Pitney Bowes Inc. (NYSE:PBI) Q4 2022 Earnings Call Transcript

Pitney Bowes Inc. (NYSE:PBI) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good morning and welcome to the Pitney Bowes Fourth Quarter Earnings 2022 Results 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 your participants for today’s conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Ned Zachar, Vice President, Investor Relations. Mr. Zachar, will now begin the call with the Safe Harbor overview.

Ned Zachar: Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes and I’d like to welcome everyone to the call this morning. We very much appreciate your interest and participation. Part of my duties include covering the Safe Harbor information for these calls. 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. For more information about these risks and uncertainties please see our earnings press release, our 2021 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations.

Please keep in mind that we do not undertake any obligation to update any 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 and also on our website. Additionally, we have provided a slide presentation and a spreadsheet with historical segment information on our Investor Relations website that summarizes many of the points we will discuss during today’s call. You may have seen that one of our shareholders recently announced director nominations for the 2023 annual meeting. We issued a press release on January 23 with our response and we will not be answering any questions relating to the nominations on this call.

Our format today is as follows: Marc Lautenbach, our President and Chief Executive Officer, will begin with opening remarks which will be followed by Ana Chadwick, our Chief Financial Officer, who will provide an in-depth discussion of our financial results. I’d like to now turn the presentation over to Marc. Marc, the floor is yours.

Marc Lautenbach: Thanks, Ned and good morning everyone. I appreciate everyone joining our call this morning. For the quarter, revenue is flat on a comparable basis after adjusting for currency, a divestiture, and a revenue presentation change that Ana will detail shortly. EBIT grew slightly and cash flow for the quarter was up strongly. SendTech and Presort continued a solid and predictable performance. In aggregate, the two businesses were essentially flat from a comparable revenue and profit perspective, and both businesses made good progress shifting their portfolios to growth. In Presort, this means marketing mail and bound to printed matter and for SendTech, shipping revenue. In North America SendTech, over 40% of our revenue is now coming from new products.

They include our most recent award winning IoT device, the Cube, Mail Station, and . These products sit along our SaaS offerings, including PitneyShip and PitneyAnalytics. This is a direct result of investments we have made in this business. Margins at Presort continue to improve and are again within the long-term model. Again, these improvements in margin are a direct result of investments we have made in automation in the Presort business. In aggregate, these two businesses continued to perform well in a choppy market. I would also be remiss if I didn’t add our financial services business performed very well. Finance receivables, an important harbinger of future growth, grew for the quarter and credit losses were minimal. Deposits, collections, and funding activities were all very well managed.

In GEC, the headline is this. We made substantial progress across many important write-downs, but we’re expecting to make even more progress. Specifically, our customer satisfaction increased 23 points over the course of the year. In the quarter, our network performance improved over 10 points on a year-to-year basis. These items helped us grow domestic parcel volumes by 16% in a difficult market. On the cost side, labor productivity improved 35% and transportation productivity improved close to 20%. All-in, gross margin per piece improved $0.50 on a year-to-year basis. Lots of good improvement, but we’re expecting even better. When you boil it down, there were two issues. First, did not get enough heavyweight parcels within our volume. This depressed revenue per piece and ultimately gross margin too lower the positive levels.

Second, our transportation improved close to 20%. We’re counting on a 25% improvement. In order to continue to improve our transportation execution, we’re enhancing our processes and implementing a new transportation management system in the first half of the year. Specific to mix, we are increasing our focus and our resources on markets that have higher weight parcels. A personal pipeline in backlog with plenty of higher rate parcels, so we have the opportunity, we just need to get that volume into our network. It will take a bit of time, but there’s no shortage of opportunity. Our cross-border business continues to face headwinds due to the unprecedented strength of the dollar and potential changes to the way one of our largest clients will access our services in the middle of the year.

