Pitney Bowes Inc /De/ Q1 FY2020 Earnings Call

Good morning, and welcome to the Pitney Bowes’ First Quarter 2020 Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today’s call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today’s conference call: Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President, Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the Safe Harbor overview.

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2019 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few operating remarks. Marc?

Good morning. I hope everyone is staying safe and in good health. Clearly, we're all operating in unprecedented times and unchartered territory. The COVID-19 pandemic has increased uncertainty around the world, impacting the accounting, business, supply chain and customer demand. It is important to note that businesses engaged in mailing and shipping, which obviously includes Pitney Bowes, have been designated as an essential service by the Department of Homeland Security. The sending of mail and parcels is critical to our economy. In the first quarter, through the disruptions and distractions, Pitney Bowes processed about 34 million domestic parcels in our ecommerce business and 4.6 billion pieces of mail and presorts. Some of this came at a higher cost, but we understand how vital this service is for our clients. This morning, I'd like to discuss our first priority, which is the health, well-being and safety of our workforce, clients, partners and suppliers. Then I will take you through where we stand today as a company, financially and operationally. Stan will then take you through how we are addressing the impacts of COVID-19 throughout the business, our first quarter results, and where we are through the end of April. For our part, we continue to take the necessary and required steps to ensure our work environments and employees are safe and healthy. We have business continuity plans in place that are designed to address various threats and vulnerabilities, including response to the pandemic, high absenteeism, and an emergency response methodology. We have specific protocols in place if an employee becomes infected with or exposed to the virus, and we’ve adjusted our sick leave policies so employees can get paid but do not have to use their sick time if they're asked to self-quarantine. Our senior leaders are communicating with their teams on a daily basis and are openly available to address concerns. Importantly, each of our businesses has been up and running through this situation. Employees that can work remotely are doing so. Within our facility, we are providing protective masks and conducting temperature checks in higher risk locations. We're also enforcing safe social distancing and sanitizing equipment in the facilities multiple times a day. Let me now turn to the state of our business and where we stand today. As we've consistently communicated, Pitney Bowes continues to be committed to maintaining a strong balance sheet. Throughout '19 and earlier this year, we took a series of actions to strengthen our balance sheet by reducing debt and improving our liquidity. In 2019, we executed the sale of our Software Solutions business, reduced our debt by over $525 million and renewed our revolving credit facility. Today, in 2020, we have reduced debt by an additional $110 million and refinanced our near-term debt maturities, which materially reduced our debt tower through 2024. Collectively, these actions, combined with the underlying strength in our SendTech cash flows, have made our debt structure more manageable in the upcoming years, and we're performing comfortably within our covenants. While we certainly did not predict this crisis, we took these actions precisely to derisk and deleverage the business and to ensure our balance sheet held up in the case there was an economic downturn. While we're maintaining a strong liquidity position, we're also taking other actions within our capital structure to preserve cash during these times. We are reprioritizing our capital needs around essential and necessary investments. We'll continue to invest in our shipping capabilities, platforms, and ecommerce facilities as well as necessary investments in new product technology that will continue to support our long-term objectives. However, by reprioritizing, we can defer a portion of our discretionary capital spend in 2020. Given the economic environment, we are taking a proven and sound approach to building out our financial services business. In addition, we will limit M&A and ensure our variable spend is in line with demand. Assumed in our cash flow scenario plan for the year is to maintain the annual dividend and we've got plans to repurchase shares in 2020. Let me spend a moment here to frame our operational business model. While our segments play in different markets, there are three commonalities among them. First, each provides an essential service to their clients and is a critical part of their operations, whether it is helping to deliver important documents, invoices, statements, or parcels. Second, we've made significant investments in each segment to improve the products and services we offer. Finally, we