Pitney Bowes : Q1 2021 Earnings Conference Call Transcript

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EDITED TRANSCRIPT

Q1 2021 Pitney Bowes Inc Earnings Call

EVENT DATE/TIME: APRIL 30, 2021 / 12:00PM GMT

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APRIL 30, 2021 / 12:00PM GMT, Q1 2021 Pitney Bowes Inc Earnings Call

CORPORATE PARTICIPANTS

Adam David Pitney Bowes Inc. - VP of IR

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

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

CONFERENCE CALL PARTICIPANTS

Allen Robert Klee Maxim Group LLC, Research Division - MD & Senior Equity Research Analyst 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 Shannon Siemsen Cross Cross Research LLC - Co-Founder, Principal & Analyst

PRESENTATION

Operator

Good morning, and welcome to the Pitney Bowes First Quarter 2021 Earnings Conference Call. (Operator Instructions) Today's call is also being recorded. (Operator Instructions) 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. Adam David, Vice President, Investor Relations and Financial Planning. Mr. David will now begin the call with the safe harbor overview.

Adam David Pitney Bowes Inc. - VP of IR

Good morning. Included in this presentation are forward-looking statements about our expected 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 2020 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 used in our press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations' website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations' website.

Now our President and Chief Executive Officer, Marc Lautenbach, will start with a few opening remarks. Marc?

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

Thank you, Adam, and thank you, everyone, for joining today's call.

We got off to a solid start for the year with every business making an important contribution to the quarter. Overall, revenue at constant currency grew 14% and every business improved their EBIT performance. For the second consecutive quarter, SendTech improved EBIT on a year-to-year basis. As I mentioned before, the transformation of SendTech from a business decline, to business well positioned to capture new value in the shipping market is one of the most impressive transformation I've ever seen. The business has leveraged digital technologies to transform our offerings and our go-to-market strategy. SendTech's platform is built on IoT technologies that are delivered on a SaaS chassis, and this business is very well positioned going forward.

Our Presort Services continued with the momentum we saw at the end of last year with both revenue and EBIT improving on a year-to-year basis. Global Ecommerce revenue at constant currency grew 40% for the quarter and EBIT margins improved nearly 400 basis points on a year-to-year basis. Importantly, profit performance improved throughout the quarter as our labor model continued to mature and pricing changes kicked in.

In the month of March, domestic parcel services per unit labor cost delivered the best performance compared to any quarter from the second quarter of last year. We expect unit labor costs to continue to improve and transportation and automation efficiencies are

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APRIL 30, 2021 / 12:00PM GMT, Q1 2021 Pitney Bowes Inc Earnings Call

primarily still in front of us.

Transportation costs remains high in both our e-commerce and Presort businesses to further in-sourcing of transportation as well as the deployment of automation will benefit both businesses. There's a lot of opportunity in front of us as we continue to invest in areas that will yield future productivity benefits.

We also made several important additions to our Global Ecommerce team. While I'm sure the team will continue to evolve, we have a group of professionals and consultants guiding our business who have built business-to-consumer networks centered on induction to the USPS system. Cash performance for the quarter was also relatively strong compared to prior year off of an improved working capital performance. The team continues to demonstrate strong operational discipline.

We also executed a successful refinance in the quarter. There were 2 objectives to the refinancing. First, we wanted to push out the maturities, further decreasing our refinancing risk. Secondly, and more importantly from my perspective, we created strategic flexibility. We achieved both those objectives.

I've described 4 chapters of transformations: quick wins, sustained investments, revenue growth and finally, profitable revenue growth. Last quarter, I said, we are poised to enter that fourth chapter, profitable revenue growth. It's hard to call the first quarter an inflection point given the nominal EBIT increase, but revenue and profit did increase and a very much like our position going forward. Each business is poised to continue to make progress during this year and for that matter, going forward beyond this year. All in all, I'm quite pleased with the quarter. It turned another strong revenue performance and improved EBIT across each segment compared to the prior year.

As the revenue compares get more difficult as the year goes on, growth will inevitably moderate, but the trend is quite clear and I very much like the way we are positioned.

With that, I will turn it over to Ana.

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

Thank you, Marc. Before I get into the details of the quarter, this being my first earnings call with the team, I want to share with you a few thoughts on what attracted me to Pitney Bowes.