As a result, I expect this business to continue to be under pressure for some time. So, in conclusion, relative to GEC, we moved the , but we had the opportunity and the expectation to do even better. That said, our domestic volume was toward the high-end of what we guided to and our implementation and backlog pipeline is very strong. This is a good harbinger for the future as volume is still the principal factor in reaching our long-term profitability. A few words on capital allocation and our balance sheet. Thematically, our emphasis for capital allocation and our balance sheet continues to be around strategic flexibility. As I indicated at the outset, our cash performance was very strong for the quarter. Part of the performance was around timing of working capital, but there was also very good execution on collections, deposits, and funding.

Also of importance, we renegotiated our revolver agreement, which will afford us more flexibility going forward. Finally, on an opportunistic basis, we began to purchase back tranches of our debt. We’ll continue to pursue debt repurchases opportunistically. A final comment on the portfolio. Our board and I continue to believe our portfolio is coherent in the markets where we have a brand permission to win. That being said, we continue to look for opportunities to unlock shareholder value. Sometimes this means proactively looking for opportunities and other times it means reacting to in-bound inquiries. The sale of Borderfree in 2022 is an excellent and recent example of how there may be opportunities to simplify our portfolio further, even within larger business segments.

So, in short, , we will continue to look for opportunities to unlock value for our shareholders and that process is ongoing. Let me now turn the conversation over to Ana.

Ana Chadwick: Thank you, Marc, and good morning everyone. Before I begin my financial review, I’ll note that the year-over-year revenue information I’m going to discuss is on a comparable basis. Adjustments include the impact of currency, the border free disposition effective as of July 1, and a change started in the fourth quarter due to a contract modification with USPS in the presentation of certain revenue from gross to net of pass-through shipping costs for our digital solutions. This revenue presentation change primarily affects Global Ecommerce and to a lesser extent SendTech. The change does not affect the profitability of those revenues. Also, unless otherwise noted, I will speak to other items such as EBIT, EBITDA, and EPS on an adjusted basis.

The following is a high level review of the year-over-year comparison of our fourth quarter results. Total revenue for the quarter was 909 million, which is flat on a comparable basis. Gross profit for the company was 288 million, compared to 283 million for the same period last year, a 2% increase. Gross margin was 32%, up from 29% last year. EBITDA was 88 million, down slightly from 89 million a year ago. EBIT was 49 million, up from 47 million a year ago, which is a 5% increase. Interest expense was 37 million, up from last year’s 35 million level. Corporate expenses for the quarter were 63 million, up 19 million from prior year, driven by the timing of variable compensation accrual. For the year, corporate expenses were 2% lower. Adjusted EPS was $0.06 in the quarter, the same as prior year.

Turning to cash flow. GAAP cash from operating activities was 167 million in the quarter, compared to 85 million in 2021. Free cash flow was 108 million, compared to 39 million last year. The improvement in free cash flow was driven in-part by lower CapEx and favorable working capital items that were a drag earlier in the year. CapEx for the quarter was 27 million, down from 43 million in prior year. During the quarter, we paid 9 million in dividends and made 4 million in restructuring payments. I will now touch on the key annual data points for 2022. For the year, companywide revenues were 3.5 billion, similar to 2021 on a comparable basis. EBIT was 179 million, 12% lower than prior year. Adjusted EPS for the year was $0.15 versus $0.32 last year.

GAAP EPS was $0.21 versus a $0.01 loss last year. Full-year cash from operations was 176 million, compared to 302 million in 2021. Free cash flow was 68 million, compared to 154 million. Capital spending was 125 million versus 184 million in 2021. At the end of the quarter, weighted average diluted shares outstanding were approximately 178 million. Looking at the balance sheet. Cash and short-term investments were approximately $681 million at quarter-end. Higher by approximately 75 million as compared to the third quarter of 2022. Total debt at year-end was 2.2 billion, compared to 2.3 billion at year-end 2021. The following segment information is summarized in our press release and slide presentation, both of which are posted on our Investor Relations website.

