Pitney Bowes - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, and welcome to the Pitney Bowes First Quarter twenty twenty Earnings Conference Call. 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. Mark Lautenbach, President and Chief Executive Officer Mr.

Stan Sattulla, Executive Vice President, Chief Financial Officer and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with a safe harbor overview.

Speaker 1

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 2019 Form 10 ks 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 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 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, Mark Lautenbach, will start with a few opening remarks. Mark?

Speaker 2

Good morning. I hope everyone is staying safe and in good health. Clearly, we are all operating in unprecedented times and unchartered territory. The COVID nineteen pandemic has increased uncertainty around the world, impacting the economy, business, supply chain, and customer demand. It's important to note that businesses engaged in mailing and shipping, which obviously includes Pitney Bowes, have been designated an essential service by the Department of Homeland Security.

The sending of mail and parcels is critical to our economy. In the first quarter, through the disruptions and distractions, Pitney Bowes processed about 34,000,000 domestic parcels in our e commerce business and 4,600,000,000 pieces of mail in presort. Some of this came at a higher cost, but we understand how vital a service this is for our clients. This morning, I'd like to discuss our first priority, which is around the health, well-being, and safety of our workforce, clients, partners, and suppliers. Then I will take you through where we stand today as a company financially and operationally.

Stan will then take you through how we are addressing the impacts of COVID nineteen throughout the business, our first quarter results, and where we are through the April. For our part, we continue to take necessary and required steps to ensure our work environment and employees are safe and healthy. We have business continuity plans in place that are designed to address various threats and vulnerabilities, including a response to the pandemic, high absenteeism, and an emergency response methodology. We have specific protocols in place if an employee becomes infected with or exposed to the virus, and we have adjusted our sick leave policies so employees can get paid but do not have to use their sick time if they're asked to self quarantine. Our senior leaders are communicating with their teams on a daily basis and are openly available to address concerns.

Importantly, each of our businesses have been up and running through this situation. Employees that can work remotely are doing so. Within our facilities, we are providing protective masks and conducting temperature checks in higher risk locations. We're also enforcing safe social distancing and sanitizing equipment in the facilities multiple times a day. Let me now turn to the state of our business and where we stand today.

As we have consistently communicated, Pitney Bowes continues to be committed to maintaining a strong balance sheet. Throughout 2019 and earlier this year, we took a series of actions to strengthen our balance sheet by reducing debt and improving our liquidity. In 02/2019, we executed the sale of our software solutions business, reduced our debt by over $525,000,000 and renewed our revolving credit facility. Today, in 2020, we have reduced debt by an additional 110,000,000 and refinanced our near term debt maturities, which materially reduced our debt towers through 2024. Collectively, these actions, combined with the underlying strength in our SendTech cash flows, have made our debt structure more manageable in the upcoming years, and we are performing comfortably within our covenants.

While we certainly do not predict this crisis, we took these actions precisely to derisk and deleverage the business and to ensure our balance sheet held up in the case there was an economic downturn. While we are maintaining a strong liquidity position, we're also taking other actions within our capital structure to preserve cash during this time. We are reprioritizing our capital needs around essential and necessary investments. We'll continue to invest in our shipping capabilities, platforms, and ecommerce facilities as well as necessary investments in new product technology that will continue to support our long term objectives. However, by reprioritizing, we can defer a portion of our discretionary capital spend in 2020.

Given the economic environment, we are taking a prudent and sound approach to building out our financial services business. In addition, we will limit M and A and ensure our variable spend is in line with demand. Assumed in our cash flow scenario plan for the year is maintaining the annual dividend, and we do not plan to repurchase shares in 2020. Let me spend a moment here to frame our operational business model. While our segments play in different markets, there are three commonalities among them.

First, each provides an essential service to their clients and is a critical part of their operations, be it helping to either deliver important documents, invoices, statements, and or parcels. Second, we have made significant investments in each segment to improve the products and services we offer. And finally, we offer different financing options and services across all of our business to help our clients manage their cash flows, which is vital, especially during times like these. Within our legacy business or SendTech, we have invested in our SendPro family of products, which operate on a modern, open platform and uses technology that positions us well to serve our clients for their mail and shipping needs. We continue to see our new offerings resonate with clients.

Our SendPro online and SendPro enterprise products enable clients to continue to send bills, statements, and parcels even if they need to work remotely. In addition, we have just introduced to the market our SendPro mail station, a new solution for both small office clients and large enterprises with distributed or home based workforces. It is the first and only meter device in the industry to utilize postage in the cloud capabilities and is a part of an integrated mailing and shipping solution that extends the SendPro family of products. It is important to note that approximately two thirds of SendTech's revenue is recurring in nature and high margin. SendTech makes up the majority of the company's cash flow, and the nature of its recurring revenue is an important contributor.

Our Presort business is an example of how our enterprise clients come to rely on us to process their first class and marketing mail letters and flash as well as their bound printed matter both timely and efficiently. We've grown this business over the last few years against a market that is in decline, which is testimony to our strong value proposition and market position. The bulk of our Presort business is in First Class Mail, which comprises bills, statements and similar business communications. Although we are seeing modest declines there, the more dramatic declines have been in marketing mail. In ecommerce, we continue to bring value to our retail and marketplace clients to satisfy their shipping needs.

Over the last several years, we've invested and built this business to now be over $1,100,000,000 of revenue, which has been critical to Pick n PayBow's overall transformation and has moved us solidly into the adjacent shipping space. It is difficult to predict with any accuracy how e commerce demand will play out during this time, but we will continue to ensure that we are delivering this essential service to our clients. One might expect an accelerated shift to e commerce sales. On the other side of the ledger, I think it is fair to expect cross border transactions to be negatively impacted in near term due to severely restricted flights. We may also see consumer purchasing beach press for a period of time due to the economic uncertainty.

