Good morning, and welcome to the Pitney Bowes Fourth Quarter 2020 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 your participants on today's conference call. Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Maria Chadwick, Executive Vice President and Chief Financial Officer; Mr. Joe Catapano, Vice President and Chief Accounting Officer; and Mr. Adam David, Vice President, Investor Relations and Financial Planning. Mr. David will now begin the call with a 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 good morning. Let me start by saying how delighted I am that Ana is joining the team as our Chief Financial Officer. Ana held several executive positions at GE Capital, most recently being President and CEO of GE Capital's, Global Legacy Solutions and prior to that, the Chief Operating Officer and CFO of that business. Ana brings with her strong financial and operational experience and will fit into the PB culture very well. Before I turn to the state of our business, I would again like to recognize and thank our employees. No one could have predicted how the world changed in 2020. I am very proud of how our team was prepared and managed through the challenges. Their efforts and hard work shown the progress we made in our business throughout the year. If I had to choose one word to sum up our employees in 2020, it would be determined. That is exactly what our team personifies. The fourth quarter was a remarkable ending to an extraordinary year. Revenue at constant currency grew 23%. To the best of our knowledge, this is the highest modern-day organic growth rate on record for Pitney Bowes. And our shipping-related revenues comprised 54% of our total revenue. For the quarter, Global Ecommerce 60% with profit improving from prior year and prior quarters resulting in positive EBITDA. Presort turned in flat revenue performance, which is a significant improvement from prior quarters embedded in the market. And SendTech turned in strong performance growing both revenue and profit over prior year. This was powered by strong equipment sales, double-digit growth in our SaaS-based shipping offerings and a solid performance in our services business. SendTech is a business that many considered a melting ice cube. However, the investments we have made in…

Thank you, Marc and good morning. Let me start by providing an overview of our full year results followed by the details of our fourth quarter. Unless otherwise noted, my statements made during our call will be on a constant currency basis when talking about revenue comparisons and on an adjusted basis when talking about earnings related items including EPS and 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. For the full year, revenue was $3.6 billion, which was growth of 11% over prior year and is our fourth consecutive year of constant currency revenue growth. Global Ecommerce grew 41%; Presort Services declined less than 2%; and SendTech declined 7%. Adjusted EPS was $0.30 and GAAP EPS was a loss of $1.06. As a reminder GAAP EPS includes a non-cash goodwill impairment charge that we recorded in the first quarter. GAAP cash from operations was $298 million and free cash flow was $279 million. Free cash flow increased $91 million over prior year. Through the year, there were a few noteworthy items that principally benefited free cash flow. First, our focus on collections resulted in a strong improvement in our DSO. We also saw a higher level of Presort and PB Bank customer deposits in part due to initiatives to support our clients. Second, finance receivables declined at a greater rate largely in the second quarter as a result of the lower placements of our SendTech equipment due to the pandemic. You can see the trends starting to improve as our SendTech business built momentum through the second half of 2020 as businesses began to reopen. And finally, CapEx early on when the pandemic surfaced we made the prudent decision to…

Thank you. [Operator Instructions] Your first question comes from the line of Ananda Baruah from Loop Capital. Please go ahead.

Hey, good morning guys. Thanks for taking the question and congrats on an overall solid execution and performance. Marc, a couple if I could. Just with regards to the remark a moment ago about significant profit improvement in e-commerce in 2021, can you just put a little context around that for us? And I suppose that would seem to suggest you could have -- you could find a quarter or two perhaps with profitability throughout the year. I'm asking, I guess, I'm using operating profit not EBITDA profit. And then I have a follow-up. Thanks.

Sure. Thank you for the question. So as you look at the dynamics of that business, I would point to kind of two clumps of dynamics. The first is the efficiencies that we control inside of our business. And as Joe pointed out and I would say the middle of last year, we added three new facilities. And as we got close to peak, we added 2,500 new employees. I put that in context that's half of the workforce. So I expect those dynamics, our own efficiency and productivity to improve on a year-to-year basis. Also as Joe pointed out, we were more dependent in the fourth quarter on the spot market for transportation than I would have liked. And obviously, when that happens you don't control your own destiny to the extent that you would want to. And at the same time when you're hiring less employees, you're subject to the rate at the time. So I think from the perspective of the dynamics that we control, there's lots of reason to believe that things are going to continue to improve. And why I know you asked your question in the context of operating profit, I don't -- shouldn't be lost that we were positive from an EBITDA perspective in the fourth quarter for the first time in a long time. The other side of dynamics that are important which are not as in -- which are not in our control are around labor inflation and transportation inflation. My expectation is those dynamics are going to continue for a bit, but I expect them to moderate as we get throughout the year. Or conversely what will happen is the industry will price for those dynamics. So, yes, we do expect that business to become significantly better from an EBIT and an EBITDA perspective in 2021.

