Q2 2022 Pitney Bowes Inc Earnings Call

Good morning, and welcome to the Pitney Bowes second quarter earnings 2022 results conference call. Your lines have been placed in a listen only mode. During the conference until the question and answer segment. Today's call is also being recorded if you have any other.

Jackson's please disconnect your lines at this time.

I would now like to introduce your participants for today's call Mr. Marc Lautenbach, President and Chief Executive Officer.

MS Anna Chadwick Executive Vice President and Chief Financial Officer, and Mr. Nab, Zacher, Vice President Investor Relations Mr.

Mr. Zacher will now begin the call with a safe Harbor overview.

Good morning, everybody.

This is zachary I manage the Investor Relations program for Pitney Bowes.

I'd like to welcome everyone to the call. This morning, we very much appreciate your participation.

Part of my duties. This morning include covering the usual and customary safe Harbor information. So please bear with me for just a moment.

Today's presentation will include 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.

For more information on these topics. Please see our earnings press release, our 2021 Form 10-K annual report and other reports filed with the SEC that are located on our website at www Dot <unk> dot com and by clicking on Investor Relations.

Please keep in mind that we do not undertake any obligation to provide updates to forward looking statements.

As a result of new information or developments.

Also for non-GAAP measures.

Reconciliations to GAAP accounting can be found in the tables attached to our press release and also on our Investor Relations website.

Additionally, we provided a slide presentation on our website that summarizes many of the points, we will discuss during today's call.

Our format. This morning is gonna be familiar Marc Lautenbach, our president and Chief Executive Officer will begin with opening remarks, he will be followed by <unk> Chadwick, our chief Financial Officer, who will provide a deeper discussion of our operational and financial results I'd.

I'd like to turn the presentation over to Mark Mark the floor is yours.

Thanks Ned.

Good morning, and thank you for joining today's call.

While there are many positive aspects to the quarter.

Second quarter results were disappointing and below our expectations.

The quarter played out against the most complicated market environment I have ever experienced.

We were not able to overcome the effects of the growing strength of the dollar.

And the Covid Lockdowns in China.

So I'm talking presort turned in solid results in a very challenging environment in those businesses in aggregate grew revenue for the quarter.

Equipment sales in <unk> were strong and our loan originations and global financial services showed solid improvement.

And importantly, finance receivable stabilized in the quarter.

The overall performance of these businesses bode well for the future.

While trends are rarely a straight line.

We assort and Suntech are well positioned going forward.

Gordon Suntech and Presort was unthinkable, a few short years ago and it was the result of smart investments.

Focus and solid execution.

Often there are concerns when companies broaden our focus away from their historic core business that they lose focus on the core.

The trajectory of <unk> and presort solid evidence to the contrary for our company.

There are a few examples of companies overcome in secular decline, but there are precious few companies that have been able to reinvent their core and we have done it and we continue to do it.

Results in global ecommerce were mixed.

But the big picture view of activity in quarter continues to support our long term thesis for this business.

In particular.

Long term model is centered around growth in the domestic parcel market and continuous operational improvement to expand profitability.

In the second quarter, our service levels were strong.

This enabled us to attract and win new customers.

Importantly, our pipeline is excellent for the second half of the year.

Our gross margin per parcel and the overall margin of the domestic delivery business showed substantial improvement year over year.

Our significant operational improvements bode well for future profitability, when we were able to achieve higher volumes.

Which we should achieve based on our improved operational capabilities and as macroeconomic conditions improve.

That being said current economic conditions present, some short term pressure on the business with a moderation in volume growth.

The longer sales and customer integration cycles.

Also the Covid lockdown in China, coupled with pricing pressures.

The headwinds in our domestic parcel business.

China inbound volume as part of our domestic parcel business, because we don't manage any cross border logistics for it.

Despite the dramatic drop in China inbound business, our domestic parcel business grew 6% for the quarter.

Well, it's hard to make predictions regarding COVID-19 in China for the moment the country seems to be moving in the right direction.

And our cross border business, we saw a negative impact and outbound United States demand due to the rapidly strengthening United States dollar.

We expect that the dollar will remain strong versus the euro for awhile credit and a headwind for our cross border business.

To sum up the team is making good progress plenty of new opportunities and operational improvements to manage costs, but we're very aware of the short term challenges in the cross border businesses.

This is probably a good segue to address our decision to sell border afraid to globally.

First the transaction allows us to focus on what we do best the logistics aspect of our cross border business.

Second the deal also opens up is set up cross border logistics opportunities with globally that we see as meaningful.

Third and more broadly the transaction shows how even as we are confident in our long term thesis on our E Commerce business, we make adjustments to specific aspects of the strategy as conditions dictate.

And finally.

It is also a clear affirmation that we will take every opportunity available to the company to unlock value for our shareholders across our portfolio just as we have consistently done for the last decade.

Our first priority for capital allocation continues to invest in our business and opportunities for profitable growth.

As we believe that smart investments in the business will create the most enduring value.

Next priority has been debt reduction to maintain appropriate levels of financial leverage which we have.

We reduced debt by $1 billion over the past four years.

As we enter a more uncertain economic environment, we intend to use the border free proceeds at least initially to operate with a stronger liquidity profile.

And that approach offers incremental strategic and financial flexibility as well.

<unk> macroeconomic environments off.

Often provide company's unique business opportunities.

That being said, we look at all investments on a risk adjusted basis.

The macro environment is more uncertain the threshold for those investments goes up.

We will be prudent in how and when we commit capital.

Let me conclude this very important topic by emphasizing our capital allocation, including returning cash to shareholders.

10 year old topic with the board and all options are on the table the.

The sale of water free is also relevant to a topic that I get asked about from some of our investors.

Typically the summer or the parts of Pitney Bowes and whether it would be better to separate the company into independent entities.

Just like capital allocation. This is a regular topic with the board and something that evaluate on an ongoing basis.

That the portfolio changes, we have made have credit strategically coherent portfolio with meaningful synergies across the business.

There was also a logical consistency in the way, we help clients simplify and manage their mailing and shipping needs.

Nevertheless, the board is always open to different ways to create value for our shareholders.

Importantly, our view that the current construction and strategic intent of the company is the right. One for now does not just our internal belief we have tested the market move away is consistent.

Consistent conclusions from those dialogues does that the best way to maximize shareholder value is to execute against the existing plan.

Addition to these assessments with active market participants the board recently commissioned a leading consulting firm to evaluate our approach there to concluded that maximizing shareholder value will be driven by further development of GE you see within the broader Pitney Bowes enterprise.

From my Vantage point I think the most important takeaway from those conversations.

The formation of the current overall strategy and.

It was crucial for us to develop positive and consistent profit margins in our juicy business to achieve higher valuations.

Of course, the board will continue to revisit this topic on a regular basis and we'll explore any opportunity that maximizes long term value.

To conclude the second quarter was not what we had hoped for and the macroeconomic environment going forward is uncertain at best but that being said as that work underneath the hood of the business my confidence in our future continues to be very high I would now like Ana take you through the details of the quarter.

Thank you Mark and good morning, everyone.

Unless otherwise noted I will speak to revenue comparisons on a constant currency basis.

Other items, such as ebay EBITDA, EPS and cash flow on an adjusted basis.

Let's start with a high level review of the year over year comparison of our financial statement data points.

Followed by a discussion of our segment results.

The balance sheet cash flow and our outlook.

Total revenue for the quarter was 871 million, which is down 2%.

Gross margin for the company was $274 million.

<unk> $301 million for the same period last year.

9% decrease.

As a percentage of total revenues.

Gross margin decreased 200 basis points to 31, 4%.

Total EBITDA was $82 million down from $96 million.

Bad debt was $39 million down from $56 million.

Interest expense was $34 million down from 36 million in the prior year, driven primarily by reductions in total debt outstanding.

Our tax rate returned to more normal levels and was 26% in the quarter.

Adjusted EPS was two cents compared to 11 cents.

Last year's 11 cents figure included tax benefit and insurance proceeds that totaled four cents.

At the end of the quarter weighted average diluted shares outstanding were approximately $177 million.

Turning to cash flow.

Cash from operations was $35 million for the quarter compared to $79 million in second quarter 2021.

Free cash flow was $6 million in the quarter compared to $87 million in prior year.

Approximately 75% of the $81 million Delta was driven by reductions in client deposits.

A result.

I mean difference in postage spend purchase account replenishment.

Free cash flow was also affected by lower net income.

<unk> of insurance premium payments and partially offset by a decrease in capital spending.

Capital expenditures for the quarter were $32 million.

Down from $40 million in prior year.

For the first half capital expenditures were 64 million compared to $84 million in 2021.

As I shared in our last call capital expenditures overall are expected to be lower than last year.

