Pitney Bowes Inc. (PBI) Earnings Call Transcript & Summary

[Audio Gap] Our 2022 Leverage Finance Conference. We're thrilled to be back in person in Boca Raton, and we're also thrilled to have Pitney Bowes with us today. From the company, we have Jason Dies, President of Sending Technology Solutions; Gregg Zegras, who is President of Global Ecommerce and Ned Zachar who's Vice President of Investor Relations and has a long background in leveraged finance. So we're happy to have you back on this side of the table with us, Ned. So without further due, I know you all had a presentation. There's a lot going on in the company, and you wanted to take this opportunity to present it to our audience today.

That's exactly right, [ Ana ]. Thank you very much. It's very nice to see my buy-side leverage finance friends this week. It's been terrific. And we very much appreciate the invitation from Bank of America and you, [ Ana ] for including us. So thank you very much. Happy to have my friends, Gregg and Jason with me to explain their businesses. I'm going to take just a couple of minutes to make a couple of announcements and then I'm going to turn it over to Jason and he'll cover the firm and the Sending Technologies business, SendTech and then Gregg will cover Global Ecommerce. One thing I do want to cover, you will not be surprised to hear that our presentation today is going to focus on the firm, the business, the industry and will not be discussing or entertaining questions on our continued engagement with [ SGA ] Capital that have recently appeared in the business press, except to say that this management team, the Board are always welcome of thoughts and perspective about how -- what we should be doing as far as Pitney Bowes is concerned, we welcome that construction feedback from our partners -- from our capital providers, I beg your pardon. So with that, let me turn it over to Jason. Please take it away.

