Pitney Bowes Inc. (NYSE:PBI) Q2 2023 Earnings Call Transcript

Pitney Bowes Inc. (NYSE:PBI) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good morning and welcome to the Pitney Bowes Second 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. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Maria Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Alexander Brown, Senior Manager, Investor Relations. Mr. Brown will now begin the call with a Safe Harbor overview.

Alex Brown: Good morning. I’m Alex Brown. And thank you for joining us. Included in today’s presentation our 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 to 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 that 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 have provided a slide presentation and spreadsheet with historical segment information on our website. And now, I’d like to turn the call over to Marc.

Marc Lautenbach: Thank you, Alex. And good morning, everyone. I appreciate you all joining us this morning. The second quarter played out as we expected as trends from the first quarter largely continued. SendTech and Presort grew profit for the quarter although SendTech less than transactions on the field that we were expecting. We expect those transactions to close in the third quarter. Presort had a solid quarter growing both revenue and profit for the second quarter. Both of these businesses are well positioned for the third quarter and second half. Global Ecommerce continued to experience different crosscurrents. On the one hand, our cross-border business continued to face headwinds, as two of our largest clients changed how they access our offerings.

Our digital expedited business trend with the overall ecommerce market. However, the large social platform opportunity I’ve mentioned on previous calls began to come online. Hard to predict how this opportunity will roll out. But it can be a very interesting opportunity. Growth in our domestic parcel business where opportunity to create value is centered, accelerating the second quarter and parcel growth for the quarter was right around 30%. We are winning new clients and our growth is well above the market. Price and weights are less than expected, but consistent with historical periods where retail performance is under some stress. Our network continued to perform well, and our service levels are very competitive in the market. Finally, our costs are progressing as expected, and are consistent with what was expected in our long-term plan.

Let me unpack the cost dynamics in this business, because they provide the foundation of our confidence. Our unit cost for transportation improved 12% quarter-to-quarter and 26% year-to-year. Going forward to achieve our long-term plan. Our plan assumes personal cost trading with inflation, transportation unit costs remaining relatively flat, labor costs inflation offset by nominal productivity and fixed cost absorption improving as volumes improve. Said another way, the plan relies on fairly standard cost improvements, resumption of market pricing and volume growth well, less than we’re experiencing right now. For me however, the big news about the quarter was how well we positioned ourselves for the second half. We got a lot of important work done.

Ana, we’ll give you more details. But our restructuring program is proceeding as we expected, if not slightly ahead of schedule. Much of the cost and expense takeout is centered GEC as we right size that business for the reset of our cross-border business and we fine tune to account for better than expected performance of the network. We also completed our refinancing, which positions the balance sheet for the next several years. Next, our bank began to buy receivables from our captive leasing company, fundamentally improving the earnings power of our bank and diversifying the bank’s balance sheet. We’ve been working on this for a good bet. And this development improves the posture of our bank, which was already very strong. Finally, the July USPS rate case expanded workshare discounts, recognizing the substantial value of the workshop program to the USPS and our clients and improving the economics of our Presort business going forward.

So to summarize, the second quarter turned out as we expected, lots of work came to fruition that set us up very well for the second half, and going forward. With that, I’ll turn over the floor to Ana to walk through the operating financial details of the quarter.

Ana Maria Chadwick: Thank you, Marc. And good morning, everyone. Before I begin my financial review, I’ll note that the year-on-year revenue information will be discussed on a comparable basis, which as previously discussed, adjust for the impact of currency, the disposition of border free and a revenue presentation change for our digital services. This revenue presentation change primarily affects Global Ecommerce revenues and to a lesser extent SendTech. The change does not affect the dollar profitability of our activities. 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 $776 million, which is a decrease of 5% compared to the prior year second quarter.

Gross profit for the company was $259 million, compared to $274 million for the same period last year, a 6% decrease. SG&A was $223 million in the quarter and down $4 million from prior year with an SG&A unallocated corporate expenses were $48 million up from $41 million a year ago, which was largely due to timing of employee variable compensation. Interest expense, including finance interest was $38 million, which is up $4 million due to higher interest rates on our floating debt. Adjusted EBITDA was $72 million compared to $82 million a year ago, and adjusted EBIT was $32 million compared to $39 million in prior year. Adjusted EPS was a $0.02 loss in the quarter compared to $0.02 in prior year. GAAP EPS was $0.81 loss in the quarter. GAAP EPS includes a noncash $0.67 goodwill impairment charge related to the Global Ecommerce segment due to performance of our Global Ecommerce unit through June 30, 2023, and continuing changes in macroeconomic conditions.