Over the past several years, we have made significant investments in our products, platforms, people, and portfolio. It is the investments we have made to transform our portfolio and the investment services we provide that allow our clients to recognize the value we bring to the business. Let me leave you with this. In April, PennyBow's marked a major milestone by reaching one hundred years. We have certainly seen our fair share of times of crisis offset by many more times of prosperity.

The COVID nineteen pandemic has disrupted every aspect of life, and our commitment to supporting our communities has never been stronger. During these challenging times, our team is working through ways to support those in need. We're supporting the business roundtable's effort in addressing this public health crisis with a donation to project hope to source personal protection equipment from global vendors. Project hope will then work with nonprofit health care ready to allocate the PPEs to the medical community in conjunction with the federal emergency management agency. We have donated reimaged laptops for online learning and have committed funds to our partners at the United Way and Fairfield Community Foundation as well as the Stanford Hospital.

During this time, thousands of women and men across Picnivos are playing a critical role in the economy by keeping mail and parcels moving, by keeping our clients' equipment running, and by keeping our supply chain flowing. I want to take this moment to acknowledge and thank our employees for their incredible work they each are performing under very difficult circumstances. In the same way, we salute the many selfless essential workers that are helping our country through this difficult period. Through the last hundred years, we have prevailed as a company by having a clear vision and strategy, but what is the same thing you boast is our character. There's a certain resilience and grit to this company, which has enabled us to endure.

The grit is built on a culture of innovation that has created and recreated this company many times over and is helping us recreate the company again today. Likewise, our country, as it always does, is demonstrating resolve and innovation that will get us to the other side of these incredible challenges. With time like these, when our true grit and ingenuity are tested during these times, I am proud of how our team rises to the occasion to keep moving forward and get Pitney Bowes to its next hundred years. With that, let me turn it over to Sam.

Speaker 3

Thank you, Mark, and good morning. I share Mark's sentiments and hope everyone is staying safe and in good health. And while there are a large number of things going on, our primary focus is the health, well-being, and safety of our employees, our clients, partners and communities remain our highest priority during these uncertain and unprecedented times. Before I turn to the quarter, I'd like to first spend some time drilling down into some of the areas Mark discussed. First, our liquidity position.

We ended the first quarter with $730,000,000 in cash and short term investments on our balance sheet. Total debt is $2,600,000,000 which is down $625,000,000 from a year ago. Of our total debt, 1,100,000,000.0 is associated with our finance receivables. Taking this all into consideration, our implied net debt position on an operating company basis is roughly 800,000,000.0 We have taken several actions and made significant progress in strengthening our balance sheet over the last few years, but especially over the last nine months. Since the beginning of 2018, we have reduced our debt by 1,200,000,000.0 renewed our credit facility and utilizing cash on hand and new issuance proceeds, we materially reduced our debt towers through 2024, putting our debt in a very manageable position over the next several years with no bond maturity to address until October 2021.

We are also performing within our covenants and have stress tested these ratios under multiple scenarios to ensure we maintain access to adequate liquidity. We have drawn down $100,000,000 of our revolving credit facility. We continue to have access to the remaining balance of $400,000,000 and are in compliance with all of the financial covenants contained in our credit facility. We believe the drawdown was the prudent thing to do at this time, and there are no immediate needs for the funds. As such, this drawdown will be invested in short term instruments.

Looking at our capital allocation and uses of cash, we are reprioritizing our capital needs around essential and necessary investments to support our long term objectives. By reprioritizing, we are estimating that we can reduce our discretionary capital spend by 30,000,000 to $40,000,000 which is about 20% to 30% lower than our original plan. Within Wheeler Financial, given the economic environment, we are taking a sound approach to building out our financial services business. We expect new originations to be no more than $25,000,000 in 2020 as compared to our original plan of $80,000,000 This is the right thing to do at this time and will improve our free cash flow for this year. We remain committed to building out our financial services over the long term and we will continue to be prudent when it comes to committing capital.

Assumed in our cash flow scenario planning for the year is maintaining the dividend at an annual run rate of $34,000,000 We are limiting M and A transactions and will not repurchase shares in 2020. We are focusing on working capital, specifically receivables, inventory and payables. We anticipate an impact on collections as we work through payment terms with some of our clients and are managing our inventory levels and the timing of our payments. Let me now provide some color on how this is impacting each of our businesses. Within SendTech, our clients rely on our products and services to help them send essential invoices, statements, documents, and parcels.

SendTech's recurring revenues are high margin and materially contribute to the company's overall cash flow. However, the one time revenue is largely around equipment sales and to a lesser degree a portion of our supplies, financing services are negatively impacted as they are more closely linked with demand and usage. Within our lease portfolio, approximately 40% of our clients are middle market, large cap and municipal accounts and the other 60% are small business, of which roughly two thirds is comprised of professional services, health care, finance, insurance. Having a broadly diversified client base across multiple industries is an important factor when managing through these economic cycles. We have experienced an economic downturns with this portfolio.

And during the last financial crisis, we adjusted payment terms and services to further help our small and medium sized clients with their cash flow needs. During that period, we saw write off rates within our US financing portfolio increase to between a 22.5% range, which is up from our normal trend of around 1%, but well below the industry average, reflecting the strength of our portfolio and essential service we provide to our clients. We are monitoring delinquency rates daily. At this point, too early to determine the impact or potential write off level. We are working with certain clients to offer hardship programs or adjust other terms in order to help them with their cash flow needs and maintain our relationship.

