Good morning and welcome to the Pitney Bowes’ First Quarter 2023 Earnings Conference Call. [Operator Instructions] 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. 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 and I manage the Investor Relations program for Pitney Bowes. I’d like to welcome everyone to the call this morning. We very much appreciate your interest and participation. Part of my duties include covering the 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 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 2022 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 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 our presentation materials, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our website. Additionally, we have provided a slide presentation and a spreadsheet with historical segment information on our IR website that summarizes many of the points we will discuss during today’s call. Also, you are likely aware that Hestia Capital has nominated several director candidates in advance of our upcoming annual meeting. Please note that today’s call is about our first quarter earnings, and we will not be answering questions related to those nominations on this call. Our format today is as follows: 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 an in-depth discussion of our financial results. I’d now like to turn the presentation over to Marc. Marc, the floor is yours.

Thanks Ned and good morning everyone. I appreciate everyone joining our call this morning. Trends from the fourth quarter continued into the new year. Specifically, Domestic Parcel continued to grow, significantly outpacing a soft market while Cross-Border continued to face meaningful headwinds and our Presort and SendTech segments provided overall ballast to the enterprise with steady profits on a year-to-year basis. Let me unpack each of these dynamics. Our Presort segment performed well in a fairly difficult market. Our First Class Mail and Marketing Mail volumes declined in the market. Presort drove solid productivity. The net revenue that was down slightly and profit that was up significantly. SendTech performed consistent with our expectations and delivered strong margins and adjusted segment EBIT performance. Our shipping offerings in SendTech continue to be very well accepted in the market. And you can see on the horizon, the absolute gains in shipping revenue outpacing the declines in mail revenues driven by secular trends. Both Presort and SendTech are well positioned for the year. And in aggregate, we expect these businesses to grow adjusted segment EBIT for the calendar year. In Global Ecommerce, where we provide three distinct services, including Domestic Parcel, Cross-Border and Digital, there were three very different dynamics in each business. In Domestic Parcel where opportunity to create long-term value is centered, we made good progress. Our Domestic Parcel volume grew 22% in a market which was flat and is well ahead of other industry players who are seeing softness. This increase was enabled by a substantive year-to-year progress on our client service levels, which are now hovering around industry best-in-class. The profile of the volume in our domestic network continues to be lighter weight, standard delivery. In addition, we are seeing softer return volumes as retailers reduce incentives that drive returns,…

Thank you, Marc, and good morning, everyone. Before I begin my financial review, I’ll note that the year-over-year revenue information will be discussed on a comparable basis, which adjusts for the impact of currency, the disposition of Borderfree and a revenue presentation change for our digital services, which we discussed in detail last quarter. This revenue presentation change primarily affects Global Ecommerce revenue and, to a lesser extent, SendTech. The change does not affect the dollar profitability of our activities. Also, please note that we are updating the name of our segment profit measure to adjusted segment EBIT. There is no change in how we have historically calculated these figures. Also, unless otherwise noted, I will speak to other items such as EBIT, EBITDA and EPS on an adjusted basis. The following is a high-level review of our year-over-year comparison for our first quarter results. Total revenue for the quarter was $835 million, which is a decrease of 4% compared to the prior year first quarter. Gross profit for the company was $278 million compared to $306 million for the same period last year, a 9% decrease. In percentage terms, gross margin was stable at 33% compared to last year. EBITDA was $73 million compared to $95 million a year ago. EBIT was $33 million compared to $53 million in prior year. Interest expense was $37 million, up from last year’s $34 million level. Corporate expenses for the quarter were $56 million, down $1 million from a year ago. Adjusted earnings per share, was a $0.01 loss compared to $0.08 in the prior year. Turning to cash flow, GAAP cash from operating activities was a use of $40 million in the quarter compared to a source of $11 million in 2021. Working capital timing differences, which we expect to normalize…

Thank you. [Operator Instructions] Your first question comes from the line of Matt Swope from Baird. Please go ahead.

Good morning, guys. Could you talk a little more on the Global Ecommerce profitability? You’ve talked at times about getting to EBITDA positive here over the last couple of years. With this tough first quarter there, is it possible to be EBITDA positive in Global Ecommerce this year?

Good morning. Yes. Thanks for the question. Listen, it’s a much more challenging environment than we were anticipating. The key is that the team continues to strive for that. We talked a lot about the dynamics here. It is more challenging, but the team is super focused. And the cost actions that we’re implementing will help attain as best an opportunity to achieve that.

