Q3 2023 Pitney Bowes Inc Earnings Call

November 2, 2023

Okay.

Yeah.

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If you have any objections. Please disconnect your lines at this time I would now like to introduce participants on today's conference call. Mr. Jason dies interim Chief Executive Officer.

MS Anna Maria Chadwick Executive Vice President and Chief Financial Officer, and Mr. Philip Landler, Vice President Investor Relations and global strategy. Mr. Atlanta will now begin the call with a safe Harbor overview.

Good morning, I'm Philip Landler. Thank you for joining us I'll be managing that Pitney Bowes Investor Relations program going forward and we'll be partnering with Alex Brown, who many of you know from prior earnings calls pardon. My duties include covering the Safe Harbor information for these calls so let me briefly cover that.

Including in todays presentation are forward looking statements about our future business and financial performance.

Forward looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections more information about these risks and uncertainties can be found in our earnings press release, our 2022 Form 10-K annual report and other reports filed with U S. D. C that are located on our website at www dot.

<unk> dot com and by clicking on Investor Relations. Please keep in mind, we do not undertake any obligation to update forward looking statements as a result of new information or developments also for non-GAAP measures that are used in the press release or discussed in our presentation materials, you can find reconciliations to the appropriate GAAP measures in the tables attached to our.

Press release finally, we've provided a slide presentation and spreadsheet with historical segment information on our website and now I'd like to turn the call over to our interim CEO Jason died.

Good morning, everyone.

I want to begin by thanking you for your ongoing investment in Pitney Bowes as you will hear today. My portion of these calls will be just as focused on our path forward as the preceding quarters result.

Today is my first call I'm going to take a few minutes to cover three areas.

First a brief overview of my background.

Second context on my leadership style.

Lastly, a high level summary of what I've been focused on since stepping into my new role on October 2nd.

With respect to my background I joined Pitney Bowes in 2015 after two decades in roles of increasing responsibility at IBM spending the past eight years in various leadership positions here at Pitney Bowes has equipped me with a strong understanding of our opportunities challenges clients and partners.

My initial years overseeing our production mail business, which we divested in April 2018.

Following that I, let a successful transformation of our Centex segment, resulting in strong revenue cash flow and growth opportunities in shipping I. Subsequently began also overseeing our presort segment. So I've led the company's to profit and cash flow drivers.

This experience as well as my working relationships with the leaders of our global ecommerce segment and functional groups is enabling me to hit the ground running in my new role.

When it comes to leadership style I believe in maintaining a culture that prioritizes accountability and the outcome I expect teams to be highly adaptable and proactive, especially when our clients needs or the broader operating environment require us to course correct.

Fortunately, we have a number of dedicated passionate and very talented individuals who embody these operating principles.

Positive responses I'm getting from our teams are very encouraging it reflects the fact that change is in our DNA at Pitney Bowes, which is why we are 103 year old company that has always evolved with the times.

In my first 30 days I've been conducting a review of our business segments and corporate functions. This means working with our teams to take a fresh look at our cost structures infrastructure and resources operating markets and opportunities there.

The primary objectives of this discovery phase are to identify near term value drivers and establish the pillars of our next long term strategic roadmap.

Importantly, we're going to capitalize on immediate opportunities, even while planning for the future.

It's still very early in the process, but I can shed some light on preliminary observations and areas of opportunity are.

Our son Tech strategy is proving effective as evidenced by the segment's strong EBIT and margin expansion last quarter, our cost management efforts product refresh and growth in shipping position. This segment to continue to transform and ideally increase its revenues over the long term for these reasons, we believe <unk> can be a sustained source.

Full value.

Our presort strategy is also driving the strong results, we have anticipated, including top line growth and EBIT growth again last quarter.

We expect to sustain this momentum.

Like with syntactic presort can be a cornerstone of pitney Bowes and an ongoing source of significant value.

With respect to G. C. Our team has built an extremely valuable foundation and succeeded in driving domestic parcel growth. However, we are focused on actions with the aim of not continuing to incur the level of losses, we've been reporting.

We continue prioritizing clients and making sure we deliver during peak season, our efforts are centered on taking action to realize the segment's potential.

As far as cost reduction and restructuring opportunities. We're ahead of schedule on hitting our previously stated target of 75 million of annualized expense savings by the end of 'twenty 'twenty four I was actively involved in this initiative over the course of the year and based on that progress as well as additional analysis, we've done in recent weeks.

We are increasing our target for annualized expense savings by $40 million, bringing us to a new overall target of approximately $115 million.

Throughout the coming weeks and months, we're going to continue to leave no stone unturned I look forward to continuing to share updates on our near term actions and long term planning.

And in the same spirit, we welcome constructive feedback from you.

In closing I want to be clear that Pitney Bowes is a strong company with great businesses and we are all committed to streamlining the organization and improving performance.

Body here is satisfied with our recent financial results.

We have a valuable foundation that is anchored by two profitable cash generative segment.

Growth opportunities across all of our businesses and a motivated and talented employee base. This is a foundation, we can leverage to ultimately deliver much stronger results in the future. Let me now turn it over to Ana to discuss our results and financials in detail.

Thank you, Jason and good morning, everyone before I begin my financial review I'll note that the year over year revenue information will be discussed on a comparable basis, which as previously discussed adjusts for the impact of currency and a revenue presentation change for those.

Services that was implemented beginning fourth quarter last year.

These revenue presentation change primarily affects global e-commerce revenues and to a lesser extent centric the change does not affect profitability.

Also unless otherwise noted I will speak to other items, such as EBIT EBITDA and EPS on an adjusted basis total revenue for the quarter was 784 million a decline of 1% versus prior year adjusted.

Adjusted EBITDA grew 6 million year over year to $84 million in the quarter adjusted EBITDA grew 5 million to $43 million in the quarter.

And that growth was offset by higher interest expense, resulting in adjusted EPS of zero in the quarter.

Turning to cash flow GAAP cash from operating activities was $25 million and free cash flow of $15 million.

Free cash flow is up in the quarter and year to date versus prior year, let's dive into our three business segments.