Also in Semtech, we are managing our supply chain to prioritize what we need to receive and when it's on demand. We saw a minor impact to our revenue in the first quarter as a result of this but expect supply to improve in the second half of this year. Our commerce services businesses are more demand driven. Within pre store, we are tracking first class and marketing mail volumes daily. On average, 80% of the volumes we process in pre store are first class mail, which we are now starting to see a low single digit decline from prior year levels.

The remaining 20% is mostly related to marketing mail, which we are seeing significant declines as clients react to market demand and reduce spend. Within e commerce, there are different dynamics to domestic and cross border demand. Domestic demand, primarily around delivery and fulfillment, along with digital volumes held up in the first quarter. However, the timing of demand for our domestic deliveries from our Chinese clients changed in the quarter as a result of the COVID crisis. These dynamics create a different mix and negatively impacted margins in the quarter, partly due to the difficulty in predicting client demand and hence adapting staffing levels accordingly.

Within our cross border business, we experienced a decline in demand along with higher transportation costs due to the restrictions on international shipments. In our drive to improve profitability on our e commerce business, we have taken a number of actions. We implemented a general price increase entering 2020 and are taking targeted pricing actions where possible to continue to improve our yield. We are driving a series of productivity actions across the business, including the consolidation of facilities to take advantage of the flagship building we opened at the end of twenty nineteen, New Jersey and California, investing in automation within our facilities and in our transportation management system, which will improve our cost per unit. We are seeing some of the benefits from the structural actions we took late last year and continue to take incremental actions to improve our SG and A.

These actions are critical on our path to profitability and are needed to address the continued shift in market opportunity along with the productivity challenges around COVID-nineteen. We expect these actions to improve our efficiency and effectiveness while continuing to bring value to our clients. Within both our presort and e commerce businesses, we have some flexibility to adjust variable costs, primarily around temporary labor based on demand. There is a certain level of fixed costs related to our facilities, full time employees, and transportation that is required to maintain regardless of demand. We actively manage all variable components including working with clients on service times and consolidating facilities in certain markets to help with productivity and reduce costs.

Within both businesses, COVID-nineteen is impacting labor productivity as the health, safety, and well-being of our employees is a top priority. When necessary, we are able to redirect mail and parcels to different facilities within our network, which also comes at an increased cost. Overall as a company, we are aggressively managing all discretionary spend. Naturally, things like travel, conferences, third party spends, and unfilled nonessential positions are frozen and we will get savings there. We are also reducing marketing programs and taking staffing actions across the company.

We continue to address our spend based on market conditions and are evaluating this on a weekly basis. As previously mentioned, we also have actions in place around CapEx. We are limiting M and A, do not participate in any share repurchase and are limiting new originations through Wheeler Financial in addition to taking actions around temporary labor. COVID-nineteen impacts us in different ways in each of our businesses and we are monitoring metrics regularly. That being said, based on the level of uncertainty around the depth and duration of COVID-nineteen, in addition to the impact on clients, consumer demand and suppliers and how it may ultimately impact each of our businesses, we are suspending guidance for the current financial year.

Let me now take you through our first quarter's results and discuss some of the trends we are seeing through April. As in the past, unless otherwise noted, my statements going forward will be on a constant currency basis when talking about revenue comparisons and on an adjusted basis when talking about earnings related items including cash flow. Reconciliations of all non GAAP to GAAP measures can be found in the financial statements posted with our earnings press release and on our Investor Relations website. Before I get into the details of the quarter, it's important to note that similar to banks and other companies with the financing arm, we increased our credit loss reserves to be in compliance with the new CECL accounting standard. Effective January 1, this resulted in a $25,000,000 increase to our credit reserve, which was recorded as cumulative catch up to retained earnings.

In addition, to reflect the rapidly changing macro environment conditions resulting from COVID-nineteen, we updated to a 100% recessionary case and increased our provision for credit losses, resulting in a negative impact of $11,000,000 or $05 of EPS for the first quarter. Let me take you through the quarter in more detail. For the first quarter, revenue totaled $796,000,000 which was flat to prior year. When you take into consideration the market exits, which we completed in the first quarter of last year, revenue grew 1%. Adjusted EPS was $05 for the quarter.

GAAP EPS was a loss of $1.22 and includes a $0.16 charge for the extinguishment of debt, dollars $0.02 for restructuring costs and a benefit of $06 for discontinued operations. In addition, GAAP EPS includes a noncash $1.15 goodwill impairment charge related to the Global Ecommerce business as a result of the macro environment conditions along with our recent operating experience. Also as I discussed, the COVID crisis had a negative impact throughout our business in the quarter in addition to the $05 charge related to our increase in credit loss provision. Free cash flow was a use of $47,000,000 and GAAP cash from operations was a use of $66,000,000 Compared to prior year, the decline in free cash flow was driven by higher accounts payable and accrued liabilities, of which roughly two thirds of this was timing related, in part due to the acceleration of interest payments related to the tender offer completed in the first quarter. Free cash flow versus prior year was also impacted by lower runoff of finance receivables.

I discussed our capital position at the onset of my remarks, but let me briefly recap where we are through the end of the first quarter. At the end of the quarter, we had $730,000,000 in cash and short term investments on our balance sheet. During the quarter, we used free cash flow to return approximately $9,000,000 to our shareholders in the form of dividends. We made $6,000,000 in restructuring payments and spent $26,000,000 on capital expenditures. Wheeler Financial funded $3,000,000 in new originations in the first quarter, bringing the total funded to $17,000,000 since the inception of Wheeler last year.

From a debt perspective, we lowered debt by $110,000,000 from prior year and ended the quarter with $2,600,000,000 in total debt, which which is $625,000,000 lower than prior year. As I discussed earlier, our implied net debt position on an operating company basis was $800,000,000 at the end of the quarter. Turning to the P and L, starting with revenue performance by line item as compared to prior year. Business services grew 9%. We had declines in support services of 5%, financing of 8%, supplies of 10%, rentals of 14% and equipment sales of 15%.