The first thing that attracted me was the growth trajectory. Now that I have had a chance to go deeper into the business, I am confident that we are on the right path to achieving what Marc referred to as the fourth chapter of our transformation, which is profitable revenue growth.

The second item is culture. I can feel a true sense of team, pride and passion for continuously innovating and winning in the marketplace. These are concepts that you cannot necessarily teach. They are ingrained, and I consider them to be imperative to our success.

And last, what I did not realize but quickly learned is how much technology is deeply needed in everything we do. It's not as evident when you look at the business from a distance, but I believe it's one of the major enablers to the company's transformation.

Now let me turn to our first quarter results. Unless otherwise noted, I will talk to revenue comparisons on a constant currency basis and earnings-related items, including EPS and cash flow on an adjusted basis. Revenue was $915 million and grew 14% over prior year. Adjusted EPS was $0.07 and GAAP EPS was a loss of $0.18. GAAP EPS includes a $0.22 loss on the refinancing of our debt as well as a $0.02 loss from discontinued operations and $0.01 from restructuring charges. Free cash flow was a net use of $1 million and cash from operations was $66 million, both an improvement from prior year due to favorable working capital changes largely around the timing of accounts payable and accounts receivable along with improved collections. This was partially offset by lower customer deposits at our PB Bank.

During the quarter, we paid $9 million in dividends and made $4 million in restructuring payments. We invested $43 million in CapEx as

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APRIL 30, 2021 / 12:00PM GMT, Q1 2021 Pitney Bowes Inc Earnings Call

part of our plan to drive future operational efficiencies. We ended the quarter with $697 million in cash and short-term investments. Total debt was $2.4 billion.

We took several actions during the quarter to refine our capital structure, along with reducing overall debt by $126 million from prior year. These actions further reduce refinancing risk with the reduction of our near-term bond maturities.

We also improved the pricing of and substantially paid down our Term Loan B, improved our covenants, which provides us greater strategic flexibility and extended the duration across our capital structure. When you take our finance receivables and cash into account with our debt, our implied operating debt is $690 million.

Looking at the P&L, starting with revenue versus prior year. Business services grew 28%. Equipment sales grew 12%, and rentals were flat to prior year. We have declines in support services of 4%, supplies of 10% and financing revenues of 14%. Gross profit was $299 million, and gross margin was 33%, which was down from the same period last year, largely due to the mix and shift of the portfolio but is an improvement from the fourth quarter.

SG&A was $238 million or 26% of revenue. This is an improvement of $10 million and 5 points, respectively, from prior year. Within SG&A, corporate expenses were $57 million, which was up about $14 million over prior year, largely due to benefits recognized last year around employee variable related costs and a sales tax credit.

R&D was $11 million or 1% of revenue and down slightly from prior year. Adjusted EBIT dollars were $50 million, which was a slight improvement over prior year. Adjusted EBIT margin was 5%.

Interest expense including finance interest was $37 million. Our tax provision on adjusted earnings was a benefit of about $400,000 and includes a benefit associated with an affiliate reorganization. Compared to prior year, our tax provision benefited EPS by about $0.015. For purposes of determining adjusted EPS, shares outstanding are approximately 179 million.

Let me now turn to each segment's performance, starting with e-commerce. Revenue for the segment was $413 million and grew 40% over prior year. Revenue continues to benefit from the strong demand, along with the prepandemic comparison. Volumes grew year-over-year across all lines of service. Domestic parcel services volumes grew 23%, cross-border volumes were more than double, and our digital services volumes grew 36%. EBIT was a loss of $26 million and EBITDA was a loss of $8 million. Compared to prior year, EBIT improved $3 million and EBIT margin improved nearly 400 basis points.

We made progress through the quarter where earlier on, we were still dealing with the residual of peak holiday season. We continue to work to improve service levels in our domestic parcel network, balancing cost and quality, which are all headed in a positive direction.

As with the industry, we all continue to see relatively high transportation costs and a competitive labor market. However, as we move through the quarter, our domestic parcel network improved parcel process per hour by approximately 45% as our labor model continued to mature. Margins continued to be healthy in our digital and cross-border services. Of the $26 million EBIT loss in the quarter, we saw a loss of $4 million in March and we reported positive EBITDA for the month.