I'll start with something.

<unk> reported revenues of $318 million in the quarter down 3% compared to prior year and the margin expanded 200 basis points driven by improved productivity.

Let's start with revenue we continue to make progress on our product refresh and are now 68% through the U S. P. S technology migration, which is up 20 percentage points from prior year.

Our success in placing advance compliant equipment puts us in a different stage of our product lifecycle, we will increasingly have more stick some lease renewals and less new lease opportunities from a financial perspective, this shift drove equipment sales down 8%.

<unk> and contributed to increasing financing revenue by 1% compared to prior year. This is a net positive cash flow.

Support services revenue declined in line with the overall mail market and as a result of exiting certain unprofitable contracts to service equipment or third parties.

<unk> continues to be a growth area for centex.

In the quarter total shipping related revenue grew 6% over prior year and now comprises over 12% of total center grabbing.

We remain very encouraged by the traction our shipping products are receiving especially with enterprise client.

Despite topline pressures, we expanded gross profit margins by 300 basis points, we continue to lower the cost of equipment manufacturing and freight which contributed to the year over year margin expansion.

Our commitment to drive efficiency in our sales and customer service operations remains a top priority.

We continue to modernize SMB client processes, driving a 25% year over year decline in total customer service calls and increasing our customer satisfaction scores to 86% in North America.

The cost of goods sold and operating expense improvement that we are pursuing drove adjusted segment EBIT growth of 3% over prior year and we are redoubling, our attention on simplifying the business and optimizing execution.

I'll spend a moment on the performance of financial services inside of centric.

Financial services remains an important component of the business.

Regarding valuable client solutions and steady returns.

We are executing on our previously announced program, where our bank will participate in the financing of select captive lease receivables and the initiatives that will be good for the bank and the enterprise overall, the health and quality of our portfolio continues to demonstrate the durability of our offerings.

Finance receivables remained steady at $1 2 billion.

Write offs continue to be low and roughly flat quarter over quarter.

Next let's turn to presort, which had another outstanding quarter freezer generated revenue of $152 million in the quarter up 5% from prior year total sortation volume declined 5% to $3 6 billion pieces, but revenue per piece expansion.

More than offset volume declines.

Rose.

Higher yielding mail classes contributed to the increased revenue per piece.

Adjusted segment EBIT for the quarter was 29 million an increase of 42% compared to last year. Adjusted segment EBIT margin also expanded almost 500 basis points to 19%.

The three main sources of margin improvement were higher revenue per piece lower unit transportation cost.

And most importantly continued labor productivity gains from our investment in new automation.

For example over the past two years, we have refreshed almost 20% of our sort of fleet, which contributed to an 8% year over year labor productivity improvement as measured by pieces fed per labor hour. We expect this positive momentum to carry into the fourth quarter.

Let's shift to global ecommerce segment revenues were $313 million down 1% versus prior year. Adjusted segment EBIT was a loss of $42 million compared to a loss of $35 million last year.

Year over year declines on both the top and bottom line were primarily driven by the change in two large cross border client relationships that occurred earlier this year.

In total cross border revenue declined 57 million and gross profit 13 million versus prior year.

Cross border stabilized quarter over quarter. However, it will remain a drag on a year over year comparisons through first quarter 'twenty 'twenty four.

Turning to the mastic parcel.

We processed 51 million packages in the quarter representing growth of 38% year over year.

We continued to gain market share driven by the value of our offerings, our strong service levels and high client satisfaction.

This translated to 29% revenue growth in the quarter, the challenging macro environment market overcapacity and parcel mix continued to put downward pressure on pricing, which offset the continued improvement in unit cost economics.

Falling fluctuations associated with peak and deliver for our clients movie.

Moving onto restructuring, we continue to make meaningful progress on our plan announced during the first quarter earnings during the quarter. We recorded restructure he related charges of 17 million and make $12 million in cash payments.

Jason mentioned, we are tracking ahead of plan and are now expanding the program savings by 40 million. This brings the total annualized savings from this program 275 to 85 million by the end of 2024, we will continue to provide progress update.

On our current restructuring plan moving to capital structure in July we raised 275 million from a private placement offering.

Proceeds we're used to redeem the remaining portion of our 2024 notes and 30 million of the term loan E. R. Next that maturity is a 2026 finally, we are updating our guidance.

Given our global E Commerce. Your two day performance and continued market headwinds, we now expect the company's full year revenue to decline between three and 4% on a comparable basis and full year adjusted EBITDA margins to remain relatively flat versus prior year.

Rosie despite continued challenges and globally commerce are consolidated if it grew year over year in the quarter driven by solid performance from pre shirt Insensate. We remain very encouraged by the results from both of these units on a global ecommerce team is working hard to realize the potential.

Of our growing volume strung service levels scalable network uncompetitive capabilities and it.

Dish and we have made meaningful progress on our cost reduction initiatives and our expanded restructuring plan will help drive improved margins going forward, Let me pass the call back to Jason for some additional remarks.

Before getting to the Q&A portion of the call I'll Wanna take a final opportunity to thank mark lautenbach for as many years of commitment and dedication to Pitney Bowes.

Everyone at P V wishes Mark the very best now we can open up the call for questions.

Thank you, ladies and gentlemen, you do wish to ask a question. Please press one and then there'll on your telephone keypad you can withdraw your question at any time by repeating the ones that are all command and if you're using a speaker phone. Please pick up the handset before pressing those numbers again, it's one zero task a question.

And will first go to a nurse.

North Coast Research. Please go ahead.

Good morning.

As you look at the e-commerce business and kind of dive into the business you know what the big picture changes.

Do you anticipate being able to make to get the business to profitability and kind of up to your expectations.

Yeah cause the thing for things without question you know what let me start off by saying you know we recognize that the level of losses that we've been reporting in that segment are not sustainable.

That said, we are taking efforts to really look at how do we make short term change in short term improvements that can help us realize the full potential of this segment.

Let and I'll talk a little bit about some of the short term improvements she's saying and then I'll come back at the end.

Yes.

The first thing I'll mention is as we call them dead in the remarks, we're doing a lot around restructuring.

