Q3 2024 Pitney Bowes Inc Earnings Call
Variable compensation headwind, reflecting better attainment on goals versus last year.
In addition, we benefited from $9 million of certain one time items split between $5 million of one time benefits in this quarter and $4 million of onetime hits in the prior year.
EPS was <unk> 21 up.
Speaker Change: Up <unk> year over year, driven by better operational performance and partially offset by higher taxes.
Speaker Change: Free cash flow was $75 million $19 million higher than third quarter last year.
Speaker Change: We continue to track well ahead on a year to date basis, as well with free cash flow up $91 million for the first three quarters of the year.
Speaker Change: Before I cover segment results, let me discuss the impact on the current quarter, resulting from the GE exit.
Speaker Change: A majority of GEC is now reported as discontinued operations in our consolidated financial statements.
Speaker Change: Certain amounts however did not qualify for discontinued operations treatment and remain in continuing operations as in other category.
Speaker Change: Included in this category are operations that we are currently in the process of exiting and a smaller continuing operation.
Prior periods have been recast to conform to the current period presentation.
Speaker Change: We will post a spreadsheet with historical quarterly data, reflecting this change on our IR website in the coming days.
Speaker Change: Now turning to the business segments.
<unk> revenue was $313 million, 4% lower year over year.
Speaker Change: Key drivers were the required product migration to new IMI technology.
Speaker Change: And an associated temporary increase in cancellation rates lower equipment upgrade opportunities and a higher mix of lease extensions.
Speaker Change: At the end of the third quarter, we had migrated 93% of our low to mid volume install base to IMI compliant.
Speaker Change: As we near the end of the migration, we are seeing several factors at play.
Speaker Change: Lower in period equipment sales declining $10 million or 13% year over year due to lower upgrade opportunities and a shift towards lease extensions.
Speaker Change: As a reminder, lease extension transactions are positive from a cash flow perspective. However result in near term equipment revenue and margin headwinds due to the timing of revenue recognition.
Speaker Change: We expect equipment sales decline to continue at the same rate through the second half of next year before stabilizing.
Speaker Change: Second a temporary uptick in cancellation rates resulted in increased decline of revenue streams, such as support services rentals and supplies.
Speaker Change: Those revenue streams declined $12 million or 8% year over year.
Speaker Change: We expect a similar decline in Q4 as we complete the migration and for this to remain a year over year headwind as cancellation rates normalize.
Speaker Change: Shipping related revenue grew 8% and now comprises 17% of segment revenue.
Speaker Change: We see significant opportunity in shipping in particular digital shipping offerings continue to perform well and drove most of the 29% year over year improvement in this quarter's business services revenue.
Speaker Change: These revenue sources are recurring and create a strong foundation for future growth.
Speaker Change: Impacting the comparison in this period was a large locker deal last year.
Speaker Change: Over the long term syntech revenue will be driven by mail decline at low to mid single digit rates and offset by the growth in shipping.
Speaker Change: Gross profit was $209 million down $9 million or 4% year over year as a result of lower revenue.
Speaker Change: EBIT was $104 million up 5% versus the prior year.
Speaker Change: Cost reductions have more than offset the gross profit decline in the period.
Speaker Change: Operating expenses declined $14 million or 11% year over year, primarily associated with our broader cost reduction initiative.
Speaker Change: Net finance receivables were $1 1 billion down 3% year over year from a decrease in lease receivables.
Speaker Change: Cash flow from lower net finance receivables totaled $15 million in the quarter and $57 million year to date.
Speaker Change: Now shifting to presort.
Speaker Change: Revenue was $166 million up 9% year over year, driven by higher volumes and pricing.
Speaker Change: EBIT was $46 million up 59% versus the prior year, thanks to both revenue improvements and a 6% year over year reduction in operating expenses associated with improved efficiencies.
Speaker Change: Unit transportation costs declined 7% year over year, as we continued to consolidate and optimize our lanes between in sourcing and third party contracts.
Speaker Change: Operating expenses declined 6% year over year from our cost reduction initiatives.
Speaker Change: Opex as a percentage of revenue improved 170 basis points year over year.
Speaker Change: Outside the business units corporate expenses were $43 million in the quarter up $2 million year over year.