That's really helpful. And just a quick follow-up to that is you guys mentioned -- well the announcement that you're going to carry this sort of recently you were going to carry as part to the surcharge forward. And then the comments just in a few moments ago about anticipating a surcharge benefit maybe that's not the right context, but sort of some surcharge above and beyond in calendar 2021, so the typical rate increases. Can you just give us a little context around, I guess, around near term and if it's distinct from sort of the comment you made about overall 2021, to what degree if any do you think you guys can benefit from those surcharges? And, I guess, I am asking a little bit about sort of is there a distinction between near term maybe second half of the year? And that's it for me. I appreciate it.

You bet. So thanks for the question. So if you think about the pricing dynamics, there's what I would characterize as the fairly standard vanilla pricing increase, which the industry is used to and has been the habit over the last several years. That is in place and we expect that to hold. The peak pricing is on top of that. And to a degree it's tailored to individual customer situations. So if you look at the fourth quarter what we saw was our pricing increase has actually helped. So the prices that we put in place around the peak, we realized the large preponderance of the value from those price increases what happened is the transportation labor costs consumed most of the price increases. So I expect that the price increases will continue to hold and the variable is less around pricing and more around what happens to cost. If you, kind of, step back and say what's going on from a broader perspective there's been such an incredible influx of demand in the industry. You've had different participants in the industry take different approaches to how they've either tried or haven't tried to accommodate that. So we're one of the players that's trying to step up and take more demand but the net effect of all that demand is it's put a fair amount of pressure on the prices of some of the individual costs within those businesses. So I would say right now we're at a point of disequilibrium from a price and a cost perspective that's going to work itself out. And I think as you bifurcated your question between the first half and the second half of the year I'm not as confident it's going to work itself out in the first half, but I do think it will work itself out as we get to the second half of the year.

And that's really helpful. So would that mean that if it doesn't completely work itself down in the first half of the year there's some potential for say like a net margin -- net cost I can't be saying net margin. Net op profit benefit for you guys to some degree in the first half. And then it normalizes in the second half and then it would probably be a neutral situation.

Yeah, I'm not going to go there. I mean, there's too many unknowns to -- off of that level of precision answer. So, I'd be tricking if I had that degree of confidence and the time frame that these things are going to work themselves out beyond the fact that I'm confident they will work themselves out.

That's really helpful, Marc. Thanks a lot.

You're welcome. Thank you.

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

Hey, good morning Marc. I just wanted to understand a little bit about the Global Ecommerce and talking about transportation and maybe controlling your own destiny there. Does that mean that you'll have to buy trucks, or does that mean that you just need to have contracts in place so that you can maybe control that cost more?

I suppose if I just answered yes you would find that an unsatisfying answer.

You're probably right.

No I'm just kidding. Yeah, the answer is we are looking at the balance of how much we are depending on the spot market. So just to calibrate it for you. I mean, we're probably 25% dependent on the spot market through the first several quarters of last year. And then in the fourth quarter it went up just short of 50%. So that's got two implications. First of all you're economically vulnerable to whatever is going out the spot market at that point in time. And the second is that you can't control your own destiny on service levels to the extent that you like. So my expectation is that for sure we will look at trying to have contracts that have got more certainty in terms of both cost and service levels. But on top of that I'd be surprised if we didn't have more trucks as we entered into next year's peak.

And what could that increase cost? I guess could 2021 be you have another really strong quarter from a revenue standpoint in Global Ecommerce but the cost -- these costs may be related to the growth of the business, and therefore becomes a little difficult to get the margin that you're anticipating?