And we <unk>.

Closed down for sites that were older technology and had adjacent sites with a more modern technology and sufficient capacity.

Creating an opportunity to better serve our clients without disruption.

We are looking at our cost overhead and infrastructure.

Leaving no stone unturned.

In addition to that or unit economics, which I pointed to.

Are improving their improving from two sources are improving from our ability to better router transportation make our network more efficient, but also from the volume you know productivity also gets in fact that by by the growth. So again. The team is working really hard to look at every opportunity and.

[noise] will continue to do so.

Yeah, and I I, just say no anisette it well there are multiple pieces here. The first is cost actions that we're taking both for the short term and for the medium term.

And I'd also touched on the fact that we have opportunity to continue to improve our our rate per piece, which will obviously drive better economics.

And then it's pretty clear that we are seeing significant growth in volumes in the domestic parcel business, which if you think about the way that clients are reacting to our offerings. It's an extremely positive sign for the business going forward clients clearly see value in what we're bringing to the table. So a lot of short term work Ah clearly on how.

Do we continue to go after cost them in the N period economics.

But the client confidence and are offering and in our ability to deliver is certainly something that I look forward to with a with a positive note.

And then in the industry what are you seeing in terms of pricing and when do you anticipate for the holiday season.

Yeah. So I think a couple of things. So you saw a varied reaction on different companies approaches to peak pricing activity. So first off that created a little bit of confusion I think in the market.

Some some uncertainty.

You've seen in other announcements already this earnings season that there is clear market overcapacity, right now, which is creating some significant pricing pressures.

That's it you know we clearly have some opportunity to go out to a pricing is a lever that we can use going forward, but let's be clear I you know I don't want anyone to be confused that we are careful and thoughtful about the volumes that we're bringing in to improve our our profit margin and to improve our fixed cost leverage.

But that said we are in a very competitive environment, you've heard that in the other forums and I will tell you that Ah you know one thing that we watch very carefully as our win rate and that has been fairly consistent over the past few quarters.

Thank you very much I really appreciate it.

And next thing go to antique liberating ski with Saddam and company. Please go ahead.

Good morning, and thank you for taking our questions and welcome Jason themselves. So first you know it was.

Nice to see a priest sort of incentive continuing their solid performance.

I know you talked about the automation efforts, helping things specifically resort, but.

It's an area that you guys talked about this for awhile. So it's not necessarily new but just just wondering are there any additional opportunities to further improve with automation or or do you think you're kind of tapped with those efforts.

Thanks for for the question Anthony productivity is a never ending.

Game I mean, this is really a pre 30th is the games of pennies and I'll tell you that seems very focused their tackling right now a lot of up to my station and transportation.

And we did sort of refreshes, they're working on come there as well so.

The rate and pace will vary over time, but I do expect continued productivity as we explore new automation and technologies as well.

That's great to hear and.

As far as G E C. So I don't know if it's.

Necessarily easy to do this but if you if we were attached need to cross border, which seems to be the biggest headwinds within.

Within G. You see if we were to hypothetically exclude that with the rest of the business.

And for G E C would that be.

Mmm better in terms of profitability versus last year or the same or worse can you give us maybe some some sense in regards to that.

Sure. So as I mentioned cross borders really a headwind when you compare year on year.

And when you look at it more a quarter over quarter.

It gives you a better representation of of the of the true performance.

And I'll mention two things around that and.

The the businesses operating I I would say kind of flattish when you look at it maybe it slipped slightly book down quarter over quarter, Excluding cross border and I did mentioned, we did some investments around those site closures that affect it our profitability, but those are investments that will pay for it.

The future so I I anticipate progress from the cost actions, we're seeing our operating expenses down a year over year and quarter over quarter and that's in addition to the improvements were doing and the cost of goods sold around the optimisation of the network and the warehousing that I mentioned.

And.

Mhm Gotcha, Okay, and then you know in in terms of the expanded restructuring as far as the that additional $40 million you know where's that.

Where are those savings coming from just just curious to get more details.

Sure. So I'll I'll give you a sense you know overall, we are looking at the entire our entire expense base.

We'll see about half of them come from cost of goods, salt and productivity related things and probably about the other half from some of our overhead and re prioritizing Ah programs and other activities that we do as you know it's a sensitive.

Topic, and we're working through it internally with our employee base and I'll end up there.

I'll I'll just jumping on top of that you know one of the things we're trying to do as part of this cost effort is we're really trying to be smart and how we go about it alright. So one of the themes that I've been working with the teams on is how do we take complexity out of the business how do we make things more simple and so in addition to just taking out cost for cost six which we need to do.

It's really important that we're doing it in a way that's gonna make the business stronger ultimately as we go forward and that's been one of the focus areas that we've been working on as a leadership team over the past 30 days is how do we do that in a smarter way that's gonna keep the cost out for the long term and allow us to be more effective as we go forward in the market.

Understood well well. Thank you very much best of luck.

Thank you.

And next you'll go to Peter sack on with credit Heights. Please go ahead.

I just to follow up on the cost cutting question can you break out by segment.

Costing about $150 million, you said half of overhead so is it half coming from the I allocated corporate overhead.

Unless you were in the process of of working through our specifics and I will tell you a lot of that will be felt in the business units and we're already feeling it a lot of what you saw on the margin expansion incense thick and presort is a testament to the restructuring that we.

Tried it earlier in the year and the cause actions we've taken throughout I I I. The vast majority of this will go to to the segments and and you should see that improve Martin as as we move forward.

I'll I'll just add in again, you know from my perspective, I wanted to see the cost cuts coming from all parts of the business that said it is really important that the business units, who ultimately fund and need the resources.

Make sure that they're making the right decisions for what do they need to run and execute on the business. So as part of this work we've done over the last 30 days to go after the incremental cost opportunity. We've really been focused on working with the business unit leaders, having them meet with each of the functional leaders across the shared services and really engaging.

And some very productive discussions on what do we need to run the business. How can we think about processes differently and how do we make sure that at the end of the day the business units have what they need to be effective in the markets.

