Good morning, and welcome to the Pitney Bowes Third Quarter Earnings 2021 and 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 participants for today's conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Ned Zachar, Vice President, Investor Relations. Mr. Zachar will now begin the call with the safe harbor overview.

Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes. And I'd like to welcome everyone to the call this morning. We very much appreciate your participation. Part of my new duties includes covering the usual and customary safe harbor information for these calls, so please bear with me for just a few minutes. Included in today's 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. For more information about these risks and uncertainties, please see 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 that are 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 provided a slide presentation on our Investor Relations website that summarizes many of the points we will discuss during today's call. Our format today is going to be familiar. Marc Lautenbach, our President and Chief Executive Officer, will begin with opening remarks, which will be followed by Ana Chadwick, our Chief Financial Officer, who will provide a deeper discussion of our financial results. I'd now like to turn the presentation over to Marc. Marc, the floor is yours.

Thank you, everyone for joining today's call. And I would like to welcome Ned to the team. Ned brings a wealth of experience to the role including investing and analyst experience. Ned has also been an investor in our debt, so he is familiar with our company. Turning to the quarter. Given a return to pre-COVID top line seasonality, the distortions in last year results in supply and demand imbalances, there were many different crosscurrents running through the quarter and year-to-year comparisons. While it's easy to get lost in the numbers, from my perspective, the headline is this. Demand for our products and services remain strong, and we continue to make progress, repositioning our company for long-term success. Our Presort business had an excellent quarter from both a top and bottom line perspective. The Presort team was able to overcome labor and transportation inflation by managing price and productivity and moved back into our long-term profit model. Importantly, the investments we have made in our network and technology have positioned us well to drive even more productivity and help more clients. Our SendTech business performed close to the long-term model even though supply constraints hit the top and bottom line. Equipment sales in our backlog both increased in the quarter, evidencing strong demand. We will continue to battle through supply-demand dynamics, but clearly our new product innovations are making it a very positive difference. In addition, more of our business is moving to a subscription model. While this depresses short term revenue, increased subscription revenue is a very positive harbinger for the future. Within Global Ecommerce, while there are year-to-year aberrations, there are two things that are important to the long-term success of this business. The first is service to our clients. We have improved our end to end cycle…

Thank you, Marc. Unless otherwise noted, I will speak to revenue comparisons on a constant currency basis and to other items such as EBIT, EBITDA, EPS and cash flow on an adjusted basis. Total revenue for the third quarter was $875 million and declined 2% from prior year. Recall that the year-over-year comparisons include the impact of COVID on us and many other companies. Last year's third quarter saw a very positive impact on Ecommerce revenue and an adverse impact on SendTech and Presort. When we compare this year's third quarter to the third quarter of 2019, in other words, pre-COVID, our 2021 revenue grew over 10%, which illustrates that the bulk of the top line gains we made last year remain intact. Adjusted EPS was $0.08, and GAAP EPS was $0.05. EPS includes a $0.02 net tax benefit offset by a $0.03 charge related to a specific pricing assessment in Global Ecommerce, which I will discuss momentarily. Free cash flow was $30 million, and cash from operations was $71 million, down from prior year, largely due to higher CapEx and changes in working capital, which are in line with our previous commentary on this topic. During the quarter, we paid $9 million in dividends and made $6 million in restructuring payments. We spent $57 million in CapEx, as we continue to enhance our Ecommerce network and drive productivity initiatives in both our Ecommerce and Presort businesses. We ended the quarter with $743 million in cash and short-term investments. During the quarter, we redeemed our 2022 notes for $72 million. Notably, total debt has declined about $225 million since year-end 2020 to $2.3 billion. When you take our finance receivables, cash and short-term investments into consideration, our implied operating company debt is $556 million. Let me turn to the specifics…

[Operator Instructions] And our first question comes from the line of Allen Klee with The Maxim Group. Please go ahead.

Good morning. Just two questions on Global Ecommerce. First, could you talk about, as you think out over the next few years, the levers that are -- that you should get the -- how you think about the timing of getting the margin improvement there? And then second, on the $8 million charge in that segment that was pricing related, could you just explain that a little more to help me understand that? Thank you.