During the quarter, we paid $9 million in dividends and made 5 million in restructuring payments.

Looking at our balance sheet cash and short term investments were approximately $582 million at quarter end.

Not including the cash from the sale of border free which closed on July 1st.

Of the 582 million total.

Almost 40% at Pitney Bowes Bank.

Approximately 25% is held internationally and the balance.

Mastic accounts, mainly to cover our usual and customary working capital needs.

As Mark mentioned, the proceeds from border free well augment our financial flexibility should the macro environment become even more challenging.

Also our 500 million dollar revolver remains undrawn.

Total debt was $2 2 billion compared to $2 3 billion at the year end 2021.

Adjusted for operating leases and cash.

Operating company debt was 593 million compared to $533 million at year end.

The following segment information is summarized in our press release and slide presentation.

Both of which are posted to our investor relation website.

Let me start with pre sorry.

<unk> revenues were $139 million in the quarter, which is a 3% improvement from last year.

New customer additions and increased revenue per piece.

More than offset volume declines.

Total sortation volumes of $3 8 billion pieces was down 8% compared to prior year.

EBIT for the quarter was $13 million compared to $16 million a year ago.

EBIT margin was 9% compared to 12% in second quarter 2021.

The decline in margins was driven largely by increased labor and transportation costs, including the change in our allocation methodology that we discussed last quarter. Additionally.

Additionally, our fuel cost doubled year over year.

Looking into the second half of the year.

We are optimistic that we can return to mid teen EBIT margin levels driven by two key factors.

First.

Adjustments in the U S. P. S work share discount program will enable us to recover cost we are already experiencing.

Second productivity gains from our multi phased sort of refresh will help with labor costs. We are also increasing the number of in source transportation lanes by utilizing excess capacity, which we believe will lower the cost of transportation.

The bottom line.

We continue to feel very good about second half growth prospects for presort driven.

Driven by better revenue per piece and increased mix of marketing mail and the above referenced cost measures.

Moving to sent deck.

<unk> reported revenues of $339 million in the quarter.

A slight increase over prior year, which as Mark noted is a significant accomplishment for a business that has natural headwinds.

The revenue stability was driven by 7% higher equipment sales and 2% increase in supplies as well as better business services revenue.

Shipping related revenue, which is now 12% of segment revenues improved 21% versus prior year.

Finance revenue was down 7% largely as a result of a revenue mixed shift resulting from equipment upgrades.

At present, roughly 40% of our Centex client base has undergone and equipment refresh and we expect the balance to upgrade over the next few years.

To ensure compliance with U S. P S security requirements, which we think bodes well for equipment sales going forward.

EBIT was 96 million compared to $107 million and EBIT margin was 28% down 270 basis points from second quarter 2021.

The changing revenue mix.

Along with inflationary pressures and component costs were the primary causes for the margin decline.

For financial services, we are very encouraged by stability in net finance receivables, which bodes well for future result.

And our continued improvement in portfolio quality.

Specifically 30 day delinquencies were down 40% from prior year and flat to last quarter.

As of quarter end net finance assets were at 1.15 billion compared to 1.14 billion for prior year.

Let me shift to global ecommerce.

Within D C revenue in the quarter decreased 5% to 394 million.

Gross margin in the quarter was 38 million compared to $45 million a year ago.

Segment EBITDA for the quarter was negative $7 million compared to positive $8 million in the second quarter of 2021.

Year to date EBITDA is breakeven.

EBIT for global ecommerce was a loss of 29 million compared to a loss of $11 million a year ago.

EBIT margin was negative 7% compared to negative 3% in the prior year.

While the headline numbers are obviously lower we are seeing two very distinct undercurrents inside our global ecommerce segment.

Essentially divided by operations with a domestic component versus operations with an international component.

I'll start with cross border, which is where the primary challenges exist in global ecommerce.

Our cross border business is largely focused on helping our clients move parcels or originating in the U S to international destinations.

It is roughly 25% of segment revenues.

Cross border revenues were down mid teens in the quarter.

Similar to first quarter.

Weaker overall economic conditions, especially in Europe are dampening e-commerce spending and with a strong U S dollar.

<unk> originating in the U S and sold into international markets.

Which describes our cross border client base are simply less competitive on price.

Additionally, border free which has been a part of our cross border operations and was sold on July 1st represented roughly one third of the revenue decline in cross border revenues in the quarter.

Bottom line is that macro conditions are negatively impacting global ecommerce international operations.

Let's switch to domestic parcels, which is over half of segment revenues, where the news is more encouraging.

First we continue to believe the domestic parcel market.

Yes.

Biggest opportunity with a large and growing addressable market.

It has been a significant focus of our business investment over the last several years.

The headline is we.

We're making very good progress growing revenue and profit for domestic parcels.

While total volumes in the quarter decreased from 44 million to 39 million.

If you exclude parcels that originate in China and.

And our process by our domestic parcel network volumes grew 4%.

Said, another way parcel volumes from North American clients grew and we believe we outperformed the domestic market based on a range of market data.

The decline in parcels originating in China, and again processed by our domestic parcel network was roughly $6 million in the quarter and was driven largely by the well reported lockdowns that country experienced in the second quarter.

Despite the downturn in China volumes domestic parcel revenue increased mid single digits as a result of much better revenue per parcel.

In terms of network efficiency, we continued to make excellent progress in generating better gross margin per parcel.

Year to date, we have increased per parcel margin by 35 cents compared to the first half of 2021.

When one love to place this figure.

Hundreds of millions of parcels flowing through our network.

Routeman inefficiency turns into meaningful dollars.

Let me talk about service levels, another contributor to our volume and revenue growth.

The investments we have made in technology systems and people have allowed us to create a fully integrated automated national network that provides us with more predictable service and costs.

In the second quarter that work has culminated in a dramatic improvement in on time performance and we are now consistently delivering market competitive services.

Better on time performance has helped drive substantial client wins.

We completed 112, new signings in second quarter.

Up from 56 in the first quarter of 2022.

For example, we recently signed an agreement with quiet platforms.

Would you still logistics operation owned by American Eagle Outfitters.

We expect the arrangement to begin generating meaningful volumes into our network beginning in the fourth quarter.

These new signings will help provide momentum and offset the headwinds that are appearing in the domestic e-commerce market.

Third party e-commerce data for the quarter indicate that volumes are down mid single digits.

But in the context of inflationary trends dollar spent are flat to slightly higher.

Let me now complete the financial discussion on global ecommerce.

We experienced higher operating expenses in the quarter.

Including an increase in research and development as well as an accounts receivable write off from a client bankruptcy.

Those factors also contributed to the overall decline in segment EBIT.

Indiana.

Our increases in domestic parcel revenue and profit were more than offset by lower cross border performance.

Recently, we have received inquiries about the United States Postal service reseller program.

Let's start with some background.

The current U S. P. S. Reseller framework was established in 1992 with a handful of designated firms that are essentially outsource postal service sales represent.

They recruit small and medium sized shippers to drive U S. P S parcel volumes reach.

Recent trade press articles.

Have suggest that that the U S. P. S will discontinue the program.

What does this mean from the Pitney Bowes perspective.

We believe the U S. P. S is looking to adjust how it works with <unk> and.

And compensates third parties that drive volume to its network.

While we are not a reseller.

We have been one of those parties driving U S. P S volumes.

And we believe strongly we can do so going forward with our ecosystem relationships and state of the art technology.

For digital offerings within our centric business, we believe our new arrangements with the USPS will enable us to maintain the same economics, we have now.

Also our physical network inside of global ecommerce, both domestic and cross border are not related to the reseller program at all.

For digital offerings that reside inside of global ecommerce.

There is work to do in assessing the potential positive or negative effects and how our services and technology will fit into the new USPS reseller landscape. We do believe that the capabilities, we have built over the years support substantial.

<unk> volumes in the U S. P S network and integrate well with U S. P S as strategic intent.

That combination should enable us to create attractive economics for pitney Bowes going forward.

And replaced the limited, but none zero potential decline in our gross margin should the program be discontinued.

Lastly, let me provide some perspective on the outlook for the full year.

Based on uncertain macroeconomic conditions.

First half results and.

The sale of border free we are updating our full year outlook as follows.

The company expects full year revenue on a constant currency to range from a low single digit percentage decline.

A low single digit percentage increase.

The company expects full year EBIT to range from a high single digit percentage decline to a mid single digit percentage increase.

We also expect to generate solid adjusted free cash flow for full year 2022 though at a lower level than last year.

The primary differences are driven by lower client deposit strengthening of finance receivables.

Just in working capital against sizable benefits in 2021.

And partially offset by a reduction in capital spending.

For the third quarter, we expect overall financial results to be roughly comparable to second quarter 2022.

As Mark and I both shared.