offer different financing options and services across all of our businesses to help our clients manage their cash flows, which is vital, especially during times like these. Within our legacy business or SendTech, we’ve invested in our SendPro family of products, which operate on a modern open-platform and use technology that positions us well to serve our clients for their mail and shipping needs. We continue to see our new offerings resonate with clients. Our SendPro Online and SendPro Enterprise products enable clients to continue to send bills, statements and parcels even if they need to work remotely. In addition, we have just introduced to the market our SendPro Mailstation and it’s a solution for both small office clients and large enterprises with distributed or home-based workforces. It is the first and only meter device in the industry to utilize postage in the cloud capabilities and is a part of an integrated mailing and shipping solution that extends the SendPro family of products. It is important to note that approximately two-thirds of SendTech’s revenue is recurring in nature and high margin. SendTech makes up the majority of the company's cash flow, and the nature of this recurring revenue is an important contributor. Our Presort business is an example of how our enterprise clients come to rely on us to process their First Class and Marketing Mail letters and Flats as well as their Bound Printed Matter, timely and efficiently. We've grown this business over the last few years against a market that was in decline, which is a testimony to our strong value proposition and market position. The bulk of our Presort business is in First Class Mail, which comprises bills, statements, and similar business communications. Although we're seeing modest declines there, the more dramatic declines have been in Marketing Mail. In Ecommerce, we continue to bring value to our retail and marketplace clients to satisfy their shipping needs. Over the last several years, we've invested and built this business to now be over $1.1 billion of revenue, which has been critical to Pitney Bowes’ overall transformation and has moved us solidly into the adjacent shipping space. It is difficult to predict with any accuracy how ecommerce demand will play out during this time, but we will continue to ensure that we're delivering this essential service to our clients. One might expect an accelerated shift to ecommerce sales. On the other side of the ledger, I think it's fair to expect cross-border transactions to be negatively impacted in the near term, due to severely restricted flights. We may also see consumer purchasing depressed for a period of time due to the economic uncertainty. Over the past several years, we've made significant investments in our products, platforms, people, and portfolio. It is the investments we have made to transform our portfolio in the services we provide that allow our clients to recognize the value we bring to the business. So let me leave you with this. In April, Pitney Bowes marked a major milestone by reaching 100 years. We have certainly seen our fair share of times of crisis, offset by many more times of prosperity. The COVID-19 pandemic has disrupted every aspect of life, and our commitment to supporting our communities has never been stronger. In these challenging times, our team is working through ways to support those in need. We are supporting the business roundtable’s effort in addressing this public health crisis with a donation to Project HOPE to source personal protection equipment from global vendors. Project HOPE will then work with nonprofit Healthcare Ready to allocate the PPEs to the medical community in conjunction with our Federal Emergency Management Agency. We have donated reimagined laptops for online learning and have committed funds to our partners at the United Way and Fairfield Community Foundation, as well as the Stamford Hospital. During this time, thousands of women and men across Pitney Bowes are playing a critical role in the economy by keeping mail and parcels moving, by keeping our clients’ equipment running, and by keeping our supply chain flowing. I want to take this moment to acknowledge and thank our employees for their incredible work. They each are performing under very difficult circumstances. In the same way, we salute the many selfless essential workers that are helping our country through this difficult period. Through the last 100 years, we have prevailed as a company by having a clear vision and strategy, but what has sustained Pitney Bowes is our character. There's a certain resilience and grit to this company which enabled us to endure. The grit is built on a culture of innovation that has created and recreated this company many times over, and it's helping us to recreate the company again today. Likewise, our country, as it always does, is demonstrating resolve and innovation that will get us to the other side of these incredible challenges. With times like these, when our true grit and ingenuity are tested, during these times, I'm proud of how our team rises to the occasion to keep moving forward and get Pitney Bowes to its next 100 years. With that, let me turn it over to Stan.