Gross profit was $3.00 $6,000,000 with a margin of 38%. This is a decline of four points from prior year, which largely reflects the shifting mix of our portfolio and decline in e commerce margins in the quarter. SG and A was $248,000,000 or 31% of revenue, which was a decline of $13,000,000 and nearly two points as a percent of revenue from prior year. R and D expense was $12,000,000 or 1.5% of revenue, which was slightly down from prior year. EBIT was $49,000,000 and EBIT margin was 6%.

Compared to prior year, EBIT declined $17,000,000 and EBIT margin declined by two points, driven primarily by the gross profit decline, which was partly offset by the improvement in SG and A. Interest expense, including financing interest expense, was $38,000,000 which was slightly down from prior year. The provision for taxes and adjusted earnings was $2,000,000 and our tax rate for the quarter was 18%, which includes the resolution of certain tax examinations in the quarter. Weighted average shares outstanding at the end of the quarter were 171,000,000 which is about 15,000,000 shares lower than prior year, reflecting the share repurchase completed in 2019. Let me now discuss the performance of each of our business segments this quarter and what we are seeing through April.

In our Commerce Services group, revenue was $433,000,000 which is growth of 8% over prior year. EBIT was a loss of $14,000,000 and EBITDA was $12,000,000 Within Global Ecommerce, revenue was $292,000,000 which was growth of 10% over prior year. We entered the year with strong momentum generating revenue growth of 12% through February, which slowed to 6% in March. Delivery and return volumes for our domestic parcel services grew 11% to 34,000,000 parcels in the quarter, driven by the strong growth in deliveries, offset by a decline in return volume. As such, the revenue growth continues to be driven by deliveries and fulfillment.

Our digital shipping API volumes more than doubled from last year and we continue to see a strong take rate on this offering. Our cross border revenue grew for the quarter. This was largely driven by a large client utilizing our cross border logistics services who have since suspended shipments since mid March due to COVID-nineteen. Our border free retail and marketplace volumes were relatively flat through February, but saw a sharp decline in March as the COVID crisis ramped resulting in lower demand and higher transportation costs due to restriction on international shipments. Looking at EBIT, we recorded a loss of $29,000,000 in the quarter and EBITDA was a loss of $11,000,000 The loss was primarily driven by the mix of the business.

Within our domestic parcel services, we continue to see delivery and fulfillment revenue outpace return, where returns operate at a higher margin and therefore the overall margin is shifting. Additionally, we are seeing a shift in the mix within our delivery volumes, where we are processing a higher percent of lightweight parcels, which tend to be at a lower margin than some of the heavier parcels. In addition to mix, we have higher costs as a result of our continued investment. Our new flagship facilities on the East And West Coast are now fully operational for processing parcels and ramped up volumes throughout the quarter. These are large facilities that we did not have in operation at this time last year.

We are in the process of consolidating volumes from other sites into these new facilities, but in the meantime are incurring incremental costs versus prior year and quarters. As mentioned, COVID-nineteen impacted revenue and drove lower productivity in the quarter, which was in part due to the difficulty in accurately predicting demand by clients and flexing labor accordingly. In addition, we implemented CDC guidelines around social distancing at each sorting facility and incurred higher costs related to sanitizing facilities, dagger break and shift scheduling, as well as health and temperature screening. We also increased our credit reserves as a result of COVID-nineteen and to comply with the new CECL accounting standard. As we look ahead, there is still uncertainty around consumer demand and the impact of volumes due to the unknown severity and duration of the COVID crisis.

In April, domestic parcel deliveries are growing in excess of 40%. We continue to see a higher percent of lightweight parcel. Digital deliveries continue to grow at strong double digit rates. Our fulfillment volumes with the addition of several large clients has more than doubled. However, returns and cross border volumes are declining approximately 20%.

We have adjusted our temporary labor based on demand, but we are also addressing a higher level of absenteeism related to COVID. We continue to drive productivity and pricing improvements, and our facilities continue to practice safe social distancing and sanitize regularly which comes at a cost to productivity. The health and well-being of our employees remains a top priority as we have thousands of employees working in these facilities. Within Presort Services, revenue was $141,000,000 which was growth of 4% over prior year. The revenue growth was driven largely by the investments we made in acquisitions in 2019, which drove three points of the growth in the quarter along with higher revenue per piece.

EBIT was $16,000,000 and EBIT margin was 11%. EBITDA was $23,000,000 and EBITDA margin was 17%. This represents flat margins versus prior year. EBIT and EBITDA growth versus prior year were negatively impacted by 4,000,000 from unrealized losses on certain investment securities driven by changes in financial markets. Excluding this, the margins would have been higher by two points over prior year.

We remain focused on our productivity initiatives. And as a result, labor cost per unit improved by 3% compared to prior year. The disciplined management actions we have taken and investments we have made over the last two years continue to yield positive results. Compared to the prior year, we improved pieces fed through our equipment per hour, resulting in 115,000 less hours to process 143,000,000 more mail pieces. Our presort business saw a significant impact on marketing mail volumes from COVID-nineteen during the first quarter.

First class mail volumes were minimally impacted in part due to the timing of volumes already scheduled to be processed. As you recall, the first quarter is typically our largest processing quarter as the New Year typically sees an increase in statements and important documents. There was some impact to our productivity in our facilities for the same reasons we saw in e commerce. Similar to e commerce, it is difficult to predict how client demand will evolve as this COVID crisis continues. Through the April, first class mail volumes are declining at a low single digit rate, and marketing mail volumes are down from prior year in the 30% to 40% range.