I’ll start with Presort. Presort revenues were 158 million in the quarter, which is a 1% improvement from last year. New customer additions and higher revenue per piece contributed to the revenue gain. Total sortation volume of 4 billion pieces was down 8% compared to prior year. EBIT for the quarter was 29 million, up 25% versus last year. EBIT margin was nearly 19%, which is a 360 basis point improvement versus fourth quarter 2021. Our ongoing investments in automation and sorter refresh is resulting in better productivity, which is driving the margin improvement. The important headline is Presort’s annual revenues topped 600 million for the first time with profitability levels in-line with our long-term model. Moving to SendTech. SendTech reported revenues of 341 million in the quarter, which was down fractionally compared to prior year on a comparable basis.

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Growth in shipping related revenues offset declines in financing, rentals, and supplies. Equipment sales continued their growth progression. SendTech EBIT was 106 million, compared to 109 million in prior year. EBIT margin for the quarter was stable at 31%. Shipping related revenue, which now comprises 14% of segment revenues increased 30% versus prior year and the SendTech team continues to build the shipping pipeline. I’ll spend a moment on the performance of our financial services business inside of SendTech. Finance receivables are up 4% year-over-year and we continue to see healthy payment trends across our financing portfolio. 30-day delinquencies are now just 150 basis points, down 70 basis points year-over-year. At year-end, the finance portfolio totaled $1.2 billion.

In summary, SendTech continued its solid performance and made strides in shipping, and financial services, both of which are positive indicators for the future of the business. Moving to Global Ecommerce. The Global Ecommerce segment made substantial progress in the quarter. Especially in the Domestic Parcel operations where gross profit improved significantly, compared to fourth quarter 2021. However, as Marc stated, the strong improvements fell short of our expectations. Global Ecommerce reported 410 million in revenues and grew slightly over prior year on a comparable basis. Total segment gross margin in the quarter was 27 million, compared to 17 million a year ago. Strong gross margin in Domestic Parcel growth total segment improvement.

Segment EBITDA was negative 5.5 million, compared to negative 20 million in fourth quarter 2021. EBIT for Global Ecommerce improved 18 million from a loss of 41 million a year ago to a loss of 23 million. First, let’s talk about where we saw improvement. Domestic Parcel volumes were up 16% year-over-year to 54 million. And as we expected, we exited the year with run rate volumes of roughly 200 million. In the context of an industry that is projecting to be down, the 16% gain highlights that our services resonate with our clients. For the quarter, Domestic Parcel gross profit improved 24 million year-over-year. For the full-year, gross profit for Parcel improved $0.35, which translates to $58 million. Let’s note, in the quarter, we reduced production labor spend by 25% versus prior year, despite processing 16% .

This improvement is a direct result of our investments in automation, robotics, and technology. Service levels continue to itself and met or were near the 90% mark throughout the quarter. As a result, our net promoter scores improved 23 points to 27 for full-year 2022. Finally, our client pipeline is strong heading into 2023 with first quarter planned implementations running near double the rate it was in the first quarter 2022. On the other hand, in-spite of these improvements, we fell short of our EBITDA positive goal by 5.5 million, especially in December, the mix of volumes skewed toward lighter parcel rates, resulting in lower revenue and margin per parcel than we anticipated. To be clear, the lighter weight volumes are still profitable, but the difference in mix from what we expected caused the majority of the from our goal.

Also, as Marc noted, transportation cost per Parcel decreased materially, compared to prior year driving approximately 20% productivity improvement, but fell short of our 25% expectation. We’re taking specific actions to address these two areas. Let me now share some perspective on the full-year for Global Ecommerce. For the year, Global Ecommerce lost 22 million in EBITDA, similar to 2021, but in many respects the years were quite different. At the gross profit line, the improvement, excluding Borderfree was 34 million year-over-year. Let’s unpack the gross profit, which more precisely illustrates the improvement in Domestic Parcel. In 2022, Domestic Parcel gross profit increased by 58 million. The remainder, cross-border, digital and fulfillment declined by 24 million, primarily due to lower volumes in a difficult macro environment.