Thank you, Marc, and good morning. I share Marc’s sentiments and hope everyone is staying safe and in good health. And while there are a large number of things going on, our primary focus is the health, well-being and safety of our employees, our clients, partners, and communities; remain our highest priority during these uncertain and unprecedented times. Before I turn to the quarter, I'd like to first spend some time drilling down into some of the areas Marc discussed. First, our liquidity position. We ended the first quarter with $730 million in cash and short-term investments on our balance sheet. Total debt is $2.6 billion, which is down $625 million from a year ago. Of our total debt, $1.1 billion is associated with our finance receivables. Taking this all into consideration, our implied net debt position on an operating company basis is roughly $0.8 billion. We have taken several actions and made significant progress in strengthening our balance sheet over the last few years, but especially over the last nine months. Since the beginning of 2018 we've reduced our debt by $1.2 billion; renewed our credit facility; and utilizing cash on hand and new issuance proceeds, we materially reduced our debt towers through 2024, putting our debt in a very manageable position over the next several years with no bond maturity to address until October 2021. We are also performing within our covenants and have stress tested these ratios under multiple scenarios to ensure we maintain access to adequate liquidity. We have drawn down $100 million of our revolving credit facility. We continue to have access to the remaining balance of $400 million and are in compliance with all of the financial covenants contained in our credit facility. We believe the draw down was the prudent thing at this time, and there are no immediate needs for the funds. As such, this drawdown will be invested in short-term instruments. Looking at our capital allocation and uses of cash, we are reprioritizing our capital needs around essential and necessary investments to support our long-term objectives. By reprioritizing, we are estimating that we can reduce our discretionary capital spend by $30 million to $40 million, which is about 20% to 30% lower than our original plan. Within Wheeler Financial, given the economic environment, we're taking a sound approach to building out our financial services business. We expect new originations to be no more than $25 million in 2020, as compared to our original plan of $80 million. This is the right thing to do at this time, and will improve our free cash flow for this year. We remain committed to building out our financial services over the long-term, and we will continue to be prudent when it comes to committing capital. Assumed in our cash flow scenario planning for the year is maintaining the dividend at an annual run rate of 34 million. We are limiting M&A transactions and will not repurchase shares in 2020. We are focusing on working capital, specifically receivables, inventory, and payables. We anticipate an impact on collections as we work through payment terms with some of our clients and are managing our inventory levels and the timing of our payments. I will provide some color on how this is impacting each of our businesses. Within SendTech, our clients rely on our products and services to help them send essential invoices, statements, documents, and parcels. SendTech’s recurring revenues are high margin and materially contribute to the company's overall cash flow. However, the one-time revenues are largely around equipment sales; and to a lesser degree, a portion of our supplies and financing services are negatively impacted as they are more closely linked with demand and usage. Within our lease portfolio, approximately 40% of our clients are middle market, large cap and municipal accounts, and the other 60% are small businesses, of which roughly two-thirds is comprised of professional services, healthcare, finance, and insurance. Having a broadly diversified client base across multiple industries is an important factor when managing through these economic cycles. We have experienced economic downturns with this portfolio. And during the last financial crisis, we adjusted payment terms and services to further help our small and medium-sized clients with their cash flow needs. During that period, we saw write-off rates within our U.S. financing portfolio increase to between a 2% and 2.5% range, which is up from our normal trend of around 1%, but well below the industry average, reflecting the strength of our portfolio and essential service we provide to our clients. We are monitoring delinquency rates daily. At this point, it’s too early really to determine the impact or potential write-off level. We are working with certain clients to offer hardship programs or adjust other terms in order to help them with their cash flow needs and maintain our relationship. Also, in SendTech, we are managing our supply chain to prioritize what we need to receive and when it's on demand. We saw a minor impact to our revenue in the first quarter as a result of this, but expect supply to improve in the second half of this year. Our Commerce Services businesses are more demand driven. Within Presort, we are tracking First Class and Marketing Mail volumes daily. On average, 80% of the volumes we process in Presort are First Class Mail, which we are now starting to see a low-single-digit decline from prior year levels. The remaining 20% is mostly related to Marketing Mail, which we're seeing significant declines as clients react to market demand and reduce spend. Within Ecommerce, there