Speaker Change: As mentioned variable compensation was a headwind here.
Speaker Change: Now, let me turn to our strategic initiatives.
<unk> with the GEC exit as of the end of the quarter. We had recorded approximately $120 million in charges and paid out about $75 million of cash related to the wind down.
Speaker Change: We communicated on August eight the day that the GEC exit commenced that we believe the onetime costs with total about $150 million.
Speaker Change: As Lance mentioned, we are still targeting approximately $150 million and expect to be largely complete by the end of the year.
Speaker Change: Second cost reduction.
Speaker Change: We accelerated the execution of this initiative in the quarter, which drove benefits in each of our segments.
During Q3, our cost reduction initiatives improved EBIT by just over $22 million exiting the quarter at an approximately $90 million run rate.
Speaker Change: This is a $20 million improvement in our run rate since the last quarter.
Speaker Change: We expect to step up the run rate more significantly beginning in the first quarter of 2025.
Speaker Change: Moving to cash optimization, we're driving progress in three specific areas.
Speaker Change: First our U S target cash balance is $100 million less following the exit of GEC.
Speaker Change: Second we continue to repatriate cash from our international entities to the U S. Following the implementation of a cash pooling system earlier this year.
Speaker Change: Through the third quarter, we have brought $117 million back to the U S year to date.
Speaker Change: Next let me discuss the PB bank receivables purchase program, which Lance teed up.
Speaker Change: This is our initiative to self select captive lease receivables funded with corporate debt to the Pitney Bowes Bank.
This helps <unk> accelerate the realization of cash from leases, while improving PV bank's return on assets.
Speaker Change: Year to date. This program has driven a $31 million increase in captive lease receivables at PB Bank.
Speaker Change: It is worth noting that only certain receivables qualify for this program and the program will take time to build that.
Speaker Change: That said to give a sense of the magnitude of the opportunity roughly $57 million of net earning assets are sitting at the bank as of the end of the third quarter out of approximately $722 million and captive lease related finance receivables in the U S.
Speaker Change: We continued to enhance the program and expect to drive roughly an incremental $100 million net earning assets through this program over the next several years.
Speaker Change: And finally lands covered our fourth initiative deleveraging.
Speaker Change: Shifting gears, let me provide an update on our 2024 guidance. We now expect full year revenue to decline at a low single digit rate.
Speaker Change: We are also raising our EBIT guidance to 355 million to $360 million.
Speaker Change: Let me note several items impacting our guidance.
One in terms of year over year, our successful removal of costs and presort performance are positive factors, while in <unk>, we expect the IMI migration to continue driving a decline.
Speaker Change: In addition, fourth quarter last year included the large government deal in Centex, which was approximately $8 million of revenue and should be taken into account.
Speaker Change: Second speaking sequentially quarter over quarter headwinds in our guidance include the $5 million, one time benefit we mentioned earlier, which will not repeat in the fourth quarter as well as approximately $10 million in additional seasonal and onetime related costs.
Speaker Change: As we continued to progress on our strategic initiatives in the fourth quarter, we will provide a more comprehensive view of our outlook for 2025 during our next earnings call and with that I'll pass it back over to Lance. Thank you.
Lance: Thank you John.
Speaker Change: This now concludes the presentation portion of today's call, we'd now like to open the call for Q&A.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Like to ask a question. Please press one then zero on your telephone keypad.
Speaker Change: If youre using a speakerphone, please pick up the handset before pressing the numbers.
Speaker Change: Once again, please press one than zero for questions at this time.
Just first question to Anthony and represents key.
Speaker Change: Sidoti <unk> company. Please go ahead.
Speaker Change: Okay. Sir your line is open now.
Speaker Change: Can you hear me now.
Speaker Change: Yes.
Speaker Change: Okay, Alright, good afternoon, everyone.
Speaker Change: So yes land so congratulations on your promotion.
Speaker Change: Do you have a few questions here so.
Speaker Change: In terms of the third quarter for us thus far centex.
Speaker Change: You guys talked about.
Speaker Change: Product migration.
Speaker Change: Impacting that I mean, I guess, when we look at the.
Speaker Change: There'll be new technology, that's required by the USPS.
Speaker Change: I know.