Second quarter numbers were disappointing.

Nonetheless, there is more progress happening inside the organization than what the financials illustrated in the second quarter, especially in global ecommerce.

We believe the operational detail, we provided adds perspective on that front.

Looking ahead, we expect solid results in presort incentives in the second half.

We are working to drive volumes into global E Commerce domestic parcel operations, which will leverage the scale, we have built and help generate the profitability everyone expects.

And while our adjusted free cash flow expectations are lower first half EBITDA less capex interest expense and taxes represents a solid improvement versus prior year.

We remain committed to being a consistent cash flow producer with appropriate amounts of liquidity as we I'll tackle a more challenging macro environment.

We look forward to your questions operator, please open the queue.

Thank you.

Ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the command up one then zero once again, if you have any questions or comments. Please press one then zero.

Our first question comes from the line of Kartik Mehta Northcoast Research. Please go ahead.

Good morning, Mark and Anna Mark just on the global ecommerce business. Obviously, you laid out some headwinds that were out of your control, but that might persist for a little time.

It gets difficult to say for how long, but are you, making any changes to the business as a result.

Or is there enough other growth in the business that Youll continue investing.

Great question, and you're right. It is hard to predict how long these headwinds will.

But our working assumptions around last for a while so I don't think this is a short term phenomena is going to right itself in the third quarter.

To your question, we are making changes first of all every aspect of cost in our cross border business.

Is under review.

We are making investments, but we're making the investments.

Principally.

As to Canada lanes, where we think we're a little bit more insulated from the currency disruptions and candidly we've got enough density in our volumes that we've got.

A critical critical mass and we've got competitive advantage versus others.

We're pairing back the investments overall in places, where we think are going to.

We faced some headwinds and we're doubling down in some places where we think we've got some natural advantages that are less susceptible and I would say in some ways you know well.

I wouldn't say the border free was.

Our response to the currency dynamics.

[noise] speaks to I'm sorry.

So it really speaks to that overall thesis.

And then just just a follow up Mark you talked a little bit about at the beginning of the call that you had asked a consulting firm to kind of look at the business what makes sense, but I'm wondering.

The conclusion that they came to kind of keeping the company together was it because of the synergies was it because of other issues.

I know, it's a I'm sure a long report, but anything you could summarize as to why or what conclusions work.

Sure.

Listen I think there was a couple of finding is first of all Oh.

Firmly overall, our thesis and the strategy.

The second that says what whether there are strategies, where there are synergies rather that.

Our meaningful across the two or three businesses that wasn't this positive factor the most important factor was.

For Juicy in particular that business needs to be further along in terms of volume and profitability and ability to kind of stand on its own two feet.

So that was kind of the.

Principal findings.

Thanks, Mark I really appreciate it you.

You bet.

Our next question comes from the line of Ananda Baruah Loop capital. Please go ahead.

Yeah. Good morning, guys. Thanks.

Thanks for taking the question and a tricky environment out there.

Got it.

<unk>.

I guess, just two if I could.

Gen six three sort of held up well.

Are you hearing sort of anything from your customers in terms of.

So macro increasing trepidation.

Any context any contract there or is it like.

Is it just very.

Very cleanly steady as she goes right now even in yeah conjectural conversations.

I would say across the board we're hearing consistently from clients that this is.

A very tricky environment and you know some are seeing near term signs of recession than others, but across our entire portfolio.

You know every customer we're talking to and candidly I always see Oh, I'm talking to sue the chat.

Challenging environment, I would just say suntech and presort and candidly, even our domestic parcels been Simpson G C.

Operating it pretty well and pretty difficult market conditions.

And so and then the second question is actually I know.

Our global ecommerce.

So you Mark you guys have any sense.

And then any impact or any discernible impact.

Jason.

The macro there yet.

The metrics are solid but did you did you expect them or they've been strong or is there no discernible real impact yet from the background why not call. It.

Domestic North America.

G C.

No. There absolutely is there absolutely was impact so I mean, I don't know what's happening as well.

We're pretty successful in the market right now signing up new customers and so you know what I talked about the 100 wins on top of the 40 or 50 wins that we had in the first quarter. So we take that as affirmation that we've got a value prop that hunt on the other side of it you know we've got customers existing customers.

Whose businesses under a real stress. So we're kind of in this you know, we're adding a lot out the front door.

You know for some of our existing customers no business and no volumes, therefore are being hurt.

And then between what I would say our sales cycles and integration cycles and I've said this in my comments or lack of it. So if you look at the 102 customers and you know I haven't talked about.

A large one in particular that we'd hope to.

Oh come on line in the fourth quarter, that's been a slow integration. So it's I would say that it's it's a little bit like running in quicksand, where we're moving forward, which I think is distinctive versus others in the industry, but it's certainly a more challenging environment in an old camera that the bankruptcy that I talked about as well as kind of.

Another sign of distress.

Distress. So it's it's not that we're not seeing that that's just domestic parcels.

Business in particular, I think we're operating in a difficult environment pretty well and best you know best we can see versus competition.

We're just holding our own if not more but yeah. The reason I like this dynamic because eventually you know the customers that are having a distressed right now their business is going to come back. So you get the benefit of their business coming back and then you know ultimately all of these new ones coming online.

So it's you know it is for sure in the short term a little bit frustrating, particularly given all the good work. The team has done on service levels and efficiency of the network and all that kind of stuff, but that's that's why we're talking about you know the internal fundamentals as you kind of work undercover you know we think are pretty solid.

That's really helpful context I appreciate it thanks a lot. Thank you.

Sure.

I mean, it was great quarter for us to sort through and explain I know, it's a complicated quarter for you also.

A lot of it.

Yeah.

It's it's the depth of the dentist communication, we've had since I've been here.

Yeah, Yeah. Thanks, Mike appreciate it.

Our next question comes from the line of Matt Swope of Baird. Please go ahead.

Good morning, Mark and Anna and Ed.

You guys did you guys give some pretty good volume data on presort and global ecommerce is there a similar kind of kpis for send pack like Ani told us that the presort pieces were down 8% year over year is there any kind of volume measure or a way to think about centex.

Are those are headwinds at the same way.

The short answer is it's a slightly different business model. So if you look at how presort makes money.

And to a degree how.

It makes money it's on throughput.

As you look at the Centex.

Business model.

It's kind of around the equipment sales the financing revenues the services so.

We do have throughput measures for shipping, which Duncan kind of gets you through but it is fundamentally a different.

A different model.

Subscription is also important and becoming more important.

So, we'll unpack that a little bit for you, but I would say you know as I look at that business.

And by the way the subscriptions point is an important one because that to a degree is changing trading out you know short term equipment revenue for longer term.

Subscription so it's a good thing and it's kind of where we want the business to go and we've been going there you know slowly over the last several years, but it certainly has a different profile in terms of how you.

Recognize the revenue.

So we'll get you a little bit more there and all that that's very helpful. Mark.

Could you could you just elaborate a little bit on that last piece you said as the as this sort of.

Lumpier equipment.

Place by subscriptions are people just effectively renting that from you so that smooth things and you get a longer commitment from them or how does that how does that change that dynamic.

And so in essence, no different than any of our software as a service type companies. So if you think about that transition to software as a service companies go through their training and Purion short term revenue for a longer a longer revenue stream in that longer revenue stream as you know different contractual agreements with it but it is more of our.

Offerings go online that becomes a more prominent.

Aspect of our financials.

I see that's that's great and then if I just change gears sort of tip it to the cash and liquidity commentary.

Could you comment on.

Whether you guys have sort of I.

Minimum cash number I know you've been asked this before.

But especially given that you have this undrawn $500 million revolver now you have these asset sale proceeds that have come in.

You're still paying the dividend, which is small I know.

But you have your bonds that are traded down a lot and you might have some opportunity to buyback bonds in the open market at very attractive levels cause could you just sort of put all that together.

How you think about cash and liquidity and an opportunity.

I'm sure. This is on them. So in terms of cash and liquidity is as I mentioned in my remarks here.

We think of it in in three.

Big pieces right. So when you take our total cash.

We have about 40% of that at the bank and we have about 25% international and that residual that we have in the U S and I'll just speak to the U S cash the way we think about it is we like to have about.

A week of outflows.

Not net of the inflows just to have that in cash on hand for the U S.

And that translates when you do that math to around that $200 million level of course, as our organization moves and need to change that that could change, but that I hope that gives you a little bit of a perspective of how we think of the cash.

No that's definitely helpful and so then just the other pieces and how you get this now you get these proceeds in from border free and you were talking about sort of just supplementing your liquidity would you consider using those to more actively reduce debt or even even to get more aggressive would you ever draw on the revolver.

To buyback bonds at a significant discount that's available right now.

So listen as I said in my remarks, you know from board perspective, as we think about capital allocation.