[noise]. Thanks can you tell us more about presort profitability improvement is great along with EBITDA perfect driven by the the higher prices. The whole service is charging cause I have a three year on the 20 per cent or.

You say that.

Government 20 per cent, if you could just walk me through a little bit of it or contact them I appreciate it.

Yeah, Let me, let me start with that I mean, first and foremost I would say that the priests. Our team has done a terrific job around productivity, you're really starting to see them execute very well on what they do best which was driving productivity across their sites and across the business. So some of the benefit is clearly coming from that they've.

They've also done a very good job of bringing additional volumes into their network to replace the natural decline of the mailing business Ah. So that's been supportive of that benefit as well and then third to your point you know there was certainly you know there was certainly a U U S. P S.

Cost change for us that benefited us, but at the end of the day I want to emphasize that the reason that the U S. P. S is giving the benefit of that workshop discount because they see the value that the presort business brings to the table, it's not something that they're doing just out of the goodness of their heart right. Our teams really do drive value for the.

S B S and you'll see that reflected changes in the workshop discounts.

Great.

[noise] disclose the covenant EBITDA leverage.

We we have not done that in the past week, maybe follow up with the I R team after the call and and take you through some more specifics later.

Okay and he was.

Market and the non deal road show.

Oh.

Like the vast majority of the enterprise value of the company that so yeah I think it would be helpful for.

For credit investors.

Review the company and can see the.

Estimate significant covenant flexibility, so I think it would be helpful.

Company.

As I mentioned, where will take it offline and and follow up with the worst specifics we absolutely welcome the feedback on and if there's more disclosures, we should be doing will will take that into consideration going forward.

Thank you.

And again it is one zero to ask a question next we'll go to match with parents just go ahead.

Oh, good morning, Jason and on them.

[noise] Commerce, Jason and I don't know, maybe it's not a fair question given your.

A recent change of status, but.

Is there any plan or spot to do something a little more drastic here rather than talking about ways things can be a little more profitable, but either shutting the business selling the business doing.

Taking a more drastic steps.

Look I mean, I I, you know to be fair amount I'm not going to comment on any specific portfolio actions. You know what I will say is we continue to believe that there is an extremely valuable foundation in that business, especially on the domestic parcel side.

We are clearly not satisfied with the financial performance that we've been delivering on that.

And as I said, we are very focused on taking short term actions to try to improve the profitability in the near term.

We have a number of efforts underway as well to look at long term long.

Long term opportunity to change the trajectory of that business you know everything from looking again as I said before at opportunity to take pricing in the market potentially.

Thinking about how we drive our network differently, but at the end of the day, you know I keep coming back to our goal is to maximize the value of that business going forward.

And I think that we are doing everything that we should be doing at the moment to ensure that that is the outcome that we're gonna drive.

Okay. No. That's that's fair I I, just wonder if strategic alternatives should be more of a part of that conversation as well at least the way you presented to us, but maybe that's going on behind the scenes.

Can I ask a more specific question on G. C. Just around the holiday season there've been some issues in the past on fixed versus variable labor.

How are you thinking about that going into this holiday season.

Yes, let me let me take that we've been working very hard preparing for peak and I'll start by saying, it's been very humbling for for the entire thing what we've gone through the past few holiday seasons here.

The second thing I'll say is we're very much of a learning.

So we're absolutely taking all those learnings and when we have the same people. So we make sure we're more prepared I'll I'll share with you an example.

In the past and we continue.

Forecasts from our clients and we always staff towards those forecast we have now developed into network, our ability to flex up easier than to flex down. So now we're planning a slightly below and we will flex up people, who see the volume so our ability and our inside of our process.

Six two flex four volumes is much greater and we've developed that again throughout the years and will be putting all of that in practice now. So one never knows peak seasons always slow curve, both but the teenagers as prepared as they've ever been.

Thank you Ana that's that's helpful and and as far as getting labor to flex up is that labor force readily available.

Actually we have a much better mix of our temp to perm.

<unk> the permanent ratio in our Labor force and when you distribute that across the sites and the current market conditions of the labor market. We tried not the same as they were over the past two peak holiday seasons, we feel very strongly and very well prepared.

Got it and.

Santa Ana you have some language and the release about.

Fewer new lease opportunities, but you should expect that to be generally offset by an increase in fixed term lease extensions.

Can you help us understand how that works from a from a revenue perspective, and and maybe if you can work in what the interest rate environment does to help you on that front.

Sure. It's a great question so.

Let me start with where we are in our product lifecycle. As you know about five years ago was when the same pro C and some of the new technology that we started rolling out for the compliance.

That we need to meet for the United States Postal service started rolling out so those that once the bulk of our start of our new product launches in the new capabilities, we're offering to our client.

With that I lease terms tend to be somewhere in that four to five year range. So ask those start to come off that product is still very good.

Still meets the market demands so that product does not require a new equipment sale.

Client is gonna come in and we're Gonna say, let's bring you out a fixed term so what happens in the revenue recognition is when you have an equipment sale, that's a lot of upfront revenue and cost.

It's very it's good Martin, but you have higher revenue in higher cost when you actually review this newly stern for another four to five years, you're gonna have better cash flow because you're gonna have more of that margin comes through but overtime.

So that's what we mean by having less of the upfront newly being a new equipment sale and more of the overtime, we choose that renewal with a new term.

I see and and with with the financing portion of that.

Is there is there an interest rate associated with that that fluctuates or how was that part of it set.

Actually that's a great question, our sales force really tends to sell the value based on the payment. So as you can imagine the profitability shifts stronger.

The renewal than in the upfront.

From a marketing perspective.

Right I see okay, great. Thank you very much for that and then and then just one last question for me on the capital structure front.

You've dealt with your 2020 fours, where where's your next focus at this point would you consider being back in the market buying bonds or how do you think about the next steps with your capital structure.

Yeah, so taking a step back a capital structure Ah our number one priority continues to be you know reinvesting in our in our business you have seen a decreasing our capex and our capital expenditures and it's been significant the main driver there has been the fact that we're not expanding.