Overall, we are very pleased with the substantial increase in Domestic Parcel volumes and profitability this quarter. We continue to expect that Domestic Parcel will improve gross profit by 400 basis points in 2023 building on the 650 basis point increase in 2022. Domestic Parcel now represents approximately 75% of segment revenue, which bodes well for the future success of the segment. Though our financial results will be more seasonally driven than they have been in the past. Now, I’ll shift the conversation to our capital structure. As you may have seen, we filed an 8-K on December 8 that details the adjustments we made in our credit agreement. We are pleased to have received the support of our lenders, which augment our financial flexibility during a period of substantial volatility in the capital markets.

We have begun to buyback our debt at a discount. To date, we have purchased approximately 10 million across the maturities and plan to continue to do so opportunistically. Anticipating a question regarding our , we expect that cash, cash flow and revolver access will be ample to meet that obligation should a cost effective capital market solution not be available. I’ll conclude my remarks with perspective on 2023. We expect flat-to-mid single-digit revenue growth on a comparable basis. We expect percentage EBIT growth to outpace revenue growth as Global Ecommerce profitability continues to improve. Finally, we expect Global Ecommerce to be EBITDA positive in 2023, driven largely by continued gross margin expansion in Domestic Parcel and partially offset by increasing macro uncertainties and softness in cross-border.

We are providing the following additional perspective on 2023. We are reaffirming our CapEx expectations of approximately 115 million. Also, higher interest rates will result in roughly $30 million of incremental interest expense, compared to prior year. And finally, we expect our effective tax rate to be approximately 25%. In closing, SendTech and Presort continue to deliver solid and predictable performance. In Global Ecommerce, we made significant progress, especially in Domestic Parcel and look forward to continuing this momentum into 2023. I will turn the call back to the operator for Q&A.

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Q&A Session

Operator: Thank you. Your first question comes from the line of Matt Swope from Baird. Please go ahead.

Matt Swope: Good morning, guys. Could you talk a little bit further on the Global Ecommerce side and how you’re looking at strategic alternatives for that business? I think, I can hear the disappointment in another negative EBITDA year, would you be open or consider selling part of the business, shutting part of the business? And I know you talked about being EBITDA positive this year, but what are other options you might explore?

Marc Lautenbach: Yes. So, appreciate the question. The first thing is, we did have the expectation to do slightly more. It would not be accurate, however say we’re disappointed. There’s a lot of progress there. So, I’d start with that. In terms of alternatives that we work for not just Global Ecommerce, but for any business, what I’ve said for 10 years is if a business is worth more to somebody else than it is to us then it’s a serious offer. We would certainly contemplate that. And if you look at the last 10 years, whether it be divestiture of the software business or or other assets, that. Most recently, the divestiture of Borderfree, I think, speaks to your question. That was a portion of Global Ecommerce. It was something that we like the business.

We continue to be in cross-border, but it was worth more to globally than it was to us. So, we would look at any alternative that we think unlocks value for our shareholder whether it be shutting something down, selling something or indeed selling the whole business, but we do think, as I said, that business continues to be a coherent part of our portfolio and we’re optimistic about how we go forward.

Matt Swope: I appreciate that, Marc. Thank you. And would you mind commenting further on SendTech? You talked a couple of interesting comments I thought. One about 40% of your sales coming from new products now, but also seeing declines last year in finance rentals and supplies that were partially offset by shipping. Can you talk about some of the dynamics in SendTech and how you see that on a unit basis for 2023?

