Pitney Bowes Inc. (PBI) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Pitney Bowes First Quarter 2021 Earnings 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 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.
Adam David: 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 Lautenbach: 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 in secular decline to a business well-positioned to capture new value in the shipping market is one of the most impressive transformation I’ve ever seen. The businesses 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 fast chassis and this business is very well-positioned going forward. Our Presort business 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 since second quarter of last year. We expect unit labor cost to continue to improve and transportation and automation efficiencies are primarily still in front of us.
Ana Maria Chadwick: 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 or 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.
Operator: Thank you. Your first question comes from the line of Ananda Baruah from Loop Capital. Please go ahead.
Ananda Baruah: Hi, guys, good morning. Thanks for taking the question and congrats on the solid start to the year. You just answered what was going to be my first question, which is how you feel about potential for e-commerce profitability as we move through the year. But let me ask it this way too. So you’re mentioning EBITDA positive for the full year. Do you feel like you have any opportunity for EBIT positive, if not for the full year, by the end of the year? And then I have a couple of quick follow-ups. Thanks.
Marc Lautenbach: Sure. Thanks, Ananda. Listen, we’re pleased with the progress that the Global Ecommerce team is making to get the profitability and being EBITDA profitable for the year is an important milestone, but it’s just that, that’s a milestone, we have more work to do. My expectation is we’re on a trajectory as we exit this year to be EBIT profitable next year. So I think that’s probably one way of answering your question. So we like the trajectory. I would also point out we had 400 – nearly 400 basis points of EBIT improvement year-to-year. If we do that for the next couple of years, we’re on the long-term model in 2024 as we have outlined. So good progress, more to do, and as Ana said, the benefits around transportation and automation are still in front of us, and with that, we’ll carry better labor.
Ananda Baruah: And it sounds– thanks, Marc. That’s great. Listen, I mean, you did a great job of laying out sort of the upcoming initiatives in e-commerce with transportation and automation, labor, et cetera. In any way, and it sounds like you’re talking about a 24-month time frame for the ones that you’re speaking to today. Any way to frame for us when you think you’ll reach sort of when in that 24 months you’ll hit kind of sort of I guess the bulk of the normalized impact just so we can sort of frame for ourselves as we model out, quite frankly 2021 and 2022, because that’s we have to do. Like, when we might expect those initiatives to layer in a really critical mass kind of way. And I have one last quick one. Thanks.
Marc Lautenbach: Sure. It’s a little bit hard to predict with precision just because you take transportation in particular, there is a lot of unknowns, not the least of which is how quickly you can get trucks and truck drivers, which right now are remarkably scarce. So as I said, we think even a positive this year on a trajectory to be EBIT positive next year is kind of how we’re thinking about it.
Ananda Baruah: Okay, that’s helpful. And then the last one from me is anyway you can give us a sense of what the e-commerce gross margin profile look like for the quarter, just reported the March quarter and then relative to the December quarter and then relative to year-over-year March quarter over the last year as well. Just so we can get a sense of what progression is there too.
Marc Lautenbach: Yes. So there is two different things that affect gross margins in Global Ecommerce. One is the various deficiency of the businesses and the second is a mix. So as you look at the gross margins for the Cross Border Business as well as the expedited business in the Digital Business, those margins are all very healthy delivery margins improved, but they still have a way to go. So I would say, gross margins were a touchdown in the business, but it was due to mix more than anything else.
Ananda Baruah: Yes, on the Q-over-Q basis of touchdown?
Marc Lautenbach: Year-over-year.
Ananda Baruah: Year-over-year. Got it, got it. Okay. Okay, great. Thank you, guys.
Operator: Your next question comes from the line of Shannon Cross from Cross Research. Please go ahead.
Shannon Cross: Thank you very much. I have a few questions about e-commerce. FedEx had mentioned China outbound is back to normal. So just overall, what are you seeing in terms of Cross Border and maybe if you can talk about the regional performance?
Marc Lautenbach: Cross Border Business was quite strong across almost all end including China.
Shannon Cross: Okay. I mean, is it – I guess, my question is that do you think you’re back to normal or is there still some improvement to go related to some of it?
Marc Lautenbach: Yes. I think that has a very different personality depending on where in the world you are. So, obviously, if you’re in India or Brazil right now, those economies or those silos are suffering a lot. So it’s very different depending on where you are. Most of our lanes are into Europe as well as China. So for the most part, we’re for the moment not being dramatically affected in the Cross Border Business and candidly, the currency rates helped us as well.