Pass city in global ecommerce, but we are definitely investing and sent that can presort as we've used to and also in up to my station.

So that's point number one point.

Number two is we will continue to look at acquisitions of course very selectively as example that the ones that come to mind that we're always looking at our around the presort space, which tend to be very accretive to.

To our editor immediately because we put them into our network third will be we will continue to assess the market for open market repurchases, mainly around our twenty-seventh as you know your to date, we've done about 17 million of those repurchases in the calendar year of 2023.

And then of course, the return of capital Ah through dividend or other means which is something we actually actively discuss without board on a quarterly basis and and that's kinda. The four key elements of our capital structure.

[noise] structure.

Got it great. Thanks, Thanks, Jason I appreciate it.

And I'll have to call back over to Mister Nice if he has any additional remarks to make.

Yeah I got it. Thank you very much I Wanna I Wanna. Thank everyone for joining today's call I am now 30 days and I will tell you. Our teams are committed to delivering streamlined organization and importantly, maximizing the potential of each of our businesses.

I am very encouraged by the continuing dedication and energy of the outstanding employees here at P. B as we work together to move the company forward and I will tell you. We look forward to continued engagement with all of our stakeholders and shareholders. So thank you again for joining the call.

And that does conclude they call for today. Thanks for your participation freezing AT&T teleconference. She may now disconnect.

We're sorry, you conference is ending now please hang up.

[music].

Good morning, and welcome to the Pitney Bowes third quarter 2023 earnings Conference call. Your lines have been placed in a listen only mode. During the conference call until the question and answer segment. Today's call is also being recorded if you have any objections. Please disconnect. Your lines at this time I would now like to introduce participants on today's conference call.

Mr. Jason Dice interim Chief Executive Officer, Ms. Anna Maria Chadwick, Executive Vice President and Chief Financial Officer.

And Mr. Philip Landler, Vice President Investor Relations and global strategy, Mr. Atlanta will now begin the call with a safe Harbor overview.

Good morning, I'm Philip Landler. Thank you for joining us I'll be managing that Pitney Bowes Investor Relations program going forward and we'll be partnering with Alex Brown, who many of you know from prior earnings calls part of my duties include covering the Safe Harbor information for these calls so let me briefly cover that.

In today's presentation are forward looking statements about our future business and financial performance forward looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections more information about these risks and uncertainties can be found in our earnings press release, our 2022 Form 10-K annual Rip.

Port and other reports filed with the SEC that are located on our website at www Dot P. B dot com and by clicking on Investor Relations. Please keep in mind, we do not undertake any obligation to update forward looking statements as a result of new information or developments also for non-GAAP measures that are used in the press release or.

In our presentation materials, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release. Finally, we've provided a slide presentation and spreadsheet with historical segment information on our website and now I'd like to turn the call over to our interim CEO Jason died.

Good morning, everyone.

Today is my first call I'm going to take a few minutes to cover three areas.

First a brief overview of my background.

Second context on my leadership style.

And lastly, a high level summary of what I've been focused on since stepping into my new role on October 2nd.

I spent my initial years overseeing our production mail business, which we divested in April 2018.

This experience as well as my working relationships with the leaders of our global ecommerce segment and functional groups is enabling me to hit the ground running in my new role.

Fortunately, we have a number of dedicated passionate and very talented individuals who embody these operating principles the PA.

The primary objectives of this discovery phase are you identifying near term value drivers and establish the pillars of our next long term strategic roadmap.

Importantly, we're going to capitalize on immediate opportunities, even while planning for the future.

It's still very early in the process, but I can shed some light on preliminary observations and areas of opportunity are.

Our son Tech strategy is proving effective as evidenced by the segment's strong EBIT margin expansion last quarter.

Our cost management efforts product refresh and growth in shipping position. This segment to continue to transform and ideally increase its revenues over the long term for these reasons, we believe <unk> can be a sustained source a meaningful value.

Our presort strategy is also driving the strong results, we have anticipated, including top line growth and EBIT growth again last quarter.

We expect to sustain this momentum.

Like with syntax presort can be a cornerstone of pitney Bowes and an ongoing source of significant value.

As we continue prioritizing clients and making sure we deliver during peak season. Our efforts are centered on taking action to realize the segment's potential.

Target for annualized expense savings by $40 million, bringing us to a new overall target of approximately $150 million.

Throughout the coming weeks and months, we're going to continue to leave no stone unturned I look forward to continuing to share updates on our near term actions and long term planning.

And in the same spirit, we welcome constructive feedback from you.

In closing I want to be clear that Pitney Bowes is a strong company with great businesses and we are all committed to streamlining the organization and improving performance nobody here is satisfied with our recent financial results.

We have a valuable foundation that is anchored by two profitable cash generative segment.

Growth opportunities across all of our businesses and a motivated and talented employee base. This is a foundation, we can leverage to ultimately deliver much stronger results in the future.

Now I'll turn it over to Ana to discuss our results and financials in detail.

That was implemented beginning fourth quarter last year.

This revenue presentation change primarily effects global e-commerce revenues and to a lesser extent centric the change does not affect profitability.

Also unless otherwise noted I will speak to other items such as EBIT EBITDA.

E P S.

On that basis total revenue for the quarter was $784 million a decline of 1% versus prior year adjust.

Adjusted EBITDA grew 6 million year over year to $84 million in the quarter adjusted EBITDA grew 5 million to $43 million in the quarter.

EBIT growth was offset by higher interest expense, resulting in adjusted EPS of zero in the quarter.

Turning to cash flow GAAP cash from operating activities was $25 million and free cash flow of $15 million.

Free cash flow is up in the quarter and year to date versus prior year, let's dive into our three business segments.

I'll start with something.

<unk> reported revenues of $318 million in the quarter down 3% compared to prior year.

Expanded 200 basis points driven by improved productivity.

Let's start with revenue we continue to make progress on our product refresh and are now 68% through the U S. P. S technology migration, which is up 20 percentage points from prior year.

Our success in placing advance compliant equipment puts us in a different stage of our product lifecycle, we will increasingly have more like term lease renewals and less new lease opportunities from a financial perspective, this shift drove equipment sales down 8%.

