Good morning, and welcome to the Pitney Bowes’ Second Quarter 2020 Results 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 your speakers for today’s conference. Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and 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 2019 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?

Thank you, Adam. And thank you everyone for joining us. I'd like to begin the call by thanking all the essential workers, including the Pitney Bowes team, for their dedication to the work in what is precedented time. And likewise, our hearts go out to all who have lost loved ones to this terrible virus. We continued [indiscernible] in challenging times and unchartered territories. And as I mentioned in our last call, times of economic dislocation and this is certainly that. Our times with market share changes hands. Our focus from the outset has been to come out of this period better than [indiscernible]. I will let Stan take you through the specifics of the quarter. But from my perspective, the quarter was quite good. We had excellent execution and made the best [indiscernible] difficult situation. Looking at the quarter from a longer-term perspective against our objective of coming out stronger. Similarly, we hit the ball well. First and foremost was the health and wellbeing of our employees. We made the necessary changes to how we did business to keep our employees safe, and we got high marks from our team. Likewise, we put a premium on our balance sheet. We exited the quarter in a much [indiscernible] position. We had already refinanced much of our debt. And in the second quarter we substantially increased our quiddity exiting the quarter with over $1 billion of cash and short-term investments. We will continue to be diligent about our balance sheet and liquidity position. In our Global Ecommerce [ph] business, we grew 100 new customers and [indiscernible] unprecedented volumes. I have heard others in our industry talk about volumes consistent with the holiday peak. Our domestic delivery volume in the second quarter were over two times holiday peak. I won't say we…

Thank you, Marc and good morning. Our continued focus remains on the health wellbeing and safety of our employees, clients, partners and communities. As we discussed in our last call, employees that can work remotely continued to do so. Within our facilities, we are enforcing safe social distancing, staggered shifts and breaks, mandating protective masks, conducting temperature checks in higher risk locations, and sanitizing multiple times a day. All areas of our business have been impacted by COVID; some positively and some negatively. In the US market ecommerce as a percent of total industry retail sales increased more than 10 points from 16% in 2019, to more recently 27%. We are also experiencing a dramatic shift to ecommerce, which fueled our strong revenue growth this quarter. In the second quarter, revenues associated with our shipping products comprised 51% of our total revenue, which is the first time our shipping revenues have outpaced mailing. As anticipated, we are experiencing pressure within the mailing related businesses. We are leveraging the investments we have made over the last several years to address opportunities and help mitigate some of the pressure. We estimate that the incremental costs related to COVID in the quarter were approximately $12 million. These costs largely relate to higher bad debt expense and ensuring the safety of our employees primarily on PPE, supplies and quarantine pay for exposed employees. In addition, we saw higher postal costs related to injecting parcels directly into the USPS and bypassing our network in order to better serve our clients. And, of course, during these uncertain times, we continue to keep a tight focus on our liquidity position and cash. Let me briefly recap. We continue to maintain a strong liquidity position. We ended the quarter with over $1 billion in cash and short-term investments.…

Hi, good morning guys. Appreciate all that detail that's really helpful, given all the business crosscurrents. I guess a few, if I could. Marc, I believe way back into your prepared remarks with regards to ecommerce, a comment was made around achieving scale sooner than anticipated. Did I hear that accurately? And if so, could you give us some context around it? And sort of get it that you're adding the three new facilities. But could you kind of walk us through, given that you were essentially breakeven this quarter in ecommerce or darn close to it, how we should think about kind of ecommerce margins going through the rest of this year? And then I have a couple of follow ups as well. Thanks.

Sure, I did say that. So you heard it correctly. First of all, I apologize that the recording line on this side was a little bit fuzzy. So if you didn't hear things, please feel free to clarify. So there's no doubt that in the second quarter we certainly saw it in our results. But you've seen it in UPSs results and you see it in USPS volumes, FedEx volumes that there was a stair step increase in ecommerce shipping. So if you think about what the market was pre-COVID, think about of 10% to 15% linear increase, we obviously saw something three or four times that in the second quarter. So that stair step increase will allow us to get to scale sooner. The unknown is how much of that stair step increase sticks. So if you look at the volumes in the second quarter and you assume that's the new reality, you come to one set of conclusions. And if you assume some of that volume is going to stick, but some of it's going to dissipate, then that's another scenario. In either case, our projections are that that business gets to scale sooner. In terms of your second question about margins, I'll let Stan elaborate. But our expectations, we continue to see margins improve as we go through the balance of the year. I'd reiterate something that Stan said, because it's really hard to underestimate the impact. 80% of the workforce in that business was new. And there's just a certain learning curve as you come up, the experience curve in terms of how you work your way around those facilities. So if for no other reason, just the team hitting their stride, we'll get more efficient. But clearly scale continues to be an important dynamic. So I'll let Stan elaborate.

