Pitney Bowes : Q3 2022 Earnings Conference Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q3 2022 Pitney Bowes Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 01, 2022 / 12:00PM GMT

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NOVEMBER 01, 2022 / 12:00PM GMT, Q3 2022 Pitney Bowes Inc Earnings Call

CORPORATE PARTICIPANTS

Ana Maria Chadwick Pitney Bowes Inc. - Executive VP & CFO

Marc B. Lautenbach Pitney Bowes Inc. - President, CEO & Director

Ned P. Zachar Pitney Bowes Inc. - VP of IR

CONFERENCE CALL PARTICIPANTS

Ananda Prosad Baruah Loop Capital Markets LLC, Research Division - MD

Anthony Chester Lebiedzinski Sidoti & Company, LLC - Senior Equity Research Analyst

Kartik Mehta Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst Matthew Warren Swope Robert W. Baird & Co. Incorporated, Research Division - MD and High Yield Desk Analyst

Tim Call - The Capital Management Corporation

PRESENTATION

Operator

Good morning, and welcome to the Pitney Bowes Third Quarter Earnings 2022 Results Conference Call. (Operator Instructions) 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 a safe harbor overview.

Ned P. Zachar Pitney Bowes Inc. - VP of IR

Good morning, everybody. This is Ned Zachar and 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 includes covering the usual and customary safe harbor information for these calls. So please bear with me for just a few minutes. 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 on our Investor Relations website that summarizes many of the points we will discuss during today's call.

Our format today is going to be familiar. 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 now like to turn the presentation over to Marc. Marc, the floor is yours.

Marc B. Lautenbach Pitney Bowes Inc. - President, CEO & Director

Thanks, Ned. Good morning, and thank you for joining today's call. There continues to be many different currents running through the economy and our business. While we are focused on navigating the moment, our focus is on how we come out of these cross-currents. In many, probably most ways the third quarter resembled the second quarter. SendTech and Presort both grew at constant currency and Global Ecommerce declined driven by the unprecedented strength of the dollar.

The strength and the resilience of our SendTech and Presort businesses will serve us very well in this turbulent market. But even more importantly, these businesses are very well positioned going forward. As you all know, these businesses are strong and reliable cash producers today and into the future. The fact that these businesses are both growing with margins close to the long-term plan bodes very well for the future.

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NOVEMBER 01, 2022 / 12:00PM GMT, Q3 2022 Pitney Bowes Inc Earnings Call

As I mentioned, our Global Ecommerce business is fighting through a dollar, which is at unprecedented highs, a very choppy retail sector and evolving consumer behaviors. We continue to believe that the currency markets will stay unsettled for the foreseeable future. I would characterize our domestic delivery business and our digital expedited business as holding serve in the quarter as we continue to add new customers, which is being offset from some weakness in our existing customers' volumes.

To be clear, we see the decline in volume from our existing clients as a market phenomenon. Our ability to win new customers and regain volume from existing customers is a direct result of our increased service levels, which position us very well vis-a-vis our competitors. That said, the most important dynamics since our last earnings call isn't found on our third quarter income statement. The most important dynamic is new customers we have won, existing customers where we affirmed our going-forward relationship and our resolution with the USPS on ongoing economics that position us very well going forward.

In the third quarter, we signed SHEIN. If you're not familiar with SHEIN, it's one of the largest online fashion retailers in the world. We started processing parcels for SHEIN in the third quarter, and we expect SHEIN's volumes to substantially increase in the fourth quarter. This is a tremendously exciting win.

We also came to terms with eBay North America and eBay U.K. in the third quarter. As you probably know, eBay has been an important customer to Pitney Bowes for over a decade. We could not be more delighted with our going-forward relationship with eBay.

Next, we came to a new agreement with USPS related to our digitally based shipping offerings, meaning how we enable shippers to pay for and label packages to send directly through USPS. As we discussed during the last earnings call, USPS ended the agreements they had with posted resellers effective October 1. While PB was not a USPS reseller, the USPS has structured the market in a way that it made economic sense for us to work through resellers. In the quarter, we successfully concluded a going-forward agreement with the USPS that enables us to essentially retain the economics we earned through the resellers, reflecting the value we provide to the USPS and shippers in the market.

As this market is evolving, we are continuing to see opportunities to expand our digital shipping offerings based on the value and innovation we bring. The most concrete example of this is an agreement we have entered into is one of the largest platform companies in the world to enable shipping from their platform.