And contributed to increasing financing revenue by 1% compared to prior year. This is a net positive cash flow.

Support services revenue declined in line with the overall mail market and as a result of exiting certain unprofitable contracts to service equipment, a third party.

Shipping continues to be a growth area for sent that.

In the quarter total shipping related revenue grew 6% over prior year and now comprises over 12% of total center grabbing.

We remain very encouraged by the traction our shipping products are receiving especially with enterprise clients.

Our commitment to drive efficiency in our sales and customer service operations remains a top priority.

We continue to modernize SMB client processes, driving a 25% year over year decline in total customer service calls and increasing our customer satisfaction scores to 86% in North America.

Spend a moment and the performance of financial services inside of centric.

National services remains an important component of the business, providing valuable client solutions and steady returns we.

We are executing on our previously announced program, where our bank will participate in the financing of select captive lease receivables.

An initiative that will be good for the bank and the enterprise overall, the health and quality of our portfolio continues to demonstrate the durability of our offerings.

Finance receivables remained steady at $1 2 billion write offs continue to be low and roughly flat quarter over quarter.

Next let's turn to pre surge, which had another outstanding quarter freezer generated revenue of $152 million in the quarter.

5% from prior year total sortation volume declined 5% to $3 6 billion pieces, but revenue per piece expansion more than offset volume declines.

Growth in higher yielding mail classes contributed to the increased revenue per piece.

Adjusted segment EBIT for the quarter was 29 million an increase of 42% compared to last year. Adjusted segment EBITDA margin also expanded almost 500 basis points to 19%.

The three main sources of margin improvement were higher revenue per piece lower unit transportation cost.

And most importantly continued labor productivity gains from our investment in new automation.

Let's shift to global ecommerce segment revenues were $313 million down 1% versus prior year. Adjusted segment EBIT was a loss of $42 million compared to a loss of $35 million last year.

Year over year declines on both the top and bottom line were primarily driven by the change in two large cross border client relationships that occurred earlier this year.

In total cross border revenue declined 57 million and gross profit of $13 million versus prior year.

Cross border stabilized quarter over quarter. However, it will remain a drag on a year over year comparison through first quarter 'twenty 'twenty four turning to domestic parcel.

We processed 51 million packages in the quarter representing growth of 38% year over year, we continued to gain market share driven by the value of our offerings, our strong service levels and high client satisfaction. This translated to 29%.

Revenue growth in the quarter, the challenging macro environment market overcapacity and parcel mix continued to put downward pressure on pricing, which offset the continued improvement in unit cost economics.

In addition, as part of our continuing focus on enhancing and optimizing our capacity we completed the previously announced facility consolidation initiative.

Clothing for older and less automated sites during the quarter.

These actions resulted in 4 million of higher one time cost in the quarter and will drive operating benefits moving forward overall on a year over year basis domestic parcel gross margin decreased by 50 basis points.

Finally, operating expense declined versus both prior year and quarter periods due primarily to the cost reduction actions taken over the past two quarters.

We expect this to be a reoccurring benefit moving forward.

Looking ahead, our team is well prepared for holiday peak the investments we have made in automation technology and our network over the past couple of years enable us to more efficiently handled volume fluctuation associated with peak and deliver for our clients.

Moving on to restructuring, we continued to make meaningful progress on our plan announced during the first quarter earnings during the quarter, we recorded restructuring related charges of 17 million and made $12 million in cash payments.

Jason mentioned, we are tracking ahead of plan and are now expanding the program savings by $40 million. This brings the total annualized savings from this program to $75 million to $85 million by the end of 'twenty 'twenty four we will continue to provide progress updates.

On our current restructuring plan.

Moving to capital structure in July we raised $275 million from a private placement offering net proceeds were used to redeem the remaining portion of our 2024 notes and $30 million of the term loan a.

Our next debt maturity is in 2020 six finally, we are updating our guidance.

Given our global E Commerce year to date performance and continued market headwinds. We now expect the company full year revenue to decline between three and 4% on a comparable basis and full year adjusted EBIT margin to remain relatively flat versus prior year.

In closing despite continued challenges in global ecommerce our consolidated EBITDA grew year over year in the quarter driven by solid performance from Presort and something we remain very encouraged by the results from both of these units on a global ecommerce team is working hard to realize the potential.

<unk> of our growing volumes strong service level scalable network and competitive capability.

In addition, we have made meaningful progress on our cost reduction initiatives and our expanded restructuring plan will help drive improved margins going forward, Let me pass the call back to Jason for some additional remarks.

We're getting to the Q&A portion of the call I want to take a final opportunity to thank Marc lautenbach for his many years of commitment and dedication to Pitney Bowes everyone at P. B wishes Mark the very best now we can open up the call for questions.

Thank you, ladies and gentlemen, if you do wish to ask a question. Please press one and then zero on your telephone keypad you can withdraw your question at any time by repeating the ones. They will command and if youre using a speakerphone. Please pick up the handset before pressing those members I guess, that's one zero task of question.

And well first go to Kartik Mehta with Northcoast Research. Please go ahead.

Good morning.

Jason as you look at the e-commerce business and kind of dive into the business you know what.

Big picture changes do.

Do you anticipate being able to make to get the business to profitability and kind of up to your expectations.

Yeah Carter. Thanks for thanks for the question, let me start off by saying, we recognize that the level of losses that we've been reporting in that segment are not sustainable now that said we are taking efforts to really look at how do we make short term change in short term improvements that can help us realize the full.

Potential of this segment I'll, let Anna talk a little bit about some of the short term improvements you're seeing and then I'll come back at the end.

Yes Hum.

But the first thing I'll mention is as we commented in the remarks.

We're doing a lot around restructuring.

And are we.

Closed down four sites that were older technology and had adjacent sites with a more modern technology and sufficient capacity.

Creating an opportunity to better serve our clients without disruption.

We are looking at our cost overhead and infrastructure and leaving no stone unturned.

In addition to that our unit economics, which I pointed to are improving they are improving from two sources, they're improving from our ability to better route our transportation make our network more efficient, but also from the volume you know productivity are also gets impacted by by the growth. So again.

