Good morning, and welcome to the Pitney Bowes’ Fourth Quarter 2019 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; Mr. Stan Sutula, Executive Vice President, Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the Safe Harbor overview.

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 2018 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 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, Marc Lautenbach, will start with a few operating remarks. Marc?

Good morning, and thank you for joining the call. There were a lot of moving pieces to the quarter, which Stan will take you through. From my perspective, I was pleased with the quarter. SendTech continued to introduce new products within its SendPro family; our Presort business improved across its key metrics, as expected and exited the year within the long-term model; and our Global Ecommerce business delivered a highest service level for the delivery and return business in the quarter. That said, we are still not where we need to be within our fulfillment business. I will focus the balance of my remarks on the full-year. For my set, 2019 was another important step forward. Excluding the impacts of currency, we grew revenue over prior years, substantially focused our portfolio, made real progress strengthening our balance sheet and set ourselves up to drive profitable revenue growth going forward. Powered by our growth in Commerce Services, 2019 marked our third consecutive year of revenue growth on a constant currency basis. As I have indicated before, revenue growth is the most positive indication of a successful transformation. Global Ecommerce continues its double-digit growth rate and our Presort business grew 3%, which is against a market that is declining. While we continue to experience some growing pains in our Global Ecommerce business and invest in front of demand, it is also clear, we have found an opportunity that’s compelling and we’ve earned the right to win. 2019 was also an important year from a portfolio perspective. We exited direct operations within six smaller European markets in our SendTech business and completed the sale of our Software business. This is in addition to the divestiture of production mail in 2018. Alternatively, we announced the introduction of the Wheeler Financial Services business. Our vision…

Thank you, Marc, and good morning. Let me start by providing an overview of the full-year results, followed by the details of our fourth quarter. I’ll then take you through our 2020 guidance. 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 schedules posted with our earnings press release and on our Investor Relations website. Let me start by giving an update on the Ryuk ransomware attack in October. As we noted on our last earnings call, we have insurance to cover these events and we have been working diligently with our insurers. We have seen no evidence that customer or employee data was improperly accessed. Additionally, we expected portion of any impact to profit to be covered by insurance and the timing of receiving the proceeds are expected to be in 2020. The insurance proceeds will be recorded when there is a high degree of certainty regarding the amount of insurance proceeds to be received, and we will continue to work with our insurers on any potential new claims that may arise. For the fourth quarter and full-year, we are estimating that the ransomware attack impacted revenue by approximately $18 million, EBIT by approximately $19 million and free cash flow by approximately $29 million. This is a result of business interruption and incremental costs related to the attack. As I discuss our results, I will quantify the impact on revenue and EBIT within each segment. With that, let me take you through our full-year results. Revenue was $3.2 billion, which was growth of 0.4% over prior year, and this is…

Thank you. [Operator Instructions] Your first question comes from the line of Kartik – or excuse me, Anthony Lebiedzinski. Please go ahead.

Yes. Good morning and thank you for taking the questions. So, first, just looking at the 4Q, you mentioned that that there was the impact of a shorter holiday season. I was wondering if you guys have any estimate as to what the – that could have been as far as impact? And looking at your parcel increase of 10%, I just wanted to get a better sense as to the breakdown between existing clients and any new clients and obviously, the 10% was the deceleration from prior quarters? I know some of that was because of the ransomware attack, but if there’s anything else that, that happened in the quarter, certainly, I would love to hear your thoughts on that?

Sure. Good morning, Anthony. Thanks for the question. So first, the question on shorter holiday, as you’ve seen from the press, this impacted a number of retailers out there, as well as logistics players and it did have an impact on us. Let me put a little bit of context around it. So in the fourth quarter, Global Ecommerce revenue grew 6.5%, as reported. I’m going to use Ryuk and ransomware and malware interchangeably, but that did have an impact in this business and we estimate that’s about 2 points. So an operational base, roughly 9% growth and all lines of business grew. To your point, volumes grew 10%. It is a shorter holiday season. Some of the clients were doing more expedited shipping, given the proximity to the holiday. In addition, some of our retail clients have a slower holiday season. You’ve seen that in some of the press and we did have one client declare bankruptcy. But I think it’s important to put that in context with the full-year. There is – these are going to be ebbs and flows, as you go through any various quarter. If we pull back to the full-year, revenue grew 13% within the long-term model and volumes grew a healthy 21%. Underlying that is an improved delivery performance on a year-to-year basis that significantly benefited us and I think brings confidence on a go-forward basis. So yes, the shorter holiday period did have an impact. But when you look at in context for the full-year, we’re still pretty comfortable at 13% revenue and 21% volume growth.