A quick final point on all of these third quarter dynamics. We're able to win these new customers and craft a new going-forward agreement with USPS because we have consistently invested in our future. We've invested in our network, our service levels, our capabilities and perhaps most importantly, our team. We have sustained these investments during COVID, supply chain issues and a potential looming recession. Others might have gone weak need in the face of all these dynamics, but we have remained resolute. The sustained investment positions PB very well going forward.

Finally, we continue to build on our third quarter momentum. In the third quarter, we began the quarter at 2.8 million parcels per week and finished the quarter at 2.9 million parcels per week, so a slight improvement, but basically holding steady. Through the first 3 weeks of the fourth quarter, we are running at approximately 3.6 million parcels per week. So you can clearly see the impact of our improved service levels driving volume to our network.

Let me dimensionalize this further. Annualizing this weekly volume increase equals 40 million to 45 million incremental parcels a year. We are looking forward to adding peak volumes to this new baseline. A few comments about capital expenditures and expense going forward, now that we largely have what we need to compete and win in our markets. As I mentioned at the outset of my remarks, our focus is navigating the moment and ensuring we come out of this economic tumult, a stronger company. Consequently, our bias on capital expenditures and expense is towards being conservative. And we'll have more to say, but we expect material savings in 2023 gross expense and CapEx.

To conclude, as Ana foreshadowed at the last earnings call, the third quarter was similar to the second quarter financially. But again, looking back in the third quarter, I'm quite confident that the headline won't be any particular financial metric for the quarter, but the substantial wins that position our business for success going forward.

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NOVEMBER 01, 2022 / 12:00PM GMT, Q3 2022 Pitney Bowes Inc Earnings Call

Now let me turn it over to Ana.

Ana Maria Chadwick Pitney Bowes Inc. - Executive VP & CFO

Thank you, Marc, and good morning, everyone. Unless otherwise noted, I will speak to revenue comparisons on a constant currency basis and other items such as EBIT, EBITDA and EPS on an adjusted basis. Let's start with a high-level review of the year-over-year comparison of our financial statements and segment results. Total revenue for the quarter was $831 million which is down 4% versus third quarter 2021. Excluding the Borderfree divestiture, revenue is down 2%. Gross margin for the company was $264 million compared to $286 million for the same period last year, a 7% decrease. As a percent of total revenues, gross margin decreased 80 basis points to 31.8%. Total EBITDA was $77 million down from $92 million. EBIT was $38 million, similar to second quarter and down from $50 million 1 year ago. Interest expense was $37 million, a slight uptick from last year's $36 million level. The provision for income taxes this quarter was $1.4 million. Adjusted EPS was $0.00 compared to $0.08 in prior year.

At the end of the quarter, weighted average diluted shares outstanding were approximately 177 million.

Turning to cash flow. GAAP cash from operating activities was a use of $36 million for the quarter compared to a source of $71 million in third quarter 2021. Free cash flow was a use of $16 million in the quarter compared to a source of $30 million in the prior year. The differences in cash flow were primarily driven by changes in working capital and lower net income. Those changes were partially offset by lower CapEx and an increase in customer deposits. CapEx for the quarter was $33 million, down from $57 million in prior year. We continue to expect CapEx to be substantially lower for full year 2022 compared to 2021 now that we have essentially completed the build-out of our domestic footprint and have shifted focus to fully leveraging our investment to maximize utilization.

During the quarter, we paid $9 million in dividends and made $4 million in restructuring payments. Looking at the balance sheet. Cash and short-term investments were approximately $607 million at quarter-end. Total debt was $2.2 billion compared to $2.3 billion at year-end 2021. Adjusted for our operating leases and cash, operating company debt was $570 million compared to $533 million at year-end.

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 $145 million in the quarter, which is a 4% improvement from last year. Total sortation volume of 3.8 billion pieces was down 9% compared to prior year. However, new customer additions and increased revenue per piece, again, more than offset the volume declines. EBIT for the quarter was $21 million, essentially flat to last year. EBIT margin was 14%, which is a 500 basis point improvement to prior quarter and a 90 basis point decline versus third quarter 2021. The decline in year-over-year margins was driven largely by increased labor and transportation costs, including the change in our allocation methodology, which we have previously discussed.

Bottom line is, we expect additional progress in fourth quarter, driven by higher revenue per piece, improvements in transportation efficiency and productivity gains from the ongoing sorter refresh. We also expect the usual uptick in seasonal volumes, largely in marketing-related services.