And the team is working really hard to look at every opportunity and and we'll continue to do so.

Yeah, and I'd, just say no and I said it well there are multiple pieces here. The first is cost actions that we're taking both for the short term and for the medium term.

And I'd also touched on the fact that we have opportunity to continue to improve our our rate per piece, which will obviously drive better economics.

We continue to go after cost and in the end period economics.

But the client confidence in our offering and our ability to deliver is certainly something that I look forward to with a with a positive note.

And then in the industry what are you seeing in terms of pricing and when do you would you anticipate for the holiday season.

We've had some come some uncertainty.

You've seen in other announcements already this earning season that there is clear market overcapacity, right now, which is creating some significant pricing pressures.

That said you know, we clearly have some opportunity to go after pricing as a lever that we can use going forward, but let's be clear I mean, I don't want anyone to be confused that we are careful and thoughtful about the volumes that we're bringing in to improve our profit margin and to improve our fixed cost leverage.

But that said we are in a very competitive environment.

You've heard that in the other forums and I will tell you that you know one thing that we watch very carefully is our win rate and that has been fairly consistent over the past few quarters.

Thank you very much I really appreciate it.

And next you can go to ancillary liberating ski with Sidoti and company. Please go ahead.

Hey, good morning, and thank you for taking the questions and welcome Jason So.

So first are you know.

Nice to see our Presort and center continues their solid performance.

On the I know you talked about the automation efforts are helping.

Specifically.

Presort, but.

It's an area that you guys talked about this for a while so it's not necessarily new but just wondering are there any additional opportunities to further improve with automation are or do you think you're kind of tapped out with those efforts.

Oh, Thanks for the question Anthony productivity is a never ending.

Game I mean, this is really a pre sorted in the game to pennies and I'll tell you. The team is very focused they are tackling right now a lot of optimization and transportation.

And we did sort of refreshes there working on come bearish as well so.

The rate and pace will vary over time, but I do expect continued productivity as we explore.

New automation and technologies as well.

That's great to hear and.

As far as the GEC. So I don't know if it's if it's necessarily easy to do this but if you. If we were to exclude the cross border, which seems to be the biggest headwind within our.

Within GE you see if we were to hypothetically exclude that with the rest of the business.

For GE, you see would that be.

Better in terms of profitability versus last year or the same or worse can you give us maybe some sense with regards to that.

Sure. So as I mentioned cross border is really a headwind when you compare year on year.

And when you look at it more quarter over quarter.

It gives you a better representation of the of the true performance.

And it.

I'll mention two things around that.

And.

That the business is operating I would say kind of flattish when you look at it maybe it slipped slightly down quarter over quarter, excluding them Cross border and I did mentioned, we did some investment around those site closures that affected our.

Our profitability, but those are investments that will pay for it into the future. So I I anticipate progress.

From the cost actions, we're seeing our operating expenses down year over year and quarter over quarter and that's in addition to the improvements we're doing in the cost of goods sold around the optimization of the network and the warehousing that I mentioned.

Got it Okay and then.

In terms of the expanded restructuring as far as the additional $40 million.

You know where is that Oh.

Where are those savings coming from just curious to get more details.

Sure so.

I'll give you a sense you know overall, we are looking at the entire.

Our entire expense base.

We'll see about half of them come from cost of goods, salt and productivity related things and probably about the other half from some of our overhead and re prioritizing our programs and other activities that we do as you know it's oh.

Incentive topic, and we're working through it internally with our employee base and I'll end. It there yeah I'll just jump in on top of that you know one of the things we're trying to do as part of this cost effort is we're really trying to be smart in how we go about it right. So one of the themes that I've been working with the teams on is how do we take complexity out of the business.

How do we make things more simple and so in addition to just taking out cost for cost saves, which we need to do.

It's really important that we're doing it in a way that's going to make the business stronger ultimately as we go forward and that's been one of the focus areas that we've been working on as a leadership team over the past 30 days is how do we do that in a smarter way that's going to keep the cost out for the long term and allow us to be more effective as we go forward in the market.

Understood well, thank you very much best of luck.

Thank you.

And next we'll go to Peter Satcom with Creditsights. Please go ahead.

I just to follow up on the cost cutting question can you break out by segment.

Of course things like that.

$15, you said half of overhead so is it a half coming from our unallocated corporate overhead.

Hum.

Listen we're in the process of working through our specifics and I will tell you a lot of that will be felt in the business units and we're already feeling it.

A lot of what you saw on the margin expansion in Centex and presort.

A testament to the restructuring that we started earlier in the year and the cost actions we've taken throughout.

I I the vast majority of this work will go to a to the segments and you should see it improve margin.

As we move forward Yeah, I'll just add in again, you know from my perspective, I want to see the cost cuts coming from all parts of the business that said.

It is really important that the business unit to ultimately fund and need the resources make.

Thanks.

Tell us all a bit more about presort profitability improvement and a great along with EBITDA improvement driven by the the higher price of the whole service is charging.

Because that was a year in the 20% or can you state the government, 20%. If you could just walk me through a little bit of better context I appreciate it.

Yeah, Let me, let me start with that I mean, first and foremost I would say that the priest our team has done a terrific job around productivity.

Youre really starting to see them execute very well on what they do best which is driving productivity across their sites and across the business. So some of the benefit is clearly coming from that.

They've also done a very good job of bringing additional volumes into their network to replace the natural decline of the mailing business. So that's been supportive of that benefit as well and then third to your point you know there was certainly you know there was certainly a U U S. P S.

Our cost change for us that benefited us, but at the end of the day I want to emphasize that the reason that the U S. P. S is giving the benefit of that work share discount is because they see the value that the presort business brings to the table, it's not something that they're doing just out of the goodness of their heart right. Our teams really do drive value for you.

S. P S and you see that in the reflected changes in the workshop discounts.

Great.

So can you disclose the covenant EBITDA leverage.

We are we have not done that in the past, we maybe follow up with the IR team after the call and and take you through some more specifics later.