Got it, good question. So we lease the trucks. So from that perspective both the cost and the revenue should match. So I would expect in general that would not be a disruption to our profitability but it might -- the other thing that Joe said, which we shouldn't -- we've sight of is our fleet performed really well in the fourth quarter both in terms of economics, as well as service levels. So the impact of being dependent on third parties is for sure you're vulnerable to whatever is going on within the spot market, but also at least our experience has been that our fleet performed better in terms of service levels. When you don't perform well in terms of service levels, what happened was we ingested into the postal network. And what I would say was a way that try to maximize client service but certainly wasn't very economical. So I think the payback on trucks is pretty solid across both benefits from savings in the spot market, but also in terms of your postal cost, which is kind of the downstream cost.

And then just one last question, Marc. I think when you gave first quarter guidance you said revenue high single digits, low double digits but EPS in line. And I'm wondering why you might not get the benefit of the revenue growth to fall to the bottom line?

Yeah. Well, I think if you look at the dynamics and I'll let Adam elaborate of the fourth quarter in particular we had strong revenue growth. We didn't get quite the flow-through to the bottom line that we had anticipated and it's because of the inflation rates of transportation and labor. I think those same dynamics are probably going to continue through the first quarter. So that's – those same sort of dynamics that you saw in the fourth quarter, I think will persist at least through the first 90 days. That being said, we've seen some moderation at least of the transportation costs through the first 30 days. Adam, I'll let you elaborate and provide more context.

Yeah, Kartik. The other two items was our tax rate in the first quarter last year was relatively low. So we expect a bit of a higher tax rate. And we did receive some rights proceeds in the first quarter of last year. So, I'd add those two points.

Thank you very much. Appreciate it. Thanks for the question.

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

Thank you very much. I wanted to dig a little bit into puts and takes for revenue for 2021. It seems a little more, I guess cautious than I would have expected given some of the trends that you're seeing. So, maybe, if you can talk a bit about what you're seeing on the mail meter side as well as e-commerce, I know you've given first quarter but just – I mean, do we – do you think that the growth that you saw in the third and fourth quarter is – was such in 2020 that there were some one-timers that won't repeat? Just trying to understand since the trajectory seems fairly strong. Then I have a follow-up. Thank you.

Sure. Great question. So, I guess, I would start with a macroeconomic statement, which you all follow as much as we do so. When you have drone power the Chairman of the Federal Reserve states the most uncertain economic times of his lifetime. That's a meaningful statement at least to me. So you're right Shannon, we are, I would say, we're trying to be balanced, but I think prudence dictates that you're cautious about how the year unfolds. If you break the dynamics between broadly speaking mail and shipping, I expect our Mail businesses to perform better this year on a year-to-year basis. So if you look at the exit rate of the Mail business SendTech and Presort, those were flattish, which was an improvement from throughout the year. If you look at shipping I expect that the volumes are going to continue to be strong. But if you look at the fourth quarter in particular is kind of a data point, do I expect that we can lap 60% growth with another 60% growth in the fourth quarter of this year? I suspect not. So I mean, as you get into the back half of the year the comparison gets pretty difficult from a shipping perspective. So that – those are the dynamics.

Okay. Thank you. And then I'm curious, if you – basically you said, you've accelerated your network build-out relative to the plans that you had in the past. So, if you go back to 2019 maybe in what you talked about where are we now in terms of the build out? And then also, I'm curious how much you're investing in automation and new facilities given the demand you're seeing in the network? Like, where is your capacity utilization by the time you get to the end of 2021 based on your estimates? Just to get an idea of what's going to be required in the future? Thank you.

Yeah. I would say from a footprint – physical footprint perspective, we'll continue to fine tune our physical footprint. There's a couple of facilities, which we've outgrown. And there's a couple of places, where we might contemplate new facilities. I would say, the overall basic footprint of the network is appropriate to the demand, we're seeing and the changes will be more in terms of the size of the facilities. And I think, I'd expect some changes there. And then obviously, it will depend on the demand environment, but not substantial. Automation is in front of us. So we're – we have pretty ambitious plan to automate our warehouses. That automation will roll out over the next couple of years. Candidly, we'd roll it out as fast as we could, but the supply is a little bit constrained. So it will be dependent on what the manufacturer's capability is. So as an example just to kind of dimension the last for you. In the shipping locations, there's technology available that does sortation and puts parcels and facts which is how the – which is how the postal service ingests in their network. There's technology available to do that on an automated basis that in essence reduces the amount of manpower by half. So as quick as we can get that technology, we'll get it, but it also has a very good payback.