are different dynamics to domestic and cross-border demand. Domestic demand, primarily around delivery and fulfillment, along with digital volumes held up in the first quarter. However, the timing of demand for our domestic deliveries from our Chinese clients changed in the quarter as a result of the COVID crisis. These dynamics created a different mix and negatively impacted margins in the quarter, partly due to difficulty in predicting client demand and hence, adapting staffing levels accordingly. Within our cross-border business, we experienced a decline in demand, along with higher transportation costs due to the restrictions on international shipments. In our drive to improve profitability in our Ecommerce business, we have taken a number of actions. We implemented a general price increase entering 2020 and are taking targeted pricing actions where possible to continue to improve our yields. We're driving a series of productivity actions across the business, including the consolidation of facilities to take advantage of the flagship building we opened at the end of 2019 in New Jersey and California, and investing in automation within our facilities and in our transportation management system, which will improve our cost per unit. We are seeing some of the benefits from the structural actions we took late last year and continue to take incremental actions to improve our SG&A. These actions are critical on our path to profitability and are needed to address the continued shift in market opportunity, along with the productivity challenges around COVID-19. We expect these actions to improve our efficiency and effectiveness by continuing to bring value to our clients. Within both our Presort and Ecommerce businesses, we have some flexibility to adjust variable costs, primarily around temporary labor based on demand. There's a certain level of fixed costs related to our facilities, full-time employees, and transportation that’s required to maintain regardless of demand. We actively manage all variable components, including working with clients on service times and consolidating facilities in certain markets to help with productivity and reduce costs. Within both businesses, COVID-19 is impacting labor productivity as the health, safety, and well-being of our employees is a top priority. When necessary, we are able to redirect mail and parcels to different facilities within our network, which also comes at an increased cost. Overall, as a company, we are aggressively managing all discretionary spend. Naturally, things like travel, conferences, third-party spends, and unfilled nonessential positions are frozen and we will get savings there. We're also reducing marketing programs and taking staffing actions across the company. We'll continue to address our spend based on market conditions and are evaluating this on a weekly basis. As previously mentioned, we also have actions in place around CapEx. We're limiting M&A. We do not participate in any share repurchase and are limiting new originations through Wheeler Financial, in addition to taking actions around temporary labor. COVID-19 impacts us in different ways in each of our businesses, and we are monitoring metrics regularly. That being said, based on the level of uncertainty around the depth and duration of COVID-19, in addition to the impact on clients, consumer demand, and suppliers, and how they ultimately impact each of our businesses, we are suspending guidance for the current financial year. Let me now take you through our first quarter's results and discuss some of the trends we're seeing through April. As in the past, unless otherwise noted, my statements going forward will be on a constant currency basis when talking about revenue comparisons and on an adjusted basis when talking about earnings-related items, including cash flow. Reconciliations of our non-GAAP to GAAP measures can be found in the financial statements posted with our earnings press release and on our Investor Relations website. Before I get into the details of the quarter, it's important to note that similar to banks and other companies with a financing arm, we increased our credit loss reserves to be in compliance with the new CECL accounting standards. Effective January 1st, this resulted in a $25 million increase to our credit reserves, which was recorded as cumulative catch up to retained earnings. In addition to reflect the rapidly changing macro environment conditions resulting from COVID-19, we updated to a 100% recessionary case and increased our provision for credit losses, resulting in a negative impact of $11 million or $0.05 of EPS for the first quarter. Let me take you through the quarter in more detail. For the first quarter, revenue totaled $796 million which was flat to the prior year. When you take into consideration the market exits that we completed in the first quarter of last year, revenue grew 1%. Adjusted EPS was $0.05 for the quarter, GAAP EPS was a loss of $1.22 and includes a $0.16 charge for the extinguishment of debt, $0.02 for restructuring costs, and a benefit of $0.06 for discontinued operations. In addition, GAAP EPS includes a non-cash $1.15 goodwill impairment charge related to the Global Ecommerce business as a result of the macro environment conditions along with our recent operating experience. Also, as I discussed, the COVID crisis had a negative impact throughout our business in the quarter, in addition to the $0.05 charge related to our increase in credit loss provision. Free cash flow was a use of $47 million and GAAP cash from operations was a use of $66 million. Compared to the prior year, the decline in free