Good morning, and welcome to the Pitney Bowes Second Quarter 2021 Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today’s call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today’s conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Maria Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations and Financial Planning. 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 2020 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also for non-GAAP measures used in our press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations website. Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few opening remarks. Marc?

Thank you, Adam and thank you, everyone for joining today’s call. We delivered a solid quarter and first half of the year and continued to make progress against our overall objectives. Every business grew revenue and improved EBIT from prior year. Overall, revenue at constant currency grew 6% and EBIT grew 16%. SendTech and Presort both grew revenue, albeit as expected given the easier compare and both businesses grew EBIT. Presort continues to see a nice recovery in volumes from pandemic levels, and EBIT margins remained in the double digit range moving back towards the long-term model. SendTech's revenue growth was led by a strong performance in our SendPro product family, in addition to continued double-digit growth in our SaaS based shipping portfolio. The business recorded its third consecutive quarter of year-over-year EBIT growth and continues to maintain its EBIT margin above 30%. Global e-commerce grew revenue this quarter despite a tough prior year comparison, and importantly also improved quarter-to-quarter. EBITDA turned positive in the quarter, and both EBIT and EBITDA improved meaningfully over the prior year and prior quarter. The path to profitability for e-commerce is an integrated approach around talent, training, automation, and execution. We've made several important additions to our team and the new management talent along with the maturation of our existing workforce are clearly yielding results. We continue to work to optimize our shipping lanes and continue to focus our investments toward more automation. We continue to make good progress with substantial opportunity still in front of us. Entering the second half of 2021, I like where we sit. The revenue comparisons will get more difficult in the second half of the year compared to the first half, but this quarter was a glimpse into what the business can look like when we hit on all cylinders and that improved profitable revenue growth is within our grasp. Over the course of the last year or so, I have said that Pitney Bowes will come out of this pandemic a bigger and better company. And while we are not out of the woods with the pandemic, we're certainly on the trajectory of being a bigger company, and we're working every day at becoming a better company. With that, let me turn it over to Ana.

Thank you, Mark. Our second quarter results reflect solid momentum across all of our businesses. We continue to make good progress and are set up well for the second half of the year. Unless otherwise noted, I will talk to revenue comparison on a constant currency basis and other items such as EBIT, EBITDA, EPS, and cash flow on an adjusted basis. Revenue was $899 million and grew 6% over prior year. Adjusted EPS was $0.11 and included a $0.03 tax benefit in the quarter. Free cash flow was $87 million, and cash from operations was $79 million which was a solid performance in the quarter and in line with our expectations. Although down from prior year, it is important to remember that last year included a $66 million contribution from the decline in our finance receivables, which was largely COVID related. This was an item that we identified as a headwind to our free cash flow comparison earlier this year. During the quarter, we paid $9 million in dividends and made $5 million in restructuring payments. We spent $40 million in CapEx as we continued to invest in our network and productivity initiatives across the business. We ended the quarter with $814 million in cash and short-term investments. Total debt was $2.4 billion, which is down $289 million from prior year. When you take our finance receivables and cash into account, our implied operating debt is $567 million. Let me turn to the P&L, starting with revenue versus prior year. Equipment sales grew 46%, supplies grew 14%, and business services grew 6%. We had decline in support services of 1%, rentals of 2%, and financing of 16%. Gross profit of $301 million improved about $17 million over prior year on growth across all segments. Gross margin was 33%, which…

[Operator Instructions] And our first question today comes from the line of Shannon Cross with Cross Research. Please go ahead. Thank you very much.

Thank you very much. I was just wondering how we should think about run rate for volume during the quarter, and if you're able to meet domestic fulfillment? So if you think about it, it is about 40 million parcels, a good run rate and then how should we think about -- that sort of for non-peak post pandemic? And then how should we think about specifically what you're doing to ramp up for the fourth quarter? Thank you.