We give a little bit more color. Ananda, good morning. The three new facilities, they are smaller facilities so think 100,000 square feet, plus or minus. And they're needed to kind of fill up spots in our, in our network that we need to optimize. And when you think about that, from a CapEx point of view, more like $5 million to $10 million and from on OpEx maybe about $5 million or so, a little bit less than $5 million for the rest of the year. So, we're adding capacity to better serve our clients. Let me spend just a minute on the margin and mark a couple of the important points. So, the Q2 volume would put us roughly on a $250 million annualized run rate. But there are two components driving improved EBIT margins, scale, and then operational efficiency. So, let's start with scale. We've invested ahead of demand with the two new flagship sites we opened in Q4. That strategy actually enabled us to handle this dramatic surge in volumes and volumes doubled on a year-on-year basis. But we are seeing the benefits of scale and we're seeing it in two areas; transportation cost and by roughly a third, and then fixed warehouse costs improved by over 45%. We're not seeing it yet is in labor. And in labor, this really manifests itself in our workforce, as Marc mentioned, growing 80% in 90 days, you can't do that efficiently. And this bit came largely through temp labor, but adding multiple shifts across the network. And so we're doing that, you combine that with a COVID-impacted spend on the Global Ecommerce business, which was roughly $10 million, or roughly just over half of the impact on EBIT, you can see that headwind that we have. I think, there's good news within that though. We are going to get better at the operational efficiency in particular around labor. And then adding these new facilities will allow us to better operate on a M2M basis. So, we've been investing for operational efficiency, which is the second part. So, investing in the network that accelerated growth to ecommerce is certainly faster than we anticipated that gives us a great opportunity to leverage operational efficiencies. We're in the middle of doing time and motion studies as an example. And that will improve our ability to operate that labor in a more efficient manner. And then the addition of those facilities will certainly help us. And Nick Smith and his team, I think, deserve a big nod of the hat for being able to handle that surge in volume and that compressed of a timeframe. I mean, typically, we start planning for peak in first quarter, and this all hit in a very sudden fashion.

That's all very helpful. As a quick follow on to that and then I'll just leave the floor. You guys mentioned that new customer wins, new market opportunities, is share gain a fair way to think about it? And if not, just any context there? Because what I'm really trying to paint a picture for is regardless of how volumes ebb and flow given COVID, do you think you sort of gained some stickier customer opportunities and relationships so that you exit this just from a stronger conviction, then you went into a structurally stronger position?

I’d say we gained share. I'd say we gained customers. I think, the important part of those 100 new customers I mentioned was they contributed very little incremental revenue to the quarter. So that revenue is still in front of us. So we'll see over the next coming days, but I don't have any doubt that if you look at, as I said, if you look at our peers in history, they're talking about volumes that are consistent with peak, we were well above peaks, I think, by any measure will have gained share. I think that's structural to your point.

Okay, great. Thanks. Thanks a lot.

Thanks, Ananda.

Our next question comes from Shannon Cross with Cross Research. Please go ahead. Please go ahead.

Thank you for taking my questions. So first is, in terms of ecommerce it sounds like, obviously you've signed a lot of new customers and that. How's the negotiation going in terms of pricing and scale? As ecommerce became more of an important way of getting products to people during the pandemic, do you have pricing power? I'm wondering if anything is shifted there. And then I have a follow up. Thank you.

So, Shannon, on pricing in the negotiations. So, this has been an interesting time for us going through this. So, we've added over 100 new clients, their primary mission was getting product to consumers, and that's where we have stepped in and stepped up. So, we have done some limited price targeting in areas that helped balance out the network and areas that where we're experiencing increased costs, but this is also going to come through scale. So as we bring additional efficiency, it allows us to modify our pricing through directing to coast, for example, on inbound from overseas. But we do see some pricing leverage in the market and we expect the volumes that that will continue on going forward.

