Q3 2021 Earnings Conference Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q3 2021 Pitney Bowes Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 03, 2021 / 12:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

1

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 03, 2021 / 12:00PM GMT, Q3 2021 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 Zachar

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

Shannon Siemsen Cross Cross Research LLC - Co-Founder, Principal & Analyst

PRESENTATION

Operator

Good morning, and welcome to the Pitney Bowes Third Quarter Earnings 2021 and Results Conference Call. (Operator Instructions) Today's call is also being recorded. If you have any objections, please disconnect your line 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 participation.

Part of my new 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 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. For more information about these risks and uncertainties, please see 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 that are used in the 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 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 a deeper 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

Thank you, everyone, for joining today's call. And I would like to welcome Ned to the team. Ned brings a wealth of experience to the role including investing and analyst experience. Ned has also been an investor in our debt, so he is familiar with our company.

Turning to the quarter. Given a return to pre-COVID top line seasonality, the distortions in last year results in supply and demand imbalances, there were many different crosscurrents running through the quarter and year-to-year comparisons. While it's easy to get lost in the numbers, from my perspective, the headline is this. Demand for our products and services remain strong, and we continue to

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

2

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 03, 2021 / 12:00PM GMT, Q3 2021 Pitney Bowes Inc Earnings Call

make progress, repositioning our company for long-term success.

Our Presort business had an excellent quarter from both a top and bottom line perspective. The Presort team was able to overcome labor and transportation inflation by managing price and productivity and moved back into our long-term profit model. Importantly, the investments we have made in our network and technology have positioned us well to drive even more productivity and help more clients.

Our SendTech business performed close to the long-term model even though supply constraints hit the top and bottom line. Equipment sales in our backlog both increased in the quarter, evidencing strong demand. We will continue to battle through supply-demand dynamics, but clearly our new product innovations are making it a very positive difference. In addition, more of our business is moving to a subscription model. While this depresses short-term revenue, increased subscription revenue is a very positive harbinger for the future.

Within Global Ecommerce, while there are year-to-year aberrations, there are 2 things that are important to the long-term success of this business. The first is service to our clients. We have improved our end to end cycle times by 25% and since the beginning of the year, which is a significant improvement. And secondly, gross margin. It is notable that gross margin improved from prior year despite the fact that we had a substantial capacity and without the benefit of peak volumes. We have foreshadowed that as volumes normalize, thus, margin improvement would happen, and it did. We have been very disciplined about the kind of volumes we have committed to the fourth quarter, and we like what we have, both in terms of overall volume commitments, the economics and the kind of volume we anticipate receiving. Like others in the industry, we saw volumes decreased year-to-year in the quarter, but we very much like how we are positioned for the fourth quarter and going forward. However, to be clear, we expect there to be some challenges this peak season. Daily headlines talk about the supply chain disruptions, and larger players are already carrying out an impact on the results or outlook. We are not immune to these supply chain constraints more as it relates to our E-commerce client supply levels and, to a degree, our SendTech products.

While it remains a level of uncertainty, our team is substantially better positioned this year based on the actions we have taken thus far. Additionally and similar to the market, we're looking at pricing to help offset some of the higher costs, particularly as it relates to transportation and labor. For example, within Ecommerce, we have put in place a surcharge for this peak season and recently announced our annual general rate increase effective for 2022. And we've implemented pricing increases in other parts of our business where it's justified by the new and increased value we are delivering for clients through our new product portfolio. So lots of moving pieces, but from my perspective, a successful quarter across many dimensions, but most importantly in terms of how the quarter sets us up for our going forward success.

Now I will turn it over to Ana.

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

Thank you, Marc. Unless otherwise noted, I will speak to revenue comparisons on a constant currency basis and to other items such as EBIT, EBITDA, EPS and cash flow on an adjusted basis.

Total revenue for the third quarter was $875 million and declined 2% from prior year. Recall that the year-over-year comparisons include the impact of COVID on us and many other companies. Last year's third quarter saw a very positive impact on E-commerce revenue and an adverse impact on SendTech and Presort. When we compare this year's third quarter to the third quarter of 2019, in other words, pre-COVID, our 2021 revenue grew over 10%, which illustrates that the bulk of the top line gains we made last year remain intact.