We will continue to drive productivity. However, this will be partially offset by our actions to ensure the safety of our workers within our facilities and as we redirect mail between sites when needed due to the COVID situation. Turning to our SendTech segment. Revenue was $363,000,000 which was a decline of 7% from prior year. We entered the year with good momentum in the business.

Through the February, our global shipments, which is the leading indicator for equipment sales, was down only 2% from prior year. In March, as the COVID-nineteen situation ramped up, we saw a steep decline of nearly 40% in global shipments. This resulted in equipment sales being down 15% for the quarter. We indicated on our last call supply chain was impacted by COVID-nineteen, which was also a contributing factor to the lower equipment sales, mostly as we were unable to store certain components for our higher end products. Supply through the February were down 7% from prior year, but ended up being down 10% for the quarter, again as we saw a steep decline in the month of March.

Rentals, financing and support service revenues declined but were partly offset by higher business services. EBIT was $107,000,000 EBIT margin was 29%. EBITDA was $116,000,000 and EBITDA margin was 32%. EBIT and EBITDA margin were negatively impacted by $10,000,000 as a result of the increase in credit loss provisions to reflect the current macro environment conditions resulting from COVID-nineteen in connection with the application of the CECL accounting standard. We continue to see the impact of COVID-nineteen, particularly on the transactional side of our business.

Through April, we are seeing the equipment sales trend for March continue with U. S. Written business down approximately 30% and continued delays in installations, will impact revenue recognition. We are seeing a similar decline in supplies, largely as a result of lower consumption. We continue to monitor delinquency rates on a daily basis and have seen a slight uptick through the month of April.

Most of our SendTech clients are billed quarterly, with the last month of the quarter typically being our largest billing cycle, making it too early to draw any conclusion on delinquency and write offs. Our supply chain is prioritizing fulfillment based on demand, but still operating on a delay through the month of April. We are working closely with our partners and suppliers and anticipate this will normalize in the second half of this year. Before we take your questions, let me briefly recap. We exited the first quarter with $730,000,000 in cash and short term investments on our balance sheet.

We have drawn down $100,000,000 against our credit facility and have access to the remaining balance of $400,000,000 We have no bonds coming due until October. We are also taking actions within our capital structure and across the business to preserve cash during this time. As I mentioned at the onset of my remarks, based on the level of uncertainty around the depth and duration of COVID-nineteen, in addition to the impact of each of our businesses, we are suspending guidance for the current financial year. We are monitoring operations, metrics and trends on a daily basis in order to take the appropriate actions in a timely manner. With that, we will now take your questions.

Operator, please open the line.

Speaker 0

If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 then 0 at this time. And one moment please for your first question. Your first question comes from the line of Kartik Mehta. Please go ahead.

Speaker 4

Hey, Mark. Good morning. I wanted to I know you gave some thoughts about what happened and what's happening in April. I'm just wondering if you could give maybe a little bit more granularity around businesses, at least trends you saw in April. I know you provided some for global e commerce, I'd be interested in what else you're witnessing out there.

Speaker 2

Yeah. I'd be glad to. So if you start with SendTech, you know, I would say that customers are starting to be a little bit more acceptable. So if you think about what is required to consummate a sale and, you know, given that many of our clients were, you know, working at home, the first is you gotta be able to find them. So I would say, you know, in March, what we saw the last couple of weeks is that, you know, our contact rate with clients read that as, you know, telephone calls that actually reach a client were pretty low.

What you would see in April is those contact rates were kind of back at reasonable levels, you know, at or above pre COVID. If you look at contracts out, it was slightly, you know, below average, but again, you know, stronger than March levels. If you look at how all that comes together, you know, I would say our written business, which is getting customer agreement, was better than March. Our shift was better than March. Our installed was consistent with the March, and that's simply because, you know, the difficulty of getting service people on-site to to install the equipment.

So that's kind of how, you know, April laid out versus March. Let me pause there and see if that makes sense. No. I'll move on to presort.

Speaker 4

Yeah. No. That makes sense. I I was just wondering, Mark, in the SendTech business, is the biggest issue net adds for you currently just because we might see a increase in small businesses unfortunately going out of business?

Speaker 2

No. The biggest well, it's it's a combination. Mean, sorry. Actually, if you look at our net adds in first quarter as well as April, you know, read that as new customers. Because of some of the new products that we have introduced, you know, read that as some online products, which certainly are appropriate given the number of clients that are working from home as well as our low end products.

We're adding a fair amount of new customers, so no problem there. The concern over time is what you said kind of embedded in the second half of your question is, you know, customer bankruptcies. You know, so far, if you look at if you kinda unpack what Stan said about delinquencies and the number of clients that we're talking about in terms of different terms, I would say it's a a de minimis amount relative to the size of the balance sheet. You know, that being said, we're we're early stages in this. So, you know, I I think it's the the biggest vulnerability, to answer your question, is our installed base and customer bankruptcies.

But, again, so far so good. And if you look back on 02/2008, 02/2009, as Stan referenced, you know, we we performed better than the industry. So that's SendTech. Presort, I would say, is, you know, Stan characterized it reasonably well. If you look at the mix of our business, it's first class.

It's 80%. You know, that was kinda down low single digits, which, you know, is better than USPS by a reasonable amount. And then marketing mail, which was down, you know, fairly substantially. Read that as 40 to 50%. So those trends have basic been the same March to April, not a not a huge difference.

You know, I I think the the interesting one in in if you look at global e commerce, if you look at our domestic network, it's operating at peak levels. So so, you know, think of, you know, October through December, the holiday season and all of the stress and strain in ecommerce networks. And that's the kind of volume we're seeing right now, and that volume continues, you know, to be growing. So it's the domestic network is at at capacity. If you look at the digital, you know, business, read that as the API business, we're continuing to see, you know, triple digit year to year increases, which again makes sense.