I just add a little more color. I mean, if you look at the industry, our colleagues in this area are taking price up. We've done a little bit of that in the quarter. But I think there's another opportunity in front of us to think about that. The negotiations with customers are different in the sense that there's only a certain amount of capacity in the industry and the industry's at that capacity. So it does provide pricing opportunity. The other thing that's perhaps not as obvious is once your business gets to scale, the marginal economics of another five million parcels isn't the same as when you're below scale. So it makes you think about incremental volume in a slightly different way and gives you a little bit more courage, if you will, to think about pricing.

And I guess how much of the -- do you have any idea, I'm sure you do, but when the crossover to where we'll really start to see the improvement in margin could come and I know there was a pandemic in that you're not giving guidance. But I mean, is this a couple quarters away, just in terms of the volumes that you expect? Is this more you're going to have to spend more and that so it's maybe further out? Just if you can give us an idea of how quickly you think you can start to benefit from some of the scale?

Yes, Shannon. So obviously, it's an important question that we've stared at a lot. And we have a number of scenarios that we have modeled out. But this is a pretty unpredictable environment. So what we've looked at is we've demonstrated that improvement in scale in transport and warehouse. We're confident that we'll continue to make inroads on the labor side. But that's going to take some time. A little bit of unpredictability is in the overall COVID impacts. And we see it across the U.S. in different areas seeing spikes up. And we can see that flow through some of our numbers. What I would tell you is that as we go through the back half of the year, we expect that this business will continue to make progress on a quarter on quarter basis. But we're not going to predict the inflection point of when it cuts over. But you should expect that we'll continue to see benefits. I mean, we're encouraged by where we are now and we're encouraged by what we see in the month of July from the volume continuing.

[Indiscernible] just some raw numbers of we're at a $150 million looking at Stan parcels on annual basis before this were 250 now. The original plan called for layering in capital and automation slightly before you saw those increased volumes. So I got to make a judgment about how much of that volume sticks and that will dictate the pacing and the sequencing of the capital on the automation. So if it all sticks and we'll move more quickly in terms of building the incremental capability to handle that officially. Right now we're throwing people at it, which is good. And we're able to accommodate the client requests as best we can, but it's not the most efficient.

Thanks. That was helpful. And then, Marc, can you talk a little bit, you had a leadership change during the quarter or actually, I guess after the quarter with Gregg taking over Global Ecommerce. Do you anticipate any changes or I mean, obviously you sort of had to jump in with a lot of volume running through the system? So do you can maybe just stress out a little bit?

Yes. So important to understand the structure that we had. So as you mentioned [indiscernible], it was a great colleague and we miss her and wish her well, left within the last 30 days. She was responsible for Global Ecommerce and Presort. Within Global Ecommerce, Gregg ran most of it. Didn't run the operations, Nick Smith does that. So from that perspective, it's less of a change than it seems. Gregg was involved along with Nick and James Fairweather and [indiscernible] in the strategy. He was certainly on point for all the client relationships. He was the Chief Commercial Officer who was responsible for the revenue. So it's perhaps less of a change than meets the eye. It was a pretty collaborative fluid team, they operated as a foursome, so we won't miss a beat.

Okay, thank you so much.

Thanks, Shannon.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Yes, good morning. And thank you for taking the question. So, just looking at the Global Ecommerce segment, that just digging into that a little bit more. So, obviously the fourth quarter tends to be the highest in terms of, because of holiday shopping season and so on. So, I guess with the new facilities that you're opening, or will be opening up soon. Can you give us a sense as far as what the potential will be for improved scale and as far as efficiencies? And also, I have a follow up to that as well.

Sure, Anthony, thank you. Good morning. So as you mentioned, the fourth quarter is typically the peak. And as I said earlier, we typically start planning peak right after we finished the last one. And so Q2 was a hit in a very sudden level of volume coming through. We would not have been able to handle that had we not invested ahead last year in particular with the two new flagship facilities. Even with that we are now running essentially 24 hours a day with downtime to do maintenance, and temperature checks and things like that across most of our facilities. So adding these three new facilities and expanding one other is going to enable us to be more efficient, have a better spread of labor and parcels across our network, better serve our clients. And importantly, as we head into peak, and we expect that these will be up late in the third quarter, but as we head into peak that will enable us to handle those volumes. We expect that, with that additional scale, both the volume and the ability to handle it through the network, that's what gives us confidence that the margin will improve from Q2 to Q3, and from Q3 to Q4. And that's why we've made those investments. We're also investing and things I mentioned the time and motion studies, but we're investing in operational efficiencies. Some of that for automation, but a lot of it is improving our processes and taking the best practices across our facilities and leveraging that to improve our overall efficiency. And I'm confident that our team is going to be able to take the experience from Q2, and be able to leverage that. And as Mark mentioned, when you bring on that much workforce and that shorter period of time, just the learning curve alone is challenging. So we anticipate and are confident that we'll be able to see improving margins as we go through the back of the year.