Sure, Allen. Let me take the first one. I'll give Ana the second question. So as we think about Global Ecommerce and the levers that we have at our disposal, the first thing I would say is it doesn't take large incremental improvements to get to the long-term model. As you look at our long-term model and you look at each of the line items, whether it be transportation, labor or postal, fairly small incremental improvements end up getting you to the margins that we've described. In the short term, labor and transportation are the 2 most substantial levers that we have. And it comes in a couple of form. Transportation -- or let me start with labor. Labor is, first of all, just getting a more mature labor model. So if you look at our labor composition last year, it was predominantly temporary. If you look at where we are today, it's 55% permanent and 45% temp as you have a more permanent workforce. They just are better at what they do. So that's kind of the first lever. The second lever around labor is around automation. So we've introduced automation into a couple of our sites. I've had the opportunity to see it over the last 60 or 90 days. So if you look at where we have the preponderance of our labor, putting parcels in sacks, most of that can be done via robotics, so large opportunities there. And candidly, we've just scratched the surface there. So while we got the robotics in place in a couple of our sites, we're early days. So you can see the benefits, but it's a lot more in front of us. In terms of transportation, again, a couple of levers. First of all, last year, we talked about being very…

Sure, Marc. So as I mentioned before, the pricing assessment is caused by lower-than-anticipated volumes between the year 2020 and 2021 of certain kind of parcels. So we entered into a contract with a vendor that set that pricing based on specific growth rate target. And as we discussed, there are several reasons mainly especially the fact that 2020, due to COVID, had very high volumes that we are not anticipating now meeting that volume targets. And for that reason, we have taken this charge. It's important to note that we do not anticipate any adverse impact from this as we move into 2022. And we have included anything associated with this related to our guidance for 2021. So I view this as a unique onetime activity.

Thank you very much.

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

Hey. Thanks for taking the question. Yeah, a couple, if I could. Just to sort of piggyback off of the transportation comment, can you, Marc, just go into a little more context for us what aspect of the transportation you're in-sourcing? You've talked about in-sourcing transportation in the past. But now that it sounds like it's actually getting some traction, just spend a second sort of just providing us the context of what all parts you're in-sourcing would be helpful. Thanks.

So let me kind of do it through the life of a parcel just to kind of make it a little bit clearer. So parcels get from retailers or marketplaces in 1 of 2 ways. Predominantly, they come in third-party trucks that are contracted by the retailer of the marketplaces. So there's a little bit of transportation there. But where most of our transportation is, is from our sortation centers into the postal network or the postal DDUs. So that's where the preponderance of our transportation is. Last year, as volumes spiked, we were very vulnerable to what happened in the spot markets. And in some ways, those prices went 4, 5 times what they had been. So just to kind of dimensionalize it for you, I visited one of our sites 30 days ago. And if we were to use a spot market, driver that was costing between $3,500 to $4,000 a lane, with one of our drivers, it was $600. So the principal use of the transportation is from our sortation facilities into the postal network, so less reliance on the spot market. As I said, we've increased our capacity a lot. The second thing is, if you can ingest directly into the postal network as opposed to going from our Atlanta facility to our Orlando facility and then from Orlando into the postal facility, you save a trip. And that's largely what we've done in the West region pilot which will roll out. So that's how we use transportation. That kind of gives you an order of magnitude of the savings that are available to us and, candidly, just as importantly, from our perspective, taking time out of overall service levels. Does that help?

Yes. No, that's great context. I really appreciate it. And then I guess a quick follow-up on Ecommerce. Are you guys -- are you expecting December quarter volumes to be up year-over-year? Or I guess maybe I should ask what are you expecting year-over-year from December quarter volumes? And the facility expansion that you spoke of to handle peak volumes, has that been completed or is that still taking place?

We expect volumes for GEC to be up quarter-to-quarter, third quarter to fourth quarter is peak. I would expect they'd be a little bit down from last year. And they're down for a couple of reasons. First and foremost, we have been very careful about the kind of volumes that we've taken on to ensure that we can provide the right service levels to our clients and, importantly, the right economics to our firm. So we've been very, very thoughtful about that. Obviously, this is in the context of overall supply chain challenges. So if you look at retailers and you see this in your own experience going to stores, stores are pretty short, retailers are pretty short of inventory right now. So that also has an overall effect. So I would say the fourth quarter volume forecasts are pretty dynamic at this point. We'd go through that with our customers on a weekly basis. And it will be interesting to see how it turns out. I'm sorry, was there a second part of the question?

The facility expansions to handle peak, has it been completed or is it still occurring?