Yes. So thank you for having us. So look, for those of you who aren't familiar, Gregg and I each represent different businesses within Pitney Bowes. So I represent SendTech, which is our technology business. We are the heritage side of Pitney Bowes. And just like Pitney Bowes as a whole, we've undergone a pretty profound transformation over the past few years. At its simplest level, SendTech as a business is a technology company. We provide hardware, software, financial services, professional services that enable people to take the complexity out of shipping and mailing. So we do 2 things fundamentally. We allow clients to print Endicia or stamp, those little red stamps that you see and shipping labels. Shipping, -- Endicia is the red stamps on envelopes that are printed by a physical hardware device. They're printed by a meter. Those meters are IoT connected. They are very secure, highly regulated. They effectively print money. That's what a stamp is. So you can imagine an environment with high barriers to entry and high cost get into the environment. Shipping side, you're all familiar with. Shipping labels tend to be higher value, more data in them. And in addition to being a shipping label on a box, you can also put a shipping label on a flat or an envelope, which is important to my business, and I'll talk about that in a second. On the meter side, that's the space we've been in for 100 years. We invented that market in the 1920s. On the meter side, there was 10 billion pieces of metered mail last year. It's an addressable market opportunity of about $2 billion. declining at about 6%. On the shipping side, we play in a very targeted space in that shipping market. And you'll hear the same thing from Gregg when he talks about his business. In our side, we play in the office and enterprise shipping. So think of generally highly regulated markets. For us, that's about a $3.5 billion addressable market opportunity growing at 5%. So when you put those 2 together, it's about a $5 billion addressable market for SendTech growing. And importantly, on both sides of that equation, we're outperforming the market. So we're outperforming on the mailing side and on the shipping side, we've had about 20% growth in the past couple of years compared to the market growing at 5%. Our core mailing business is the business you're probably most familiar with. We have -- You want to go to the next slide, Gregg? Our core mailing business is the one you're probably most familiar with. We have 600,000 clients in that space, over $1 billion of equipment financed through Pitney Bowes financial services. So it is a steady, predictable, durable business that generates revenue and free cash flow in a very predictable way. What makes SendTech really exciting is that we have this cash engine on the mailing side but we've also moved into a growth opportunity on the shipping side. So we've been able to move on from the $1.3 billion or so revenue that we have on the mailing side at about 30% EBIT margins and we're building a comparable business on the shipping side in a way that provides end-to-end solutions for clients in our office and enterprise space that no one really taps at the moment. And I want to spend a couple of minutes on how we make money, if you go to the next slide, Gregg, so I think it's very important. The first thing to take away is 70% to 75% of our revenues are recurring. Again, it speaks to that predictable, durable business model. On the mailing side, we make money through enterprise equipment sales through financing and other financial services offerings, think about financing postage and those types of things. We have a professional services arm, which drives a big portion of our revenue. Think installation of those physical devices, services, maintenance, and then we get a supply as annuity stream, think inks. We actually had a fantastic Cyber Monday yesterday on the supply side. What's cool is our shipping business has a comparable business model, a comparable set of revenue streams. We have a subscription business on the software side, 145,000 paid subscriptions. That business drives some equipment also. I think printers and scales. There are obviously annuity streams on supplies for that. We can finance postage for people as well. And importantly, we have a professional services capability on the shipping side, which I will come back to, that's really important as you think about how we integrate our software into our clients' environments. So at the end of the day, all of that is underpinned by a financial services capability that, again, allows us to be a very durable set of revenue streams that are comparable on both sides of the equation from a margin perspective. I do want to spend a couple of minutes on the shipping side of the equation for us on the SendTech side because that's the part you're probably least familiar with. The shipping market is huge. The good news is we don't have to win in every space we play in. We have a very targeted niche area we're going after, and it stems from the assets that we bring to the table. So think about our core client base of 600,000 clients globally small and medium businesses, all the way up to Fortune 500. We're moving from those client relationships into a shipping space. Again, think office, enterprise, pharmacy, government, financial services, places that tend to be regulated. We have an end-to-end value proposition that we can put in place there that other companies don't. And I'll spend a second, we'll give you a couple of examples of those as we go forward. So the first one you see there is a great example in the middle, New York City global financial institution that actually serves kind of as a proxy for a lot of our enterprise clients. So I'm going to extrapolate a bit. But that's a business where we had an existing relationship on the mailing side. We moved into the shipping side. The reason we were able to do that is because we had a solution that meet their enterprise needs. So you think about an enterprise has to worry about security, analytics, identity management, single sign-on, all of those things that we can wrap around our software through our professional services arm. But at the base, we're taking complexity out of the shipping equation for them just like we did on the marketing -- on the mailing side and it's because we understand their workflows, and we really understand how to drive value for them and take complexity out on that side of the house. In the interest of time, I'm not going to spend time on the USDA and the Navy ones, but I will say on the Federal side, we have a federal security certification, again, stemming from the fact that we do this a lot on the mailing side but our shipping software has a federal security designation called FedRAMP. We are the only shipping software that has that designation, and it's allowed us to create a lot of traction and a lot of business in the federal space, again, important to us. I will spend a second on CVS, probably our most complex workflow on the CVS side. So if you think about CVS having 10,000 locations across the country, stores, warehouses. We do almost all of the shipping for CVS, about 75% pharmaceutical, about 25% store. It's a very complex set of workflows. So shipping from store, shipping from warehouse returns and then underneath that, you have some intricacies around pharmaceutical workflows, right? So the prescriptions need specific handling, track links, tracking specific sign-off from the pharmacy. It creates a very complex environment. We help CVS build a business rules engine and workflows around that. About half of their spend then goes to USPS, half goes to UPS and we are in the front of that for them, taking that complexity out of their business, allowing them to track it more effectively and securely. The other one I'll reference on here is Grady Healthcare. Those of you from Atlanta will be familiar with them. They run some hospitals in the Atlantic space. What Grady brings to the table is there are an institution that uses Epic, the Epic hospital management software. Grady actually came to us because our shipping software is integrated into that Epic software stack. And so as Grady was looking for an opportunity to drive down their shipping costs and get control over that, tracking and analytics. The fact that we were integrated with Epic made it an easy choice for them to come to us and just demonstrates the opportunity we have going forward with third parties to integrate our shipping software into their tech stacks and have an additional route to market for us. Go forward one more. So look, I know we want to get to questions. I want to get to Gregg, so I'm not going to spend a bunch more time. But I do want to leave you with the fact that we are a predictable and durable cash generation engine on the SendTech mailing side. We've got a growth opportunity that says we can take advantage of on the shipping side as well for our business. At the end of the day, we aspire and will become a growth business overall when you put those 2 addressable markets together. We believe that we have a lot of opportunity combined both with the new technology that we've put in the mailing space, but also with the new offerings we're putting in the shipping space. And at the end of the day, we think our opportunities are still in front of us as we grow our business on the SendTech side.