Speaker Change: How should we think about that as far as being able to transition the rest of the old technology meters. Do you think those will happen or will that be a headwind looking out to next year.
Speaker Change: Yeah. Thanks, Anthony I'll take a just kind of a broad overview and then I'll turn it over to John for more color.
John: So the the IMI migration is largely complete and <unk>.
John: Most of those machines have been migrated to the more recent technology.
John: It did result in some additional.
John: Attrition.
John: But that will be moderating over the next couple of quarters and should be largely behind us in the next next few quarters.
John: John do you want to add yes, that's right, Hey, Hi, Anthony So so we would have seen in the quarter.
Speaker Change: Some uptick in cancellation rates as we get to the sort of the the end of the migration process as we said earlier, we're 93% complete.
Speaker Change: So we don't expect that that will.
Speaker Change: The.
Speaker Change: Fail to complete by the end of the year, we have a requirement to get this done to get to the new security platform.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Got it okay I'm sorry.
Speaker Change: Yes.
Speaker Change: I cut you off there.
Speaker Change: What it means to do that but you were saying that you were suspecting something yes.
Speaker Change: No I was just going to say so now that now that were complete with the with the low and mid volume machines.
Speaker Change: We will see going forward is more of a lease extension period for this client base.
Speaker Change: Understood Okay.
Speaker Change: What that will end up looking like is less than the equipment sales revenue for a period of time, but more in the recurring revenue.
Speaker Change: Over the longer lease secondary lease period.
Speaker Change: It is kind of analogous to the transition that a lot of software companies made from kind of a license software model to a SaaS model, where our expectation is that revenues will take us short term hit but cash flow should be positively impacted.
Speaker Change: Got it okay. Thanks for that and then switching over to a pre source.
Speaker Change: So that was certainly a nice quarter there what is your sense as to being able to sustain volumes there and how should we think about pricing for <unk> going forward.
Speaker Change: Yes. So presort is just really doing great just running on all cylinders.
Speaker Change: Happy with the team and with the performance of that business and.
Speaker Change: We are anticipating continued strong results.
Speaker Change: Okay, Alright, and then as far as me although the.
Speaker Change: Cost reductions.
Speaker Change: So I know you guys talked a lot about the taking cost out.
Speaker Change: But when I look at the corporate expenses.
Speaker Change: We're up on a year over year basis. So.
Speaker Change: Just can you guys clarify that and then as far as just the.
Speaker Change: Kind of go over like what's driving the increased cost savings that you announced today.
Speaker Change: Maybe the primary factors for that.
Speaker Change: Yeah, Anthony it's John I'll take I'll take that so in the period, we actually had a headwind.
Speaker Change: With respect to variable compensation in the period, we had we had actually booked more in the period versus what we had shown in the prior in the prior year.
Speaker Change: And that's really because as I mentioned in my in my opening statements that's.
Speaker Change: That's because we are actually achieving the goals that we set internally for the team versus where we were last year.
Speaker Change: So without without that I mean, we have cost cost savings across all of the segments, both in corporate as well as the two other business units.
Speaker Change: That's really that's really what the offset is.
Speaker Change: And I think the second part of your question.
Anthony: Anthony going forward.
Anthony: Seeing.
Anthony: Significant savings coming from indirect or external spend so examples would be things like insurance savings and contract renegotiations and outsourcing vendors that our team is confident that it will bring in house for savings et cetera. So these are all expenses that we have identified and that we have a.
Anthony: <unk> to implement but it just takes given the time of contract renewals and things like that it takes a few quarters for it to be fully recognized.
Speaker Change: Got you, Okay, Alright, and then I guess lastly from me. So I know you haven't given specific guidance for 2025, but.
Speaker Change: Maybe just a broad picture when we look at the business now obviously very simply simplify but what are the kind of the main kind of key <unk> and headwinds that we should be looking out for next year, you know keeping in mind.
Speaker Change: You said that.
Speaker Change: 7% of your units in Centex.
Speaker Change: Made our transition to the new platform, but just maybe if you could just speak to that broadly speaking as far as what are the main things that we should be on a lookout for for next year as far as <unk> and headwinds.
Speaker Change: Yes, no that's great and again, we're not providing guidance at this point, but I would say that.