All options are continually about it isn't all options are continually.

On the table. So you know it's.

We like to see a little bit more data and we got a little bit more analysis to do before we kind of conclude.

What's going forward, but I think what you should assume is that while all options on the table you know we're gonna want it remains some degree of flexibility both strategically.

And financially.

No.

For the moment, we like to have a stronger liquidity profile and as I said in my comments and views.

These moments in time often.

Present opportunities. So for example, there was a couple of smaller.

Smaller acquisitions in presort that probably weren't available to us.

A couple of quarters ago that all of a sudden our available at pretty good prices and those things are accretive so you.

You know, it's it's hard to make blanket statements beyond Ah I can assure all of our investors and everyone on the call that the board works with this all the time and all the different options.

Or not we would draw on the revolver to buyback that.

Probably not but you know again.

We're very open minded about how we think about this.

That's great Thanks, Mark and Anna for the candid responses.

Next question is from Anthony Levinsky's Somebody <unk> company. Please go ahead.

Yes, good morning, and thank you for taking the question. So just looking at equipment sales. So two quarters in a row that the that increase here.

Second quarter revenue from that segment was roughly in line with the first quarter. So.

Was there anything specific that drove that as far as the equipment sales increase and just wondering how you how we should think about sustainability.

Equipment sales.

If I said brilliant execution, because I leave it at that.

[laughter].

I think it's a great question when we think about all the time. So first of all I just think the team executed quite well, so I think I wouldn't drive through that.

We are in a very good product cycle, and we expect that product cycle. The last not just for the next couple of quarters, but candidly for the last couple of years.

And then underneath that as Ana said in her remarks, the U S. P. S has put out new security requirements are for the devices, which customers need to comply with.

That creates kind of a natural tailwind I think honestly, we're 40 or 50% of the went through.

Refreshing that technology base. So we got some good you know we've got some good tailwind and some good momentum for the next you know.

The extended period of time in that business. So we like how the team is executing I really liked the product cycles.

And then we've got some you know some tail winds with some U S. P S.

Changes in what they are requiring for security.

Got it yeah, that's it thanks.

That's very helpful color and then you know in terms of the global ecommerce segment. So.

You enter the back half of the year and more specifically the fourth quarter were just curious to get your thoughts as far as <unk>.

How does it.

Yeah, I know, it's still a chicken environment, obviously, but you know.

Far as seasonality I mean is there any notable difference in terms of.

The cross border volumes versus domestic volumes.

Back half of the year versus the quarter that you just reported.

So that's why I'm answering this question with a high degree of humility are based on the current environment and candidly you know we don't have great visibility.

Nor do our customers have great visibility in our business.

Do think that the cross border headwinds will last through the balance of the year. So defense you know increased interest rates by 75 basis points yesterday.

Europe , you know increase their interest rates by 50 basis points, but there's still a pretty big disparity between.

You know where the respective geographies on interest rates, which drives the you know the disparity in exchange rates. So I think that's going to continue I was in Europe , a couple of weeks ago, and you know theyre very concerned.

As they get into the fall about food shortages and fuel shortages.

I suspect it.

The monetary officials in Europe will be continue to be pretty cautious about raising interest rates.

The cross border dynamics are and for you know a.

A couple of tough quarters until things begin to even out a little bit.

On the domestic side.

It's a little bit harder to tell I mean, our current plans are that there will be you know.

<unk> a peak this year in terms of volumes.

A natural phenomenon.

We assume that you know buying behaviors will be kind of as we expect in the customer's.

Customers as the supply chain and become more predictable will you know believe that online is a viable way to get packages delivered on time, and then you know kind of a wildcard is pricing. So historically, there's peak pricing.

Happens in the fourth quarter, that's kind of an industry phenomenon, where we're planning on a little bit of that.

But there's a lot there's a lot more valuable than the domestic business that are a little bit harder to predict but we are planning for some you know some seasonality that we've.

We've seen historically in some price no.

Some pricing power as well.

Got it Okay, and lastly, I know you mentioned that there was a write off for a small bank of appliance.

G C. Just just wondering about the magnitude of that.

Should we think about that.

Yeah, Yeah, it was around two and a half million.

Got it okay. So that's a really good question and it's one of the things that we're looking at carefully and I know the banks are as well.

You know what what is the overall payment.

Profile don't read them. So in the second quarter, I mean, DSO improved a lot.

The collections that were pretty good so theres nothing in our.

And in our dashboard or that we're seeing that would tell you that our.

<unk> are under unique stress. This one situation that I don't have a reference was unfortunate.

And you know, Ken we will let them get a little bit more out in front of us than we should have but underneath that the fundamentals.

Still pretty good in terms of our customers are paying us, but we're paying close attention.

Got it okay, Thanks, and best of luck.

Thanks.

And once again, ladies and gentlemen, if you have any questions or comments. Please press one of them zero.

Our next question comes from the line of Ananda Baruah Loop capital. Please go ahead.

Yeah, Thanks, guys, yes.

Yes.

Just ask a quick guide excuse.

Some quick context on the U S. P S reseller.

Framework.

I guess the.

Yeah.

What's the timeline.

You guys are looking out for any sort of.

<unk> determination.

Our visibility.

Okay.

Hard to know precisely that the.

The reseller agreements.

A time out at the end of the third quarter.

I want to just back up cause I you know it.

It's important here to have a perspective of what the postal service at least in my judgment was trying to do is trying to align our incentive systems with where value is being created and the ecosystem.

I wholeheartedly and fully applaud that.

And over time, and it's hard to be precise that's going to advantage Pitney Bowes I believe because we're all about creating value to the postal service and we've been doing it for 102 years.

So you know as.

As it relates to that the resale agreements, particularly as you know on our side. We know we're not a reseller we do participate in some of the downstream economics with those resellers, we've mitigated all of that in the Suntech.

G C. Its a little bit harder you know little bit harder to know, but were working pretty hard to tell them to land that plane sooner versus later and there's multiple different kinds of options one is.

Short term a combination of the postal service second is a longer term type of agreement or some other way to replace the economics in the marketplace. So we're pursuing all of those alternatives, but you know well, it's I would say short term unsettling, even though it's not that much money I do like the philosophy, because I think.

It plays well to our strengths.

Yeah.

Is it possible that you called out.

Because the amount of money you make.

So in these situations can increase.

I mean, if if they take a fresh look at what was value being created and they say pivot more sure that yes.

Thank you.

The answer is absolutely yes.

Got it.

That's helpful color.

Got it.

And at this time there are no more questions I would like to turn the call back to Mr. Lautenbach for closing remarks.

Thanks.

And you know as we've talked about and you all know I mean, this is kind of a complicated environment as I said in my remarks, I said it again, I think obviously that I'm, saying it.

And there's a lot of different cards that are running through the market lots of different comps that are running through.

On the business.

Got it.

You can simplify.

Our business at the moment Suntech and presort are operating pretty darn, well and are pretty complicated environment and I think that's they are well situated to continue to do that in the future they've got good opportunities in terms of costs and they've got good opportunities in terms of price.

<unk>.

Global ecommerce you know again.

Our our thesis if you look at our long term thesis, it's all about improvement in domestic parcels and you know why I would say that the cross border business and expedite it doesn't start you know important.

Legs of the stool.

The the whole value appreciation story for global Commerce and by extension Pitney Bowes is around domestic parcels and the fundamentals of domestic parcels is good we are winning in the marketplace.

Revenue grew parcels grew ex China, a deliberate and you know one of the things that honest said and I'll just kind of highlight it as you know 35 cent per parcel.

The improvement in gross margin 35 cent across you know 200 million parcels are a 300 million parcels is $70 million to $100 million of profit improvement going forward. So it's like you know when you operate an incense itself on 35 cents, that's not that big of a deal when you really step back and say that's occurred.

<unk> 200 million parcels of 300 million parcels is a really big deal and you know it is just symptomatic of the fundamentals of that business continuing to increase whether it be went into the marketplace service levels customer satisfaction.

Well the network is operating and how efficient the network is operating.

The cross border stuff is momentarily inconvenient, but I've been in this cross border business long enough now for 10 years, but I know that comes and goes.

It will at some point normalize again and probably flipped the other way.

So.

Yeah, I don't mean to be overly pollyanna cause I think the difficult environment and I think we're pretty sober about what we're dealing with the next couple of quarters, but the underlying fundamentals of the entire business in the portfolio.

Are pretty well positioned so we'll talk more I'm sure you're going to have more questions as you unpack.

Our comments this morning, where all around answer investors' questions and questions.

Questions from analysts and we'll look forward to seeing you soon thanks for your time this morning.

And ladies and gentlemen that concludes our conference today. Thank you for your participation and for using AT&T Conferencing service you may now disconnect.