Thank you, Jason. Good to be with you this afternoon. Again, thank you for the invitation from Bank of America. Gregg Zegras. I run a Global Ecommerce business. I've been in this leadership position since July of 2020. If you're familiar with that time frame. I landed in this role at the sort of moment of COVID really taken over this country. I want to spend a little bit of time this afternoon talking about what we've been doing inside of Global Ecommerce. We are effectively a 7-year-old start-up inside of a 100-year-old company. Jason's business having been the core. What we are doing right now is providing services that are Ecommerce logistics services for both cross-border and domestic delivery. And so we go to market offering these services primarily for the mid-market of retail, addressing their opportunities to take kind of the friction out of their both domestic and cross-border opportunities. If you look at this chart, just to kind of describe what we do for a client, the gray areas are where either our client or partners participate in the supply chain. So on the manufacturing side, we don't participate there. Obviously, our clients are responsible for that. There's lots of stories about what's been going on in the supply chain. But our clients as they're taking orders through their digital or Ecommerce, those are firing in their order work -- order management system in their warehouses, and they are moving those packages into our network. At the other end of this, we are working with other parties to deliver, so what we call final mile. In the domestic business, that's through the United States Postal Service and cross-border, we work with a range of providers to deliver packages across the globe. In the middle is what we do. And we have both physical and digital solutions in this business. We offer fulfillment services. A lot of what we do is middle mile transportation. So we are operating our own private fleet. We are working with other contractors to move parcels in and out of our network and ultimately getting prepared to ship in the case of the domestic side to the USPS. This is all underpinned by a range of digital and technology that both Jason and I actually share around compliance, shipping label technology, our ability to provide code, accurate coding, tracking of the package, all of the things that you would expect from a transaction as a consumer when you're buying from a merchant, right? Where is my package? How long will it take to get there? Those are services that our digital capabilities provide to our merchants. If you look at where we are as a business, as I said, we are relatively young but growing. We're participating in a market that, as a result of COVID, had a step change. It's an overall $40 billion market. We are specifically focused on about $3.5 billion of that, which is the small parcel Ecommerce space, both cross-border and domestic, which is growing at close to 20%. Our network today is 16 facilities in the U.S. We use those facilities to process our customers' packages. We provide our cross-border services to 200-plus countries and we work with around 450 customers and growing. What we are talking about externally and something that I did recently at another event in Scottsdale, Arizona, is talking about what has changed about Global Ecommerce in the last year, and therefore, why are we optimistic about our future potential and growth. Again, I described we have 2 primary platforms, a Domestic Parcel Service and a Cross-border Service. Again, powered by technology that Pitney Bowes has owned and operated for a very long time, including, by the way, important capabilities around data science that we leverage. Both of these platforms, since we have really exited the pandemic are now operating at scale, importantly, with both predictable cost and service. During the COVID epidemic, there was more volume moving through the U.S. than any single provider had the capacity to provide that included Pitney Bowes, which therefore made cost and service less predictable. We are through that part of our journey and have much more predictability there, which is proving to be good for our customers. It's allowing us to sign more business. It's keeping us stickier. Also with the domestic network largely built out, we are also moving to a different phase of our investment. We have been net investing in this business for the last 3 or 4 years, building out our facilities, building out our automation capabilities, investing in things like robotics in order to make that service, as I said, and the cost that comes with it more predictable. Before the pandemic, we had a notion of building out to 24 to 26 facilities in order to address the market. We now have a view of that is now 16 to 18. I have 16 today. So the major capital investments in our business are in our rearview, which is a reason to be optimistic about the future. What this better cost of service is also doing for our customers is providing a consistent service that is showing up in improved NPS scores as an example, again, a leading indicator of what the future holds. We've improved our NPS by 45 points just in the last year. That is also showing up in KPIs that we measure around client churn. So much less churn, we're in low single digits churn, which was very different from where we were in 2020 and in 2021. We're also clearly competing in a very competitive market, very, very large providers in this space. And so we think very hard about what differentiates us. Again, going after the mid-market of retail, we tend to see those retailers as being underserved by the larger providers. We go to them with a value proposition around domestic and cross-border. We try to do it with an easier model, a more transparent pricing model. And that resonates, particularly if you are a mid-market retailer who's only controlling maybe $40 million or $50 million of shipping spend where they can get a bit of a better bang for their dollar. So all of that being said, we also operate a cross-border business, which today is going through some changes in the market as a result of the U.S. dollar being very, very strong. We've seen this before. We've been in the cross-border space for about a decade. And so we have seen this impact of FX on our business before but we are not sitting still kind of wait for that to mitigate. We've gone proactively to innovate and invest in our cross-border business. Recently with our announcement of what we're doing in Canada. We traditionally service Canada as a U.S. to Canada route. We are now doing Canada to the U.S. We announced a good strategic partnership with eBay out of Canada for that service. And we are also adapting that capability to do intra-Canada, so effectively domestic solution in Canada. Again, that's just an example of being proactive to innovate and not wait for currency in the U.S. to mitigate. The other thing I would call out, too, is our investment in our management team and particularly in our operation. Again, we are relatively new at this with respect to this business. Our management team now comes from many different places that you would recognize and names you recognize Amazon, UPS, FedEx. We now have established that team. They are operating this network at scale, and that also bodes well for the future. I mentioned service. Service is critical to this. So if you can kind of look at, this is where we have been over the last 2 years, really kind of coming through the pandemic. And you can see service levels going back to the middle of 2021, really all the way up until the first quarter of 2022 in that low 70, mid-70s to mid-80s range. Acceptable during a moment when there was more volume than there was capacity, but really not acceptable as a service standard. As we exited the first quarter of this year, coming out of last year's peak, we have seen consistent service levels in the low to mid-90%. This bodes really well for the future of this business. We actually believe we have more opportunity here. But these are service levels that allow us and allow our new business team to go out and win new business and also to keep and retain the customers that we've got. This has also helped us improve the economics of this business. As you can see on the right, first half of 2022 versus '21, we've seen a significant improvement in our gross margins. I mentioned our NPS scores are heading in the right direction. I mentioned that low revenue churn on an annualized basis. And we continue to win new business in the market, which is important. I've called out -- We called out publicly a new relationship with SHEIN, which you may or may not be familiar with, but it's a large provider of low-cost fashion, very popular in the U.S. We are one of their key partners, they've launched this peak, and they are providing a material difference to our volumes as we're coming through this peak. All of this, again, is a backdrop for why we're confident in our go-forward plan. So -- what we've talked about from this business now as we sit here today, we expect our financial performance on top of everything that I just described to be materially better going forward. We see volumes in our domestic network exiting 2022 at between $195 million and $200 million, actually, as we sit here today, off of a very strong Black Friday and Cyber Monday. I expect us to be at the upper end of that range based on what we're currently seeing in our network today. And we expect our gross margin improvement to be in the range of 400 basis points in 2023. We have in our plan the mitigation or in our plan, the continued U.S. dollar strength being something that we expect. So that is factored into our model which allows us to sit here confidently that in the long term 6% to 8% EBIT margins in this business by 2026. And importantly, CapEx levels to be approximately 20% of segment EBITDA in that range as well. All which bodes very well for the future of Ecommerce.