Speaker Change: Some of our tail wins include the <unk>.
Speaker Change: Growth of our shipping business within.
Speaker Change: <unk>.
Speaker Change: Really strong performance within the presort business some growth initiatives that we are using within all three of our business units.
Speaker Change: Winds would include the completion of the IMI migration and sand Tech.
Speaker Change: And as John mentioned, some of the transition from equipment purchases to lease transactions.
Speaker Change: As well with incentives, which would be a revenue headwind, but not a not an EBIT or cash flow headwind.
Speaker Change: The other any other tailwind would actually be additional cost savings in this program, but we will continue to add to the progress of what we already see in the period.
Speaker Change: That's very helpful. All right well, thank you very much guys.
Anthony: Thank you Anthony.
We will go to the line of David Steinhardt.
Speaker Change: <unk> capital. Please go ahead.
David Steinhardt: Hey, good afternoon, good evening.
David Steinhardt: So in terms of GEC.
David Steinhardt: Being largely expected to be done.
David Steinhardt:
Speaker Change: End of this year can you expand on that end.
Speaker Change: I wonder how much longer that process is actually a tick.
David Steinhardt: Yes, that's great David Thank you so.
David Steinhardt: We're super happy with the way the the Hilco wind down of GEC is progressing.
David Steinhardt: We believe that it will be.
David Steinhardt: Largely complete by the end of the year, there may be one or two outliers in terms of creditors that might take a bit longer but we are as a company are prioritizing doing the right thing for our shareholders. Even if that means taking a bit more time to resolve some of these last remaining creditor issues.
Speaker Change: Okay and in terms of.
Speaker Change: Hum.
Speaker Change: Yes.
Speaker Change: Fintech, an inflection point do we expect to be back in growth mode in 25 or so.
Speaker Change: Or is there some work to do in terms of as we move to <unk> as you described a more SaaS.
Model for our revenue stream.
Speaker Change: Yes, so as we mentioned, we're not yet providing guidance into 25, and we gave some color as to the the headwinds and <unk> that are affecting <unk> in the other businesses.
Speaker Change: I think that.
Speaker Change: What youll see is the headwinds are more kind of revenue related and.
Speaker Change: And to the extent that that affect some of our.
Speaker Change: <unk> of our earnings, but we've got a few nice.
Speaker Change: Earnings tailwind behind us.
Speaker Change: Okay, and then in terms of the strategic conversations.
Speaker Change: Conversations.
Speaker Change: Can you describe or expand on what you're thinking.
Speaker Change: Thinking about right now or is it too early in the process to go into the detail yes.
Speaker Change: Yeah, absolutely. So we are as a company a materially stronger credit than we were a few months ago and now we can look at refinancing and in rebalancing our debt from I think a much stronger position. So we mentioned that we have about $100 million of cash that we've set aside for debt reduction and as we look at allocating.
Speaker Change: That cash and look at other kind of restructuring of our debt, we're balancing things like our near term maturities our higher cost debt.
Speaker Change: Minimizing fees and we're taking a careful look at making sure. We do the right thing from a both a shareholder and a debt holder perspective.
Speaker Change: That's great and in terms of I guess, taking a look at all paths to maximize value for shareholders.
Speaker Change: I mean, it's clear that youre doing youre, making a lot of progress I'm not sure that the market is giving you full.
Speaker Change: Credit for the work that you and your team have.
Speaker Change: We made progress on so far.
Speaker Change: I think we're going to be at a much lower net leverage standpoint.
Speaker Change: Nine to 18 months from now.
Speaker Change:
Speaker Change: I guess can you give us a preview like what youre thinking about potential pass or maximizing value or how do you plan to.
Speaker Change: Engage with a wider investor community if that's the route that's taken.
Speaker Change: Instead of maybe a more strategic decision.
Yeah, no. Thank you, David and I can't comment on the way the market values of our company, but I would say in the time that I've been here that.
Speaker Change: The company had really a credibility issue when I started and I feel like we're making good progress at earning that that credibility with the market and we're being very transparent in our information, we're being trying to be very clear.
Our outlook for the business and.
Speaker Change: And identifying the progress that we're making.