We're sorry your conferences ending now please hang up.

[music].

[music].

Good morning, and welcome to the Pitney Bowes second quarter earnings 2022 results conference call. Your lines have been placed in a listen only mode. During the conference until the question and answers segment.

Today's call is also being recorded if you have any objections. Please disconnect your lines at this time.

I'd now like to introduce your participants for today's call, Mr. Marc Lautenbach, President and Chief Executive Officer.

MS Anna Chadwick Executive Vice President and Chief Financial Officer, and Mr. Nat Zacher, Vice President Investor Relations.

Mr. <unk> will now begin the call with a safe Harbor overview.

Good morning, everybody.

This is zachary I manage the Investor Relations program for Pitney Bowes.

Welcome everyone to the call. This morning, we very much appreciate your participation.

Part of my duties. This morning include covering the usual and customary safe Harbor information. So please bear with me for just a moment.

Today's presentation will include 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.

For more information on these topics. Please see our earnings press release, our 2021 Form 10-K annual report and.

Other reports filed with the SEC that are located on our website at www Dot <unk> dot com and by clicking on Investor Relations.

Please keep in mind that we do not undertake any obligation to provide updates to forward looking statements.

As a result of new information or developments.

Also for non-GAAP measures the reconciliations to GAAP accounting can be found in the tables attached to our press release and also on our Investor Relations website.

Additionally, we provided a slide presentation on our website that summarizes many of the points, we will discuss during today's call.

Our format. This morning, it's gonna be familiar Marc Lautenbach, our president and Chief Executive Officer will begin with opening remarks, he will be followed by on a Chadwick our chief financial Officer, who will provide a deeper discussion of our operational and financial results.

I'd like to turn the presentation over to Mark Mark the floor is yours.

Thanks Ned.

Good morning, and thank you for joining today's call.

While there are many positive aspects to the quarter.

Second quarter results were disappointing and below our expectations.

The quarter pointed out against the most complicated market environment I have ever experienced.

We're not able to overcome the effects of the growing strength of the dollar and.

In the Covid Lockdowns in China.

So I'm talking presort turned in solid results in a very challenging environment.

Those businesses in the aggregate grew revenue for the quarter.

Equipment sales incentives were strong and our loan originations and global financial services showed solid improvement.

And importantly, finance receivable stabilized in the quarter.

The overall performance of these businesses bode well for the future.

While trends are rarely a straight line presort and suntech are well positioned going forward.

Gordon Suntech and Presort was unthinkable, a few short years ago and it was the result of smart investments focus and solid execution.

Often there are concerns when companies broaden our focus away from their historic core business that they will focus on the core.

The trajectory of <unk> and presort solid evidence to the contrary for our company.

There are a few examples of companies overcoming secular decline, but there are precious few companies that have been able to reinvent their core and we have done it and we continue to do it.

Results in global ecommerce were mixed.

But the big picture view of activity in quarter continues to support our long term thesis for this business.

In particular, our <unk>.

Long term model is centered around growth in the domestic parcel market and continuous operational improvement to expand profitability.

In the second quarter, our service levels were strong.

It's enabled us to attract and win new customers.

Importantly, our pipeline is excellent for the second half of the year.

Our gross margin per parcel and the overall margin of the domestic delivery business showed substantial improvement year over year.

Our significant operational improvements bode well for future profitability, when we were able to achieve higher volumes.

Which we should achieve based on our improved operational capabilities and as macroeconomic conditions improve.

That being said the current economic conditions present, some short term pressure on the business with a moderation in volume growth.

Longer sales and customer integration cycles.

Also the Covid lockdown in China, coupled with pricing pressures created headwinds in our domestic parcel business.

Ana inbound volume as part of our domestic parcel business.

Because we don't manage on a cross border logistics for it.

Despite the dramatic drop in China inbound business, our domestic parcel business grew 6% for the quarter.

Well, it's hard to make predictions regarding COVID-19 in China for the moment the country seems to be moving in the right direction.

And our cross border business, there's a negative impact and outbound United States demand due to the rapidly strengthening United States dollar.

We expect that the dollar will remain strong versus the euro for awhile, creating a headwind for our cross border business.

To sum up the <unk>.

<unk> is making good progress finding new opportunities and operational improvements to manage costs, but we're very aware of the short term challenges in the cross border businesses.

This is probably a good segue to address our decision to sell border free two globally.

First the transaction allows us to focus on what we do best.

Logistics aspect of our cross border business.

Second the deal also opens up a set of cross border logistics opportunities with globally that we see as meaningful.

Third and more broadly.

The transaction shows how even as we are confident in our long term thesis on our E Commerce business, we make adjustments to specific aspects of the strategy as conditions dictate.

And finally.

It is also a clear affirmation that we will take every opportunity available to the company to unlock value for our shareholders across our portfolio just as we have consistently done for the last decade.

Our first priority for capital allocation continues to invest in our business and opportunities for profitable growth.

As we believe that smart investments in the business will create the most enduring value.

That's priority has been debt reduction to maintain appropriate levels of financial leverage which we have.

We reduced debt by $1 billion over the past four years.

As we enter a more uncertain economic environment, we intend to use the border free proceeds at least initially to operate with a stronger liquidity profile.

And that approach offers incremental strategic and financial flexibility as well.

<unk> macroeconomic environments.

Often provide company's unique business opportunities.

That being said, we look at all investments on a risk adjusted basis and as the macro environment is more uncertain the threshold for those investments goes up.

We will be prudent in how and when we commit capital.

Let me conclude this very important topic by emphasizing our capital allocation, including returning cash to shareholders.

10 year old topic with the board and all options are on the table.

The sale of water free is also relevant to a topic that I get asked about from some of our investors specifically.

Some of the parts of Pitney, Bowes and whether it would be better to separate the company into independent entities.

Just like capital allocation. This is a regular topic with the board and something they evaluate on an ongoing basis.

We believe that the portfolio changes, we have made have credit strategically coherent portfolio with meaningful synergies across the business.

There was also a logical consistency in the way, we help clients simplify and manage their mailing and shipping needs.

Nevertheless, the board is always open to different ways to create value for our shareholders.

Importantly, our view that the current construction and strategic intent of the company is the right. One for now does not just our internal belief we have tested the market move, whereas the consistent conclusions from those dialogues does that the best way to maximize shareholder value.

Against the existing plan.

In addition to these assessments with active market participants the board recently commissioned a leading consulting firm to evaluate our approach there to concluded that maximizing shareholder value will be driven by further development of GE you see within the broader Pitney Bowes enterprise.

From my Vantage point I think the most important takeaway from those conversations is an affirmation of the current overall strategy and it.

It was crucial for us to develop positive and consistent profit margins in our GSE business to achieve higher valuations.

Of course, the board will continue to revisit this topic on a regular basis and we'll explore any opportunity that maximizes long term value.

To conclude the second quarter was not what we had hoped for and the macroeconomic environment going forward is uncertain at best but that being said as I look underneath the hood of the business my confidence in our future and continues to be very high I'll now take you through the details of the quarter.

Thank you Mark and good morning, everyone.

Unless otherwise noted I will speak to revenue comparisons on a constant currency basis and other items such as.

EBITDA EPS and cash flow on an adjusted basis.

Let's start with a high level review of the year over year comparison of our financial statement data points.

Lode.

A discussion of our segment results.

Balance sheet cash flow and our outlook.

Total revenue for the quarter was $871 million, which is down 2%.

Gross margin for the company was $274 million compared to $301 million for the same period last year.

A 9% decrease.

As a percentage of total revenues.

Gross margin decreased 200 basis points to 31, 4%.

Total EBITDA was $82 million down from 96 million.

Net debt was $39 million down from $56 million.

Interest expense was $34 million down from 36 million in the prior year, driven primarily by reductions in total debt outstanding.

Our tax rate returned to more normal levels and was 26% in the quarter.

Adjusted EPS was <unk> <unk> compared to 11 cents.

Last year's 11 cents figure included tax benefit and insurance proceeds that totaled four cents.

At the end of the quarter weighted average diluted shares outstanding were approximately $177 million.

Turning to cash flow.

GAAP cash from operations was $35 million for the quarter compared to $79 million in second quarter 2021.

Free cash flow was $6 million in the quarter compared to $87 million in prior year.

Approximately 75%.

The $81 million Delta was driven by reductions in client deposits a.

A result.

Any difference in postage spend purchase account replenishment.

Free cash flow was also affected by lower net income.

<unk> of insurance premium payments and partially offset by a decrease in capital spending.

Capital expenditures for the quarter were $32 million.

Down from $40 million in prior year.

For the first half capital expenditures were $64 million compared to $84 million in 2020 one.

As I shared in our last call capital expenditures overall are expected to be lower than last year.