Within our domestic parcel service, our initiatives to improve productivity are still largely in front of us. As we have discussed in the past, Investments will include new automated sorters, along with streamlining our processes to improve productivity. We placed one new sorter in a high-volume site in the first quarter and expect to roll out more over the next 12 to 24 months. In addition, we are implementing modern sortation processes in each of our facilities before the upcoming holiday peak season this year.

This investment and related productivity actions are expected more than double our pieces process per hour over time. In addition, our transportation team continues to execute on the strategy of migrating outsourced lanes into our own PB fleet. In the first quarter, we insourced several of these lanes with more plans for the second quarter, all of which will improve cost and service.

We also brought in third-party industry expertise to help support our execution in the area of transportation. We believe that optimizing

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APRIL 30, 2021 / 12:00PM GMT, Q1 2021 Pitney Bowes Inc Earnings Call

our transportation will yield significant productivity benefits.

Finally, we are in the process of opening 2 new sites and upgrading another, which we expect to have completed prior to the peak season. This will allow us to handle volumes more efficiently and delivered deeper into the USPS network. Ultimately, we expect transportation and labor productivity, along with optimizing final mile solutions to be critical drivers in attaining our long-terme-commerce margins. We expect these to account for approximately 75% of the margin improvement.

Our Presort Services saw the momentum from the second half of 2020 continue into the first quarter. The business turned in a solid performance, growing revenue, EBIT and EBIT margin over prior year. Revenue was $143 million and grew 2%. Overall, average daily volumes were flat to prior year, where First Class letter mail declined 2%, Marketing Mail grew 11% and Marketing Mail Flats and Bound Printed Matter grew 30%. EBIT was $19 million and EBIT margin was 13%. EBITDA was $27 million, and EBITDA margin was 19%. EBIT and EBITDA improved from prior year due to both revenue growth and lower expenses.

We have been able to maintain double-digit margins in the Presort business, even as we continue to invest in our talent and equipment. Compared to prior year, we improved pieces per labor hour by 4%, resulting in 85,000 less processing hours.

Within SendTech, we also picked up on the momentum from the second half of 2020 as we continue to soften the decline in our revenue and maintain strong EBIT margins. Revenue was $359 million and declined 3%. We continue to differentiate ourselves in the market with our end-to-end mailing and shipping offerings to enterprise and small office providers that are attracted to both existing and new clients. We have a growing revenue stream around office shipping that carries with it high margin, approaching that of our legacy mailing business and a software business.

Unlike the legacy mailing business, the shipping opportunity in SendTech provides multiple paths for us to add profit and revenue like supply, financing and the professional services. SendTech's shipping-related revenue grew at a low double-digit rate to approximately $30 million in the quarter. The number of labels printed through our shipping offerings grew over 40%, and paid subscriptions grew approximately 80%. Additionally, we are seeing good growth in shipping volumes that our U.S. clients are financing, which grew nearly 80% over prior year.

These positive metrics show that our clients are adopting and using these new offerings as they see the value it brings to their businesses.

Equipment sales grew 12% over prior year, driven by strong placement of our SendPro C, which includes a large government deal, and we continue to see good placements of our new central mail station multipurpose device. It is important to point out that like others, we have experienced transportation issues related to our supply chain. We have been able to properly manage our inventory and grow our equipment sales despite these challenges. And it is an area that we are closely monitoring. We are also keeping a close eye on the semiconductor industry and are looking to mitigate any potential second half supply shortage by repositioning our solutions as necessary.

We turned in a strong EBIT performance of $114 million, which represents growth of $8 million over prior year, and is the second consecutive quarter of EBIT growth. EBIT margin was 32%, which improved 250 basis points over prior year. EBITDA was $122 million, EBITDA margin was 34%, both improving over prior year.

As you may recall, prior year included an increase to our credit loss provision to reflect macroeconomic conditions resulting from COVID-19 in connection with the application of the CECL accounting standard.

One other point that I'd like to make is that this team has done a tremendous amount of work, not only to transform its products and offerings, but also its channel. Today, about 80% of all U.S. sales transactions are happening through our web or inside sales channel. This has allowed our field team to concentrate on larger enterprise deals. And this has been a great contributor to maintaining the very healthy margins that we see in this business.

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