Got it. Okay. Yes, thank you for that. And I know, Stan, you gave some color as far as Q1, how we should think about that? As far as the rest of the year and kind of high-level thoughts as to how we should model the rest of the year, I know, for instance, your Christmas is going to shift from a Wednesday to a Friday and the holiday season actually will be two days longer because of an earlier Thanksgiving. So any sort of high-level thoughts about the Q2, Q3 and Q4 as to how we should think about modeling those quarters?

Yes. Anthony, as you think about that, we talked a little bit about Q1. If you kind of look at the through the rest of the year, again, we’re going to see a slightly heavier weighting towards fourth quarter, as Ecommerce, we told you that the Commerce Services making up a larger proportion of our overall business. So you’re going to continue to see a slight skew back towards the fourth quarter and at peak holiday season. The magnitude of that, I think, will be a little bit lower than prior years, but you should still expect that fourth quarter would be a little bit higher than this past year, in particular, with the change in the holiday. On a profit front, I think, you should think about more of this being towards the back-end of the year, as we ramp-up our efforts to improve Global Ecommerce profitability, that’s going to ramp through the year similar to what you saw on Presort this year.

Got it. Okay. So is that consistent with, I think, Marc’s thoughts about the growing pains that you saw in the fourth quarter. As you get more scale, you should see more profitability in that segment?

Correct.

Yes. I would just add, I mean, the flow of businesses continue to add clients and that’s a great thing. And as they add volume, we A, invest slightly in front-end and kind of work through the operational issues. I think, to your point about the shorter season, it was approximately, I think, 3 points of growth. Stan, correct me if.

That’s estimated. I mean, it’s hard to tell on that exactly, but that’s probably in a ballpark.

Got it. All right. Well, thank you and best of luck.

Thank you.

Your next question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.

Hey, good morning, Marc and Stan. Marc, just on Global Ecommerce big picture. It sounds like 2020, you’re still anticipating an operating loss for the year. If you could just tell me if that’s true or not? And secondly, as you look at towards the back-end of the year, do you anticipate Global Ecommerce to be positive from a profit standpoint towards the end of the year?

Kartik, why don’t I start off, I’ll let Marc give you some color around it. So let me start at a macro level. Our 2020 guidance has EBIT growing double digits. I just want to pause there. It’s been a long time since that’s happened here. And Global Ecommerce is certainly a part of that. And as we develop this guidance, there are multiple ways to achieve our objectives. Obviously, it’s February. So a lot of unknowns for the year, which is why we lay out internally a Plan A, or Plan B, et cetera. And as it pertains to Global Ecommerce, specifically, we’re going to make significant progress in profitability in 2020. Now some of the contributors to that growth and volumes, obviously, going to yield scale benefits and transport warehouse and labor. We’re increasingly bundling our offerings. We’ve taken additional pricing actions in a number of areas and we’ve streamlined the organization. We also have a long list of productivity actions around things like site consolidation, process improvements and labor scheduling. And candidly, we have specific investments for the team on delivering profitability. Now some of these actions are done, some are underway and some are going to occur later in the year. So the momentum will build through the year, back to your point, about exiting the year at a profitable rate. But it’s an uncertain or less certain macro environment, economic conditions, trade, China and the coronavirus and the retailer performance. But this business has come a long way. I mean, if you step back and look at $15 million of revenue in 2012 to over $1.1 billion in 2019, our models evolving towards profitable revenue growth and we’re confident that these actions will help us progress and you’ll see significant improvement in Global Ecommerce.

I guess, for Marc from a big picture, as you look at Global Ecommerce, if you look over the next few years, what’s your expectations for kind of profit margins for that business?

Yes, I’d say, our long-term view is still in that 8% to 12% range. There’s nothing that’s changed about that. As you look at the arc of that growth, we still think getting to 250 million parcels is key, if you kind of do the math from where we are 125 million to 130 million parcels. So I mean, I think that kind of gives you the trajectory. That kind of gives you a sense of when we get to the long-term model, and we’ll make progress as we go along. I would just highlight what Stan said. We expect significant progress this year. We’ve got multiple ways to get to the full-year plan. And I would underline that the team has important financial incentives to get this business to profit this year, but it’s a long-haul from where they are.

And then, Stan, just one last question on debt. As you look towards your debt, anymore refinancings anticipated in 2020, or are you kind of done for now and you’ll reassess the portfolio at a later point?

