Good morning and welcome to the Pitney Bowes Third Quarter 2023 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. Jason Dies, Interim Chief Executive Officer; Ms. Ana Maria Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Philip Landler, Vice President Investor Relations and Global Strategy. Mr. Landler will now begin the call with a Safe Harbor overview.

Good morning. I'm Philip Landler. Thank you for joining us. I'll be managing the Pitney Bowes Investor Relations program going forward and will be partnering with Alex Brown whom many of you know from prior earnings calls. Part of my duties include covering the Safe Harbor information for these calls, so let me briefly cover that. Including today's presentation our 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. More information about these risks and uncertainties can be found in 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 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. Finally, we have provided a slide presentation and spreadsheet with historical segment information on our website. And now, I’d like to turn the call over to our Interim CEO, Jason Dies.

Good morning, everyone. I want to begin by thanking you for your ongoing investment in Pitney Bowes. As you will hear today, my portion of these calls will be just as focused on our path forward as the preceding quarter's results. Since today is my first call, I'm going to take a few minutes to cover three areas. First, a brief overview of my background. Second, context on my leadership style. And lastly, a high-level summary of what I've been focused on since stepping into my new role on October 2nd. With respect to my background, I joined Pitney Bowes in 2015 after two decades in roles of increasing responsibility at IBM. Spending the past eight years in various leadership positions here at Pitney Bowes has equipped me with a strong understanding of our opportunities, challenges, clients and partners. I spent my initial years overseeing our Production Mail business, which we divested in April 2018. Following that, I led a successful transformation of our SendTech segment, resulting in strong revenue, cash flow and growth opportunities in shipping. I subsequently began also overseeing our Presort segment. So I've led the company's two profit and cash flow drivers. This experience as well as my working relationships with the leaders of our global e-commerce segment and functional groups is enabling me to hit the ground running in my new role. When it comes to leadership style, I believe in maintaining a culture that prioritizes accountability and outcomes. I expect teams to be highly adaptable and proactive, especially when our clients' needs or the broader operating environment require us to course correct. Fortunately, we have a number of dedicated, passionate and very talented individuals who embody these operating principles. The positive responses I'm getting from our teams are very encouraging. It reflects the fact…

Thank you, Jason, 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 as previously discussed adjust for the impact of currency and a revenue presentation change for our digital services that was implemented beginning fourth quarter last year. This revenue presentation change primarily affects global e-commerce revenues, and, to a lesser extent, SendTech. The change does not affect profitability. Also, unless otherwise noted, I will speak to other items such as EBIT, EBITDA and EPS on an adjusted basis. Total revenue for the quarter was $784 million, a decline of 1% versus prior year. Adjusted EBITDA grew $6 million year-over-year to $84 million in the quarter. Adjusted EBIT grew $5 million to $43 million in the quarter. This EBIT growth was offset by higher interest expense resulting in adjusted EPS of 0 in the quarter. Turning to cash flow. GAAP cash from operating activities was $25 million and free cash flow of $15 million. Free cash flow is up in the quarter and year-to-date versus prior year. Let's dive into our 3 business segments. I'll start with SendTech. SendTech reported revenues of $318 million in the quarter, down 3% compared to prior year. EBIT margin expanded 200 basis points, driven by improved productivity. Let's start with revenue. We continue to make progress on our product refresh and are now 68% through the USPS technology migration, which is up 20 percentage points from prior year. Our success in placing advanced compliant equipment puts us in a different stage of our product life cycle. We will increasingly have more fixed-term lease renewals and less new lease opportunities. From a financial perspective, this shift drove equipment sales down 8% and contributed to increasing financing revenue by 1%…

Before getting to the Q&A portion of the call, I want to take a final opportunity to thank Marc Lautenbach for his many years of commitment and dedication to Pitney Bowes. Everyone at PB wishes Marc the very best. Now we can open up the call for questions.

[Operator Instructions] And we'll first go to Kartik Mehta with Northcoast Research. Please go ahead.

Good morning. Jason, as you look at the e-commerce business and kind of dive into the business, what big picture changes do you anticipate being able to make to get the business to profitability and kind of up to your expectations?

Yes, Kartik, thanks for the question. Look, let me start off by saying we recognize that the level of losses that we've been reporting in that segment are not sustainable. That said, we are taking efforts to really look at how do we make short-term change and short-term improvements that can help us realize the full potential of this segment. I'll let Ana talk a little bit about some of the short-term improvements she's seeing, and then I'll come back at the end.