Adjusted EPS was $0.08, and GAAP EPS was $0.05. EPS includes a $0.02 net tax benefit offset by a $0.03 charge related to a specific pricing assessment in Global Ecommerce, which I will discuss momentarily.

Free cash flow was $30 million, and cash from operations was $71 million, down from prior year, largely due to higher CapEx and changes in working capital, which are in line with our previous commentary on this topic. During the quarter, we paid $9 million in dividends and made $6 million in restructuring payments. We spent $57 million in CapEx, as we continue to enhance our E-commerce network and drive productivity initiatives in both our Ecommerce and Presort businesses. We ended the quarter with $743 million in cash and short-term investments. During the quarter, we redeemed our 2022 notes for $72 million. Notably, total debt has declined about

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

3

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 03, 2021 / 12:00PM GMT, Q3 2021 Pitney Bowes Inc Earnings Call

$225 million since year-end 2020 to $2.3 billion. When you take our finance receivables, cash and short-term investments into consideration, our implied operating company debt is $556 million.

Let me turn to the specifics in the P&L, starting with revenue versus prior year. Equipment Sales grew 4%. We had declines in Business Services of 1%, Support Services and Supplies of 4%, Rentals of 5% and Financing of 17%. I would like to point out that as it relates to our Financing revenue, prior year results included investment gains related to the sale of securities, which represent about half of the year-over-year decline.

Gross profit was $286 million and improved across our Ecommerce and Presort segments. Gross margin of 33% was flat to prior year. SG&A was $225 million and approximately $14 million lower year-over-year. SG&A was 26% of revenue, which is a 100 basis point improvement over prior year. Within SG&A, corporate expenses were $49 million, $4 million lower than prior year largely due to variable employee-related costs.

R&D was $11 million or 1% of revenue. EBITDA was $92 million, and EBITDA margin was 10.5%, both of which were relatively flat to prior year.

EBIT of $50 million was down about $4 million from prior year, while EBIT margin of 6% was flat to prior year. Total interest expense was $36 million, down $3 million year-over-year. Our tax rate of 1% includes net benefits associated with the resolution of tax matters. And we expect our rate will return to more normalized levels going forward. Shares outstanding were approximately 179 million.

Let me turn to each segment's performance. Within Ecommerce, revenue in the quarter declined 4% to $398 million. However, recall that last year's third quarter saw a surge of new revenues driven by the effects of the pandemic. If you compare this quarter to third quarter of 2019, revenues for the Ecommerce segment are up over 40%. Said another way, we kept the vast majority of the revenue gains we experienced post COVID.

Inside of Ecommerce, revenue growth from Cross Border and Digital Services was offset by lower revenues from Domestic Parcel services. Domestic Parcel volumes were 41 million in the quarter, down from prior year on a tough compare, but up from 2019 levels. Aside from the tough compare, the decline in volumes can be attributed to the return of a more normal seasonality, where third quarter is typically softer than second. Additionally, we made a strategic decision to take on volumes that fit our desired partial profiles and drive improved service levels, which also had an impact on volumes.

Demand for our services continues to be strong, as we signed over 130 client deals in the quarter and were able to bundle additional services with 40% of those signings. Gross margin improved 100 basis points from prior year despite higher labor and transportation cost and inclusive of the previously mentioned pricing assessment. EBITDA for the quarter was breakeven, which is an improvement of $3 million versus the same period last year. EBIT was a loss of $21 million.

As I referenced earlier, our results in the quarter include an $8 million charge associated with a pricing assessment, which was mainly caused by lower-than-anticipated volumes that originate outside of the U.S. for our domestic delivery services. This assessment encompasses the first 3 quarters of the year. The impact from this pricing assessment has been factored into our full year guidance.

It is also important to highlight that since the beginning of the year, there has been a 25% improvement in our end-to-end cycle time from induction into our system to the actual delivery of the parcels. Looking ahead, we have taken numerous steps to be ready for this year's holiday peak season. We have brought in new leadership with deep industry expertise across virtually every facility in the network. Additionally, last year's peak called for a change in our approach to hourly labor, and we have made very good progress heading into this year-end. We have more than doubled the ratio of our permanent hourly workforce from a year ago, and we are seeing promising results from new wage programs, resulting in a more effective recruiting process and improved employee retention, both of which will further improve service quality.