Moving to SendTech. SendTech reported revenues of $332 million in the quarter, a slight increase over prior year, which is a significant accomplishment for a business that has natural headwinds. Equipment sales and shipping-related revenues continued to fuel the growth. Shipping-related revenues, which is now 12% of segment revenues, increased 18% versus prior year, and the SendTech team continues to build the shipping pipeline. SendTech EBIT was $95 million compared to $99 million in prior year, and EBIT margin was 29%, down 60 basis points from third quarter 2021. Margins were impacted by inflationary pressures and a higher mix of lower-margin equipment revenue. In response to higher input costs, we introduced select price increases in the quarter, which will be an offset moving forward.

We also continue to see stability in our finance portfolio, driven by growth in our lending business, and ongoing strength in our

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NOVEMBER 01, 2022 / 12:00PM GMT, Q3 2022 Pitney Bowes Inc Earnings Call

equipment sales, which translate into lease receivables and bodes well for future finance revenues. As of quarter-end, net finance assets were $1.15 billion, flat quarter-to-quarter. Also, credit quality inside the financial services portfolio remains excellent. 30-day delinquencies are down 40% from prior year and remain under 2% for the third consecutive quarter. Despite the macro headwinds, we see healthy payment trends across our finance portfolio.

Let's talk about Global Ecommerce. Total segment revenue decreased 10% to $354 million. The decline, excluding Borderfree, which was divested on July 1, was 7%. Organic decline was driven by weakness in cross-border and to a lesser extent, lower digital volumes. Domestic Parcel revenues were up 2% in the quarter. Segment gross margin in the quarter was $20 million compared to $34 million a year ago. The year-over-year improvement in Domestic Parcel gross margin was more than offset by lower contributions from cross-border. Segment EBITDA for the quarter was negative $17 million compared to breakeven in the third quarter of 2021. EBIT for Global Ecommerce was a loss of $35 million compared to a loss of $21 million a year ago.

Let me break down the cross-currents inside the segment. Additional progress in Domestic Parcel is more than offset by ongoing macro trends negatively impacting cross-border. Compared to prior year, cross-border volumes, revenues and gross margins are down in excess of 25%. As you may recall, our cross-border business is largely focused on helping our clients move parcels originating in the U.S. to international destinations. As we noted last quarter, the strength in the U.S. dollar and macro weakness, especially in Europe, continued to put pressure on international e-commerce activity. As a result of the tougher environment, we are taking meaningful steps to mitigate the headwinds, including the launch of U.S. inbound services from the U.K. and Canada as well as a new intra-Canada service.

Let's move to the Domestic Parcel business next. In the quarter, parcel volumes were 36 million, down 4 million from prior year. Lower volumes were a result of softer overall e-commerce activity and a continued decline in inbound parcels from China. On the other hand, revenues were up 2% year-over-year on higher revenue per parcel. We continue to believe Domestic Parcel is our biggest opportunity with a large and growing addressable market. It has been a significant investment priority over the last several years from automation to management systems to human capital, resulting in much improved service levels and more predictable costs. Since late March, on-time performance has been consistently in the low to mid-90% range and the much improved gross margin levels highlight our ability to better match resources against the volumes in our facilities.

Despite lower volumes year-to-date, gross margin per parcel improved $0.29 compared to the same period in 2021. Our Domestic Parcel network is well positioned to handle peak volumes this year as well as an expected increase in the run rate parcel volumes driven by recent new client wins. Since the beginning of the third quarter, 32 new domestic parcel clients have gone live ahead of peak. New clients are expected to account for roughly 20% of fourth quarter parcel volumes. New notable clients include SHEIN, Hudson's Bay and Japan Crate.

As a direct result of better service levels, we are seeing material pickup in volumes from existing clients, such as BarkBox, SuperGoop and Victoria's Secret. We are already seeing the volume uplift in October. On a month-over-month basis, weekly volumes have grown over 25% to 3.6 million. We are encouraged by the healthy increase in volumes which are critical in driving margin improvement.

As we stated in our materials from mid-September, we expect annual run rate volume levels in the Domestic Parcel network to exit the year at approximately $195 million to $200 million. We are reaffirming our expectations that the Global Ecommerce segment will generate positive EBITDA in the fourth quarter. Also, for full year 2023, we are targeting segment EBITDA to exceed CapEx. This assumes ongoing pressure in cross-border and reflects our new agreement with USPS and eBay, which we will discuss next.

Last quarter, we also discussed the changes in the USPS reseller program. We now have finalized a new agreement with USPS that enables us to maintain and possibly improve the economics we had historically generated from the reseller ecosystem. The technology-oriented capabilities we have built over the years which supports substantial volumes in the USPS network were integral to the new arrangements with USPS and reflect the benefits of our innovations to both USPS and shippers.

We have also finalized a new agreement with eBay, and we are pleased to continue to be an integral part of their international shipping program.

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