Sure. Thanks Shan. So I think it's easy to get lost in a sea of numbers. There’s so many different dynamics and currents running through the marketplace. So if I might, let me kind of start with a macro view and then go to a micro view. So if you think about this from a macro perspective, e-commerce purchases as a percent of total retail last year went from roughly 16% to 26%. So, over a 50% increase. Now, subsequently, that number has regressed a little bit, but it's still 24%, 25%. So, slightly below last year, but substantially above pre-COVID. Within that overall dynamic, there is also quarter-to-quarter dynamics. So, if you think about last year, in the world of COVID, first quarter, we got two months in before the virus hit, second quarter was kind of the tsunami and not only did you have many customers moving to e-commerce and the internet for purchasing, but you had retail outlets that were essentially closed. So, within the quarter-to-quarter dynamics, last year you had a particularly strong set of dynamics in the second quarter and to a degree that moderated a touch but lasted throughout the year. So, second quarter was kind of for all kinds of different reasons an unusual quarter. From a micro perspective, I should make one other comment from a macro perspectives. All this was against an industry capacity that was really oriented towards pre-COVID levels, so think of an industry that had capacity to accommodate the 16% or 17% with this influx of demand. From a micro perspective, Pitney Bowes as a challenger, we tried to say yes to as many customers and as much volume as we could, partially because we saw there is an opportunity to get to scale partially because we are…

No. I think that was really helpful. I guess one question, my follow up question is just, how do we think about your opportunity to grow? And this is over a longer-term period of time? Is it incremental customers that are around that one pound level or will you develop your facilities such that you can handle a wider variety of parcels? I’m just trying to think about how you think about your CapEx investment in what you do?

That's really a good question. So if you think about kind of going forward, so you had this kind of one time step up with a slight digression. I suspect, as you get into 2022 the out years kind of what you're thinking about for sustained growth, it goes back to the 10% to 15% growth that the market was clipping along at. In terms of how we're thinking about it, the gating factor on size of parcel isn't as much your network footprint as it is the tooling inside of the warehouses. So, there's different tooling that accommodates different sized parcels. So yes, we will continue to build out our footprint. We've got a couple of more sites that we will bring online here in the second half of the year, but we're going to tool them kind of for what we think our sweet spot in the marketplace is. I'd say think about the 10% to 15% long term, we will continue to build out the network. I think the build out of the network and we're looking at different scenarios, candidly, right now do accelerate the build out and finish it, already do it over kind of a more staged process and kind of meter [ph] that out. But I think the overall capital spending for the quarter was $40 million. That was kind of a reversion back to what it was. That's kind of how we're thinking about it for the moment. If we change that and we decide that we're going to accelerate, we will; but the total build out of the network is in the context of our balance sheet certainly very manageable.

Okay, great. Thank you so much.

And we do have a question from the line of Allen Klee with Maxim Group. Please go ahead.

Hi, good morning. Two questions. One is the adding of the two new facilities for e-commerce plus optimizing another one. What percent is that increase your capacity in domestic parcel? And then second, you highlighted cross border as an area that attributed to your global e-commerce results. Could you just go into a little bit of what's behind that? Thank you so much.

Yes. I was for the first question. Adam gets back to you in terms of how much capacity that increased. I don't think materially increased the capacity. It was more a modernization of the existing facilities. And as you think about the economics of that business, the deeper you can ingest into the postal network and the closer you are to be able to ingest deeper into the postal network, the better economics that you have. So it was more kind of a fine tuning of the footprint to improve our efficiency and our costs as opposed to something that dramatically improves or increased capacity. And I'm sorry, what was your second question?

Cross Border.

Cross Border. Yes. So Cross Border is a combination of a couple of things. First of all exchange rates matter a lot in Cross Border. So when you've got a relatively strong dollar to other currencies that helps. We continue to invest in our Cross Border platforms. We've got a couple of large clients that continue to give us more and more demand particularly from the United States and Canada. And they are interested enough we're able to protect price in the marketplace as well. So you've got some macro things that are going for you with currencies. And we've got a very good capability, particularly U.S. to Canada, which is attractive to some of the larger clients with meaningful scale.