Okay. And actually, if I could just sneak one more in. If you think of e-commerce and the growth you expect this year, how much of it do you think will come from existing customers you had signed as of the end of 2020? And so you're just seeing those customers expand versus the need to go out and sign new logos to grow the business? And that's it. Thank you.

We don't – I mean, I suspect, we will continue to sign new clients we'd like to. The plans are really not predicated, and the plan is predicated on keeping the customers we have with some nominal amount of growth underneath it. We had a very successful year last year in terms of signing new customers. Our focus now is making those customers successful.

Thanks.

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

Good morning. I thought I heard you say with Global Ecommerce that you had a price increase plus a surcharge. Could you tell us how much of the revenue in the quarter came from just the peak surcharge?

Let me defer to Joe or Adam on that number.

I can take that one Allen. Yes, I mean Allen, we don't want to give a specific number out as far as the peak surcharge obviously for competitive reasons, but it certainly did help our revenue. However, it's important to keep in mind that the largest item by far driving the revenue year-to-year increase was our volumes. As we talked about volumes increased by over 50% or more across all our lines of businesses. So, it was really the volume increase that drove most of the revenue from a year-to-year perspective.

Thank you. And you highlighted your ability in 2020 to decline SG&A as a percent of revenue. Do you anticipate in 2021 that SG&A as a percent of revenue will decline again? And do you think that CapEx in 2021 will be higher or lower than 2020?

Adam, why don't you take that?

Yes. So, I'll answer the second part first. So, CapEx, Allen, as you recall in the second quarter when the pandemic hit, we talked about reprioritizing our spend and we did that. So, our CapEx came in much lower than in prior years. As we look into 2021, we expect CapEx to return back to normal levels. A lot of those investments in CapEx will go to the points Marc talked around automation and building out the efficiencies for e-commerce. As far as SG&A as a percent of revenue, yes, I mean as we look forward across our long-term plan, we expect that SG&A as a percent of revenue to continue to improve. There's opportunities and continues to be opportunities in shared services to reduce costs. We continue to benchmark all the shared services there's opportunity there. Another example is within our SendTech business on how we go to market, right; we've done a lot of work shifting our go-to-market from the direct sales to inside sales which is a more efficient channel. We've certainly sold more over the web now which is the most efficient channel. And I think as we look forward here we'll continue to ship more and more of our sales via the web. So, certainly continued opportunity from an SG&A front.

I would just add on that. I mean our model -- if you look at our long-term model, it suggests that while revenue continues to increase at moderate levels expense either it stays flatter comes down. So, it's -- and that's one of the dynamics that creates leverage of the business model.

Great. And my last two questions related to SendTech. One the increase in new business equipment, can you just dig into that a little bit of what's behind that and the potential for that to continue? And then second I know for Wheeler Financial, you don't want to give how much -- it's not prudent to say we're planning to put this much money to work. But in general, if you could just remind us how much excess deposits are available? And have you changed your view of like that we want to pull back on Wheeler that maybe there's an opportunity to expand that in 2021? Thank you.

Sure. Let me take both of those if I might. So, within SendTech there were a couple of different factors that drove equipment sales. First of all, in the fourth quarter, there was a large government deal which we realized some of the revenue from in the fourth quarter. We'll realize more of the revenue from that deal in 2021. But that being said as Joe pointed out, the low and middle-end devices grew fairly substantially last year and that's because we had new value principally shipping that was embodied in those devices. So, the product was relatively new. So, you always get a little bit of an initial surcharge on revenue as you introduce new products. But I'm fairly confident that we've tapped into something that's a pretty important revenue source for us going forward. So, whether or not every quarter looks like the fourth quarter we'll see. But as Joe pointed out and I would reiterate, the decline of the core Mail market is now substantially being offset by shipping revenue in SendTech and I expect that dynamic to continue. As our rates to Wheeler we still think that's an important opportunity for the company. We have -- I'll defer to Joe or Adam, but $300 million or $400 million of deposits that we would like to put to work, we think those deposits are economically advantaged in terms of costs. And we think there's great opportunities to put that money to work in a way that drives incremental earnings. If you look at how our thinking has evolved, however, when this business started, we had envisioned it as principally a lease-based business. I would say, as our thinking has evolved, we've moved more to working capital loans for shipping, somewhat analogous to what we've done for the Mail market over the last several decades. The advantage of that is those loans, if you will, that working capital has a higher velocity to it, it is relatively reliable from a credit perspective. And it's accretive to our shipping businesses. The other advantage of it is, unlike when you're making loans where you take residual value risk, you don't take any residual value risk when you're providing working capital loans. So our rate and pace of putting those deposits to work will depend on economic conditions. But I'm as convinced now, as I was several years ago, it's a great economic opportunity. Just again to repeat, there's a customer base that we understand well from a credit perspective. We have economic advantage in terms of the funding source. And we've already gone through the expense of acquiring those clients. So as long as you stay in your installed base, as long as you stay within kind of capital that you can control, we bring structural advantages to the marketplace which I continue to think are very compelling.