Yes. Kartik, it’s a good question. So you’ve seen we’ve been very busy over the last several months. Back in September, we repaid the balance of the term loan for $200 million. November, we did a new Term Loan A for $400 million, repaid $150 million and $300 million, respectively, another term loans did a new revolving credit facility, and then in December, we redeemed $300 million of notes. Now in December, you saw that we obtained commitments for $650 million Term Loan B, and that we intend to use a portion of the remaining software sale proceeds together with this term loan to prepay future near bond maturity. So that, obviously, we haven’t done that yet and I’m not going to give you an exact specifics. But I think, if you step back, this is resulting in a healthier balance sheet, lower leverage, currently no maturities until October 2021. And then as we address the near-term debt maturities, that debt profile the towers out in time, I think, it’s going to improve significantly.

Thank you very much.

Your next question comes from the line of Shannon Cross from Cross Research. Please go ahead.

Thank you very much for taking my questions. Can you talk a bit about the customer, the client that decided to stop using the settlement service? I’m just curious, is this a trend you expect, or just sort of a one-off? And then how should we think about that business sort of from a longer-term standpoint? And then I have a follow-up? Thank you.

Shannon, just to clarify, the client didn’t leave the fulfillment business. The client currently is on using our shipping APIs for labels and printing those and they were taking advantage of our guaranteed delivery service. Just as reminder, this guaranteed delivery service was really born out of our analytics, where we have enough history and confidence looking at the two enter from locations to guarantee delivery. When we guarantee that delivery, we take the risk of any claims. This client has selected not to participate in that guaranteed delivery anymore. So hence, we don’t have the risk. So that’s – the revenue impact was to a net treatment. Now, the client still – PB client, this offering in general has had great take up since it start. We believe that it continues to bring a lot of value in the market, in particular, to small and mid-sized retailers, and I wouldn’t see this as a trend. I think, this was an economic decision for the one client.

Yes. I would just add. If you look at Global Ecommerce broadly, and you look at the churn rate a little bit to kind of the broader theme of your question, the churn rate on a year-to-year basis 2019 to 2018, the churn rate was half in 2019 as it was in 2018. So substantial progress in reducing churn. I think that speaks to the team’s progress in providing outstanding service delivery. And we saw it clearly in the fourth quarter, where the network performed by any measure at above market rate. So I – in general, we like our position from a client retention. As they make different choices, it affects some aspects of the revenue recognition. But in general, we like where we’re positioned and no, we don’t see it as a trend on the contrary.

Okay, that’s very helpful. And then I’m curious as it – was the churn you were seeing sort of out of the old logistics business, and so you’ve been able to improve, because I know they had some customer service issues over time, or was it another areas, that’s a significant improvement. So I’m just wondering what – where specifically you…

We’re principally out of logistics, but also our API business. So, if you go back to couple of years and we introduced that product, and we had some growing pains when we first introduced, so it – it’s really across Global Ecommerce. But to your point, it’s principally in logistics.

Okay. And then in terms of third-party leasing business, that has obviously gotten some traction there. So can you talk a bit more about how you’re seeing that business? How big it could be over time? Just it seems to be a good use of cash at this point? Thank you.

Sure. I’ll take that one, Shannon. So, look, at Wheeler, we told you that when we created this, we were going to do this with purpose, meaning, third-party platform, the right industry talent, and the right approach, and we ramped up through the year. So in 2019, we signed $14 million and funded $14 million in deals. A little bit of color, that’s roughly a 70-30 split between loans and fair market value leases. In total, we signed roughly 50 transactions. So you can get a feel for the structure of the deals, as we look at that, and we’re gaining momentum. As we look into this year, we said that the net impact of Wheeler would be a use of cash of roughly $80 million. We’re confident with the pipeline that we can build into that level. Now for the longer-term, how big could this business get? Look, we have aspirations to grow it responsibly, but we’ll look at this. We’ll measure that rate and pace of progress also at the macroeconomic and environment, but we like how we’re positioned. We think we’re bringing value to our clients and we think that this business is getting some legs.

So let me just add to what Stan said. So if you think about this business broadly, there’s a couple of different dimensions. One is, the level of placements we have. So think about that as new loans that we originate or new leases. And then second is, how big do we let the balance sheet get. So as this business gets bigger and we fully expect that it will, we’ll have options in terms of syndicating these assets or other types of activities. So it’s really in those two dimensions. And the way we think about that, Shannon, no surprise to you is, we have a source of funds, that is economically advantaged. We tend to – our intent is to consume those funds and then we’ll begin to think about how does that we think about the balance sheet going forward.

Great. Thank you. That was very helpful.

Thank you, Shannon.