Shannon Cross: And what about pricing and you’ve taken prices up. Do you think there is room to take them up again given the improving demand? Or are you feeling pretty good about where your prices are?
Marc Lautenbach: So as I said in my comments, based pricing is the highest we’ve had in the last 12 months. The peak pricing – and this is an important dynamic for Global Ecommerce. So the peak pricing we reinstated – we did reinstate it until the end of January. So if you look at, as Ana said in her comments, the texture of the quarter we got off to a more difficult start in Global Ecommerce but it was expected because you had all of the increased costs, but you didn’t have peak pricing. So what I would say, so far, is the base pricing as well as the peak pricing is held in terms of the possibility of increase in prices further, obviously, we’ll pay attention to what the other industry players do to a degree of chance can depend on what happen to transportation costs. So labor costs are, I think, going to stay high, but we’ve got ways with automation to deal with that and candle is the model matures, it will become more efficient. Transportation is the one that if – if transportation costs don’t moderate then I would expect that there’ll be pressure on prices upward.
Shannon Cross: Okay, great. And then just one last question with regard to equipment. Like how much was related to the large government deal in terms of the growth and then how should we think about the pipeline that you’re seeing for equipment sales as we look through the year? Thank you.
Marc Lautenbach: Yes. So, Adam or Ana will give you the specific. I think $5 million a quarter was from the – from the government deal. So it’s an important contributor, but again the low end of that product line as well as the mid range of our product lines has done well and continues to do well. In terms of backlog, we like how the backlog is situated second quarter for SendTech is pretty easy comparison. I think you’re going to see pretty strong relative performance into the second quarter and to the degree end of the third quarter and that will moderate as the year goes on. Adam, do you have a specific number for the government deal?
Adam David: Yes, that’s correct, Marc. So, Shannon, without the government deal, we would have still grown equipment sales in the mid to high single-digit range.
Shannon Cross: Okay, great. Thank you very much.
Marc Lautenbach: Thank you.
Operator: Your next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.
Kartik Mehta: Good morning, Marc and Ana. Marc, you’ve talked, obviously, with the Global Ecommerce business and transportation costs being a headwind, but it seems like transportation costs, labor costs and automation all three help you. Out of the three, what’s the most important? Is transportation just a near-term issue you have but longer term, one of the other two have to be– have to moderate. And so I guess in a long-term standpoint, what’s the most important out of the three?
Marc Lautenbach: Transportation is the most important of the three. So if you look at the cost complexion of that business, 50% postal costs, there is some percent there, 25% or so is transportation cost. There is, we believe a lot of opportunity there, and if you look at spot rates on a year-to-year basis in general that have gone up 40% plus and candidly they went up from January to March. So if it continues to be pressured up and then labor cost is around 12% of the total. So as you look at transportation and labor, those are the preponderance of the opportunity for improvement. And as Ana said, our place is pretty simple here, and it gives me high confidence that it’s executable. I mean, we are simply trying to insource more lanes. So we insourced seven lanes in the first quarter, we’re going to insource another 20 lanes in the second quarter. So that not only gives you better economics and makes you less vulnerable to the spot rate, but it also provide better service, because if you’re in the spot rate and your volume, that doesn’t get necessarily the same priority as others. So this is a win-win and it’s not spending items. We just – we need to get the trucks and the truck drivers. So we’ve got a lot of – a lot of pressure on the team to add the resource.
Kartik Mehta: And then on the Presort Business, obviously, a good margin quarter. And you talked about, it seems like the revenue momentum should stay for the remainder of the year. Is the margin – would you anticipate the margin momentum to also stay the rest of the year?
Marc Lautenbach: I think the margins are probably going to stay pretty close to where they are. There is – on the one hand, the work that we did a couple of years ago around transforming that business saved us a lot of labor hours. I think we saved 85,000 or 90,000 labor hours in the quarter on a year-to-year basis. So that was good. On the other side of it, like will be e-commerce, they’re susceptible to transportation price increases and labor obviously is becoming more scarce. So we’re looking at some accelerated opportunities to apply automation to our Presort Business that will help, but my expectation is margins will stay kind of in the zip code that they are this year with the opportunity to make substantial improvement going forward. And we’re looking at automation opportunities that can make a real difference in that business.
Kartik Mehta: Well, thank you very much. Appreciate it.
Marc Lautenbach: Thank you.
Operator: Your next question comes from the line of Allen Klee from Maxim Group. Please go ahead.
Allen Klee: Yes, hi. For the debt that you’ve paid down and refinanced, where does that put you in terms of how much debt and notes are now due in 2021 and in 2022?