During the quarter, we paid $9 million in dividends and made $5 million in restructuring payments.

Looking at our balance sheet cash and short term investments were approximately $582 million at quarter end.

Not including the cash from the sale of border free which closed on July 1st.

Of the 582 million total.

Almost 40%.

Pitney Bowes bank.

Approximately 25% is held internationally and the balance.

Mastic accounts, mainly to cover usual and customary working capital needs.

As Mark mentioned the proceeds from border free will augment our financial flexibility should the macro environment become even more challenging.

Also our 500 million dollar revolver remains undrawn.

Total debt was $2 2 billion compared to $2 3 billion at the year end 2021.

Adjusted for operating leases and cash.

Operating company debt was $593 million compared to $533 million at year end.

The following segment information is summarized in our press release and slide presentation.

Both of which are posted to our Investor Relations website.

Let me start with Cree story.

Research revenues were $139 million in the quarter, which is a 3% improvement from last year.

New customer additions and increased revenue per piece more than offset volume declines.

Total sortation volumes of $3 8 billion pieces was down 8% compared to prior year.

EBIT for the quarter was $13 million compared to $16 million a year ago.

EBIT margin was 9% compared to 12% in second quarter 2021.

The decline in margins was driven largely by increased labor and transportation costs, including the change in our allocation methodology that we discussed last quarter. Additionally.

Additionally, our fuel cost doubled year over year.

Looking into the second half of the year.

We are optimistic that we can return to mid teen EBIT margin levels driven by two key factors.

First.

Adjustments in the U S. P. S work share discount program will enable us to recover cost we are already experiencing and second productivity gains from our multi phased sort of refresh will help with labor cost. We are also increasing the number of in source.

Transportation lanes by utilizing excess capacity, which we believe will lower the cost of transportation.

The bottom line.

We continue to feel very good about the second half growth prospects for presort driven.

Driven by better revenue per piece and increased mix of marketing mail and the above referenced cost measures.

Moving to <unk>.

<unk> reported revenues of $339 million in the quarter.

A slight increase over prior year, which as Mark noted is a significant accomplishment for a business that has natural headwinds.

The revenue stability was driven by 7% higher equipment sales and 2% increase in supplies as well as better business services revenue.

Shipping related revenue, which is now 12% of segment revenues improved 21% versus prior year.

Finance revenue was down 7% largely as a result of a revenue mix shift resulting from equipment upgrades.

At present, roughly 40% of our Centex client base has undergone and equipment refresh and we expect the balance to upgrade over the next few years.

To ensure compliance with U S. P S security requirements, which we think bodes well for equipment sales going forward.

EBIT was 96 million compared to $107 million and EBIT margin was 28% down 270 basis points from second quarter 2021.

The change in revenue mix.

Along with inflationary pressures and component costs were the primary causes for the margin decline.

For financial services, we are very encouraged by stability in net finance receivables, which bodes well for future result.

And our continued improvement in portfolio quality.

Specifically 30 day delinquencies were down 40% from prior year and flat to last quarter.

As of quarter end net finance assets were at 1.15 billion compared to 1.14 billion for prior year.

Let me shift to global E Commerce.

Within the GEC revenue in the quarter decreased 5% to $394 million.

Gross margin in the quarter was $38 million compared to $45 million a year ago.

Segment EBITDA for the quarter was negative $7 million compared to positive $8 million in the second quarter of 2021.

Year to date EBITDA is breakeven.

EBIT for global ecommerce was a loss of $29 million compared to a loss of $11 million a year ago.

EBIT margin was negative 7% compared to negative 3% in the prior year.

While the headline numbers are obviously lower we are seeing two very distinct undercurrents inside our global ecommerce segment.

Essentially divided by operations with a domestic component versus operations with an international component.

I'll start with cross border, which is where the primary challenges exist in global ecommerce.

Our cross border business is largely focused on helping our clients move parcels or originating in the U S to international destinations.

It is roughly 25% of segment revenues.

Cross border revenues were down mid teens in the quarter.

Similar to first quarter.

Weaker overall economic conditions, especially in Europe, I dampening e-commerce spending and with a strong U S dollar products originating in the U S and sold into international markets.

Which describes our cross border client base are simply less competitive on price.

Additionally, border free which has been a part of our cross border operations and was sold on July 1st represented roughly one third of the revenue decline in cross border revenues in the quarter.

Bottom line is that macro conditions are negatively impacting global ecommerce international operations.

Let's switch to domestic parcels, which is over half of segment revenues, where the news is more encouraging.

First we continue to believe the domestic parcel market.

Yes.

Biggest opportunity with a large and growing addressable market.

It has been a significant focus of our business investment over the last several years.

The headline is we.

We're making very good progress growing revenue and profit for domestic parcels.

While total volumes in the quarter decreased from 44 million to 39 million.

If you exclude parcels that originate in China and.

And our process by our domestic parcel network.

<unk> grew 4%.

Said, another way parcel volumes from North American clients grew and we believe we outperformed the domestic market based on a range of market data.

The decline in parcels or originating in China, and again processed by our domestic parcel network was roughly $6 million in the quarter and was driven largely by the well reported lockdowns.

That country experienced in the second quarter.

Despite the downturn in China volumes.

Mastic parcel revenue increased mid single digits as a result of much better revenue per parcel.

In terms of network efficiency, we continued to make excellent progress in generating better gross margin per parcel.

Year to date, we have increased her personal margin by 35 cents compared.

<unk> to the first half of 2021.

When one bank to place this figure.

Cross hundreds of millions of parcels flowing through our network.

Bruce meant inefficiency turns into meaningful dollars.

Let me talk about service levels and.

Other contributor to our volume and revenue growth.

The investments we have made in technology systems and people have allowed us to create a fully integrated automated national network that provides us with more predictable service and costs.

In the second quarter that work has culminated in a dramatic improvement in on time performance and we are now consistently delivering market competitive services.

Better on time performance has helped drive substantial client wins.

We completed 112, new signings in second quarter up from 56 in the first quarter of 2022.

For example, we recently signed an agreement with quiet platforms.

Would you still logistics operation owned by American Eagle Outfitters.

We expect the arrangement to begin generating meaningful volumes into our network beginning in the fourth quarter.

These new signings will help provide momentum and offset the headwinds that are appearing in the domestic e-commerce market.

Third party e-commerce data for the quarter indicate that volumes are down mid single digits.

But in the context of inflationary trends dollar spent are.

To slightly higher.

Let me now complete the financial discussion on global ecommerce.

We experienced higher operating expenses in the quarter.

Including an increase in research and development as well as an accounts receivable write off from a client bankruptcy.

Those factors also contributed to the overall decline in segment EBIT.

Indiana.

Our increases in domestic parcel revenue and profit were more than offset by lower cross border performance.

Recently, we have received inquiries about the United States Postal service reseller program.

Let's start with some background.

The current USPS reseller framework was established in 1992 with a handful of designated firms that are essentially outsource postal service sales represent.

They recruit small and medium sized shippers.

To drive U S. P S parcel volumes reach.

Recent trade press articles.

Have suggested that the U S. P S will discontinue the program.

What does this mean from the Pitney Bowes perspective.

We believe the USPS is looking to adjust how it works with <unk> and.

And compensates third parties that drive volume to its network.

While we are not a reseller.

We have been one of those parties driving U S. P S volumes.

And we believe strongly we can do so going forward with our ecosystem relationships and state of the art technology.

For digital offerings within our centric business, we believe our new arrangements with the USPS will enable us to maintain the same economics, we have now.

Also our physical network inside of global ecommerce, both domestic and cross border are not related to the reseller program at all.

For digital offerings that reside inside of global ecommerce.

There is work to do in assessing the potential positive or negative effects and how our services and technology will fit into the new U S. P. S reseller landscape.

We do believe that the capabilities, we have built over the years support substantial volumes in the U S. P S network and integrate well with U S. P S as strategic intent.

That combination should enable us to create attractive economics for fitness boes going forward.

And replaced the limited, but none zero potential decline in our gross margin should the program be discontinued.

Lastly, let me provide some perspective on the outlook for the full year.

Based on uncertain macroeconomic conditions.

First half results and the sale of border free we are updating our full year outlook as follows.

The company expects full year revenue on a constant currency to range from a low single digit percentage decline to a low single digit percentage increase.

The company expects full year EBIT to range from a high single digit percentage decline to a mid single digit percentage increase.

We also expect to generate solid adjusted free cash flow for full year 2022 though at a lower level than last year.

The primary differences are driven by lower client deposit strengthening us finance receivables.

And working capital against sizable benefit in 2020 one.

And partially offset by a reduction in capital spending.

For the third quarter, we expect overall financial results to be roughly comparable to second quarter 2022.