cash flow was driven by higher accounts payable and accrued liabilities, of which roughly two-thirds of this was timing related, in part due to the acceleration of interest payments related to the tender offer completed in the first quarter. Free cash flow versus prior year was also impacted by lower run-off of finance receivables. I discussed our capital position at the onset of my remarks, but let me briefly recap where we are through the end of the first quarter. At the end of the quarter, we had $730 million in cash and short-term investments on our balance sheet. During the quarter, we used free cash flows to return approximately $9 million to our shareholders in the form of dividends. We made $6 million in restructuring payments and spent $26 million on capital expenditures. Wheeler Financial funded $3 million in new originations in the first quarter, bringing the total fund to $17 million since the inception of Wheeler last year. From a debt perspective, we lowered debt by $110 million from the prior year and ended the quarter with $2.6 billion in total debt, which is $625 million lower than the prior year. As I’ve discussed earlier, our implied net debt position on an operating company basis was $0.8 billion at the end of the quarter. Turning to the P&L, starting with revenue performance by line item as compared to prior year. Business services grew by 9%. We had declines in support services of 5%, financing of 8%, supplies of 10%, rentals of 14%, and equipment sales of 15%. Gross profit was $306 million with a margin of 38%. This is a decline of 4 points from the prior year, which largely reflects the shifting mix of our portfolio and decline in Ecommerce margins in the quarter. SG&A was $248 million or 31% of revenue, which was a decline of $13 million and nearly 2 points as a percent of revenue from the prior year. R&D expense was $12 million or 1.5% of revenue, which was slightly down from the prior year. EBIT was $49 million, and EBIT margin was 6%. Compared to the prior year, EBIT declined $17 million, and EBIT margin declined by 2 points driven primarily by the gross profit decline, which was partially offset by the improvements in SG&A. Interest expense, including financing interest expense was $38 million, which was slightly down from the prior year. The provision for taxes on adjusted earnings was $2 million, and our tax rate for the quarter was 18%, which includes the resolution of certain tax examinations in the quarter. Weighted average shares outstanding at the end of the quarter were 171 million, which is about 15 million shares lower than the prior year, reflecting the share repurchase completed in 2019. So let me now discuss the performance of each of our business segments this quarter and what we are seeing through April. In our Commerce Services group, revenue was $433 million, which is growth of 8% over the prior year, EBIT was a loss of $14 million, and EBITDA was $12 million. Within Global Ecommerce revenue was $292 million, which is growth of 10% over the prior year. We entered the year with strong momentum generating revenue growth of 12% through February, which slowed to 6% in March. Delivery and return volumes for our domestic parcel services grew 11% to 34 million parcels in the quarter, driven by the strong growth in deliveries, offset by a decline in return volume. As such, the revenue growth continues to be driven by deliveries and fulfillment. Our digital shipping API volumes more than doubled from last year, and we continue to see a strong take rate on this offering. Our cross-border revenue grew for the quarter. This was largely driven by a large client utilizing our cross-border logistics services who has since suspended shipments since mid-March due to COVID-19. Our border-free retail marketplace volumes were relatively flat through February but saw a sharp decline in March as the COVID crisis ramped, resulting in lower demand and higher transportation costs, due to restriction on international shipments. Looking at EBIT, we recorded a loss of $29 million in the quarter, and EBITDA was a loss of $11 million. The loss was primarily driven by the mix of the business. Within our domestic parcel services, we continue to see delivery and fulfillment revenue outpace returns, where returns operate at a higher margin, and therefore the overall margin is shifting. Additionally, we're seeing a shift in the mix within our delivery volumes where we are processing a higher percentage of lightweight parcels, which tend to be at a lower margin than some of the heavier parcels. In addition to the mix, we have higher costs as a result of our continued investments. Our new flagship facilities on the East and West Coasts are now fully operational for processing parcels and ramped up volumes throughout the quarter. These are large facilities that we did not have in operation this time last year. We are in the process of consolidating volumes from other sites into these new facilities; but in the meantime are incurring incremental costs versus the prior year and quarters. As mentioned, COVID-19 impacted revenue and drove lower productivity in the quarter, which was in part due to the difficulty in accurately predicting demand by clients and flexing labor accordingly. In addition, we implemented CDC guidelines around social distancing at each sorting facility and incurred higher costs related to sanitizing facilities, staggered break and shift scheduling, as well as health and temperature screening. We also increased our credit reserves as a result of COVID-19 and to comply with the new CECL accounting standard. As we look ahead, there's still uncertainty