Completed for this year. So a different -- a much different dynamic this year than last. I visited our Orlando site earlier this week. Orlando was just coming online 12 months ago. So as you look at our sites today, they've all been in business for a while. Now I visited Columbus last week. That's a fairly new site. We're not really relying on a lot of volume there. So the overall network is much more stable today than it was 12 months ago. And I've visited 75% of the sites in the last 60 or 90 days, and their readiness for peak is in a much, much better place. And I was really pleased with what I saw. In terms of the overall network build-out, we've got two or three sites, larger sites that will build out over the coming 12 months. But as it relates to the fourth quarter and peak, we're in pretty good shape and pretty stabilized.

Very helpful. Thanks a lot.

And we do have a question from the line of Shannon Cross with Cross Research. Please go ahead.

Thank you very much. I was wondering, with your contracts with your customers, how much flexibility do you have in terms of pricing? I assume obviously the -- whatever you incur from a...

Did we lose Shannon?

Her line is still open.

Let me answer the question at least as I understand it. And if we get Shannon back, she can elaborate. So in terms of pricing, pricing really happens on a pretty predictable rhythm within the industry. There is a matter of practice of what the industry will referred to as a GRI. That's an annual price increase. We just announced our price increase for next year earlier in the week, and then there's a price increase as it relates to peak, which goes into effect November 1 and then goes through the peak season. So I would say that the pricing happens on a fairly predictable and stable rhythm and adjust a couple of times a year.

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

Good morning. This is Alex on for Kartik. Great news here seeing some of the transitions of reducing some of those variable costs within Global Ecommerce. I guess the first question is what is the time frame of bringing some of those temporary workers to more permanent workers. And then also, I believe at a recent conference, you guys highlighted Global Ecommerce to have EBIT margins in the long term of about 8% to 12%. Does that -- does this recent news confirm some of that confidence that you guys have in those -- in that margin guidance? Or does that bring some of the targets forward? Or how are you guys thinking about that? Thank you.

Yes. I'd say our long-term view continues to be that the margins in this business will be 8% to 12%. As we look at some of the other companies in the space, that seemed to be kind of industry norms. So we've learned nothing from the industry or our own internal operations that would suggest those EBIT aspirations, the long-term model are out of range. What I would add to that is if you look at incrementally what needs to be done, and I think this is really important to understand, that it's 1 or 2 points of improvement on an annual basis. These are not long puts. These are kind of things that you would expect within the normal course of business, and that gives me a lot of confidence. In terms of the labor model, so again, perspective is important. We're essentially going from all temporary workforce to 55% permanent. The plan this year was to be around that number. I'd like over time to get that number to 70%. But we're about where we expected to be for this year. And if you look at industry models, they vary. I mean some of our largest competitors have an all-temporary model. But as we look at we think 70% is important, and that gives you the ability to flex up and flex down with volume. But clearly, the more permanent workforce you can have, it just makes things better. More permanent workforce is more reliable. They understand how to use the conveyor system better. They understand how to use the equipment better. It's just they feel more ownership of what they're doing. So we think that's kind of the right model for us. So we made a heck of a lot of progress in the last 12 months. I'd say we've got a little bit more to do, but we're in the zip code.

Great. Thank you.

And we have a follow-up question from the line of Ananda Baruah with Loop Capital. Please go ahead.

Yes, I appreciate it. On SendTech, how would you -- it sounds like things are pretty solid. How would you describe the demand backdrop in general? And you talked about being constrained, but how would you describe the demand backdrop in general? And then just you mentioned moving to a sub model. Just any context around what that looks like and which customers are participating in that?

I'm sorry, what was the second part of your question?

The subscription model, yes, more adoption of the subscription model.