Yes. The first thing I'll mention is, as we commented in the remarks, we're doing a lot around restructuring. And we closed down 4 sites that were older technology and had adjacent sites with more modern technology and sufficient capacity creating an opportunity to better serve our clients without disruption. We are looking at our cost overhead and infrastructure and leaving no stone unturned. In addition to that, our unit economics, which I pointed to are improving. They're improving from two sources. They're improving from our ability to better route our transportation, make our network more efficient but also from the volume, productivity also gets impacted by the growth. So again, the team is working really hard to look at every opportunity, and we'll continue to do so.

Yes. And I'd just say, Ana said it well, there are multiple pieces here. The first is cost actions that we are taking both for the short term and for the medium term. Ana also touched on the fact that we have opportunity to continue to improve our rate per piece, which will obviously drive better economics. And then it's pretty clear that we are seeing significant growth in volumes in the domestic parcel business, which if you think about the way that clients are reacting to our offerings, it's an extremely positive sign for the business going forward. Clients clearly see value in what we're bringing to the table. So a lot of short-term work clearly on how do we continue to go after cost and the in-period economics. But the client confidence in our offering and in our ability to deliver is certainly something I look forward to with a positive note.

And then in the industry, what are you seeing in terms of pricing and what do you anticipate for the holiday season?

Yes. So I think a couple of things. So you saw a varied reaction on different companies' approaches to peak pricing activity. So first off, that created a little bit of confusion, I think, in the market, it created some uncertainty. You've seen in other announcements already this earnings season that there is clear market overcapacity right now, which is creating some significant pricing pressures. That said, we clearly have some opportunity to go after pricing as a lever that we can use going forward. But let's be clear, I don't want anyone to be confused that we are careful and thoughtful about the volumes that we're bringing in to improve our profit margin and to improve our fixed cost leverage. But that said, we are in a very competitive environment. You've heard that in the other forms. And I will tell you that one thing that we watch very carefully is our win rate, and that has been fairly consistent over the past few quarters.

Thank you very much. I really appreciate it.

Next we can go to Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Hi good morning and thank you for taking our questions and welcome Jason and Phil. So first, it's nice to see Presort and SendTech continuing their solid performance. Ana, I know you talked about the automation efforts helping, I think, specifically Presort, but it's an area that you guys talked about this for a while, so it's not necessarily new. But just wondering, are there any additional opportunities to further improve with automation or do you think you're kind of tapped out with those efforts?

Thanks for the question, Anthony. Productivity is a never-ending game. I mean, this is really -- Presort is the game of pennies, and I'll tell you, the team is very focused. They're tackling right now a lot of optimization in transportation. And we did sort of refreshes. They're working on conveyors as well. So, the rate and pace will vary over time, but I do expect continued productivity as we explore new automation and technologies as well.

That's great to hear. And as far as the GEC, so I don't know if it's necessarily easy to do this, but if we were to exclude the cross-border, which seems to be the biggest headwind within GEC. If we were to hypothetically exclude that, with the rest of the business for GEC, would that be better in terms of profitability versus last year or the same or worse? Can you give us maybe some sense in regards to that?

Sure. So as I mentioned, cross-border is really a headwind when you compare year-on-year. And when you look at it more quarter-over-quarter, it gives you a better representation of the true performance and I'll mention two things around that. The business is operating, I would say, kind of flattish when you look at it may be slightly book down quarter-over-quarter, excluding cross-border. And I did mention we did some investments around those site closures that affected our profitability. But those are investments that will pay fruits into the future. So I anticipate progress from the cost actions. We're seeing our operating expenses down year-over-year and quarter-over-quarter, and that's in addition to the improvements we're doing in the cost of goods sold around the optimization of the network, and the warehousing that I mentioned.

Got it. Okay. And then in terms of the expanded restructuring as far as that additional $40 million, where is that -- where are those savings coming from? Just curious to get more details.

Sure. So I'll give you a sense. Overall, we are looking at our entire expense base. We'll see about half of them come from cost of goods sold and productivity-related things and probably about the other half from some of our overhead and reprioritizing programs and other activities that we do. As you know, it's a sensitive topic. We're working through it internally with our employee base, and I'll end it there.