Thank you.

And we do have a question from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Hi, this is Alex on for Kartik. Good morning. Our first question had to do with just the profitability of global e-commerce and within this elevated demand environment, could you just talk about some of the factors that increase profitability for the quarter? No, was the in-source of new lanes, fair use of the spot market and very reliable, just tell me some of the factors that improve this quarter?

Ana go and take it [crack it] and I'll add some color.

Sure. So we saw improvement in two key variables. I mean, we saw with the changes in management and labor strategies that we have been implementing in combination with the automation. We saw improvement in parcels per hour. So our labor productivity is improving. And the second factor that we also saw improvement was around our transportation. So we're continuing the strategy that we have mentioned about in sourcing lanes and making sure we optimize the capacity of the trucks better. So those two factors I would say were at the top. And of course, we continue to work our postage and ensure we deliver at the best penetration levels that we can in the USPS. So I would put them in kind of that order.

Yes. I think on a set of quite well, I would also add. So if you think about pricing, so pricing quarter-to-quarter, importantly stayed pretty steady. So as the industry continues to be capacity constraint. Pricing is holding. We expect pricing will actually go up in the second half of the year as there is more volume and more demand is. As Ana said labor was an improvement quarter-to-quarter, pretty substantial improvement. But that's not really much of a product of the automation. That's just the labor model maturing. So if you think about what our labor strategy had been or what it was, when we bought logistics a bit ago, it was all a temporary labor force and it remained a temporary labor force well until last year. That's problematic, because you just don't get enough continuity in the specific role. So as we've moved to a more permanent workforce you can see the productivity improves. So we're now at, I think 40% of the workforce is permanent and we want to get that a little bit higher which allow you to kind of flex up and down with volume. So I say that because it demonstrates and reveals the power of just having a more mature model. And also importantly the benefits of automation are still in front of us. So while we added some automation know in the quarter and kind of like what we're seeing, I would consider those as kind of testing and learn and sandbox type initiatives. So it makes you very excited about that. Transportation improved. Good quarter-to-quarter. It's still well above last year. So if you look at the transportation unit costs from this year to last, it's still way higher. So we still have an opportunity in front of us and…

Okay, great. Thank you. And then also, in regards to the growth that you saw within the equipment sales and no part of that growth was just from the comparison of last year, but was there anything major that was also contributing to that growth for this quarter? Was that the higher product sales within the product family?

Yes, you're absolutely right. Part of that was of course, the easy comparison that that was mentioned by that. But we're seeing great attraction in the market from the SendPro family both the Mail Station and the SendPro C and the shipping capabilities that tags along. So we're seeing that and we started also some international rollouts of the product.

Again, it's easy to kind of get lost in your dynamics and there's so much noise in the numbers. But honest comment about growing 1% versus 2019 you think about that, that's a meaningful accomplishment in the context of a market, a mail market that's still declining. And if you go back to 2019 that kind of takes out all of the comparison issues and it leads you back to precisely the point that [I will make is] its new product innovation. If you look at the new products the SandTech team has introduced, they're just doing great. And they're doing great domestically. And we're starting to roll them out internationally. And if you look at their overall revenue, that's driven by new products is meaningful. So the innovation pipeline is really starting to hit the ball and hit the ball hard.

Okay, great. Thank you. Thanks for the insight.

And we do have a question from the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good morning and thanks for taking the questions. So first, on the global e-commerce site, so nice to see that you're -- you will be able to get that to be EBITDA positive for the full year. So in order to get a business to be EBITDA positive, is that more of a function of gaining more productivity or more scale? Can you just comment on your high level thoughts there?