Okay, and he was provided to the market and the non deal roadshow. So.

The vast majority of the enterprise value of the company.

So yeah, I think it would be helpful.

Or credit investors.

Or do you as a company and can see the Oh, well they estimate significant covenant flexibility so.

It can be helpful to.

For the company.

Yeah.

As I mentioned, we will take it offline and follow up with the specifics we absolutely welcome the feedback on and if there is some more disclosures, we shouldn't be doing well, we'll take that into consideration going forward.

Thank you.

And again it is one zero to ask a question next we'll go to Matt Swope with Baird. Please go ahead.

Good morning, Jason and on Hum on global ecommerce, Jason and I don't know, maybe it's not a fair question given your.

The change in status, but.

Is there any plan or spot to do something a little more drastic year, rather than talking about ways things can be a little more profitable, but either shutting the business selling the business doing taking a more drastic steps.

We are clearly not satisfied with the financial performance that we've been delivering on that.

And as I said, we are very focused on taking short term actions to try to improve the profitability in the near term.

We have a number of efforts underway as well to look at long term.

Long term opportunity to change the trajectory of that business.

Everything from looking again as I said before at opportunity to take pricing in the market potentially.

So thinking about how we drive our network differently, but at the end of the day, you know I keep coming back to our goal is to maximize the value of that business going forward.

And I think that we are doing everything that we should be doing at the moment to ensure that that is the outcome that we're going to drive.

Okay No that's.

That's fair I, just wonder if strategic alternatives should be more of a part of the conversation as well at least the way you presented to us, but again, maybe that's going on behind the scenes.

Can I ask a more specific question on GEC just around the holiday season, there have been some issues in the past on fixed versus variable labor.

How are you thinking about that going into this holiday season.

Yes, let me let me take that we've been working very hard preparing for peak and I'll start by saying, it's been very humbling for for the entire team what we've gone through the past few holiday seasons here.

The second thing I'll say is.

We're very much of a learning tool.

So we're absolutely taking all those learnings that we have the same people.

So we make sure we're more prepared I'll share with you an example.

In the past and we continue to do as we get the forecast from our clients and we always staff towards those forecast. We have now developed in the network our ability to flex up easier then to flex down. So now we're planning a slightly below and we will flex up people, who see the volume so.

Ability in our inside of our processes to flex for volumes is much greater and and we've developed that again throughout the years and we will be putting all of that in practice now so one never knows and peak seasons always throw curve balls, but the team is as prepared as they've ever been.

Thank you Ana that now that's helpful and as far as getting labor to flex up as that labor force readily available.

Actually we have a much better mix of temp to perm the temporary.

Temporary to permanent ratio in our labor force and when you distribute that across the sites and the current market conditions of the labor market, which are not the same as they were over the past two peak holiday seasons, we feel very strongly and very well prepared.

Got it.

And then on Fintech honor them you have some language in the release about.

Fewer new lease opportunities, but you should expect that to be generally offset by an increase in fixed term lease extensions.

Help us understand how that works.

From a revenue perspective, and then maybe if you could work in what the interest rate environment does to help you on that front.

Sure. It's a great question so.

Let me start with where we are in our product lifecycle. As you know are about five years ago was when does San proceeds in some of the new technology that we started rolling out for the compliance that we need to meet for the United States Postal service started rolling out so those that once the bulk of our start of our new <unk>.

Product launches and the new capabilities, we're offering to our client.

With that our lease terms tend to be somewhere in that four to five year range. So as those start to come off that product is still very good.

Still meet the market demands so that product does not require a new equipment sale.

That client is going to come in and we're gonna say, let's renew at a fixed term. So what happens in the revenue recognition is when you have an equipment sale. That's a lot of upfront revenue and cost. It's very it's good margin, but you have higher revenue and higher cost when you actually renew these new lease terms.

For another four to five years, you're going to have better cash flow because youre going to have more of that margin comes through but overtime.

So that's what we mean by having less of the upfront new.

Lease being a new equipment sale and more of the overtime, which is that renewal with the new term.

Yeah.

I see and with the financing portion of that.

Is there a is there an interest rate associated with that that fluctuates or how is that part of it said.

Actually great question or Salesforce really tends to sell the value based on the payment. So as you can imagine the profitability shifts stronger.

The renewal than in the upfront.

From a margin perspective.

Right.

I see okay, great. Thank you very much for that and then and then just a last question for me on the capital structure front.

You've dealt with your 2020 fours, where whereas your next focus at this point would you consider being back in the market buying bonds or how do you think about the next steps with your capital structure.

Yes, so that.

Taking a step back a capital structure are our number one priority continues to be you know reinvesting in our in our business.

You have seen a decreasing our capex and our capital expenditures and it's been significant the main driver. There has been the fact that we're not expanding capacity and global ecommerce, but we are definitely investing in scent. They can pre sorted out we'd be used to and also in optimization.

So that's point number one.

Point number two is we will continue to look at acquisitions of course very selectively as example that the ones that come to mind that we're always looking at our around the presort space, which tend to be very accretive to.

Two our EBITDA immediately because we put them into our network third will be we will continue to assess the market for open market repurchases, mainly around our twenty-seventh as you know year to date, we've done about $17 million of those repurchases.

The calendar year of 2023.

And then of course the.

Return of capital.

Through dividend or other means which is something we actually actively discuss with our board on a quarterly basis and and that's kind of the four key elements of our capital structure.

Structure.

Got it great. Thanks, Ana Thanks, Jason appreciate it.

And I'll hand, the call back over to Mr. Dice, if he has any additional remarks to make.

Yeah, well. Thank you very much I want to I want to thank everyone for joining today's call I am now 30 days in and I will tell you. Our teams are committed to delivering a streamlined organization and importantly, maximizing the potential of each of our businesses.

I am very encouraged by the continuing dedication and energy of the outstanding employees here at P. B as we worked together to move the company forward and I will tell you. We look forward to continued engagement with all of our stakeholders and shareholders. So thank you again for joining the call.

And that does conclude the call for today. Thanks for your participation for using AT&T teleconference. You may now disconnect.

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