Perfect. I'll take over for a second. Firstly, I've left hard copies of the slides in the back and the presentation is online on our Investor Relations website for those that would prefer that. As far as Presort is concerned, $575 million business, generating $100 million plus in EBITDA. And I think the easiest way to understand the business model is if you think about putting a stamp on an envelope of $0.60, it's $0.50 for using Jason's metering equipment. And if you give it to us as a credit card company, a health insurance company, anybody who's sending tons of mail, including mail service providers, you give it to us, we take that co-mingled mail, sort it down to the 5-digit ZIP code and then give it to the post office and trays for their delivery in the last mile. In 2021, we processed 17 billion pieces of mail, which is a lot. If you think about how many pieces that might be across that 35 node sortation network. The customer base, as I referenced, banks, insurance companies, utilities, business process outsourcing, colleges and universities, Anybody who is sending a ton of mail. And what I think is most interesting about the Presort business in spite of the fact that there are significant long-term secular headwinds as far as the business is concerned, i.e., first class mail through market share gains, they're making a little bit of acquisitions. They're taking business from people that used to in-source the business themselves a little bit of help as far as the workshare discounts. They're finding ways to grow the business at somewhere between mid -- sorry, low to mid-single-digit kind of revenues, and we saw a very nice bounce back in their margins in the third quarter. So that's a little bit of recap as far as the Presort business is concerned. In terms of our numbers, we reported results on the first of November for the third quarter. Revenues were minus 4% on a constant currency basis. EBITDA -- sorry, EBIT was comparable to the second quarter numbers at $38 million and -- versus $50 million a year ago. Importantly, SendTech and Presort both grew top line and a lot of the feedback I got from my post quarterly calls, people were impressed with the durability of both SendTech as well as Presort. I think Gregg pretty well covered the challenges easing with the stronger U.S. dollar international. So I'm not going to rehash that, except to say that his improved service levels should help really push volumes and better financial performance as we look into the fourth quarter and to 2023. We did reaffirm our guidance on last quarter's call. We're looking for revenues for the year, low single-digit decline to low single-digit gain. And on the EBIT side, we're looking for high single-digit decline to a mid-single-digit increase. In terms of the capital structure, we paid down $1.4 billion debt over the last several years. Total debt now was $2.2 billion and then leverage net of cash is running at about 4.5x. In terms of tenor, the financing we did in March of 2021 was an important event. We pushed out debt maturities, paid back a lot of near-term maturities and our capital structure is in a much better place. At the risk of preempting a question that might come out, in terms of the 2024 maturity, obviously, capital market solution would be the preferred approach. But if not, a combination of cash, free cash revolver and secured debt capacity would be more than enough to handle that $238 million maturity. So in summary, I think there are compelling investment opportunities across the capital structure, both debt as well as equity. And as we outlined, SendTech and Presort have leading market positions and are finding new ways to grow despite some natural headwinds and our much more durable businesses that I think most people would have thought looking back a couple of years ago. Gregg walked us through his vision for the financial path of GCE which should build on the solid free cash flow generation that we have now. And as we look into 2023, looking at it as EBITDA being somewhat higher than CapEx for 2023. So with that, Ana, we'd love to take questions if you have it.