Marc Lautenbach: Sure. So, I mean there’s two different currents running through the SendTech business. The first is the Mail business, which continues to experience secular decline, that hasn’t changed. The other current is shipping revenue, which continues to be a good market. And aggregate those two markets together are about a $6 billion business that’s growing. So, our expectation is shipping revenue becomes a higher and higher percent of the total business and continues to grow. You know Ana said, 20% that those two dynamics begin to cancel each other out. And as you look at SendTech overall, it was essentially flat last year. From a unit perspective, equipment revenue is probably the easiest way to think about that. Equipment revenue was up low single digits for the quarter and for the year.

That’s kind of the confluence of those two dynamics coming together. So, I like that business. I would say SendTech and Presort together provide balance for the business in our balance sheet as we continue to improve Global Ecommerce.

Matt Swope: And Mark, when you say Mail continues to experience secular decline, could you quantify that secular decline number at all about where you guys continue see that?

Marc Lautenbach : I mean, so First Class Mail is, I would say down high-single-digits, you know 5% to 10% depending on the quarter, marking Mails down a little bit less. So, it’s €“ I would say single-digit declines depending on which segment of mail.

Matt Swope : That’s great. And then just a last one for me. Ana, could you comment on just expectations for free cash flow for 2023? I think you gave us pieces, but just curious from your model how that looks on a total free cash flow basis for 2023?

Ana Chadwick: Yes. So, as you commented, I gave you the pieces there on EBIT CapEx, interest, and tax. The hard one to call here is a little bit around working capital and that’s why we gave you the pieces. As the business moves to seasonal adjustments greater in the fourth quarter and calling out the movements in working capital is a little harder. That’s why we moved the to give you the components.

Matt Swope: Got it. Thank you both for your help.

Operator: Your next question comes from the line of Anthony Lebiedzinksi from Sidoti & Co. Please go ahead.

Anthony Lebiedzinksi: Yes, good morning and thank you for taking the questions. So, first on GEC. So, you talked about that the mix overall had a higher than expected volume of light weight parcels of hurting profitability or maybe less than expected, I guess, this is a better choice of words, but was this really, you think more of a result of new client wins that these new clients that you signed on, did that have most significant impact from this or was it just a mix of old clients just shipping more light volume? Just wanted to get a better sense of that.

Marc Lautenbach: That’s great question. So, there’s a couple of things that are true. We had a very successful quarter in bringing on new clients. I would say those new clients did have a slightly lower weight than average. However we plan for that. What was different than what we expected is from our existing customers, think of that as same store sales for lack of a better term. In weeks 49, 50, and 51, read that as the last couple of weeks of the quarter, we didn’t get as much volume from them as we expected. We still got more volume than we had the previous quarters and good performance, but we’re expecting slightly more. So, if you look at same store sales, they were €“ we got good increases from many of our clients. It was just slightly less than we expected those last two or three weeks.

Anthony Lebiedzinksi: Understood. Okay. So, now looking forward, when you’re going out and targeting new clients, are you going to be more, kind of diligent as far as who you assess as to who you, kind of bring on to make sure that you have a better mix of heavier weight parcels? Is that how you’re thinking about managing that or maybe could you just talk a little bit more how are you thinking about trying to be more profitable in GEC?

Marc Lautenbach: Sure. So, one thing that I understand that’s really important and I don’t want people to lose sight of is, even the light weight parcels were positive from a gross margin perspective. So, as long as our network is under capacity, we’ll take that volume. It adds to profitability, it’s accretive to absolute margins etcetera. We will within the total pipeline be more diligent if you will, in terms of realizing the higher weight stuff and we will skew our marketing and sales resources to get more higher weight stuff too. So, it’s not that I don’t like the lower weight stuff, I like it. As long as our networks under capacity, we’ll take more of it, but it’s also true that our sales and marketing and our management system will be more skewed to ensure that we get higher weight stuff.

And that’s, you know €“ my comment on the backlog is important. So, we’ve got a big backlog right now and we’ve got plenty of higher weight stuff in there. We just need to get that stuff into the network.

Anthony Lebiedzinksi: Got you, okay.