Yes So first of all, I'm going to take a small victory lap that we're EBITDA positive in the first half by a couple of hundred thousand dollars. So we expect that to continue in the second half as we get more efficient and more productive and more volume. In terms of your broader question of the path for profitability, sustained profitability towards our long term models for global e-commerce. I'm going to caveat this upfront, in that, if you would have asked me that question 18 months ago, I would have given you an answer of how we get to the long term model. The world's changed a lot in the last 18 months, not the least of which is pricing has gone up by 20%-25% unit cost on transportation has gone up substantially. So we'll be doing the long term model but with that caveat of how we think about the long term, if you look at the path to the long term margins, it will principally be driven by labor and transportation. So labor and transportation provide 60% of the total. If you think about the postal costs, that's another couple of points. If you think about the benefit the mix between mix, scale, and pricing at a slight positive, but transportation and labor are the principal cost, then also warehousing kind of gives you a couple points, as well. So labor and transportation are the things to keep an eye on. And I don't think that I mean, we're going to fine tune the long term model. I don't think that'll change that much.

Okay, that's very helpful. And then switching over to the SendTech business. So you posted your third consecutive quarter of improved EBIT. How sustainable is that? What are your thoughts?

Well, we think that says it's the right long term thought. It's something that I don't, I wouldn't lead you to believe that that's something you would expect in 2022. But as we think about the long term model, we truly believe that business is positioned to be able to grow revenue and gross profit. It's just kind of, it's got to get the shipping business into a lesser degree, the financial services business, a little bit more scale. So long term, yes. Short term, we might have a couple of quarters. As we have kind of getting their nose above water, medium term we expect continued progress.

Got it? And just to follow up on that, actually, in the SendTech piece, so how much of your revenue is now coming from shipping?

Well, $31 million out of the total.

Got it. Right. Thank you and best of luck.

Thank you.

And we do have a question for the line of Ananda Baruah from Loop Capital. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions. Hey, Mark, just on the I guess on sort of the e-commerce, marketplace and your thoughts about it. I guess, or at least the company's position that it does sort of go back to being a 10% to 15% revenue growth business. With I guess, what are your thoughts on percentage of retail remaining online? And it sounds like, so a couple of things? Is it stronger? Is retail online stronger now? I've maybe through you sort of company, sort of just purchasing online being still 24%-25%? Is that higher than you thought it would be when we entered the year? And if it does stay elevated meaningfully above the mid teens level would that alter your thought process around the 10% to 15%? Or would it alter your thought process around long term Pitney? And then I have a couple follow up, thanks.

Sure. I would say there's been kind of an evolution of thinking on percent of retail over the internet. When COVID first hit that was kind of the million dollar question is how much of this volume sticks? I think shortly after shortly ended the pandemic crisis people became convinced their buying habits have changed substantially in a more permanent way. So I think you can argue whether it's going to be 24, 25, 26, where it settles out, but it's going to settle out well above where it was. I think it's pretty clear. And certainly working from home over the last 16 months, it's been striking the number of deliveries that come to the door, I don't think that's everything at all. I do think once it kind of find that new level that 24, 25, 26 then it's going to have a personality that's driven much more by kind of retail and consumer trends 10% or 15% can be well above what retail as a sector grows. So you'll continue to see that percentage increase. But I don't think it's not our expectation in a way that it's going to grow 20%, 30% 40% in a sustained way. In terms of how that makes me think about the opportunity. I love this opportunity. It's an opportunity that's got strong secular growth. It's an opportunity that's got industry players that are responsible in terms of how they think about pricing and how they think about managing demand. It's an industry that leverages our relationship with a post. It's an industry where we've got the right to learn, if you think about you follow the company for a while Presort is a postal ingestion model for mail. Now what are global e-commerce businesses is a postal ingestion business for parcels. So we understand the space. We got, we have the right to win. We've got all the right intellectual capital to be an important player here. And again we write off the postal service of scale. So we're able to participate in this marketplace without having to buy planes, trains and automobiles. So I really like where we're situated. And it couldn't be a better opportunity for us.

