds.
If you look back to the last recession free cash flow. While it was lumpy did did hold up to two a reasonable degrees, we expect free cash flow to improve and that will have the liquidity to whether this crisis.
Thank you that was very helpful.
I guess my next question is is on the write off to each test on any commerce can you give more specifics on I watch or that unless specifically you consider in Paris. Thank you.
Sure. If you go back and look at our accuse over the last several quarters, we've disclosed that we're below 20%, which is kind of our bright line on coverage and what we looked at in the first quarter was the weakness in the performance and co bid exacerbated that so as you look at co bid I think at an outsized effect.
Here in E. Commerce, so that became a kind of a trigger point for our evaluation now we did this with a third parties from and then looked at scenarios out through the year and does this change in trajectory do their current macro environment as well as the weaker than expected profit performance is really what drove that.
Action in the first quarter now we still have confidence in the long term model, but the ramp of getting there. We think has shifted a little bit and the difficulty of predicting how cobot will alter that was part of the challenge of looking that in first quarter. So we've come back we did the analysis and you saw we took a 100.
$98 million impairment. If you recall, we had just over 600 million of goodwill on the balance sheet.
For a global ecommerce as a reminder, it's obviously a noncash event and we still are confident in the long term prospects for our global ecommerce business.
Great. Thank you very much.
Thank you Shannon.
Your next question comes from the line of Allen Klee. Please go ahead.
Yes, hi for the new accounting for.
Credit losses could you explain that and then.
The amount that you took a reserve of five cents per share per share can you kind of explain that's.
What time period, Thats, some covering and.
Is there any reason we should just maybe think this time it going from 1% to two 2.5%.
This time it might actually the charge offs might be a little higher than that thank you.
Thanks, Alan So let me let me take that one so cecil for those who may not have a as much experience with this is the current expected credit losses, which was a new accounting standard that went into effect in one one I would direct you to the charge that we produced a there is a chart and there that breaks down the Cecil in.
Packed and how much went through retained earnings versus how much was in a quarter, but let me. Let me. Let me go through that now so obviously pitney Bowes has a financing business, which includes captive leasing as well as postage loans through an unsecured line of credit and third party leasing we offer that through a PV bank similar to other banks and couple.
As a financing arms, we implemented seasonal accounting standard effective January onest, so when we implemented this.
The standard calls for a one one opening balance adjustment that goes retained earnings recorded a $25 million credit charge reserved in retained earnings on the balance sheet. It's important to note at that time, we looked at our portfolio and we built a model that we've been through their external auditors and that model uses a pub.
Buckley published recession factor in it that recession factor at the time was 30%.
Now that resulted in a retained earnings charge no impact to the piano of 25 million now when you go that becomes your one one opening balance on the reserve. So then what happened in the period is that there's a number of factors you have to look at this every every quarter as you go through and when we did that and we ran our model the recession.
Dr driven by co bid went from 30% to 100% that that change drove $11 million of impact in the quarter across our business now incremental to that was roughly another $5 million that I was it was more normal changes and I'll give you. An example, there known glow.
Thirdly commerce, given some increase bankruptcies with some of our clients. We increased that rate is well and that resulted in additional charge now offsetting that is a write offs.
Two of certain receivables, which was about $10 million. Those write offs are fully reserved so there's no financial impact through the piano for those that charge was taken previously. So if you look are the effective diesel we ended last year with $38 million of reserve, we booked 25 million.
In in opening balance that yielded 62 million and then within the quarter driven by the higher recession factor is the primary driver we had credit loss expense of 16 million in total of which 11 million was specifically related to the recession factor change and roughly $10 million of write offs for which.
There was no PML impact so ending reserve is 68 million now how to think about that on a go forward basis is we'll continue to evaluate this obviously I would not expect the recession factor given we're at 100% have any material impact going forward, but there could be other specific reserves that come up if so.
Certain clients get into trouble and then as the macroeconomic environment improves then you could eventually see that recession factor go back down and and see the reserve come back down to accordingly.
Okay. Thank you so much.
You're welcome.
And at this time there are no further questions.
Great. Thanks.
So, let me, Oh, and where I began matters too.
Hope everyone on the call as well.
Incredibly difficult times, I would like to acknowledge Shannon.
So generous comment about our people want to.
Not just showed pitney bowes team, but Shannon.
Alluded to it.
It's just remarkable in those countries.
People that are doing incredible work each.
Each day to support the economy under.
Sometimes really you know.
Danger circumstances so.
Appreciate the comp Shannon.
Also I'm.
Our next question about a new client I do see this as an opportunity to to help.
To help clients and conceivably pickups from new clients both and.
Suntech because of our online offerings, which are.
Terrific in general, but really terrific that this environment, but also and global ecommerce, whereas I said domestic networks our operating.
A.
Capacity in many instances.
Some of the others in the.
Market will not be able to fulfill existing client demand side.
Moments like this are always opportunities for market share to.
The change hands, and our largest competitor and suntech.
You know pick and 30% or team off the field so.
There there's lots of.
Lots of moving pieces.
Let me conclude over the last several years we've taken.
I forgot strategic actions.
This ranked our portfolio products and our balance sheet for long term, we've executed on the sale of production mail software solutions.
As well as many other smaller.
Divestitures in international markets.
These actions collectively simplified our portfolio.
And also focus on mailing and shipping or working underpinning financing.
We've also leveraged and take advantage of tax reform to repatriate cash we view this combination to strengthen our balance sheet.
Reduce debt.
And our financing terms in the.
Near term or.
Modest until next year, we're going to continue to invest.
Jason spaces, because we think.
Markets that we're pursuing.
Still over the long term have attractive.
Yes, and user growth characteristics and good option that profit.
Like everyone else, we're not feel the affects of covenant team, but everything we've done for the last several years to strengthen our balance sheet to strength our portfolio.
Reposition this business put us in a much better place.
To weather the storm in our focus is to fulfill our roles in the central business.
And.
Do the necessary things on a day basis to continue to move mail parcels.
Finance small businesses.
But importantly to come out of this.
Crisis or even stronger than before.
So with that I'll close todays call the.
Conversation on filling some of the other comments stuff.
It out I'm in June will be available to take you through that so.
Again, I hope, everyone as well and we'll talk soon.
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Ladies and gentleman that does conclude your conference for today. Thank you for your participation and for using 18 T. teleconference. You may now disconnect.
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