We have increased our PB fleet by 42% over prior year, which reduces our reliance on third-party transportation including use of the spot market. Lastly, we opened 3 new facilities and are expanding another to create more effective network footprint with enhanced coverage.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

4

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

NOVEMBER 03, 2021 / 12:00PM GMT, Q3 2021 Pitney Bowes Inc Earnings Call

Additionally, all of our new facilities now have some element of induction and/or sortation automation with plenty of opportunity for further automation still in front of us. The net of all these items is that we believe we are well-positioned to handle peak volumes and deliver appropriate service levels to our clients.

Turning to Presort. Presort had a terrific quarter. Revenue was $139 million, 9% better than prior year. This is the third consecutive quarter of positive revenue growth, illustrating the resilience of a business that has recovered nicely from the impact of COVID. Revenue growth was driven by several factors including higher revenue per piece, strong sales performance and growth in overall volumes. In addition, we are realizing clear financial benefits from network investments we made to capture greater work share discounts around 5-digit sortation.

While volumes and revenue grew, so did variable cost to support that growth. On a positive note, the strength of our management systems as well as the investments we have made in technology have enabled us to hold productivity levels flat to prior year. In the end, we are pleased that volumes and revenue growth more than offset the market-driven increases in our Presort costs.

We will continue to invest in automation and productivity in order to help us continue to grow EBIT dollars and expand profit margins. For the quarter, Presort EBITDA was $27 million, and EBITDA margin was 20%. EBIT was $21 million, and EBIT margin was 15%. All of these are significant improvements from prior year and aligned with our long-term targets.

Moving to the SendTech segment. SendTech revenue was $338 million, which was down 5% from prior year. As noted earlier, last year's third quarter included investment gains which benefited financing revenue and created a challenging year-over-year comparison. Last year's investment gains represent about 200 basis points of the year-over-year revenue decline for SendTech in the quarter. Inside SendTech, I'd like to highlight Equipment Sales, which is a leading indicator for future revenue streams. For the quarter, Equipment Sales saw 4% growth despite some supply chain challenges in obtaining product.

I'd also highlight our efforts to shift our business mix to the growth areas of the shipping and mailing markets. Our new SendTech products and offerings have been gaining traction in the marketplace led by the SendPro family, which is an all-in-one system that offers multi-carrier alternatives to find the best rates and delivery options, track parcels, gain postage discounts and manage spend. In North America, more than 25% of our revenue comes from these new products, and we have begun to launch these products in select international markets. We are also seeing strong demand for our SendPro mailstation product, which we launched in April 2020 and have shipped over 40,000 of these devices to date. Our SaaS-based Subscription revenue grew 21%, and paid subscribers for our SendPro online product were up 58% over prior year.

I am also pleased to report that we have been able to satisfy the strong demand for our products, while managing supplier and transportation disruptions that have become prevalent across global supply chains. SendTech EBITDA was $107 million, and EBITDA margin was 32%. EBIT was $99 million, and EBIT margin was 29%. Margins reflect the decrease in high-margin financing results as well as increased freight and shipping costs that have become a theme across the corporate sector. It's important to note that we have implemented pricing actions where it is justified by the new and increased value we are delivering for clients through our newer product portfolio.

Let me now turn to our outlook. As Marc discussed, we expect there will be some supply chain disruptions. We are not immune to the market-wide supply chain challenges, but we believe our outlook takes this into consideration, and we are reaffirming what we have previously communicated. We still expect annual revenue at constant currency to grow over prior year in the low to mid-single-digit range. We still expect adjusted EPS to be in the range of $0.35 to $0.42. And we continue to expect Global Ecommerce to be EBITDA positive for the year. We still expect free cash flow to be lower than prior year driven primarily by a rebound in CapEx investments largely as it relates to the expansion of our E-commerce network and productivity initiatives, along with a slower decline in our finance receivables. We also expect our tax rate in the fourth quarter to return to a normalized level.

In summary, I feel that Pitney Bowes is in very good shape both operationally and financially. We have taken important steps throughout the year to strengthen our network capabilities and footprint, our balance sheet and our human capital. These actions leave us well-positioned to achieve our financial objectives for the year and going forward. Thank you very much.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

5

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.