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

Yes, good morning. Looking at SendTech and the postal meter business, you said you’re thinking about mid-single top line declines in 2020. That would be an improvement from what we’ve seen. Can you kind of help us understand where you get – what actions you’re taking and your confidence in getting there? Thank you.

Sure. Thanks, Allen. So let me talk briefly about SendTech. So the revenue for the quarter was down 11%, as reported. Recall that we had market exits here earlier in the year. So, when you adjust for that down 9%, but Ryuk had an impact on this business as well and it normalized down to roughly 7%. But I think it’s important to look at a full-year. If you do the same market adjustments and impact the ransomware, revenue was down about 5% and that’s in our long-term model range. And with that, as we look going forward, we expect that we’ll see improvement. If you recall from my prepared remarks in the script, we had some issues around installed here in the fourth quarter, that’s all recoverable. I mean, that is, as we go out and install those, that is items that we can pull back. And as we look forward, it’s really bringing the new offerings we talked about in the prepared remarks, new product, rolling them out internationally, and then importantly, shipping. So we’re seeing improvements in activation. We’re seeing improvements in take up and throughput. Remember, we’re very early days into this business on shipping through this platform. So we’re excited about that opportunity. And we think that the combination of those can be a help as we go through. Now on a profit point of view, this business operated the full-year 32%, as reported, and about 32.5% when you adjust for the malware. So right in the middle of the long-term model and we expect and combined, that includes $10 million of tariff impact as well. So as we look forward, we like the positioning of SendTech. We think they’re gaining some momentum here and can operate at a profitable level and improve that level of profit on a year-to-year basis, still decline, but at a lesser rate.

So I mean, at a very simplistic level, if you think about 2019 is the baseline and you make the adjustments that Stan talked about for Ryuk, as well as the market adjustment, it was minus 5-ish. So if you think about entering into 2020 with that as kind of a baseline, except you’ve got a completely replenished portfolio that moves around the world and increased traction on service – on shipping services. So that’s kind of, I mean, how I think about it at a very high-level.

Okay, thank you. Then maybe some smaller modeling type of questions. In terms of your actions to continue to focus on operating – operational excellence, how do you think about how much you are planning to cut out of expenses in 2020?

Look, we’re going to improve our SG&A, but you’re going to see this actually rippled through the income statement in multiple areas, because keep in mind how this operates. So our shared services functions, if you step back and look at part of the transformation has been simplifying this business model into shipping and mailing, underpinned by financing. We’ve gone from six segments a couple of years ago to three segments and really two groups here, Commerce and SendTech. So when you look at that, we continue to adjust our support services to align to that new model. So as that alignment will yield savings, now some of those savings you’ll see at the top and some of those savings will ripple through the business. They’ll also hit in different line items depending on the source of the spend. So we’re going to tackle that corporate structural spend. We’re still going to make investments in other areas. And so you’re going to see that manifests itself in different areas on the income statement. Now the operational excellence also goes not just from a pure dollars, but improving the support of the business. These two businesses are moving in new directions with new product, new offerings and we’re morphing to support that as well. And so, as I think about where we’ve been and where we’re going, we said a couple of years ago, we’re going to take out over $200 million of spend and we executed that. So I think, you should have confidence in our ability to execute this go forward.

Okay. And can you take a stab at what you think the interest expense will be in 2020?

Yes. When we’ve modeled out the interest expense and if you think about, I rattled off all the debt activity that we’ve had. I think you should think about the interest expense being just very modestly higher than what it was last year, single-digit million.

Okay. Thank you so much.

You’re welcome. Next question?

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

Hi, good morning, guys. Thanks for taking my questions here. Just a couple for me. Could you both Marc and Stan, maybe describe the demand tempo, as you saw it, going through the – to the December quarter? Then listen, there has been a lot of great contexts so far on sort of the moving parts of demand. With sort of constant currency decline being a little bit stronger, both declines, sort of declines in SendTech and sort of growth tapered, which you have walked through the dynamics in ecommerce, but just sort of across the Board, we’d love to just get a sense if you think it sort of business environment is holding up, or if there’s something is sort of some sort of incremental headwind that you guys are also seeing, which you haven’t yet described? And then I have a follow-up to that as well. I appreciate it.