Okay, thank you for that. And then when would you expect to complete the time and motion studies?

They're ongoing Anthony. And look, we come out productivity in a number of ways. So we're looking at our cost modeling, our pricing. And this business is growing very rapidly routing lots of new clients, lots of new capabilities. But the time and motion studies are always insightful. Because we are standing up new facilities, we're standardizing our footprint of how we want to operate. That gives Nick Smith and our operational team a lot more information on how to streamline the flow of parcels. And we've made a number of changes already that have resulted in our existing facilities to handle far more capacity than they did last year. So those will be ongoing, but they will certainly help us heading into peak.

Got it, okay. And then in terms of improved truck routing capabilities, where are you with that initiative now?

So we can tell you -- this is a good example of our transport costs improved by over a third. Some of that is just pure scale, you're filling up the trucks more. And then it's also the ability to look at that network and how you do your routing. I would tell you though, that we spent a lot of time and money to reroute parcels in order to meet our client's needs during the quarter. So even though we improved our transport per parcel by roughly a third, I think there's more opportunity there, because we had to balance in between our facilities in particular, the two coast guards are hit particularly hard from China inbound volume that would come in big surges, and we would use -- we would offload to other facilities to try to balance out the network. That's why adding three new facilities is so important. We also expect that that will improve our transport costs going forward.

Got it, okay. And the last question for me as the incremental COVID cost for the third quarter, do you think those would be comparable to the second quarter?

Hey, it is really hard to predict that. We know there’ll be an impact, I mean, the pandemic isn't going away. What I would tell you though is our preparedness continues to improve. If you think back to where we were in March, most companies including us, were getting PPE almost at any cost, so some of that has gotten better. We've also gotten better at handling how do we do temperature checks, how do we do staggered shift, how do we do cleaning in between shifts and maintain our facility so our employees stay safe. So I expect COVID will still have an impact going into the third quarter. We don't know if that's going to increase or decrease, we said look part of that was bad debt. And the retail industry is a tough industry and so, some of that could continue to manifest itself. That's adding new clients is so important. It diversifies our base and gives us additional protection. But the team did a really nice job in collections through the end of June. And then, candidly collection through July, the developing strong relationships with the clients and as you saw that manifest itself and improve DSO.

All right, well thank you and best of luck.

Thanks Anthony.

Our next question comes from Allen Klee with National Securities Corp. Please go ahead.

Good morning. Two financial questions and then one follow-up. The financial questions are could you clarify on your income statement you have other income of $17.4 million of what that is? And then, for your free cash flow for the quarter alone, the number was, it was extremely high I mean, if you annualize so it's over a 150 -- 100% free cash flow yield. So can you go into what's like normalized in that or what were the things that affected that? Thank you.

Sure Allen. Good morning, so let's start with the other income. As we said in our prepared remarks, we sold an investment which is not in our operational results, but it is in our GAAP results. And that investment generated about $12 million gain. And that treatment is consistent with how we treated others in the past. So again, not in our operational results but it is in our cash balance obviously and then, our GAAP result. This was a sale of a 50% joint venture that we had. And so that closes out our participation in that. Again about $12 million was the gain. And then if you go to free cash flow, your second question, free cash flow this quarter at a $148 million obviously, was a very big number. Let me break that down. I’ll start with if you recall in the first quarter, we did not have a strong free cash flow. But if you look at the first half at a $101 million, that's up roughly $70 million year-to-year. Let me start with the second quarter. So for the second quarter, there's a number of drivers. The biggest one was accounts payable and accrued liabilities, that's up about a $120 million. And if you peel that back, accounts payables was up about 25, customer deposits was up about 35, GEC volume which drives more payables etcetera was up about 25 and then taxes payable. Those are the big drivers and they are very operational. The other big driver was a run-off in finance receivables. That was worth about $75 million. Now that's not how we want to generate free cash flow, but it represents kind of where we are. If you think about how this works as finance receivables roll-off the balance sheet, typically, we're…