The team is focused on that. That’s what they have a plan to do, that’s what they are paid to do. Clearly, after the first quarter, it’s become a higher risk plan. So it is still the focus. There is still a credible plan in order to get there, but it’s a tougher hill to climb than we expected in this environment.

Marc, you guys sold Borderfree last year. It sounds like cross-border is by far the most difficult part of this right now. Is there a way to sort of get out of the cross-border business while maintaining the domestic business?

Yes. I mean they are separable. And I’m not going to comment on any particular portfolio actions. I will say, as I’ve always said, everything is on the table, that particular dynamic is clearly in our sight. So if we can find something that makes sense for our shareholders, makes sense for our bondholders, makes sense for our customers, we would take that path. So I’m not – for obvious reasons, I’m not going to go a lot deeper than that. I will say that our guidance doesn’t rest on that business becoming EBITDA positive. So we’ve de-risked the plan in other ways. So it’s a good question. You know me, I mean, for 10 years. Everything has been on the table. Borderfree is a recent example. Software was an example before that. We will do what’s right. Because at the end of the day, if we can’t make that business helpful to what we’re trying to do in terms of making that overall segment profitable, then there is got to be a better owner for it.

Right, certainly fair enough. On the SendTech front, you guys talk about the secular decline in mail. How do you think about that going forward? As you think about in terms of volume or whatever the right way is to model that, what kind of percentage secular decline do you think about for mail as a whole?

Yes. It’s a super good question. Why don’t we talk about all the time we have power games on the secular decline in mail. So the first thing I’d say is we don’t see that changing. The secular decline of mail is kind of baked into the wood of the market and baked into the wood of how we think about the business. I tend to think about it around mid-single-digit decline, is kind of where it’s been gravitating, if you look at it. And I think people lose sight of this. When I started, there was 70 billion pieces of mail in the U.S. Postal Service network, there is 48 billion pieces of mail last year. So it kind of ebbs and flows based on what’s going on in the economy. So I would think of it, and the way we think about it from a corporate modeling perspective is mid-single-digit decline. So as you think about that relative to SendTech and you think about the shipping revenue at an absolute level, gaining more than the mailing revenue declining. And that’s kind of what we’re teetering on right now. So when we talk about that business getting us nose above water, it’s not that we see the secular decline of mail abating. It’s just that the shipping revenue, which is a much bigger market and a market that’s growing and we’re doing fine and that, that absolute growth outpaces the mailing decline. We’re – last year, SendTech was minus 1, I think, so you can kind of see those dynamics starting to cross.

Great. No, that’s helpful. And then as we think about Presort and you talked there too about lower First Class and Marketing Mail volumes. Do you think about that the same way? Or are there any differences there when you think about the secular decline that Presort faces in terms of volume?

No. It is a little bit different in the following sense. SendTech has a very high market share in the mail markets that they trade in. So there is not a lot of headroom for them to grow, they essentially kind of at the market, Presort has a nice market share, but it has headroom to grow. So the way we think about Presort dynamics is, first of all, they have got headroom. Secondly, as mail volumes decline, other sortation companies have harder time getting the densities that they need in order to have attractive economics. So that becomes target acquisitions for us, and we’re pretty active there. So we have a very disciplined process around tuck-in acquisitions in Presort. It also becomes, as mail volumes decline harder for our customers, to qualify with enough densities, so you can pick up more there. And then I would say there is classes of products like Bound & Packet Mail and Marketing Mail that we have a very local share in that there is lots of opportunities for growth. So it is different dynamics. I mean Presort, if you look at the last several years, has grown more often than not. First quarter was a touch of anomaly. So we do think of those businesses. They are similar and they have got mail dynamics, just they have got different opportunities available to them. I would say the other thing that’s [indiscernible] Presort is tremendous productivity opportunities available for us if we can get a little bit of invention with some of our automation partners to do more in the sortation facility. So as I said, it requires invention. It’s not something that’s commercially available today, but with a little bit of a mention, we can do more with less.

And when you’re taking share here, is that typically from other sortation companies or is it from customers who have done it in-house and look to outsource? Where does that share come from?

Yes. All of the above. And by the way, we had a large customer that made an acquisition, they got larger and they in-sourced themselves. So I mean the dynamics are in both ways. But by and large, it’s through acquisitions, it’s through organic types of opportunities as densities become more difficult to qualify. It’s just a terrific business.