Yes. I'll just jump in on top of that. One of the things we're trying to do as part of this cost effort is we're really trying to be smart in how we go about it, right? So one of the themes that I've been working with the teams on is how do we take complexity out of the business, how do we make things more simple. And so in addition to just taking out cost for cost sake, which we need to do, it's really important that we're doing it in a way that's going to make the business stronger ultimately as we go forward. And that's been one of the focus areas that we've been working on as a leadership team over the past 30 days is how do we do that in a smarter way that's going to keep the cost out for the long-term and allow us to be more effective as we go forward in the market.

Understood, well thank you very much and best of luck.

Thank you.

And next, we'll go to Peter Sakon with CreditSights. Please go ahead.

Hi, just a followup on the cost cutting question, can you break out by segment this cost saving the $115 million? You said half is overhead. So is it half coming from unallocated corporate overhead?

Listen, we're in the process of working through our specifics. I will tell you a lot of that will be felt in the business units, and we're already feeling it. A lot of what you saw on the margin expansion in SendTech and Presort is a testament to the restructuring that we started earlier in the year and the cost actions we've taken throughout. The vast majority of this will go to the segments, and you should see an improved margin as we move forward.

Yes. I'll just add in again. From my perspective, I want to see the cost cuts coming from all parts of the business. That said, it is really important that the business units who ultimately fund and need the resources, make sure that they're making the right decisions for what do they need to run and execute on the business. So as part of this work we've done over the last 30 days to go after the incremental cost opportunity. We've really been focused on working with the business unit leaders, having them meet with each of the functional leaders across the shared services and really engaging in some very productive discussions on what do we need to run the business, how can we think about processes differently? And how do we make sure that at the end of the day, the business units have what they need to be effective in the markets?

Can you tell us a little bit more about Presort's profitability improvement is great along with EBITDA improvement, driven by the higher price that the Pulse service is charging because obviously, you're in the 20% or you save the government 20%. If you could just walk me through a little bit better context, I'd appreciate it.

Yes. Let me start with that. I mean, first and foremost, I would say that the Presort team has done a terrific job around productivity. You're really starting to see them execute very well on what they do best, which is driving productivity across their sites and across the business, so some of the benefit is clearly coming from that. They've also done a very good job of bringing additional volumes into their network to replace the natural decline of the Mailing business. So that's been supportive of that benefit as well. And then third, to your point, there was certainly a USPS cost change for us that benefited us. But at the end of the day, I want to emphasize that the reason that the USPS is giving the benefit of that work share discount is because they see the value that the Presort business brings to the table. It's not something that they're doing just out of their heart, right? Our teams really do drive value for the USPS, and you see that in the reflected changes in the work share discounts.

Great. Lastly, can you disclose the covenant EBITDA and leverage?

We have not done that in the past. We may be follow-up with the IR team after the call and take you through some more specifics later.

Okay. Can you give us and on to the market in the non-deal road show, so the vast majority of the enterprise value of the company is debt. So I think it would be helpful for credit investors who review the company and you can see the -- we estimate significant covenant flexibility. So I think it will be helpful to the company.

As I mentioned, we'll take it off-line and follow up with more specifics. We absolutely welcome the feedback and if there's more disclosures, we should be doing, we'll take that into consideration going forward.

Thank you.

[Operator Instructions] Next, we'll go to Matt Swope with Baird. Please go ahead.

Good morning Jason and Ana. On global e-commerce, Jason, and I know maybe it's not a fair question given your recent change in status, but is there any plan or thought to do something a little more drastic here rather than talking about ways things to be a little more profitable, but either shutting the business, selling the business, doing -- taking a more drastic step?

Look, I mean, to be fair, Matt, I'm not going to comment on any specific portfolio actions. What I will say is we continue to believe that there is an extremely valuable foundation in that business, especially on the domestic parcel side. We are clearly not satisfied with the financial performance that we've been delivering on that. And as I said, we are very focused on taking short-term actions to try to improve the profitability in the near term. We have a number of efforts underway as well to look at long-term opportunity to change the trajectory of that business, everything from looking again, as I said before, at opportunity to take pricing in the market potentially to thinking about how we drive our network differently. But at the end of the day, I keep coming back to our goal is to maximize the value of that business going forward. And I think that we are doing everything that we should be doing at the moment to ensure that, that is the outcome that we're going to drive.

Okay. No, that's fair. I just wonder if strategic alternatives should be more of a part of that conversation as well, at least the way you presented to us. But again, maybe that's going on behind the scenes. Can I ask a more specific question on GEC. Just around the holiday season, there have been some issues in the past on fixed versus variable labor. How are you thinking about that going into this holiday season?