Thank you very much.

Your next question comes from the line of Anthony Lebiedzinski from Sidoti. Please go ahead.

Yes. Good morning and thank you for taking the questions. So, first, just wanted to follow-up on the previous questions in regard to the equipment sales. So, if we to back out the equipment sales to the large government deal that you had, that business have grown in the fourth quarter?

Equipment sales would have grown. The overall total revenue is probably close enough that it was still kind of around flattish. Adam, is that the right recollection?

Yes, that's right, Marc.

Got it. Okay. Thanks for that. And then, as far as your first quarter guidance that you mentioned, that you expected, kind of, EPS to be flat from a year ago. Can you give us a sense as to what's embedded in those expectations for profitability for each of the three main segments?

Adam, I'll let you handle that one.

Yes. I mean, Anthony, we're not going to obviously give segment-by-segment guidance here for the quarter. As I mentioned, I think, it was Shannon who asked the question, we do expect improvement here as we move forward throughout the quarter. First quarter, as we mentioned, we did have a lower tax rate last year and some right proceeds, but we certainly expect continued improvement from an EPS standpoint as we move throughout the year. With the fourth quarter naturally being our largest quarter, right, with the holiday season and e-commerce being a bigger, bigger piece of the business.

Got it. Okay. And you mentioned, several cost headwinds as far as transportation and labor certainly seeing an increase there. Any sort of cost tailwinds that could materialize over the course of the year? I know you talked a little bit about automation, but would anything else there that you could call out?

Well, I would say just general efficiencies. So again, if you think about the operating dynamics within GEC, in particular, I mean 2,500 people that were brand new to their job as we entered into peak, there's just a certain maturation of skill that will yield efficiency and productivity all by itself. So, put automation aside, we'll get to that as quick as we can. But as the network settles out and matures just a little bit, we would expect more efficiencies.

All right. Thank you. Best of luck.

And at this time, there are no further questions. I'd now like to turn the call back to Mr. Lautenbach for any additional remarks.

Yes. Thank you, and thanks for the questions. The questions were terrific and instructive. So hopefully, our answer is more equally instructive. Before I go any further, I'd like to thank Joe Catapano. Joe has ably sat in for Stan Sutula over the last a couple of months and done a terrific job of getting us through year-end close as well as starting off the year, and he's been a terrific partner. So Joe, thank you for your partnership. And again, we're just delighted to have Ana on Board. As it relates to guidance, I understand the desire for us to provide specific guidance. Candidly, I'd like to get there as quickly as I can. So, as soon as we can give you a set of numbers that we have a degree of confidence then we'll do that. We understand the importance from your perspective as well as the investor perspective. I just didn't think right now that we had the degree of confidence in how the year unfolded, particularly in the back half of the year to do that. So, we'll get to that as quickly as we can. I would just pick up where I concluded in my formal remarks and that is, we're of the precipice of doing something that very few companies have done. You all follow a cadre of terrific companies, many of whom are going through some of the same challenges that Pitney Bowes has gone through over the last decade, and the digital disruption of business and how business models have become so disrupted. We're through the preponderance of the things that we needed to do in order to recreate this company. And as I've said that last chapter of profitable revenue growth is the mark of a fully transformed company that moves on. And as our guidance suggested, we believe we're poised to reach that. So, we'll continue to talk. And we would like to do an Investor Day sometime in the first half of the year, if we can to provide as much clarity to you as we possibly can. So, of course, we would have to do that in a way that was either virtual or safe. But nonetheless, we want to be as transparent as we can. So with that, we'll conclude this morning's remarks, and we look forward to talking to you soon. Take care.

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.