Alright. No, that’s helpful. And then just a last one for Ana, maybe on that ‘24 bond maturity, Ana, when you talk about cash that’s available, we’ve asked this question a couple of times in the past, but how much of your cash is available to be used for something like that? How much of your cash is tied up in the system versus how much could be free to handle a maturity?

Yes, very good question. So as you know, we finished with a little over $500 million of cash. I would say cash available from that perspective that’s not tied up, whether at the bank or international or needed for working capital, you’ll probably say, I don’t know, somewhere around 15% or so of the total cash balance, maybe a little more. And then in addition to that, of course, as we’ve mentioned with the access to our revolver combined, if the capital markets were not available for many macroeconomic reasons out there, we feel comfortable that we can meet that maturity. Again, our preference would be to do the refinancing. I actually want to add [indiscernible] we are in the cash topic here for a second. As you know, we have the Pitney Bowes Bank and our bank, given the macro things that are happening in the banking sector, I just want to touch on that for a minute. Our bank is there for a very specific purpose, and the purpose is to facilitate postage. So our clients deposit in our bank for that purpose. And we have fluctuations in that as volumes shift, as clients come in and out. So far, everything we’re seeing is exactly as we anticipated in the changes that we’re seeing. We’re not seeing anything out of the ordinary. And I just thought it would be important to highlight that as we are in this macro environment.

No. That’s helpful, Ana. Did – do clients ever try to take money out of the bank? Or is the money all just go into prepay postage?

The vast majority is for payments of postage and it’s a floatation to either feed meters or permit mail for our Presort clients.

It’s all payments, I mean, at a practical level. I mean there is – if they are going to park money, they are not parking in our bank, they are parking in their commercial relationships. So the money is there for a very specific purpose. It moves in and out pretty fast. I mean, so it’s – the velocity of that is, I think, less than 30 days. So it’s a very fit-for-purpose bank that customers use in a very specific way.

Great. That’s very clear. And sorry, Ana, just to clarify, when you said on the $500 million of cash, did you say 15, 1-5 or 50, 5-0 percent is available?

1-5.

Got it. Great. Thanks for all the questions, guys.

Thank you. Super good questions.

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

Hey. Good morning guys. Thanks for taking the questions as well. Really appreciate it. Yes, a few for me also, if I could. Marc, can you remind us GEC right now, what percentage of the volumes are domestic versus cross-border? And – or what’s the best – I guess, what’s the most useful way to think about it? Is it parcels? Is it revenue? Is it both? That would be helpful. Thanks.

Yes. So, the way I think about it is, first of all, in context of the market opportunity. So, the market opportunity for domestic parcels, the market that we are chasing after is probably 10 billion parcels, think about $5 per. So, it’s a $50 billion market opportunity. It’s a super big opportunity, a market opportunity that traditionally, and we think going forward, although not at the moment, we will grow that 10% to 15%. If you look at our business mix right now, it’s probably 75% plus domestic parcels. So, it’s the biggest portion of the business by far. Cross-border is probably 20-ish, 15%, 20% of the numbers. And I would stress these businesses are separable. They share some structure, their sales force, but we are – we have broken the businesses. We have the businesses by EBIT and we know how to break them apart. So, I mean what’s going on cross-border right now is kind of a double whammy. I mean exchange rates have continued to be a headwind. That may abate at some point, although with yesterday’s news of the Federal Reserve, it doesn’t seem like it’s going to abate quite as quickly as I would have hoped. So, interest rates still relatively higher compared to other countries. And then as honest, we have had two large customers who are great customers. We enjoyed great relationships with that as you are inclined to do with some of these larger relationships have in-sourced portions of their business. So, it obscures some of the progress – not some obscures the progress that’s being made in domestic parcels where we think the market opportunity is. So it’s – I think it clouds something that, candidly, we are trying to work to make very clear to our external investors, both on the equity and the bond side because it’s important in terms of how they think about the business.

That’s super helpful context. And then just sort of more clarity around – I think there was a remark you made in prepared remarks, 80% of the pipeline has higher – 80% of the GEC pipeline has higher volumes, is it higher volumes…?

High margin.

High margin, yes. Could you unpack that a little bit? And how does that stack up that 80% kind of relative to the last couple of years? Just to give some context around it.

