Pitney Bowes Inc. (NYSE:PBI) Q1 2024 Earnings Call Transcript

Pitney Bowes Inc. (NYSE:PBI) Q1 2024 Earnings Call Transcript May 2, 2024

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Operator: Good morning, and welcome to the Pitney Bowes First Quarter 2024 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 Dies, Interim Chief Executive Officer; Mr. John Witek, Interim Chief Financial Officer; and Mr. Philip Landler, Vice President, Investor Relations and Global Strategy. Mr. Landler will now begin the call with a Safe Harbor overview.

Philip Landler: Good morning. I’m Phil Landler, Vice President, Investor Relations and Global Strategy. Thank you for joining us this morning. Included 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 2023 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.pb.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.

For non-GAAP measures that are included 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. We have also provided a slide presentation and a spreadsheet with historical segment information on our website. Finally, in our prepared remarks, revenue comparisons will be on a constant currency basis, other items such as EBIT, EBITDA, EPS, and free cash flow on an adjusted basis. And now, I’d like to turn the call over to Interim CEO, Jason Dies.

Jason Dies: Good morning, and thank you for joining the call and your ongoing investment and interest in Pitney Bowes. I’d like to start the call today by first addressing the recent changes to our Board of Directors before providing a high-level overview of our Q1 results. As many of you know, last year, the Board endorsed our strategic priorities focused on achieving efficiencies, simplifying the corporate structure, increasing efforts to maximize the value of GEC and renewing our focus on our cash generating in high-margin segments. Given the clarity on the path ahead and the confidence in our team to carry out that mission, several directors felt this year’s annual meeting is an appropriate time to retire from the Board.

This will result in a more streamlined board for this next phase of Pitney Bowes’ transformation. I and the rest of the management team look forward to working with them to accelerate progress on the key priorities and opportunities ahead of us. I’d also like to thank our retiring board members for their leadership, guidance and insights during this period of transformation. Their skills, experiences and counsel have been invaluable as we reposition the company for an exciting future. Now moving on to first quarter. Our results from the past quarter reflect the enterprise-wide changes in focus, priorities and accountability that we’ve been implementing over the past few months. The impact of these changes is evident in our strengthened performance across multiple parts of the business with EBIT growing by more than $23 million on relatively flat revenue.

This represents a 71% improvement when compared to prior year. We also continued to make progress on our cost reduction and restructuring efforts. As a result, we now expect cost savings from the program we announced last year to exceed the $75 million to $85 million target. We see additional opportunities to build on this momentum by maintaining strong execution and a disciplined focus on cost to increase cash flow and create capacity for investment in high-margin growth areas. At the segment level, SendTech and Presort Services recorded strong results in the quarter. Presort achieved record revenue and EBIT with expanded EBIT margins. We will continue to capitalize on our excellent operational and client support capabilities to create value in this segment.

SendTech had another solid quarter with increased EBIT, expanding margins and accelerating growth in shipping. SendTech will continue to shift resources towards investments in our shipping capabilities where we see meaningful long-term profitable growth potential. Global Ecommerce grew domestic parcel volumes 20% in a challenging market and reduced operating expense, while delivering the best network performance since the pre-COVID timeframe. The team continues to take the necessary steps to accelerate progress and improve results as we continue our efforts to maximize value for this segment. Looking ahead into our 2024 strategic and operational priorities, we continue to look at ways to increase accountability, streamline the organization and further improve execution.

We will continue to simplify the business to both reduce cost and build on the productivity improvements that you’ve seen over the last couple of quarters. To complement these efforts, we have recently engaged an outside firm to help us identify and implement additional ways to remove complexity and increase efficiency. These savings will create capacity for us to further capitalize on attractive growth opportunities. Our shipping play in SendTech represents one of these significant opportunities where we can leverage our assets and footprint to drive meaningful growth in targeted verticals particularly for enterprise clients. We are leveraging our existing relationships in the Office segment, and we will continue to invest and develop specialized vertical shipping solutions with differentiated value.