Marc Lautenbach: I’ll let Ana, Allen, take a swing at that one, we’re in pretty good shape for 2021 and 2022.
Ana Maria Chadwick: Yes, absolutely. So the maturities that are coming due now for the remainder of 2021, we really don’t have any, and the maturity profile for 2022 is a small amount is around $72 million. So really we truly accomplished what we set out to do when we issued our debt refinancing and not only did we pushed out some of our maturities, but we also improve some of the terms and we believe we’re much better positioned now for having more flexibility as we execute our strategy.
Allen Klee: Great. And you had announced the partnership with UPS a couple of quarters ago to have them as one of your carriers. Could you just give an update on how that’s going?
Marc Lautenbach: Yes, it’s early. So we continue to be very optimistic about the possibilities. They are a great company and important provider industries, so early days. We’ll have more to say about that as we go forward.
Allen Klee: Thank you. Last question, I thought SendTech was great. I mean the quarter, how do you think about now kind of where the top line, the trend rate longer-term for the top line and the bottom line given that you have more shipping. Maybe you could also just remind us. Maybe I missed it. How much of your revenues are coming from shipping and if you could break out maybe the three components of – well, anyway, no, forget that last one. It’s to do with another segment, but just what I just said. Thank you.
Marc Lautenbach: Okay. We’ll come back so you can finish up the last question. good about SendTech, when I’ve started in 2012, I thought there was great opportunities to extend the life of that business. If you ask me today, that’s no longer my paradigm. My paradigm is that it’s going to be an important business in Pitney Bowes future indefinitely. So I think the top line will continue to moderate. No, it was minus three in the first quarter, a little bit better than that of actuals. Second quarter is going to be an easy compare. So that’s going to look pretty positive, but we had talked about go to mid-single digit decline in that business. I’m feeling right now it’s closer to the well part in the mid and the shipping is an important opportunity. So just to dimensionalize it for you, the shipping revenue for SendTech was $30 million in the quarter against the total. It grew depending on how you want to look at it. There were some anomalies and noise in the numbers, but somewhere between 10% and 15%, and I would say without the noise, closer to 14% or 15%. So as you look at that, that number getting bigger and beginning to offset the top line and importantly the bottom line decline in the Mail business, that’s improving dynamic and one that we’re excited about. And as Ana said, I think it’s a similar margin profile. So if you look at that $30 million, I mean there’s probably $15 million that’s a pure software margins and there’s other ancillary businesses, whether it be supplies or financing or rebates from suppliers that come at very high margins. So – and the addressable opportunity for shipping in the office space is twice the opportunity – twice addressable opportunity in Mail. So it’s – those dynamics all bode well for the mid to long-term. And the other thing that I would say is, the whole shipping dynamic doesn’t really account for the fact that our meter attrition rate has moderated a bit and there’s lots of different reasons for that. We’ve clearly got some great products now and we’re really have good cycle. But also as you drive more value to those relationships, the devices are stickier. They’re stickier in terms of people keeping them and people keeping them longer, so really good dynamics in that business going forward and lots of opportunity.
Allen Klee: Thank you. Could you give us an update on Wheeler Financial in terms of how much money was put to work and how you’re thinking about that for the year?
Marc Lautenbach: Yes. And I’m going to defer to Adam on the specific. I mean it was put to work. But I mean in general, I would say our vision for that business continues to be very positive. The nature of the opportunities that we’re pursuing has changed slightly. So they went from a business that was focused on leasing mission critical assets to loans around mission critical assets. More and more of the opportunity that we’ve seen is now around working capital in the shipping market. So if you think about the whole genesis of the Financial Services Business for Pitney Bowes, it was around providing a service to mailers that they could either prepay postage or conversely buy postage on credit. That same paradigm applies to shipping. So we’ve kind of evolved our way in where I think the sweet spot is. So it’s a place that’s highly accretive to our shipping business. It’s a natural extension, obviously, at the space that we understand very well. So as our thinking has evolved on the target markets, and that’s not to say we don’t continue to put money to work in those other markets around equipment leases and loans, but more and more it’s around shipping working capital, which just feels right. So Adam or Ana, do you have specific number that we put to work in the first quarter on Wheeler?
Adam David: Yes, we funded about $4 million, Allen, in the first quarter relative to Wheeler.
Allen Klee: Great. I apologize for so many questions. The last one I had is within Global Ecommerce, can you say what percent of the revenue was from your three big buckets of Domestic, Cross Border and Digital?