Thank you. My last question is more strategic and it relates to potentially splitting the company up. I normally wouldn't ask something like this on the public call, but it just seems so compelling and obvious in the current environment, where if you look at pure play e-commerce companies and even ones that are unprofitable, I mean, I can think of Overstock and Wayfair and a bunch of other examples. If you took the multiples that those type of stocks trade at and apply that to your ecommerce business, you could get a market cap or more than the whole market cap of your company today. And the market is just not paying you for your ecommerce business. And you could create tremendous shareholder value if the company was split up. So the question is, is this something that you guys would consider?

Let me take a shot at not answering that question. So the first thing I would say is what we've said before. On a regular basis, the Board of Directors looks at all alternatives. That's something that's been true since I've been here. It will continue to be true. The dynamic that you mentioned is obviously one that we've noticed as well. And we've studied. What I would say is what we've said all along is if an asset is worth more to a different set of owners than it is to ours, then that would be something that we would contemplate. The second thing I said, and it's certainly true, is software as well as, when we sold a [indiscernible] timing's not an unimportant aspect of that. So we understand the dynamics well, it's something the Board works out on a regular basis. I'd reiterate what I said, if it's right for the shareholders, then that's something we do. But timing is not unimportant in terms of how we think about that.

And our next question comes from Kartik Mehta with Northcoast Research. Please go ahead.

Hi, this is Basel for Kartik. I just want to ask a general view question. Based on the trends you have seen in ecommerce, do you expect this similar trend to continue into 2021?

Yes. I mean, just look at from a biobehavioral perspective. I mean, the amount of Global Ecommerce as a percent of retail went up 10 points, like 16% or 17% to 27%. Does it stay at 27%? I don't know. But it's clearly going to be a hell of a lot more than 16%. So I think that trend is clear then. And if you look out from the other side, the number of bricks and mortar stores are going down partially because some retailers are going away. But also, for those retailers that are sticking around, they're changing their routes. So I do think the trends will go forward. The question is kind of not to me. Did the trends continue, it’s at what level does the trend continue?

And my second question, as the Fed continue to maintain interest rates, at such a low level, are you guys looking to refinance even furthermost portions of the debt that are due in 2021?

So we look at the debt, I mean, obviously we've done a ton of work on this. If you go back to the end of last year with the sale of our software business, a new revolving credit facility, a new term loan A, new term loan B, and then using those proceeds to do a waterfall tender, which reduced our towers. We are always looking at the opportunities in the market at all different solutions. Obviously, our next bond maturity is the $172 million in October of 2021. And we will deal with that opportunistically if that presents itself. But we are confident in our ability to refinance that. So we're constantly evaluating the market on what the art of the possible is to make sure we put our money at the best use. So right now, if that presents itself, we'll take advantage of it.

That's great. That's all for me. Thank you so much.

Thank you.

Thank you. Mr. Lautenbach, would you like to make any additional remarks?

I would. Thank you, operator. First of all, let me just comment on the changes in leadership at USPS. We welcome to the industry; I love to draw his long-term industry veteran and we look forward to working with him. At the same time we wish Megan Brennan, the previous Postmaster General well. But likewise, [indiscernible] may inherit the CEO role at UPS. I've known Karl [ph] for a long time. She's great executive and wish her well. And likewise David Adam, CEO, previous CEO great executive and solid industry colleague. So let me close with this. When you look at Pitney Bowes through a wider lens, you see a company with over $3 billion of revenue, growing mid-single digits in the middle of a pandemic. GDP results will come out today, but we're faring quite well. We've transformed our portfolio in the pockets of our businesses is now and shipping. And I think it's worth noting, for 100 years now and has been the majority of our business in the second quarter, those two lines crossed and shipping going forward will continue to be a bigger and bigger portion of the business. But we didn't get a lot of questions on SendTech today. I will say if you look at the SendTech results underneath what they are able to do, they were great. And as you think about the transformation of the company, the transformation of SendTech is instrumental to that and we hope to talk more about that in the coming days. We've done the hard work around our balance sheet. And to stand last point and we got $1 billion in the bank. So we're in a strong position from liquidity. Our debt manageable, got good cash flow. Let me be emphatic about the full employment, we're…

Thank you. Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing service. You may now disconnect.