Turning to cash flow. GAAP cash from operating activities was breakeven. Free cash flow was a use of $11 million, compared to a source of $8 million last year. CapEx for the quarter was $26 million, down from $32 million in prior year. During the quarter we paid $9 million in dividends and made $8 million in restructuring payments. Let’s dive into our three business segments. I’ll start with SendTech, SendTech reported revenues of $321 million in the quarter, down 4% compared to prior year. We continue to make progress on our product refresh and are now 63% through the IMI migration, which is up 20 percentage points from prior year. We are now entering a stage of our product lifecycle, where we will have less new lease opportunities, offset by a corresponding increase in fixed term lease extensions.

This is largely due to our success, in placing new equipment over the past several years. From a financial perspective, this shifts results in lower upfront equipment sales offset by higher margin financing revenue spread over the lease term. This is a net positive to cash flow. This dynamics coupled with transactions being deferred played out in the second quarter with equipment sales down 11% compared to prior year and financing revenue only down 1%. Shipping continues to be a bright spot for SendTech. In the quarter shipping related revenue grew 14% over prior year and now comprises 12% of segment revenues. We remain very encouraged by the traction our shipping products are receiving, especially in the enterprise segment where we saw our largest growth.

Moving to profit, adjusted segment EBIT grew 2% over prior year as SendTech removed costs faster than revenue declined. We achieve this through initiatives to drive efficiencies and simplified the business. I will highlight two. First, we reorganized our supplier network to be less concentrated in China, while also lowering the cost of equipment manufacturing and freight. These actions helped offset product mix headwinds and resulted in flat equipment gross margins year-on-year. Second, we continue to optimize our sales and customer service operations, driving more client’s touch points to lower cost channels. For example, more than 50% of our U.S. SMB client service requests are handled via an automated chat function. This has resulted in a 22% decline in total customer touch points, while maintaining an over 80% customer satisfaction score.

These actions continue to demonstrate the durability of the business. I’ll spend a moment on the performance of financial services inside of SendTech. This quarter, we made significant progress positioning our financial services, for long-term success by growing finance receivables, including those held at the Pitney Bowes Bank. We also initiated a program, where our bank will participate in the financing of select captive lease receivable and initiatives, that will be good for the bank and the enterprise overall. Finance receivables grew $12 million over the quarter to $1.2 billion, and we continue to see healthy payment trends across our financing portfolio, with delinquencies improving to its best level in over 15 years. Next, let’s turn to Presort.

Presort generated revenue of $143 million in the quarter, up 3% from prior year. Total sortation volume declined 5% to 3.6 billion pieces. Revenue per piece expansion and growth in higher yielding mail classes offset volume decline. Adjusted segment EBIT for the quarter was $20 million, an increase of 59%, compared to last year. Adjusted segment EBIT margin improved 500 basis points to 14%. The improvement in margins highlight, the team’s excellent work driving operational efficiency. More specifically, margin improvement was due to better revenue per piece. Continued labor productivity gains from our investments in use orders and lower unit transportation costs. Also, as Marc mentioned, the USPS implemented new rates on July 9 that reflect the value our Presort network provides our client and the postal service.

These new rates along with continued technology investments and operational improvements will help drive continued strong performance in the second half. Let’s shift to Global Ecommerce, revenue was $313 million down 9% versus prior year. Adjusted segment EBIT was a loss of $38 million, compared to a loss of $29 million last year. Cross-border continues to weigh heavily on segment performance. The changes in how our two largest cross-border clients access our services, which we described in last quarter’s earnings call contributed to over 100% of the year-on-year declines in segment revenue and drove lower adjusted segment. Cross-border revenue excluding border free declined $55 million versus prior year and $24 million versus last quarter.

Gross profit was down $13 million and $4 million against the same time period. Moving forward, we expect changes in cross-border to be less significant on a sequential quarter basis. We continue to be encouraged by the progress in domestic parcel with several strong leading indicators that set the stage for improved financial performance. These are strong service levels, volume growth, and unit cost improvement. Let me unpack these items. First, service levels were very competitive in the quarter with on-time delivery reaching the high 90s during several weeks in the quarter. This performance bolstered client satisfaction scores, we reached an all-time high and more new clients want our services. Second, domestic parcel volumes were $50 million up 29% over prior year against the market that is close to flat domestic parcel revenue grew 19%.

Third, higher volumes coupled with operational improvements drove 8% lower unit cost versus prior year and 3% lower versus prior quarter. Our transportation and labor costs are now in line with our long-term model. Unit transportation costs declined 26% versus prior year and 12% versus prior quarter, and labor costs declined 12% and 3% against the same periods. However, similar to last quarter, a mix of lighter weight parcels combined with pricing pressures from market overcapacity resulted in lower revenue per parcel. In addition, our regional delivery offerings, which has been essential to winning more volume in the market, have also impacted revenue per parcel. These dynamics absorbed the improvements in unit cost. We already started to address this issue, with our newly signed 2023 clients, which, on average come at a higher revenue per parcel and margin.