Going back to the conversation you and Shannon were having, is there an opportunity to sort of change the tooling or add to the tooling in the warehouses and expand the TAM, I guess at some point in the future that would make a difference to the business?

I don't feel compelled to have to expand the TAM plenty big as is. So no, if you think about the addressable market of small parcels, we can grow substantially for a long, long period of time without having to focus on retooling our warehouses. So addressable opportunity is not the problem.

Okay, awesome. I got two more quick ones. Given what you've seen so far in the marketplace this year, do you feel any difference about sort of the leverage points in the e-commerce model? Do you think you can get to some of them more quickly over time? And then maybe it doesn't take longer. I mean, I guess sort of what's your thought process six months into this year on the leverage points on e-commerce over time?

Yes, I still think 2024 is kind of the right thought for us in terms of getting into the long term model, as I looked at what needs to get done. And as we kind of refined the volume a little bit to be more congruent with our capabilities then letting the labor model and the transportation kind of mature. So we're, as I said, we're not updating the long term plan now. We will review that with you sooner versus later. But right now I think it's, still think the, the overall margin aspiration timeframe is kind of correct. Some of the elements underneath it might be a little bit different. And certainly pricing. I mean, well we know they're definitely pricing is way different than what we thought 18 months ago, as our transportation costs. So labor costs will kind of, I suspect, at a hourly worker, they will go up, but we have such an important opportunity to automate that our focus is. And how we are bringing on a more reliable labor base that stays with us and add automation to that.

That's helpful. And then just quick housekeeping this one would be for Ana. Can you quantify the benefit from the lower debt expense to the e-commerce EBIT.

Yes. So the benefit was around $7 million for the quarter.

Got it. And any context around this? Is that sort of going forward? Is that will continue or change in anyway?

No, I mean, we expect the levels that we have to be realistic. Of course, we have some seasonality, as you know, based on our billings and everything, but we feel pretty good with our customer base and the types of credit that we have in our receivables. So based on what we see into the future, we think the levels should maintain.

And to the extend so as a predictor of which is DSO in that business is terrific. So I mean their cash conversion business is crazy. Good. DSO is at industry best levels.

It’s helpful. Thank you guys. Thanks a lot.

We do have a question for the line of Jeff [indiscernible] with Barclays. Please go ahead.

Hi. Good morning. Can you go into a little more detail about the semiconductor and supply shortages that you cited potentially 4Q in which products and in which businesses?

Yes. It's in SendTech and our SendPro product line. So chips from principally Asia. So it's kind of the same chips that everyone else is vying for. We are vying for as well, we're pretty confident that we've seen our way through the third quarter. But you follow the space, so you understand how dynamic that is. And it presents some risk, temporary risks to the fourth quarter. We see that risk as less than we did probably 30 days ago, but there's still a risk.

Okay and then in SendTech, can you just talk a little bit about the in terms of the SendPro refresh cycle and you've seen very strong equipment sales? How much of your base you see that rolling through? And when do you see that sort of maturing?

So we see it rolling through all of our base. If you think about that business, it's the least business. So the normal rhythm is, you have probably 20% to 25% of your products come up for renewal each year or trade up to a new technology. So it's kind of rolling through that fairly predictable basis. I think there is a couple of more years left. And certainly, most of the international opportunities is still in front of us.

Got it. Thanks very much.

And with no further questions in queue, I'll now turn the call back to Mr. Lautenbach for any additional remarks.

Terrific. Thank you. And thank you for joining today’s call. Early in the year we said we're poised for improved profitable revenue growth. We characterize profitable revenue growth as the last chapter of a successful transformation. And we also said that global e-commerce would be EBITDA profitable this year and while this year isn't done, I like where we stand on profitable revenue. And I really like where global e-commerce stands in terms of being EBITDA positive. So another data point in the second quarter more work to do for sure, but I certainly like how we're situated as we get into the second half of the year. Thank you for your time, and we'll talk soon.

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