So, I will answer them in reverse order. It’s higher. It’s part of what has happened is – and this is a touch of an industry phenomenon. So, as you guys follow the other industry participants, whether it would be Amazon or FedEx or UPS, they are all trying – they all have a little bit more capacity than they need right now. So, I would say pricing is getting a little bit more difficult. But in that context, we landed a very large client last year that was accretive. So, marginal revenue above marginal costs, but it was a big portion of the pipeline and it’s a big chunk of the business, right. I love having it because you need a couple of anchor clients, but it certainly skewed the pipeline and it skewed to a degree our current revenue mix. So, I would characterize what we have now, the 80% higher than history and certainly higher than the second half of last year, but not appreciably. We are focused on the mid-market. Again, mid-market is where there is less price pressures, it’s less served, it’s a better market for us to hang out in. In terms of the type of offerings that we have that are higher margin, I would start with digital. We know particularly since digital has net revenue treatment now as opposed to gross. It’s basically – it’s like a software business. It’s got those kinds of margins. I would say after that, if you unpack the rest of the business, cross-border traditionally have been pretty good margins. That obviously has got some pressures at the moment. When you look at domestic parcels, I would say there is a couple of different lenses. One is over one pound has better margins. And from a customer set perspective, middle market has better margins. So, that’s kind of on the delivery side and then obviously, returns has good margins as well. It tends to trend heavier in terms of weight. And because it’s more complicated, there is a little bit better margin opportunity. So, we have really tilted the sales force. I mean we knew with this large anchor clients that we are picking up, we had really incent the sales force towards the higher-margin items, and the team has done a good job, and you can see it in the pipeline. And I think it’s not likely to evolve much in the second quarter, but I believe it will in the second half.

That’s a lot of helpful context. Let me ask one more here, and then I will see the floor. SendTech’s EBIT growth in ‘23 is your expectation? I think you said shipping is now 11% of the revenue. So, can you just – could you just remind us of shipping margins and I guess the SendTech margins and how you are expecting the SendTech margins to manifest? Sorry, not SendTech, the shipping margins and the traditional meter margins right now and how you are expecting the meter – how you are expecting, how we should expect the meter margins to manifest through the year on the way to that EBIT growth? Thanks.

So, there is different shipping businesses inside of SendTech. There is a subscription software business. It has subscription software types of margins. There is a business that’s adjacent and runs off with the same device as the mailing business. So, you think about our new products, they have got shipping and mailing. So, those margins are the same as mailing. And then I would say we have a systems integration services business around lockers. That tends to have a little bit less margin in it. So, on balance, we do not expect the increase in services – I am sorry, the increase in shipping revenue to be dilutive. We would – we expect it to be – come in at comparable margins all-in, but with some different currents underneath, if that makes sense. So, it makes your job from a modeling perspective a little bit easier. I wouldn’t try to and via it’s on average, it will work out the right way.

That’s super helpful. Really appreciate. Thanks a lot.

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

Hi. Good morning. This is Stephane Guillon [ph] on for Anthony Lebiedzinksi. How are you guys doing?

Fair.

On your last conference call, you talked about having a higher-than-expected volume of lightweight parcels hurting your profitability in Q4. Can you give us an update on whether or not there was a notable change in mix of parcels in Q1 versus Q4 and Q1 last year? And how that may have impacted segment results for GEC?

Q4 and Q1 was similar in terms of the types of weight of parcels. It was down on a year-to-year basis. I think as I have said, we picked up a large client, in particular who has traded down in terms of volumes. I think it’s baked into the wood as the new margin – higher-margin stuff comes online from the pipeline, it will begin to normalize.

So, are you expecting to bring in additional clients to GEC over the course of this year?

Yes. No. And we did in the first quarter, so Ana talked about. I think we had 80-some-odd wins for a good chunk of revenue in the first quarter. Ana can give you the specifics. The pipeline is super good. Pipeline is as good as it’s ever been. And it’s – as I said, it’s trending towards higher margin stuff, not just higher weight, but higher margin. So, I will say, at the moment, the industry has got more capacity and some of the larger players and it’s a touch surgical. In general, they talk about raising their prices, which is kind of how history works in this market. But there is particular lines of business or particular kinds of business where they would become more aggressive. So, I would say pricing, which has been kind of only one way in this business historically, at the moment is a little bit more challenging. As the industry gets right-sized in terms of capacity, it’s our expectation that the industry will kind of get back to historical pricing actions, which is very consistent price increases each year of 5% or 6%. But that’s – at the moment, that’s a little bit more choppy.