We expect volumes from our new clients to start ramping up in the second half, and scale as we move into 2024. From an operating expense perspective, we completed a significant portion of the plant headcount reduction. We also made progress on our plan to consolidate facilities. In total, we have started the process to close three facilities, all of which will occur in the third quarter. These actions marginally benefited expenses in the second quarter, and will provide further benefit in the second half of the year, and going forward. Cost actions combined with more attractive incremental volume, we expect to come online in the second half of the year are the major building blocks, required for long-term profitability in the segment. That said, we expect continued pressure on revenue per parcel in the third quarter.

Let me shift gears and discuss the meaningful progress, we made on the restructuring and cost reduction plan announced last quarter. We reduce headcount and shifted more processes to shared service centers, resulting in restructuring charge of $22 million. We are reaffirming our annualized savings target of $75 million by the end of 2024 from the restructuring plan and productivity measures in Global Ecommerce. Next, regarding capital structure. We took several significant actions to strengthen our balance sheet. During the quarter, we bought $13 million of bonds in the open market, bringing the total purchase to $39 million year-to-date. Most importantly, earlier this week, we raised $275 million in a private placement offering maturing March 2028.

Net proceeds will be used to redeem the remaining balance of our 2024 notes, as well as a portion of our term loan A. After this refinancing, our next maturity will be in 2026. Moving to guidance. For full year 2023, we expect revenue to be on the lower end of our guidance, relatively flat on a comparable basis. We continue to expect adjusted EBIT performance to outpace the percent change in revenue. We also anticipate third quarter revenue and EBIT to improve versus second quarter at incremental volumes in Global Ecommerce. New rate case in Presort and cost actions materialized. In conclusion, SendTech and Presort maintained strong momentum with profit growth. And while cross-border remained a headwind in the quarter, strong service levels, volume growth and unit cost improvement in domestic parcel position Global Ecommerce well, for the second half.

Operator, please open the call to questions.

Operator: Thank you. [Operator Instructions] One moment, we’ll go to Anthony Lebiedzinksi with Sidoti and Company. Please go ahead.

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Q&A Session

Anthony Lebiedzinksi: Good morning. And thank you for taking the questions. So first, I guess maybe a little bit of a bigger picture question. So this is your first public call since the Board of Directors was changed. What can you share with us so far, as far as in regards to the initial assessment of the new Board?

Marc Lautenbach: So listen – here’s what I would say about the Board. I would say the following, the onboarding that we went through with the new Board members was terrific. They were highly engaged, ask lots of great questions. And hopefully, we passed on lots of great information. So that’s the first thing I would say. So, the second thing, as we reconstituted the committees and the Board Chair, all of those votes were unanimous. So you’ll see people coming together to move forward. And then I would say, though beyond that. There’s a fairly intensive effort for I would say the entire Board, the new Board members as well as existing Board members to drive shareholder value, consistent with how you would expect.

Anthony Lebiedzinksi: Got it. Okay. Thanks for that. And then, in regards to GEC so, obviously, cross-border was the biggest headwind within that. So, if we were to exclude cross-border, can you comment on the profitability of GEC? How the numbers could have been looking to just kind of ballpark maybe estimates?

Marc Lautenbach: Yes, I would say directly domestic parcels profit increased and expedited kind of trade with the markets. I think, Ana said it in her remarks or somewhere, you know, the deterioration in cross-border revenue and profit consumed everything, and then some of the progress that the rest of the segment made. So and that’s going to find its right level one way or the other. But you know, as we’ve said, all along, and I go back to, as we contemplate our long-term plan. And where the value creation opportunity is, it’s in domestic parcels. So, I would say the cross-border is creating some noise right now and the results and – teams doing their best to kind of work their way through it. But, we continue to keep our eye on the prize, and that’s in the domestic parcels.

And if you kind of go through that dynamic, the partial growth in the second quarter was terrific, well above the market. The unit costs behaved exactly, if not a little bit better than we would have thought, and are consistent with kind of endpoints of the long-term plan. The service levels were terrific. Honestly, there’s some pressure on revenue per piece, which is a little bit of a market phenomenon. And a little bit of some of the new customers that we’ve brought on, that come with slightly different revenue per piece, because they’re much more focused on regional types of services. So therefore, while they bring less revenue per piece, they also bring less costs. So, the more we said the cost, and the revenue per piece, the more that we get confident that those dynamics are working out precisely the way that we would expect the long-term plan.

Anthony Lebiedzinksi: Got it. Okay. And then, so just to follow-up as far as cross-border, so that’s been sort of the biggest challenge for few quarters. Is that a sub-segment that you – could perhaps maybe carve out and look to divest, or is – that’s not something you would consider?