Similarly, in Presort Services, we can leverage our national footprint, extensive transportation network and operational excellence to drive growth in targeted areas. In closing, we are making significant progress against our strategic and financial objectives. As a reminder, we grew EBIT 28% in Q4 and have built on that with another 71% growth in the first quarter. We also see significant opportunities to build on that momentum as we look forward, especially in the second half of the year. The progress we’ve made over the past seven months and the opportunities ahead give me great confidence in our future. I’d like to thank all of our teams for their hard work in delivering a strong first quarter and their continued dedication as we move through the next phase of our transformation.

And now I’d like to turn it over to John to discuss our Q1 results in more detail.

John Witek: Thanks, Jason, and good morning, everyone. As Jason highlighted, we drove significant progress over the past two quarters in improving execution and reducing costs. These actions are showing up in our financial results, especially on the bottom line, with first quarter EBIT up 71% year-over-year. Consolidated revenue was $831 million in the quarter, down 1% versus prior year, with solid performance across each of the segments. EBIT improved $23 million to $56 million for the quarter, driven by cost reduction actions and strong operational performance from SendTech and Presort. EPS was flat versus prior year at a loss of $0.01 as EBIT improvement was offset by higher interest and tax expense. Our effective tax rate was high in the quarter, primarily due to unfavorable tax adjustments related to the U.S. taxation of our foreign operations and state valuation allowance adjustments.

Free cash flow was a use of $17 million, which was an improvement of $43 million versus prior year due to several items, including lower CapEx, changes in finance receivables and lower pension and retiree medical payments. Before I get to our segment results, I want to talk about our enterprise cost reduction efforts. As Jason mentioned, this is one of our key priorities in 2024. This was an area I directly oversaw prior to assuming this interim CFO role. We continued to progress on our restructuring plan in the quarter, and now we expect to exceed the high end of the $75 million to $85 million range. Turning to our segments. Effective January 1, 2024, we moved the digital delivery services offering, which was previously in GEC to SendTech to better leverage our go-to-market and our capabilities to create client value.

We have recast prior period financial results to conform with this change. Recast quarterly segment results can be found within the Financial Reporting section of our Investor Relations website. SendTech continued its momentum from last quarter, with another solid quarter from strong execution and growth in shipping. Revenue declined 2% to $327 million, while EBIT grew 6% to $101 million as product mix and cost reductions more than offset lower revenue. Shipping related revenue grew 8% on a recast basis and now comprises 15% of total segment revenue. Growth primarily came from our digital offerings, including subscriptions. Revenue from SaaS subscriptions grew 40% year-over-year, building a strong base of recurring revenue. Lower in-period equipment and professional services tempered the overall shipping growth.

Mailing related revenue declined 4% year-over-year, primarily from a decrease in our meter base due to a couple of factors. One, overall secular decline in the installed base; and two, an expected uptick in cancellation rates as we near the tail end of our product migration. Also, the current phase of our product life cycle with more lease extensions than new placements negatively impacted in-period results. As a reminder, this shift results in lower equipment sales, partially offset by higher margin financing revenue spread over the lease term. We expect these headwinds to increase in the second half of the year as we near the end of the migration process. In the quarter, we migrated about 5% of our total installed base to our new product lines and ended the quarter with 77% of our total base on the new IMI technology.

As a reminder, our low and mid-volume product lines are further along in their migration process and are required to be IMI compliant by the end of this year. Our high-volume products are in the early stages and have until 2027 to be compliant. This quarter, we benefited from about $6 million of in-period revenue as a result of two large deals signed in the fourth quarter of 2023 and implemented this quarter. Inside the financial services portion of SendTech, net finance receivables were $1.2 billion and remained relatively flat, declining $2 million versus the prior year. We also continue to make progress on our previously announced program where our bank is participating in the financing of select captive lease receivables, an initiative that will be good for the bank and the enterprise overall.

Shifting to SendTech segment profitability, gross profit was flat despite revenue decline as we had a favorable mix of higher margin revenue streams. Financing revenue grew 1% and business service revenue grew 36%, primarily as a result of higher SaaS subscription and volume-based revenue streams from our digital shipping offerings. Gross margins continue to benefit from improvements we made to our supply chain in 2023, which resulted in lower product and transportation costs. Simplification and cost reduction initiatives drove a $6 million or 5% decline in operating expenses year-over-year. Next, moving to Presort Services. Presort had another great quarter and achieved its highest ever quarterly revenue and EBIT. The segment’s continued excellent performance is a testament to the high quality of our product offering.