So let me start at a micro level and then I’ll move to a macro level. So in the context that you asked the question in terms of the trajectory throughout the quarter, keep in mind to some extent, my answer data is colored by the fact that, we had the Ryuk incident from October 12 to October 20. So that, that affected how we saw demand. That being said, if you look at every one of the businesses, I think, the demand environment was actually reasonably strong. SendTech, if you look at what we call written sales, which is the amount of business they write versus they install, that was pretty strong. If you look at Presort, again, a strong and improving demand throughout the quarter. If you look at the GFS business, Wheeler to Shannon’s earlier question, strong demand and then Global Ecommerce good. And I would point out, as you think about, as I think about all those businesses, I like kind of how they’re positioned for the first-half of the year. They’ve got some good deals that we think are encouraging. We’ll see how they unfold. From a macro environment, I would say, there’s some good things and some things that are a little concerning. So clearly, I think USMCA is a positive thing that should help trade. The first phase with China is a good thing. We’re encouraged by that. We’re hopeful about the second phase. On the other side of it, the virus in China – the coronavirus in China is concerning. And our heart goes out to all the people that have been affected by that. But it obviously has kind of an uncertain impact on trade. So I would say, we’re cautiously optimistic about the macro environment that we’re dealing with in particularly no traders. I feel better about trading today than I did 120 days ago.

The only thing I’d add, Ananda, is if you step back, unfortunately, this impact from the malware incident, it’s real, right? It happened, but it kind of clouds some of the underlying performance. If you go to the macro view Marc highlighted in 4Q, if you look at the impact of exiting the market exits, and at constant currency and the malware incident, we’re roughly flat. And if you look at the full-year, we grew just over 2% on those same adjustments at a constant currency. So third consecutive year of revenue growth, and I think it sets as well heading into 2020.

And you kind of put that in context, I mean that 2% for 2019. And you look at the guidance this year, adjusted for the client issue that we talked about, it’s kind of in that same trajectory, even though, I think, GDP is probably a little bit more modest growth in 2020 than 2019. But overall, we’re paying attention, but nothing to be terribly concerned about right now.

And marc, I think you just answered my second question, which was with the constant currency revenue growth guidance is flattish, plus minus in 2020 is the – is really the 2% impact from this client that really put to the difference relative to 2019?

Typically, Stan hits me over the headline start talking about guidance, but I’m a little bit further away from them on the table. So I’ll take – I think of minus 1% to plus 1.5%, that slightly positive at the midpoint. You think of $60 million or $70 million for that client, that’s a couple of points. That’s kind of at same Zip code that we’re in. And that’s, I think a prudent view of guidance.

Okay, that’s helpful. I appreciate it, guys. Thanks a lot.

Thanks, Ananda.

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

Yes. Hi. Just a follow-up to the coronavirus, I believe you do some of your manufacturing in China for your equipment. How do you think about how that could impact your – you’re having enough inventory? Or maybe another way to think of it is, if the issues there lasted for what time period would it then become a concern?

Let’s I mean, again, I go back to what I said. I mean, we’re really very focused on all the people in China and our heart goes out to all those who are affected. In terms of the substance of your question, it’s really hard to speculate. I mean, I know this is kind of unknown territory. As we sit here today, I’m not worried about any impact on the supply chain. We’re kind of watching cross-border trade and how that works out. So we’re concerned, but we don’t know enough to give you a responsible answer to your question.

Just keep in mind, I mean, with the tariff situation, we’ve also been working our supply chain over the last 18 to 24 months on improving that position. But it’s early days here. We’re taking care of our people and watching this closely with our partners.

That’s just as a part of our supply chain has moved from China as well. So we’re a little bit more geographically diversified than we were 18 months ago.

Thank you.

[Operator Instructions] And at this time, there are no further questions.

All right, let me conclude. So, as I look at 2019, just to finish it off, and I would say a decent year, not a great year, but a decent year 2% revenue growth, third consecutive year of growth, as I said, that’s the most positive indicator of a successful transformation and we take that quite seriously. At the same time, a much more focused narrowed portfolio in markets that are growing and markets that we have a right to win and we are winning. And you see that in the Global Ecommerce business, you see it in the service levels, they’re providing us it and reduce churn. You see it in the 20% increase in volumes on a year-to-year basis. And this sense point about the balance sheet, the balance sheets in a much stronger place. And if you look at the net debt overall of the company or you take out the finance receivables and cash, from my perspective, that’s not only very improved, but also very manageable. Looking forward, we see continued growth. We see continued growth and I’d go back to what Stan said, profitable revenue growth going forward. So it’s one thing to have increase in profit. It’s another thing to have increased revenue growth, but to have both of those at the same time is the next phase of the transformation and double-digit profit growth at that. So, as always, an uncertain environment, some things from a macro perspective that we’re paying attention to. But we like the demand posture throughout the fourth quarter and as we enter into the first quarter and we’re optimistic about the year. So with that, thank you for your time and we’ll talk to you in 90 days.

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.