Speaker Change: We continue to take a very comprehensive look at the business I think we made a real quick and bold decision on GEC, which is turning out really well.
Speaker Change: We're achieving on our on our cash and cost savings and we're just very optimistic on where we're heading.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Okay. We will go to the next line.
Speaker Change: Justin do perilla.
Speaker Change: <unk> capital management. Please go ahead.
Speaker Change: Thank you really a fantastic quarter guys.
Speaker Change: Two things first of all you mentioned Theres a part of GEC, that's still in continuing ops are.
Speaker Change: Looking at that it looks like if that were to be excluded. It would have added about another <unk> <unk> per share to earnings does that sound about right.
Speaker Change: That's about right. It's okay then it was.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Lucia.
Speaker Change: You still there.
Speaker Change: Okay.
Speaker Change: Alright perfect.
The other caution I was wondering.
Speaker Change: As you look out at the remaining two core segments could you elaborate on the long term prospects for the business and how you would respond to someone that would say major parts of the business are in secular decline.
Speaker Change: Unfortunately, not able to get your questions.
Speaker Change: Operator, maybe take another question when we come back to Justin if he has a better a better line.
Speaker Change: Are you unable to hear me.
Okay.
Speaker Change: Another shot let's try again.
Speaker Change: Oh, Okay, I said as you as you look out at the remaining two core segments can you elaborate on the long term prospects for the business and how you would respond to someone that would say major parts of the business are in secular decline.
Speaker Change: Yes, so we're looking at both the presort and the <unk> business.
Speaker Change: As we mentioned on the presort side that business has been a consistent grower. So.
Speaker Change: We've seen many consecutive quarters and years.
Speaker Change: Regular continuing growth.
Speaker Change: The <unk> business, we've we have identified some of the headwinds in this call and in prior year.
Speaker Change: Releases and calls.
Speaker Change: But we're managing that very effectively and I think the team is doing a terrific job of kind of transitioning from some of those.
Speaker Change: More legacy markets to the faster growing SaaS technology oriented shipping markets.
Speaker Change: Okay, and what future expansion of revenue revenue generating ideas most exciting you right now.
Speaker Change: So we will give.
Speaker Change: Stay tuned another quarter, when we talk about 2025.
Speaker Change: In particular, but I would say that we've mentioned that there was opportunities to accelerate growth.
Speaker Change: Growth in presort.
Speaker Change: Both through.
Speaker Change: Organic advantages that we have as well as through M&A.
Tuck in acquisitions that are very highly accretive and <unk> is looking at.
Speaker Change: Some specific initiatives to enter some new segments of the shipping business. So for example that business has been primarily in the office to office shipping market and has a great opportunity to expand into the E. Commerce SaaS shipping market, which is kind of an adjacent market, that's large and potentially off.
Speaker Change: There is a great opportunity for us.
Speaker Change: Okay excellent.
Speaker Change: Given where the stock kind of piggyback on the last caller, given where the stock currently trades. Despite earnings that are likely to approach close to a $1 50 per share next year are there any specific leverage metrics that you guys are looking at before.
Speaker Change: Perhaps announcing a share repurchase plan.
Speaker Change: Yes, so what I would say there Justin is that every quarter the board.
Speaker Change: It looks at its capital allocation and in ways very carefully.
Speaker Change: The needs and goals of shareholders and the needs and goals of <unk>.
Speaker Change: Debt holders.
Speaker Change: Did announce a dividend today, which we've been doing consistently and we'll continue to take a good rigorous look at how we allocate our capital.
Speaker Change: Excellent.
Speaker Change: Lastly, I hear correctly that Curt is also available.
Curt: Yes, I'm on the call.
Curt: Yes.
Speaker Change: I was just wondering a question occurred if maybe you could elaborate on the process that you went through in <unk> and bringing on lands full time as CEO.
Speaker Change: Permanent CEO and Thats My last question.
Speaker Change: Yes, Thank you Justin.
Speaker Change: Great hearing from you.
Speaker Change: Yes, so what I'd say is that share the value enhancement committee of the board.
Speaker Change: Which was very involved with the search process.
And we ran a very thorough process and spoke with a number of very highly qualified candidates that came through a recruiting firm.