Revenue was $170 million, up 7% year-over-year. Higher revenue per piece drove the growth. Sorted volume declined 2% to 3.9 billion pieces. Turning to margin. Higher revenue per piece, along with a 10% improvement in labor productivity, and a 7% improvement in unit transportation costs drove nearly a 700 basis point expansion in EBIT margins. EBIT was $40 million in the quarter. Year-over-year improvement in both revenue and EBIT did benefit from a $5 million one-time prior period adjustment booked in this quarter. Even without this benefit, Presort still would have achieved record revenue and EBIT. We continue to raise the bar on labor productivity with pieces fed per labor hour, improving at 27 of our 33 sites and reaching an all-time high for us.

Investments in automation equipment continue to bring meaningful step-ups in productivity. We are also realizing better labor efficiencies through investments in analytics and process standardization across our network. On the transportation side, we continue to optimize both our in-sourced fleet and our outsourced contract lanes. Turning to Global Ecommerce. Segment revenue was $333 million, with domestic parcel growing 8% and cross-border declining 49%. We will lap the headwind in cross-border next quarter. EBIT and EBITDA were a loss of $35 million and $21 million, respectively, which were $2 million and $3 million worse than prior year. Year-over-year decline was driven by lower gross profit and partially offset by a 19% reduction in our operating expenses.

Turning to the domestic parcel space specifically. We continue to see three trends. One, volume growth; two, lower revenue per piece and three, better cost per piece. Domestic parcel continued to add volume in a soft market. We processed 60 million parcels in the quarter, 20% growth over prior year. Service levels remain very competitive, which is helping us attract volumes and offset fixed costs. Our network performed the best it has during the quarter with more than 80% of our overall volume delivered in less than three days and return volume processed consistently within four to five days. Revenue per piece declined 10% as market overcapacity continues to put downward pressure on price. Our client and product mix also shifted towards lower revenue per piece with lighter weight and shorter zone delivery volume and fewer returns.

Both shifts are consistent with larger market trends. Moving to costs. We continue to make steady progress in driving efficiency from prior investments in technology and systems. However, lower revenue per piece more than offset improvements in unit costs. Unit transportation costs declined 24%, driven by productivity improvements and increased leverage from higher volumes. Transportation utilization improved significantly in the quarter, as in-sourcing of certain lanes and the rollout of our regional model yielded results. We are also seeing better labor productivity, which improved 12% year-over-year. Total fixed costs were higher versus prior year from investments in our network and automation made in the first half of last year. Despite higher absolute costs, unit fixed costs improved year-over-year from higher volumes.

To wrap up, our first quarter was strong. We made progress in each of our segments, and our cost reduction initiatives helped deliver a significant bottom line improvement. We exited this quarter on a good trajectory and are optimistic about the opportunities in front of us, especially in the second half of the year. With that, thank you, and operator, please open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Anthony Lebiedzinksi from Sidoti & Company. Please go ahead.

Anthony Lebiedzinski: Good morning, and thank you for taking the questions. So it’s certainly nice to see the EBIT improvement in Presort and SendTech as far as Presort, especially. So I guess as far as on the Presort side, maybe we could start there. I know you guys have done well in that segment and have done some acquisitions also in that segment. Just wondering what’s your confidence level and your ability to sustain this strong performance and whether you’re looking for perhaps additional acquisitions in Presort?

Jason Dies: Yes. Anthony, sure. This is Jason. I’ll take that. So I appreciate the comments and the call out on Presort. That team certainly had a fantastic quarter. But as I’ve said on previous calls, they’ve had a fantastic few years. The past few years, they’ve done a tremendous job of driving both topline and bottom line growth. That team, I think, still has plenty of runway. If you think about the market and you think about the dynamics in the market, we’ve done a tremendous job of bringing in additional volumes despite the overall headwinds from first-class mail. We have growth opportunities in that space as well, not only from additional offerings around things like marketing mail, but also additional opportunities as you point out, to pull in additional volumes both from clients who have traditionally in-sourced that work before who now look to outsource it, but also from taking additional share by bringing in additional acquisition opportunities.