As Mark and I, both shared second quarter numbers were disappointing.

Nonetheless, there is more progress happening inside the organization than what the financials illustrated in the second quarter, especially in global ecommerce.

We believe the operational detail, we provided a perspective on that front.

Looking ahead, we expect solid results in presort incentive in the second half.

We are working to drive volumes into global E Commerce domestic parcel operations, which will leverage the scale, we have built and help generate the profitability everyone expects.

And while our adjusted free cash flow expectations are lower first half EBITDA less capex interest expense and taxes represents a solid improvement versus prior year.

We remain committed to being a consistent cash flow producer with appropriate amounts of liquidity as we I'll tackle a more challenging macro environment.

We look forward to your questions operator, please open the queue.

Thank you.

Ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the command up one zero. Once again, if you have any questions or comments. Please press one to zero.

Our first question comes from the line of Kartik Mehta Northcoast Research. Please go ahead.

Good morning, Mark and Anna Mark just on the global ecommerce business. Obviously, you laid out some headwinds that were out of your control, but that might persist for a little time.

It gets difficult to say for how long, but are you, making any changes to the business as a result.

Or is there enough other growth in the business that Youll continue investing.

Great question.

Youre right. It is hard to predict how long these headwinds will.

But our working assumptions around last for a while so I don't think this is a short term phenomenon is going to right itself in the third quarter.

To your question, we are making changes first of all every aspect of cost in our cross border business.

Is under review.

We are making investments, but we're making an investment.

Principally.

As to Canada lanes, where we think we're a little bit more insulated from the currency disruptions and candidly we've got enough density in our volumes that we've got.

A critical critical mass and we've got competitive advantage versus others.

We're pairing back the investments overall in places, where we think are going to.

We faced some headwinds and we're doubling down in some places where we think we've got some natural advantages that are less susceptible and I would say in some ways you know well.

I wouldn't say that border free was.

Our response to the currency dynamics.

Dynamics.

Certainly speaks to.

So I will speak to that overall thesis.

Yeah.

And then just just a follow up Mark you talked a little bit about at the beginning of the call that you had asked the consulting firm to kind of look at the business what makes sense, but I'm wondering.

The conclusion that they came to kind of keeping the company together was it because of the synergies was it because of other issues.

I know, it's a I'm sure a long report, but maybe you could summarize is too wide or what conclusions work.

Sure.

Listen I think there was a couple of findings first of all.

Firmly overall thesis and the strategy.

The second that says what whether there are strategies, where there are synergies rather that.

Our meaningful across the two or three businesses that wasn't this positive factor. The most important factor was for GSE in particular that business needs to be further along in terms of volume and profitability and ability to kind of stand on its own two feet.

So that was kind of the.

Principal findings.

Thanks, Mark I really appreciate it.

You bet.

Our next question comes from the line of Ananda Baruah Loop capital. Please go ahead.

Yeah. Good morning, guys. Thanks.

Thanks for taking the question.

Yeah, sure tricky environment out there for everything.

Got it.

I guess, just two if I could.

Gen six three sort of held up well.

Are you hearing sort of anything from your customers in terms of.

The macro increasing trepidation.

Any context any context, there or is it like.

Is it just very.

Very cleanly steady as she goes right now even in yeah contextual conversation.

I would say across the board we're hearing consistently from clients that this is a.

A very tricky environment and some are seeing.

Our term signs of recession than others, but across our entire portfolio.

You know every customer we're talking to and candidly every C O I'm talking to sue them.

<unk> environment, I would just say suntech and presort and candidly, even our domestic parcels business in D C.

Operating it pretty well and pretty difficult market conditions.

And so and then the second question is actually on <unk>.

On the domestic.

Global ecommerce.

So you Mark you guys have any sense.

Is that there's been any impact or any discernible impact.

Hey, Jason.

From a macro there yet.

All the metrics are solid but ticket.

Did you expect them to Nathan stronger or is there no discernible real impact yet from macro lineup.

North America.

Yeah.

No there absolutely is a absolutely impacts so I mean, you don't.

Now what's happening is.

We're pretty successful in the market right now signing up new customers and so you know what I talked about the 100 wins on top of the 40 or 50 wins that we had in the first quarter. So we take that as affirmation that we've got a value prop.

Hunt on the other side of it you know we've got customers existing customers, whose businesses under a real stress. So we're kind of in this you know what.

Adding a lot out the front door and you know for some of our existing customers no business in their volumes. Therefore.

Are being hurt.

And then between what I would say sales cycles are integration cycles, and I've said this in my comments or lack of them. So if you look at the 102 customers and you know I haven't talked about.

A large one in particular that we'd hope to come online in the fourth quarter. That's been a slow integration. So it's I would say that it's it's a little bit like running in quicksand, where we're moving forward, which I think is distinctive versus others in the industry, but it's certainly a more challenging environment than OCA.

The bankruptcy that I talked about as well as kind of another sign of the.

Distress. So it's it's not that we're not seeing that that's just domestic parcels.

Business in particular, I think we're operating in a difficult environment pretty well and best you know best we can see versus competition.

We're just holding our own if not more but yeah. The reason I like this dynamic because eventually you know the customers that are having a distressed right now their business is going to come back. So you get the benefit of their business coming back and then ultimately all of these new ones coming online.

So it's you know it is for sure.

In the short term a little bit frustrating, particularly given all the good work the team has done on service levels and fill.

So you have a network and all that kind of stuff, but that's why we're talking about you know the internal fundamentals as you kind of work undercover you know we think are pretty solid.

That's really helpful context, I appreciate it thanks a lot. Thanks.

Sure.

Complicated.

Great quarter for us to sort through and explain I know, it's a complicated quarter for you also.

A lot of them.

No doubt.

Yes, it does.

The dentist communication, we've had since I've been here.

Yeah, Yeah. Thanks, Mike appreciate it.

Our next question comes from the line of Matt Swope of Baird. Please go ahead.

Good morning, Mark and Anna and Ed.

Guys can you guys give some pretty good volume data on presort and global ecommerce is there a similar kind of kpis for centex.

To us that the presort pieces were down 8% year over year is there any kind of volume measure or a way to think about centex in terms of those headwinds at the same way.

Yeah.

Yeah.

The short answer is it's a slightly different business model. So if you look at how presort makes money.

And to a degree how geez it makes money.

On throughput.

As you look at the Centex.

Business model.

It's kind of around the equipment sales the financing revenues the services.

We do have throughput measures for shipping, which Duncan kind of gets you through but it is fundamentally.

Different.

A different model.

Prescriptions are also important and becoming more important so we'll unpack that a little bit for you, but I would say as I look at that business.

And by the way the subscriptions.

It is an important one because that to a degree is changing.

Now you know short term equipment revenue for longer term.

Subscription so it's a good thing that's kind of where we want the business to go and we've been when they're you know slowly over the last several years, but it certainly has a different profile in terms of how you.

Recognize the revenue.

So we'll get you a little bit more there and all that that's very helpful. Mark.

Could you could you just elaborate a little bit on that last piece you said as the as this sort of.

Lumpier equipment revenue was replaced by subscriptions or people just effectively renting that from you so that smooth things and you've got a longer commitment from them or how does that how does that change that dynamic.

And so in essence, no different than any of our software as a service type company and so if you think about that transaction that software as a service companies go through their training.

In short term revenue for a longer.

A longer revenue stream in that longer revenue stream as you know different contractual.

Agreements with it but it is more of our offerings go online that becomes a more prominent aspect of our financials.

I see that's that's great and then if I just change gears sort of to the to the cash and liquidity commentary could.

Could you comment on.

Whether you guys have sort of.

Minimum cash number I know you've been asked this before.

But especially given that you have this undrawn $500 million revolver now you have these asset sale proceeds that have come in.

You know you're still paying the dividend, which is small I know.

But you have your bonds that are traded down a lot and you might have some opportunity to buy back bonds in the open market to at very attractive levels cause could you just sort of put all that together.

How you think about cash and liquidity and an opportunity.

I'm sure. This is on them. So in terms of cash and liquidity is as I mentioned in my remarks here.

We think of it in 83.

Big pieces right. So when you take our total cash thanks.

We have about 40% of that at the bank and we have about 25% international and that residual that we have in the U S and I'll just speak to the U S cash the way we think about it is we like to have about.

A week of outflows.

Not net of the inflows just to have that cash on hand for the U S.

<unk>.

And that translates when you do that math to around that $200 million level of course, as our organization moves and need to change that that could change, but that I hope that gives you a little bit of a perspective of how we think of the cash.

No that's definitely helpful.

And so then to the other pieces and how you get this now you get these proceeds in from border free and you were talking about sort of just supplementing your liquidity would you consider using those to more actively reduce debt or even even to get more aggressive would you ever drawn the revolver to buy back bonds at a significant discount that's available.