You know, where we're struggling a touch is on cross border and what was probably not generally known is a lot of our cross border traffic flies on commercial flights. So if commercial flights aren't going, then, you have to go to a different kind of carrier which is more scarce and more expensive. So, you know, that's kind of the April to May trends. Stan, don't know if you'd add anything.

Speaker 3

Yeah. No. The only thing I'd add, Kartik, is, you know, we saw returns are also down. And obviously that creates a mix issue when you go through EBIT. While we hit the volume numbers, we don't normally share this.

But let me do a little bit on the month of April with some preliminary kind of revenue. And as you saw, the global e commerce has some good growth in domestic parcels that's driving revenue. And we expect that revenue for the month of April to be roughly double digit. And presort, first class, as Mark said, the volumes are down low single digit. But marketing mail is certainly feeling an impact.

And remember marketing mail makes up roughly 20% of our volume. We expect that presort for the month of April to be down about 10%. Then SendTech, as you go through the impact on the volumes, for particularly equipment sales and supplies. And that has an impact in the quarter. I want to emphasize a couple of things though.

So when you look at SendTech, even a written business, when you're signing new deals, we are doing new deals. But until you can get in and install them, some portion of our portfolio requires installation for revenue recognition. So we have roughly about $10,000,000 higher than where we were at this point last year, at the end of the quarter last year, of revenue that's under contract that will be installed at some point in the future as those sites open up. But we expect SendTech, driven primarily by equipment sales to be down roughly about 20%. So you kind of put that all together for PB for the month of April, we're kind of looking at down high single digits as we would have expected from the volume mix.

Speaker 4

Stan, that's really helpful. And just one last question. Mark, on Global Ecommerce, as you continue to grow revenue, unfortunately, the trends are not going in the right direction in terms of profitability. I realize this quarter had some unique aspects to it because of COVID-nineteen and some of the increase in expenses. But where do you stand in terms of what you need to get in terms of profitability in the past?

You've talked about number of parcels. I don't know if that's how you still think about it or if there's another metric you're looking at to have an idea as to when it gets to profitability.

Speaker 2

Yeah. I mean, number of parcels is still the ultimate measure of getting to profitability. Underneath that, you know, as Stan mentioned, the mix of the kind of parcels is becoming increasingly more important. So, you know, we have kind of a sweet spot in terms of volume for our network. It it tends to be, you know, smaller type of parcels, you know, but not too small.

So, you know, there's six or seven different metrics, but far and away, the most important one is is number of parcels. But, you know, embedded in that is, you know, a lot of productivity measures within the within the distribution centers, and as Stan mentioned, you know, because of, you know, things like temperature checks, social distancing, you know, moving moving volume around. And, you know, candidly, we, you know, had two sites that we brought online and we still had the old sites in the first quarter. So there was a lot of moving pieces in the quarter. But we expect the profitability of that business to continue to improve this year, and I'm still very optimistic.

Speaker 4

Thank you very much. Really appreciate it.

Speaker 0

Your next question comes from the line of Ananda Baruah. Please go ahead.

Speaker 5

Hey, good morning, guys. Thanks for taking the question. Hey. Good to good to hear that you guys are are are good. Mark, this can this can be for both of you.

Should we two things. Should we use I appreciate the April detail, Dan. That's that's really helpful. I know you're not giving guidance, but does it make sense, or or would it not make sense for us not to use those April trends as we think about the June? And then do you guys, Mark, do do you think it's, is it your opinion that the June will be the softest revenue quarter for the year?

Then I have a couple follow ups after that. Thanks.

Speaker 2

So let me, let me start with the last question. I certainly expect the second quarter to be more challenged than the first. You know, in terms of how the rest of the year unfolds, your guess is as good as mine. And a lot of it depends on, you know, the states opening up and how the virus is able to be contained. So, you know, as we do our internal modeling, we we do think the second quarter is a trough, but, that's precisely the reason we suspended guidance is, you know, our ability to give responsible guidance at this point as well.

In terms of the color on April, I'm not gonna tell you how to to do your models. We felt in this particular moment that transparency was important for our investors. So, you know, it's a it's a data point. And, you know, con you know, I have a reasonable amount of confidence in, you know, our data points a couple weeks at a time. When you get into to June, it just becomes too hard to predict.

Speaker 5

Okay. That's that's totally fair. And you guys mentioned, during the prepared remarks, 30 to 40,000,000, in lowering of the discretionary spend. A lot of moving parts, but it does it make sense for us to remove that from the cost base?

Speaker 3

Ananda, that comment was around CapEx explicitly. So as we look, we've told you that CapEx runs about $140,000,000 And we think within that there's a discretionary component. Now I want to reemphasize we're still going to invest in the business and you see us doing that. But we're going to be prudent about it. So we may make different decisions on cash versus lease.

But we believe that within that framework we can extract about 30,000,000 to $40,000,000 which will preserve cash as we go through. Now there are a number of actions we're taking overall, that will help us also conserve cash and reduce spend. So obviously, we're reprioritizing that CapEx we talked about. Certainly travel, conferences, all that is done. We have hiring freezes and some other headcount actions.

We're going to manage our marketing spend to align with where we see the demand. And obviously we're doing things like consolidating facilities within e commerce and dealing with third party spend all designed to reduce spend and preserve cash until we get some better clarity on how this will play out.

Speaker 5

Got it. That's helpful. I'm going to say I'm going to throw you one more anecdotal question, an anecdotal business question in the context of that you guys aren't giving guidance and a lot of moving parts. Is as you guys laid out, is it still possible for the the ecommerce margins in the December to be positive? And I'm just I'm just trying to develop a framework for ourselves here, kind of broad strokes how to think about the kind

Speaker 3

of Ananda, so I appreciate the question. I mean it's very difficult to predict what's going to happen here given the uncertainty which is exactly why we withdrew the guidance. So while we're seeing strong volume growth here, particularly on the delivery side of the business, we believe that we'll get better at fulfillment. And candidly we saw signs of that. You know, our margins improved versus last quarter through February.