All right. So I would start where you kind of started. I would say the demand environment for SendTech is super solid, super solid. And as you unpack the results, candidly, we left between $5 million and $10 million on the docs in the third quarter because of supply that we couldn't get. And that kind of takes 3 different forms. First of all, we're reliant, like many others are, on the chips that are in such short supply. Secondly, we had, as many others, ships circling the Los Angeles port waiting to get in. And then third, trucks, so we ended up using some of our own trucks to get parts from the Los Angeles port to Chicago, where they go from Chicago to (inaudible) where we assemble the technology. So $5 million to $10 million of revenue left on the docs for the third quarter. Also, as Ana highlighted, last year had some onetime benefits that affected both revenue and top line. If you look at the 2 of those together, the business is pretty close to flat overall. If you look at Equipment Sales, again, Equipment Sales were up, notwithstanding the fact that we left some revenue on the quarter. In terms of subscription model, it's the same customers that we have in general. It's just they're opting for a different way to procure the technology. So it's a transition that we've been making for a while. We haven't talked a lot about it. We think it's the right long-term thing to do for the business, but it clearly suppresses in-period revenue. So when you kind of look at all those things together, some onetime aberrations last year, some supply chain challenges this year, move to subscription revenue, super good demand environment relatively speaking in a market that's challenged. And candidly, I'd point right back to the product innovations that the team has driven over the last 3 or 4 years. They're -- each of those products is really hitting the ball and hitting the ball well.

That's helpful context, Marc. Would you -- just real -- one quick follow-up on that. Does what you guys have been seeing on the demand side, is it in any way alter your longer-term perspective with regards to the potential for SendTech, growth potential for SendTech and the way we should think about it? Or is it changing at least the way you may be thinking about it?

Yes, I won't presume to tell you how you should think about it. I tell you the way I'm thinking about it. I think about it in kind of a bifurcated way. So if you look at the mail industry, I think the mail industry is pretty set on the path that it's been on and will continue to decline. On the other side of it, however, is the shipping opportunity, and the shipping opportunity is larger and growing. And when you put those 2 opportunities together, which our technology allows us to address, the opportunity is for that business to grow over time. So we'll update our long-term view of that business in our next Analyst Day, which I hope will be sooner versus later, where we can get together. But that technology that allows us to address the shipping market, which is so important to so many of our office customers, allows us to think about that market in a different way. And then candidly, if you throw a financial services opportunity on top of that, it makes it even more compelling. So if I were trying to think about it, I would model the two markets separately and then aggregate them together. But my expectation is, at some point, shipping revenue gains is going to outpace mail declines.

Appreciate it. Thanks.

One other point I'd make about SendTech as you're thinking about the fourth quarter in particular, the team has done a terrific job of getting most of the supply they need for the fourth quarter in our grasp. So it's our expectation that we'll have all the supply that we need for the quarter by the middle of November. So I think the supply chain issues are going to continue well into next year. But at least for this quarter, we have bought ahead and we're largely in possession of what we need to prosecute the quarter, as with how that business is executing.

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

Yes, hi. Following up on SendTech, could you talk about for Wheeler Financial how much they put to work during the quarter? What's your excess bank deposits are? And how you think about going forward the opportunity with that? Thank you.

$4 million to work for the quarter, we put $44 million life to date for Wheeler. I continue to think it's a great opportunity. We have plenty of deposits to put to work. And I would say more recently, as we've evolved towards providing working capital for shipping, we found an adjacency that in many ways resembles putting working capital to work for mail but in a growing market. So I continue to think it's a great opportunity, and we've scratched the surface of what we can do there.

[Operator Instructions] And at this time, it does appear there are no further questions from the phone lines. I'll now turn the conference back to Mr. Marc Lautenbach.

Great. Thanks, operator. And again, thank you for everyone to join this morning. Let me just conclude with a couple of thoughts. The first is we really like the demand environment we're in. As I talked about SendTech demand environment is the best I've seen since I've been here. Presort, at 9% revenue growth, we don't think that's necessarily the long-term trajectory of that business is terrific. Ironically, as the mail market continues to decline, it allows us to make more and better acquisitions, so we can continue to grow that business and add to the demand. And in GEC, while volumes are moderating a touch from last year, I think it's important to have a little bit of perspective last year in the third quarter revenue grew 47% or so, and volumes more than doubled. So volumes revenue are a little bit off of last year but not much. So we've kept much of the demand that we have earned over the last couple of years. And importantly, the demand is now kind of in the sweet spot of what we think we can prosecute. It's hard to know in the fourth quarter how supply and demand work out. The supply environment is problematic both from a overall capability perspective and also forecasted and visibility. But fourth quarter is one quarter. Overall, what will be enduring is the demand environment, supply issues will work themselves out, and we really like how we're positioned going forward. So we're looking forward to a very successful peak season. And importantly, I think as you look at the pillars of the business, they're all in very solid footing right now. So with that, we'll close this morning's call, and we'll talk again soon. Thank you.

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