Right now.

So listen as I said in my remarks, you know from a board perspective, as we think about capital allocation.

All options are continually about it isn't all options are continually.

On the table. So you know it's.

It's.

We'd like to see a little bit more data than we've got a little bit more analysis to do before we kind of conclude.

What's going forward, but I think what you should assume is that while all options on the table.

Gonna want to remain some degree of flexibility both strategically.

And financially.

No.

For the moment, we like to have a stronger liquidity profile and as I said in my comments.

Bruce.

These moments in time often.

Present opportunities. So for example, there's a couple of you know smaller.

Smaller acquisitions in presort that.

Probably weren't available to us.

A couple of quarters ago that all of a sudden now are available at pretty good prices and those things are accretive so you.

You know, it's it's hard to make blanket statements beyond Ah I can assure all of our investors and everyone on the call that the board looks at this all the time and all the different options, whether or not we would draw on the revolver to buyback that.

Probably not but you know again.

We're very open minded about how we think about this.

That's great Thanks, Mark and Anna for the candid responses.

Next question is from Anthony Levinsky's without a <unk> company. Please go ahead.

Yes, good morning, and thank you for taking the question. So just looking at equipment sales. So two quarters in a row that the that increase here.

Here.

Second quarter revenue from that segment was roughly in line with the first quarter. So.

Was there anything specific that drove that as far as the equipment sales increase and just wondering how you how we should think about sustainability.

For equipment sales.

If I said brilliant execution, because I leave it at that.

[laughter].

And I think that's a great question, we think about all the time.

So first of all I do think the team executed quite well, so I think I wouldn't drive through that.

We are in a very good product cycle, and we expect that product cycle. The last not just for the next couple of quarters, but candidly for the last couple of years.

Then underneath that as Ana said in her remarks, the USPS has put out new security requirements are for the devices, which customers need to comply with so that creates kind of a natural tailwind I think honestly, we're 40 or 50% of the way through refreshing that technology.

Yes.

So we got some good you know we've got some good tailwind and some good momentum for the next you know.

The extended period of time in that business. So we like how the team is executing I really liked the product cycles.

And then we've got some you know some tail winds with some U S. P S chain.

Changes in what they are requiring for security.

Got it yeah. That's very helpful color and then you know in terms of the global ecommerce segment. So.

You enter the back half of the year and more specifically the fourth quarter were just curious to get your thoughts on sports.

How does it.

I know, it's still a chicken environment, obviously, but you know.

Seasonality I mean is there any notable difference in terms of.

The cross border volumes versus domestic volumes.

Half of the year versus the quarter that you just reported.

So as I I am answering this question with a high degree of humility are based on the current environment and candidly you know we don't have great visibility.

Nor do our customers have great visibility in that business.

Do think that the cross border headwinds will last through the balance of the year. So defense you know increased interest rates by 75 basis points yesterday.

Oh, you know increase their interest rates by 50 basis points, but there's still a pretty big disparity between.

Where are the respective geographies on interest rates, which drives them.

Disparity in exchange rates. So I think that's going to continue I was in Europe , a couple of weeks ago, and you know theyre very concerned.

As they get into the fall about food shortages and fuel shortages.

I suspect it.

The monetary officials in Europe will be continued to be pretty cautious about raising interest rates.

The cross border dynamics are and for.

A couple of tough quarters until things begin to even out a little bit.

On the domestic side.

It's a little bit harder to tell I mean, our current plans are that there will be you know.

A peak this year in terms of volumes.

Kind of a natural phenomenon. So we assume that you know.

Buying behaviors will be kind of as we expect customers as the supply chain become more predictable.

You know believe that online is a viable way to get packages delivered on time.

And then you know kind of a wildcard is pricing so historically, there's peak pricing.

Happens in the fourth quarter, that's kind of an industry phenomenon, where we're planning on a little bit of that but there's a lot. There's a lot more variables in the domestic business that are a little bit harder to predict but we are planning for some studio some seasonality that we've seen historically in some price now.

Some pricing power as well.

Got it Okay, and lastly, I know you mentioned that there was a write off for it from a banking client.

You see just wondering about the magnitude of that how should we think about that.

Yep.

It was around two and a half million dollars.

Got it okay.

Really good question and it's one of the things that we're looking at carefully and I know the banks are as well as you know what what is the overall payment.

Profile that we're even so in the second quarter, I mean, DSO improved a lot.

We looked at collections they were pretty good.

So theres nothing in our.

And in our dashboard.

We're seeing that would tell you that.

Our customers are under stress. This one situation that honor our reference was unfortunate.

And you know, Ken we will let them get a little bit more out in front of us than we should have but underneath that the fundamentals.

Still pretty good in terms of our customers are paying us, but we're paying close attention.

Got it okay, Thanks, and best of luck.

Thanks.

And once again, ladies and gentlemen, if you have any questions or comments. Please press one zero.

Our next question comes from the line of Ananda Baruah Loop capital. Please go ahead.

Yes, yes, yes.

Yes.

Just ask a quick through some quick context on the U S. P. S reseller framework.

And I guess.

Yeah.

What's the timeline.

You guys are looking out for any sort of I.

I guess determination.

Our visibility.

Got it right.

Uh huh.

Hard to know precisely that.

The reseller agreements.

Time out at the end of the third quarter.

I Wonder if back up because you know it.

I think it's important here to have one with respect to what the postal service at least in my judgment is trying to do is trying to align our incentive systems with where value is being created and the ecosystem.

I wholeheartedly and fully applaud that.

And over time, and it's hard to be precise that's going to advantage Pitney Bowes I believe because we're all about creating value to the postal service and we've been doing it for 102 years.

So.

As it relates to that the resale agreements, particularly as you know on our side. We know we're not a reseller we do participate in some of the downstream economics in those resellers, we've mitigated all of that in the Suntech.

Do you see it a little bit harder you know little bit harder to know.

But we're working pretty hard to to.

To land that plane sooner versus later and there's multiple different kinds of options one is.

Short term a combination of the postal service second is a longer term type of agreement or some other way to replace the economics in the marketplace. So we're pursuing all of those alternatives, but you know well, it's I would say short term unsettling, even though it's not that much money I do like the philosophy, because I think.

It plays well to our strengths.

Yeah.

Is it possible that you called out.

Because the amount of money you make.

These situations can increase.

If they take a fresh look at what was value being created anything pick up more share that yeah, it's sort of it.

Thank you.

Answer is absolutely yes.

Got it.

That's helpful color.

And at this time there are no more questions I would like to turn the call back to Mr. Lautenbach for closing remarks.

Listen you know as we've talked about and you all know I mean, this is kind of a complicated environment as I said in my remarks, I said that again, I think our receipt of saying it.

And there's a lot of different cards that are running through the market lots of different comps that are running through.

The business.

But it.

You can simplify.

Our business at the moment Suntech and presort are operating pretty darn, well and are pretty complicated environment and I think that's they are well situated to continue to do that in the future they've got good opportunities in terms of costs and they've got good opportunities in terms of price.

<unk>.

Global ecommerce you know again.

Our our thesis if you look at our long term thesis, it's all about improvement in domestic parcels and you know while I would say that the cross border business and expedite business are important.

Important.

The stool.

The the whole value appreciation story for global Commerce and by extension Pitney Bowes is around domestic parcels and the fundamentals of domestic parcels is good we are winning in the marketplace.

Revenue grew parcels grew ex China delivery and you know one of the things that Arnaud said and I'll just kind of highlight it as you know 35 cent per parcel.

Our improvement in gross margin.

35 cent across you know 200 million parcels are a 300 million parcels is $70 million to $100 million of profit improvement going forward. So it's like you know when you operate an incense itself on 35 cents, that's not that big of a deal when you really step back and say that's across 200 million parcels on a 300 million parcels is a really.

A big deal and it is just symptomatic of the fundamentals of that business continuing to increase whether it be went into the marketplace service levels customer satisfaction.

How well the network is operating how efficient the network is operating.

So the cross border stuff is momentarily inconvenient, but I've been in this cross border business long enough now for 10 years, but I know that comes and goes.

Well at some point normalize again, and probably flipped the other way.

So.

Yeah, I don't mean to be overly pollyanna cause I think the difficult environment and I think we're pretty sober about what we're dealing with the next couple of quarters, but the underlying fundamentals of the entire business in the portfolio.

<unk> are pretty well positioned.

Physician so are we.

We'll talk more I'm sure you're going to have more questions as you unpack.

Our comments this morning, where all around answer investors' questions and questions.

Questions from the analysts and we look forward to seeing you soon thanks for your time this morning.

And ladies and gentlemen that concludes our conference today. Thank you for your participation and for using AT&T Conferencing service you may now disconnect.