Marc Lautenbach: Adam, is that a number we made public?
Adam David: Yes, we don’t publicly make that number visible. I think Allen, Ana talked about in her comments prepared remarks growth in all three areas and gave some growth rates there. So – but we don’t publicly disclose the exact amounts for each one of those.
Allen Klee: Okay, great. Thanks.
Marc Lautenbach: I mean just go back market size, I mean the delivery business is clearly the biggest. And that’s what kind of affects the – you had a question earlier about gross margins. So as the opportunity is the biggest there, the flood of demand, and that’s how our business reflects that.
Allen Klee: Thank you so much.
Operator: Your next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Please go ahead.
Anthony Lebiedzinski: Yes, good morning, and thank you for taking the questions. So just wondering if you guys could provide a little more details as far as the expected timelines for some of the automation initiatives that you talked about.
Marc Lautenbach: Sure, we bought – well, I mean, so let me talk about both the Presort as well as Global Ecommerce. So Global Ecommerce, we put one sorter to work in the first quarter in a large site. Second is I believe installed in the second quarter. We will continue to rollout the sorter technology throughout this year. We’re looking at accelerating some of those investments if we can get the equipment. In Presort, well, I don’t think it requires big invention or innovation. The kind of equipment that we’re looking at doesn’t exist yet. So we’re working with some automation companies to invent or bend a little bit metal to help with some of the work there. But again, it’s a tremendous opportunity. So if you look at the capital budget this year, we’ll spend more money on capital this year and that’s principally because of automation, so and we’re looking to accelerate that.
Anthony Lebiedzinski: Right. So Marc, you just said that if you can get the equipment. So what are, I mean, I know there is a lot of constraints in the supply chains with the ocean shipping containers and so on, so coming from Asia, so is that – what – why you said that if you can get the equipment and as they like what are your – how do you feel about that? Will be your confidence level about being able to get that equipment?
Marc Lautenbach: So listen, it’s – we kind of step back. It’s not so much around the back up in the court. It’s just more around the availability of equipment. So if you look at the overall demand for Global Ecommerce logistics and shipping, it’s increased dramatically over the last 12 months since COVID. So everyone is trying to get this automation. So I’m highly confident we’ll get it. I’m not as confident that we will get it as soon as I want.
Anthony Lebiedzinski: Okay, got it. Okay, that’s fair. Thank you. And then I don’t know if you guys talked about this, but just overall COVID-related incremental costs, can you give a better sense as to how much of that impact in the quarter?
Marc Lautenbach: I don’t have a specific number off the top of my head. I mean it was – I think we’ve done a really good job adapting to this new unfortunate world that we find ourselves in. So it wasn’t a material impact from my perspective in terms of expense and obviously, the place that we’re paying close attention right now is around AR and delinquencies. And again, that’s been relatively stable but that’s the place where there’s I’d say, our strongest focus. Adam or Ana, if you want to add anything.
Ana Maria Chadwick: No, I think you’ve covered it.
Anthony Lebiedzinski: Got it, okay. And then last question for me. I think you mentioned before that you expect a higher tax rate for this year. Can you give us a sense as to how we should think about the tax rate for 2021?
Marc Lautenbach: Ana or Adam?
Adam David: Yes. I would say 20% to 25%, that type of range, Anthony.
Anthony Lebiedzinski: All right. Well, thank you and best of luck.
Marc Lautenbach: Thank you.
Operator: And at this time, there are no further questions. I’d now like to turn the call back to Mr. Lautenbach for any closing remarks.
Marc Lautenbach: Thanks, operator, and thanks for everyone’s attention this morning. Let’s – we got off to a really solid start. We hit the ball in every business. Clearly, with that being said, we’ve got good opportunities to continue to improve our margins in Global Ecommerce and highly confident we’ll do that. The team has laid out a pretty good roadmap, a very good roadmap for what needs to be done. The timing is a little bit varied and there’s some things out of our control, but as you look at the list of things in Global Ecommerce that need to get done, they’re highly doable. And as I said in my remarks, we’ve made some really important additions to the team in terms of people that have experience building these types of networks. I mean building a business to consumer logistics network with postal injections a little bit of a rarity, but it’s a highly effective model. So I feel very good about where that business is headed. Presort is back on its feet, hit the ball well in the first quarter and I think is very well-positioned for the year. And SendTech is just – I am as excited about the possibilities in SendTech as I am about the possibilities in Global Ecommerce. So all in all, good start, more to do, and we’ll be back with you soon. Thanks for your time this morning.
Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