Okay. Great. Thanks. We only have a few minutes, but that was very thorough, very helpful presentation. So just to clarify the point on the capital structure since this is a debt conference. So the '23 and '24 maturities, you believe that the preferred approach would be to refinance them, but if the markets were not conducive, you've got the cash availability and cash flow availability to address those 2 maturities?

I think that's right. I think cash, cash flow, free cash flow, revolver capacity as well as secured capacity. The combination of those things would be more than enough to...

With the secured capacity as well.

Right. We would be more than enough to handle that $238 million maturity. I will say the preferred solution would be in the capital markets. But as everybody in this room knows, it's definitely messy out there.

Okay. Got it. What -- what are you feeling now in your businesses with regard to macro headwinds?

Yes. So I think 2 sides for me in the Cross-Border space. I think the headwind there, as I said, we've seen this fluctuation before actually twice in the last 10 years. We've had a very strong U.S. currency. And so I think that continues. I think we expect that to continue well into next year. But eventually that will cycle through, and we're just going to stay on offense and be proactive and continue to innovate that service. I think the other one, obviously, is -- are we -- aren't we in a recession? How hard will that recession be? And therefore, what impact will that have on the consumer as it relates to Ecommerce, from our business. Whether consumer is proven to be pretty resilient. I don't think anyone even a few weeks ago would have expected the kind of sales we saw on Black Friday and Cyber Monday. Set records yesterday as far as the data that I saw right before I got to the event this morning. So that's something we'll keep an eye on. I think for our business, however, we're not -- we're participating in a very large market that grew exponentially during COVID. So even if there is some pullback in overall volume availability for Global Ecommerce. There's plenty of market for us to get given our position in the market.

And I would say on the SendTech and Presort side, we've seen -- historically, we're a very durable and predictable generator of cash. So we have a high concentration of a lease structure. So clients tend to be on long-term cycles with us, on average, an 8.5-year relationship. So it's been pretty stable over time.

Okay. And then I would echo the comments, Ned, that you made about some of the reaction to the third quarter results on the SendTech and Presort side as being, I would say, remarkably stable given everything that has been happening. What -- in the post pandemic world where we've got less people in office, what does that do to demand?

Yes. It actually creates an opportunity for us. So if you think about taking complexity out of shipping and mailing, when you have people who are now in the headquarters of remote office, working from home, it just makes the challenge of tracking, analyzing, making sure that you're capturing the right spend, all the more difficult because it's a more complex environment, which is where we can really step in and help by helping simplify and giving the analytics.

Okay. And then I'll use up our last 30 seconds. But -- so obviously, labor is a big topic. Do you have the labor that you need?

Yes. We've spent a lot of time on this in the last couple of years. I've actually -- I actually see this frankly, being mitigated at this point. I think the labor that we need, plus we have been on offense with automation and robotics to ensure that we are doing certain jobs in our facilities that are less desirable through technology and then allowing ourselves to focus on employees, developing upskilling them for other roles. So I feel pretty good about where we are.

Okay. Okay. That is -- I think we're out of time. But thank you so much. It's super informative, and I'm really happy that you're able to join us.

Thank you very much.

Thanks for having us.