Yes. Let me take that. We've been working very hard preparing for peak. And I'll start by saying it's been very humbling for the entire team, what we've gone through the past few holiday seasons here. The second thing I'll say is we're very much of a learning theme. So we're absolutely taking all those learnings and we have the same people, so we make sure we're more prepared. I'll share with you an example. In the past, and we continue to do is we get the forecast from our clients. And we always staff towards those forecasts. We have now developed in the network, our ability to flex up easier than to flex down. So now we're planning slightly below, and we will flex up if we see the volumes. So our ability in our -- inside of our processes to flex for volumes is much greater and we've developed that again throughout the years, and we'll be putting all of that in practice now. So one never knows, peak season is always so careful, but the team is as prepared as they've ever been.

That's helpful. And as far as getting labor to flex up, is that labor force readily available?

Actually, we have a much better mix of our temp to perm, temporary to permanent ratio in our labor force. And when you distribute that across the sites and the current market conditions of the labor market, which are not the same as they were over the past two peak holiday seasons, we feel very strongly and very well prepared.

Got it. And then on SendTech, Ana, you have some language in the release about fewer new lease opportunities but you expect that to be generally offset by an increase in fixed term lease extensions. Can you help us understand how that works from a revenue perspective? And maybe if you could work in what the interest rate environment does to help you on that front?

Sure. It's a great question. So let me start with where we are in our product life cycle. As you know, about 5 years ago was when the Send-Pre [ph] and some of the new technology that we started rolling out for the compliance that we need to meet for our United States Postal Service started rolling out. So those -- that was the bulk of our start of our new product launches and the new capabilities we're offering to our clients. With that, our lease terms tend to be somewhere in that 4- to 5-year range. So as those start to come off, that product is still very good, still meets the market demand. So that product does not require a new equipment sale. That client is going to come in and we're going to say, let's renew at a fixed term. So what happens in the revenue recognition is when you have an equipment sale, that's a lot of upfront revenue and cost -- it's very -- it's a good margin, but you have higher revenue and higher costs. When you actually renew this new lease term for another four to five years, you're going to have better cash flow because you're going to have more of that margin come through, but over time. So that's what we mean by having less of the upfront new lease being a new equipment sale and more of the overtime, which is that renewal with the new term.

I see. And with the financing portion of that, is there an interest rate associated with that, that fluctuates or how is that part of it set?

Actually, that's a great question. Our sales force really tends to sell the value based on the payment. So as you can imagine, the profitability shift stronger, in the renewal than in the upfront from a margin perspective.

Right, I see. Okay, great. And then just a last question from me. On the capital structure front, now that you've dealt with your 2024's, where is your next focus at this point? Would you consider being back in the market buying bonds or how do you think about the next steps with your capital structure?

Yes. So taking a step back at capital structure, our number 1 priority continues to be reinvesting in our business. You have seen a decrease in our CapEx and our capital expenditures and it's been significant. The main driver there has been the fact that we're not expanding capacity in global e-commerce, but we are definitely investing in SendTech and Presort as we've used to and also in optimization. So that's point number one. Point number two is we will continue to look at acquisitions, of course, very selectively. As an example, the ones that come to mind that we're always looking at are around the Presort space, which tend to be very accretive to our EBITDA immediately because we put them into our network. Third will be, we will continue to assess the market for open market repurchases, mainly around our 27s. As you know, year-to-date, we've done about $17 million of those repurchases in the calendar year of 2023. And then, of course, the return of capital through dividends or other means which is something we actually actively discuss with our Board on a quarterly basis. And that's kind of the 4 key elements of our capital structure.

Got it, great. Thanks Ana, thanks Jason. I appreciate it.

And I'll hand the call back over to Mr. Dies, if he has any additional remarks to make.

Yes. Well, thank you very much. I want to thank everyone for joining today's call. I am now 30 days in, and I will tell you our teams are committed to delivering a streamlined organization and importantly, maximizing the potential of each of our businesses. I am very encouraged by the continuing dedication and energy of the outstanding employees here at PB as we work together to move the company forward. And I will tell you, we look forward to continued engagement with all of our stakeholders and shareholders. So thank you again for joining the call.

And that does conclude the call for today. Thanks for your participation and for using AT&T Teleconference. You may now disconnect.