And then as COVID hit, this is a very labor intensive business that has an outsized effect in the month of March. You know, the team there has, you know, OpEx is actually down year to year. So a number of the actions that they've taken are taking root. We expect the contribution, from their productivity actions to more than double in Q2. But the uncertainty around what's particularly a lot of our clients, our retail clients, and you're seeing what's happening every day when you open up online and look at what's happening in the press makes that difficult to predict whether or not that will be positive exiting the year.

What I am confident in telling you is that those actions I think will take hold and will deliver improvement. I think we need to see the macro environment, how that settles out. Is this a U, a V, or some other shape of recovery?

Speaker 5

That's helpful. And it's,

Speaker 0

appreciate

Speaker 2

I mean, the wildcard in all this, particularly in the retail sector, is how this shakes out. And, you know, broadly, what we're seeing, you know, is those that are those two clients that are kind of born on the net that have, you know, digitally native businesses, they're thriving. You know? And conversely, clients that have a more of a brick and mortar business model, and you you see it, you know, in the headlines every morning, are struggling. So that's the part I mean, I can kinda tell you how it feels inside of, you know, our business, but the the the broader customer environment's really hard to predict right now.

Speaker 5

Thank you. Thanks, guys.

Speaker 3

Thanks, Ananda.

Speaker 0

Next, we'll go to the line of Shannon Cross. Please go ahead.

Speaker 6

Thank you very much for taking my question, and thank you for all of what your employees are doing. Because I think those involved in the postal stream, whether the the workers at the USPS or companies like yours are incredibly important right now and and doing a lot of things that are sort of scary behind the scenes. So, again, thanks. The, the question I had, I guess, maybe more for Stan, just on cash flow. I know you gave some details, but I'm curious as we think about the potential for benefit from finance receivables or how we should think about, in general, working capital to the extent you can talk about it over the next few quarters, whether or not you think it would be a source or use of cash and what the various segments might do?

Thank you.

Speaker 3

Sure Shannon, thanks. So as we looked at first quarter, you know, we view the majority of this as timing, 17,000,000 prior year. But $30,000,000 is timing within 2020. So we expect that we're going to get, that back. You know, I think as you consider free cash flow it's important to keep in mind that one of our strengths is the recurring nature of our revenue and resulting cash flow, in particular in SenTec.

So SenTec revenue is roughly two thirds recurring in nature and that recurring stream is actually highly profitable. So roughly three quarters of their profit is recurring in nature. Now equipment sales will be impacted and I'll get to your point on finance receivables because it's an important one. And supplies to a lesser degree. But those streams provide good reliable cash flow.

Presort and e commerce are more volume dependent. When you look at presort, we talked earlier about there's clearly an impact in marketing mail. But first class mail, remember most of our clients are large banks, insurance companies, they still need to get those invoices and statements out. And first class mail is down low single digits. And as I think about the year, let me go into kind of the headwinds, tailwinds.

And let me start with the tailwinds. So that $30,000,000 of timing we expect to get back through the year. And then the CapEx we have a good line of sight on 30,000,000 to $40,000,000 of reduction and that will also improve free cash flow. And then as you saw from Wheeler, we originated just around $3,000,000 in the first quarter and we see obviously a challenging economic environment. Given that, we expect that those new originations for the year will be no higher than $25,000,000 or so.

So that's over $50,000,000 of a benefit to cash flow. Now obviously that cash stays at the bank and can't be used for parent purposes but it still delivers, incremental free cash flow. Now to your point, what we saw in the last recession was a runoff of the financing portfolio, so those finance receivables. And we expect that that will occur to a degree here as well. And that will become a tailwind.

Not exactly how I want to generate cash, but there's going be a balance here. As we write new business, as COVID goes on longer, that install cycle's longer. It's more likely that we're going to see runoff coming in before we see the installs get to go and start to backfill them. Another tailwind that I would highlight, if you recall, we have insurance coverage for last year's cyber attack. And we disclosed that we received about $4,000,000 thus far.

And if you remember that claim is obviously a lot larger than that. And we expect that we'll get some of those proceeds as we go through the year. Now the tailwind side of this is that they'll be offset from lower profit performance within the business units given the challenges we're going through now. Because COVID really ramped up through March but we expect a greater impact in the second quarter. And then I mentioned in our prepared remarks, we do anticipate an impact on part of our working capital predominantly around our accounts receivable and collections.

And while we haven't seen a material impact yet, we believe that that will increase. Now we're working on the other side of working capital on driving payables and inventory working with our partners. So if I kind

Speaker 5

of step back, I give you

Speaker 3

a flavor for the headwinds and tailwinds. And if you look back at the last recession, free cash flow while it was lumpy, did hold up to a reasonable degree. We expect free cash flow to improve and that we'll have the liquidity to weather this crisis.

Speaker 6

Thank you. That was very helpful. I guess my next question is on the write off that you took in e commerce. Can you give us some more specifics on what drove that and what specifically you'd consider impaired? Thank you.

Speaker 3

Sure. You know, if you go back and look at our Qs over the last several quarters, we've disclosed that we are below 20%, which is kind of our bright line on coverage. And what we looked at in the first quarter was the weakness in the performance So as you look at COVID I think it had an outsized effect here in e commerce. So that became kind of a trigger point for our evaluation.