Thank you. That was helpful. Can you share more details about the facility rationalization, how many locations do you expect to close and when?

I am not going to get into the specific locations. I will say these are older sites. They weren’t automated. They are all close to sites that we have built that are new. We originally thought maybe we needed them longer term to be kind of safety valves for the larger sites. The larger sites are operating so incredibly well we just don’t need them. So, it’s – I am not going to give you specific sites. Obviously, we are kind of sensitive from a people perspective and other side. But it’s smaller sites that have been older. They are not automated, and it’s just an artifact of the fact that the newer sites are running so well. Couldn’t be more pleased with how they are doing.

Thank you. And can you comment on labor and transportation costs? Are you seeing signs of stabilization?

Yes, for sure. I mean I would say two things. So, I would say the transportation spot market has actually come down pretty substantially over the last year or 2 years. Although, it was 2 years ago, it was crazy high. So, I would say transportation has not only stabilized, it’s come down a bit. Labor and wage rates have not come down, don’t expect them to come down. We are becoming more efficient on both dimensions, both labor and transportation. And what we are seeing is we get more volume into the network, you can just see the unit costs, both from labor and transportation come down. So, it’s – those dynamics are all kind of headed the right way. So, it’s – as you look at how we contemplate the long-term plan and you look at the unit costs that are contemplated in the long-term plan and you see the trajectory that we are on labor, transportation, I would say, warehouses as well, the trajectory is exactly the right way. We need the volume and we need pricing to stabilize a touch.

Thank you so much guys.

Thank you. Good questions.

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

Good morning. Marc, I know you talked a little bit about if it makes sense, you would be willing to separate the cross-border from Global Ecommerce like you have done with other assets in the past. But I am wondering if you wanted to separate that business, is it not intertwined in terms of facilities and logistics and transportation with domestic? I guess how easy would it be if that made sense?

It’s not intertwined in any of those dimensions. It does have a separate sales expenses and some similar operations expense, the logistics, transportation, the sites are all distinctive. So it’s – so listen, I mean these integrations are always challenges to them. I mean – but this is doable.

And then, Marc, you talked a little bit about the changing environment for returns and maybe that’s lowering return volume. So, I am wondering if you could just talk about maybe the level of decline you have seen in revenue from returns or maybe level of decline you have seen from the volume and returns, if that’s starting to happen?

So, I would say volume is a little bit down. Price is a little bit up. Weights are a little bit up. So, it’s kind of that stood up offsetting a little bit.

And then just, Ana, you talked about obviously gross savings you are anticipating. Can you talk at all about net savings you would anticipate from the cost-cutting initiatives?

Yes. So, the best way to think about this is we will have actions throughout time. So, the best way to think about it is as we are moving here into the next few quarters, we will be taking actions and we anticipate from the new restructuring program that will cost us about $40 million to $50 million. And then the savings on a run rate basis, think about them on an annualized basis, from the restructuring program itself would be savings of $50 million [ph] and then in addition to that, we have specific productivity actions, particularly in the Global Ecommerce segment that will drive an incremental $25 million.

I would also say, and I have said this before, we are never done. You are always in the seventh inning as it relates to efficiency actions. So, we swept up everything we can see to kind of give you the best visibility for what the next year looks like. But we are not done. We will continue to work on this.

And Marc, one last question. The Presort business is a business that’s done well. You have done well in it. And in the past, you have talked about it’s a fragmented business. There is always opportunity for consolidation. And I am wondering in this environment, kind of as you look at your liquidity needs and where you are, is that a business that you could see acquiring other businesses to continue consolidation, or would that not be something you would look to do in the next 12 months to 18 months?

No, it depends. I mean I would say most of the acquisitions that we have seen are, I would say kind of in the $5 million to $10 million range. So, they are pretty digestible, a couple of chunkier ones that are out there, and it would just depend on the economics.

Perfect. I appreciate it. Thank you very much.

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

Thanks operator and thank you for everyone’s attention this morning. I thought the questions were terrific. Obviously, a lot’s going on in our business, but I would remiss if I didn’t acknowledge the great work that I thought our team did in the first quarter really across the board. It is a wonderful team, highly focused on serving customers and creating value. So, I would just close by acknowledging their hard work, and we will similarly put our heads down and go back to work, and we will talk to you soon.

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.