We’ve certainly focused on that in the past. I think the number off the top of my head is we’ve probably done 12 acquisitions in that space in the past 10 years. It’s certainly something we continue to look at. And I think we have continued opportunity to drive both topline and bottom line growth, both because we can take in volumes on the topline. But secondly, I’d just call out again the productivity that, that team has been able to deliver has been outstanding. John mentioned that I think in his comments, we had 27 to 33 sites improved productivity across the network. They were up about 10% on pieces fed per labor hour, which is one of the key metrics that, that team focuses on. And in the quarter, we were able to take out about 150,000 labor hours.

So if you look at kind of all the metrics on that business, we feel very good about it and we are going to be very aggressive in trying to bring in additional volumes into that because they can be accretive very quickly.

Anthony Lebiedzinski: Got it. Thanks for that. And then, Jason, you and John both sounded, I guess, more optimistic about the second half of the year. What’s driving that optimism and whether or not there is something to read into the second quarter? Are you being just less optimistic about the near term? And I just wanted to – for you to take that opportunity to square that away?

Jason Dies: Yes. Look, I don’t think you should read it majorly on our confidence in the second quarter versus the second half. I certainly see opportunities as we continue to progress throughout the year. I think the comment that John and I were making is as we look at kind of this next round of cost improvements and restructuring, that’s going to take a little bit of time to bake in. So as we’re doing that work now, you’ll start to see the improvements of that more in the second half than you will in the first half. And then I think as you look from a business segment point of view. Certainly, I think Presort has opportunity in the back half of the year that I think will increase. And I think SendTech will continue to see benefit as they grow their shipping business.

So it’s not a statement necessarily of the timing on that, but particularly around the cost takeout in this next round that we’re going to be working with the third-party on, that is going to take a little bit of time. So I wouldn’t read in it too much, but it’s a fair comment.

Anthony Lebiedzinski: Okay. Got you. Okay. Thanks for that. And then in terms of GEC, I know this is the last quarter, I believe, that you’re lapping the cross-border headwinds. That being said, the business admittedly still lost more money. There was a shareholder letter sent to the Board of Directors a couple of days ago. Just wondering if you guys have a response to that. And how do we think about this near term and longer term in this segment?

Jason Dies: Yes. Look, I mean it’s not going to be a tremendously different answer than I’ve given in the past. What I’ve said is we are certainly focused on maximizing the value of that business as best we can. I think the team has done a really good job of creating value with that business over the past few months and over the past few years. You think about kind of what’s going on in that business. I’ll just kind of step back and give a little bit of color on it. Clearly, there’s a couple of headwinds that we’re facing. The market is clearly at overcapacity. You heard that from multiple of our competitors. You heard it from the USPS as they talked about their volumes. That’s creating tremendous pressure on rate per piece.

That said, if you look at kind of the three factors that we’ve always talked about for that business, we always talk about volumes as being important and we’re doing very good on that. We continue to grow volumes and bring clients into our network, which is a testament of the value we can provide to clients and a recognition by clients of the value we provide. Secondly is improving on cost performance. We continue to make strides there. And again, I would say that the team has really taken up the banner on that over the last two or three quarters. This quarter, I think John said, we were down 19% on OpEx which has really saw improvement. And then the third variable is the one I just mentioned, which is kind of the price and the rate per piece in the market, which is clearly at a tough point market-wide, not just with us, and that’s going to take some time to stable out and to stabilize.

That said, if you look at what we’re doing from an internal perspective, we’re doing the things that we need to do for both short-term and long-term success. We are driving more volumes into the network to cover our fixed costs. We are working to make our mix more effective, right? If you think about that rate per piece, so things like focusing on our returns business, which generally comes in at a better rate per piece, and we’re continuing to focus on cost reductions and you’ll see more improvement on that as we go forward throughout the year. So internally, we’re focused on what we can control to make the business better. Externally, we’re looking at things like partnerships and other opportunities that present themselves in the market to make sure that we maximize the value of this business going forward.