Speaker Change: As we wrapped up the process was incredibly clear to us is that among this competitive field plants really stood out as a clear choice and I would say there are three reasons for that first of all Lance has far exceeded our expectations on the turnaround to date.
Speaker Change: Significantly expanded and accelerated the cost out opportunity is the most notable example of that.
Speaker Change: Second I think Lance has demonstrated strong change management skills and has done an impressive job getting buy in from our highly talented and dedicated team throughout the turnaround which is I believe critical to any sort of turnaround and then finally.
Speaker Change: Lance presented to the board a very compelling path forward for Pitney Bowes.
Speaker Change: I won't be talking about it today, but I do look forward to Lance sharing the path forward with you in future calls and I would add as well too and I think Atlanta is really demonstrated something that was really important to the board that I would like to highlight going back to David's question. When he was asking about.
Speaker Change: Essentially we're doing all the right things what do we do to get the market to appreciate that and as the board spoke with Lance about how did you think about the opportunity how do you think about the path forward.
Speaker Change: When I really appreciate it was as of <unk>.
Speaker Change: Long term investor myself, and I think most on this call are long term investors as well.
Speaker Change: His number one priority was to start doing the right things and.
Speaker Change: And so I think Lance you made very clear that his focus would be doing the right things driving results and earning credibility and a point of how do we get the market to appreciate that.
Speaker Change: Lance.
Speaker Change: And I'm sure all the investors on this call would agree as well.
Speaker Change: Your attitude of perform.
Speaker Change: <unk> generate the results and then let's go talk to people and talk about what we've done. So I think his priorities are spot on in terms of how he thinks about fixing the company.
Speaker Change: Driving value for shareholders.
Speaker Change: Hopefully that answers your question well.
Speaker Change: Awesome, absolutely can't wait to hear what's next thank you.
Speaker Change: Okay.
Speaker Change: And we'll go to next line Kartik Mehta.
Speaker Change: North Coast research.
Speaker Change: Please go ahead Sir.
Speaker Change: Thank you good evening.
Speaker Change: The shipping business <unk> has done really well and I know you've given some commentary as to why and I'm wondering.
Speaker Change: What is the primary competitor for you in that business is it just convincing.
Speaker Change: Customers that you have a great solution and that they should use or are you displacing somebody.
Speaker Change: To win that business.
Speaker Change: Yes. So thank you kartik, so theres a few things one is that.
Speaker Change: One of the major competitors is a company called octane, which has a number of business units that are in that space.
Speaker Change: Companies.
Speaker Change: To do this themselves some go directly with a shipper and what Pitney Bowes offers is a is a really wholesome.
Speaker Change: Technology that enables shippers to optimize their shipping so it selects the best of the shipping vendors that are available for their individual needs. It also provide some excellent analytic tools, which particularly large clients.
Speaker Change: And admire and we do it with a very very strong focus on security and some of those needs are really the requirements that I heard when I was out in the field with our major clients and I feel like our team is really delivering on those technologies.
Speaker Change: And then.
Speaker Change: John just to understand the opportunity at PV Bank.
Speaker Change: On the receivable side.
Speaker Change: Could you just maybe expand on that a little bit in terms of what percentage of.
Speaker Change: Those leases are available for that program.
Speaker Change: And what ultimately cash generation you can achieve from that.
Speaker Change: Yes, so karthik, Sean so, yes, so I would say that we're still evaluating what percentage is actually available to us today today, it's fairly it's fairly limited and we are actually looking to actually qualify more opportunities I would tell you that.
Speaker Change: We're looking to expand that by about $100 million over the next couple of years that would actually benefit both pitney Pitney bank as well as the parent over that same period.
Speaker Change: Perfect.
Speaker Change: Just lastly, congrats on.
Speaker Change: The permanent CEO position great to see.
Kartik Mehta: Thank you Kartik I appreciate that.
Speaker Change: Alright, thank you.
Speaker Change: Okay. At this time, we have no further questions in queue Mr.
Speaker Change: Mr Rosensweig any additional remarks at this time.
Thank you operator, and thank you all for joining we look forward to updating you again in our first fourth quarter earnings call early next year.
Speaker Change: Thank you, ladies and gentlemen that does conclude your conference. We do thank you for joining you may now disconnect.
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