Now we did this with a third party firm and then looked at scenarios out through the year. And this change in trajectory due to the current macro environment as well as the weaker than expected profit performance is really what drove that action in the first quarter. Now we still have confidence in the long term model, but the ramp of getting there we think has shifted a little bit. And the difficulty of predicting how COVID, will alter that, was part of the challenge of looking at that in first quarter. So we've come back, we did the analysis and you saw we took a 198,000,000 impairment.

If you recall, we had just over $600,000,000 of goodwill on the balance sheet for Global Ecommerce. As a reminder, it's obviously a non cash event, and we still are confident in the long term prospects for our Global Ecommerce business.

Speaker 6

Great. Thank you very much.

Speaker 3

Thank you, Shannon.

Speaker 0

Your next question comes from the line of Allen Klee. Please go ahead.

Speaker 7

Yes. Hi. For the new accounting for credit losses, could you explain that? And then the amount that you took a reserve of $05 per share, can you kind of explain that's what time period that's covering? Do we is there any reason we should maybe think that this time it going from 1% to 2%, 2.5%, you know, this time it might actually the charge offs might be a little higher than that?

Thank you.

Speaker 3

Thanks, Alan. So let me take that one. So CECL for those who may not have as much experience with this as the current expected credit losses which is a new accounting standard that went into effect in oneone. I would direct you to the charts that we produced. There is a chart in there that breaks down the CECL, impact and how much went through retained earnings versus how much was in a quarter.

But let me go through that now. So obviously Pitney Bowes has a financing business which includes captive leasing as well as postage loans through an unsecured line of credit and third party leasing. We offer that through a PB Bank. Similar to other banks and companies of financing arms we implemented CECL accounting standard effective January 1. So when we implemented this, the standard calls for a oneone opening balance adjustment that goes to retained earnings.

We recorded a $25,000,000 credit charge reserve in retained earnings on the balance sheet. It's important to note at that time we looked at our portfolio and we built a model that we've been through with our external auditors. And that model uses a publicly published recession factor in it. That recession factor at the time was 30%. Now that resulted in a retained earnings charge, no impact to the P and L of $25,000,000 Now when you go, that becomes your oneone opening balance on the reserve.

So then what happened in the period is that there's a number of factors. You have to look at this every quarter as you go through. And when we did that and we ran our model, the recession factor driven by COVID went from thirty percent to 100%. That change drove $11,000,000 of impact, in the quarter across our business. Now incremental to that was roughly another $5,000,000 that I would say was more normal changes.

And I'll give you an example there. In global e commerce given, some increased bankruptcies with some of our clients, we increased that rate as well and that resulted in an additional charge. Now offsetting that, is a write off to of certain receivables, which was about $10,000,000 Those write offs are fully reserved. So there's no financial impact through the P and L for those charges taken previously. So if you look, our, the effect of CECL, we ended last year with $38,000,000 of reserve.

We booked $25,000,000 in, opening balance. That yielded $62,000,000 And then within the quarter, driven by the higher recession factors of primary driver, we had credit loss expense of $16,000,000 in total of which $11,000,000 was specifically related to the recession factor change and roughly $10,000,000 of write offs for which there was no P and L impact. So our ending reserve is $68,000,000 Now how to think about that on a go forward basis is we'll continue to evaluate this. Obviously I would not expect the recession factor, given we're at 100%, to have any material impact going forward. But there could be other specific reserves that come up if certain clients get into trouble.

And then as the macroeconomic environment improves, then you could eventually see that recession factor go back down and see the reserve come back down accordingly.

Speaker 7

Okay, thank you so much.

Speaker 1

You're welcome.

Speaker 0

And at this time there are no further questions.

Speaker 2

Great, thanks, operator. Listen, let me end where I begin, and and that is to hope everyone on the call is well. Obviously, incredibly difficult times. I I I would like to acknowledge Shannon's generous comment about our people, and it's not just true with the Pitney Bowes team, but as Shannon alluded to, it's it's just remarkable in this country that people that are doing incredible work each each day to support this economy under, you know, difficult and sometimes really, you know, dangerous circumstances. So I appreciate the call out, Shannon.

Also, Carter's question about new clients, I I do see this as an opportunity to to help help clients and conceivably pick up some new clients both in SendTech because of our online offerings, which are terrific in general, but really terrific at this environment. But also in Global Ecommerce, where as I said, you know, domestic networks are operating at capacity in in many instances. You know, some some of the others in the market will not be able to fulfill existing client demands. Think, you know, moments like this are always opportunities for market share to change hands. You know, our largest competitor in fintech has, you know, taken 30% of their team off the field.

So there there's lots of lots of moving pieces. So let me conclude. Over the last several years, we've taken significant strategic actions to strengthen our portfolio of products and our balance sheet for the long term. We've executed on the sale of production mail, software solutions, as well as many other smaller divestitures in international markets. These actions collectively simplified our portfolio, and also focused us on mailing, shipping, or underpinning financing.

We we've also leveraged and taken advantage of tax reform to repatriate cash. We've used a combination of this to strengthen our balance sheet, reduce debt, and our financing terms in the near term are modest until next year. We're gonna continue to invest in adjacent spaces because we think that the markets that we're pursuing still over the long term have attractive end user growth characteristics and good opportunity to make profit. Like everyone else, we're going feel the effects of COVID-nineteen. But everything we've done for the last several years to strengthen our balance sheet, to strengthen our portfolio, to reposition this business, put us in a much better place, to weather the storm.

And and our focus is to fulfill our role as an essential business and do the necessary things on a day to day basis to continue to move mail, move parcels, finance small businesses, but importantly, to come out of this this crisis even stronger than before. So with that, I'll close today's call. The conversation on CECL and some of the other accounting stuff is common. Adam and June will be available to take you through that. Again, I hope everyone is well, and we'll talk soon.

Take care.

Speaker 0

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T teleconference. You may now disconnect.