around consumer demand and the impact of volume due to the unknown severity and duration of the COVID crisis. In April, domestic parcel deliveries are growing in excess of 40% and we continue to see a higher percentage of lightweight parcels. Digital deliveries continue to grow at a strong double-digit rate. Our fulfillment volume with the addition of several large clients has more than doubled. However, returns and cross-border volumes are declining approximately 20%. We have adjusted our temporary labor based on demand, but we're also addressing a higher level of absenteeism related to COVID. We continue to drive productivity and pricing improvements as our facilities continue to practice safe social distancing and sanitize regularly, which comes at a cost to productivity. The health and well-being of our employees remain a top priority, as we have thousands of employees working in these facilities. Within Presort Services, revenue was $141 million, which is growth of 4% over the prior year. The revenue growth is driven largely by the investments we made in acquisitions in 2019 which drew 3 points of the growth in the quarter along with higher revenue per peak. EBIT was $16 million and EBIT margin was 11%, EBITDA was $23 million and EBITDA margin of 17%. This represents flat margins versus the prior year. EBIT, EBITDA growth versus the prior year were negatively impacted by $4 million from unrealized losses on certain investment securities driven by changes in financial markets. Excluding this, the margins would have done higher by 2 points over the prior year. We remain focused on our productivity initiatives. As a result, labor costs per unit improved by 3% compared to the prior year. The disciplined management actions we have taken and the investments we have made over the last two years continue to yield positive results. Compared to the prior year, we improved pieces fed to our equipment per hour, resulting in 115,000 less hours to process 143 million more mail pieces. Our Presort business saw significant impact on Marketing Mail volumes from COVID-19 during the first quarter. First Class Mail volumes were minimally impacted in part due to the timing of volumes already scheduled to be processed. As you’ll recall, the first quarter is typically our largest processing quarter as the New Year typically sees an increase in statements and important documents. There was some impact to our productivity in our facilities for the same reasons we saw in Ecommerce. Similar to Ecommerce, it’s difficult to predict how client demand will evolve as this COVID crisis continues. Through the end of April, First Class Mail volumes are declining at a low single-digit rate, and Marketing Mail volumes are down from the prior year in a 30% to 40% range. We will continue to drive productivity; however, this will be partially offset by our actions to ensure the safety of our workers within our facilities and as we redirect mail between sites when needed due to the COVID situation. Turning to our SendTech segment, revenue was $363 million, which was a decline of 7% from the prior year. We entered the year with good momentum in this business. Through the end of February, our global shipments, which is the leading indicator for equipment sales, were down only 2% from the prior year. In March, as the COVID-19 situation ramped up, we saw a steep decline of nearly 40% in global shipment. This resulted in equipment sales being down 15% for the quarter. We indicated on our last call that supply chain was impacted by COVID-19 which was also a contributing factor to the lower equipment sales, mostly as we were unable to source certain components for our higher-end products. Supplies through the end of February were down 7% from the prior year, but ended up being down 10% for the quarter, again, as we saw a steep decline in the month of March. Rentals, financing, and support service revenues declined, but were partly offset by higher business services. EBIT was $107 million, EBIT margin was 29%, EBITDA was $116 million, EBITDA margin was 32%. EBIT and EBITDA margins were negatively impacted by $10 million as a result of the increasing credit loss provisions to reflect the current macro environment conditions resulting from COVID-19 in connection with the application of the CECL accounting standard. We continue to see the impact of COVID-19 particularly on the transactional side of our business. For April, you're seeing the equipment sales trend from March continue with U.S. written business down to approximately 30%, and continued delays in installations, which will impact revenue recognition. We are seeing a similar decline in supplies, largely as a result of lower consumption. We continue to monitor delinquency rates on a daily basis and have seen a slight uptick through the month of April. Most percentile of clients are billed quarterly, with the last month of the quarter typically being our largest billing cycle, making it too early to draw any conclusion on delinquency and write-offs. Our supply chain is prioritizing fulfillment based on demand, but still operating on a delay through the month of April. We are working closely with our partners and suppliers and anticipate this will normalize in the second half of this year. Before we take your questions, let me briefly recap, we exited the first quarter with $730 million in cash and short-term investments on our balance sheet. We have drawn down $100 million against our credit facility and have access to the remaining balance of $400 million. We have no bonds coming due until October 2021. We are also taking actions within our capital structure and across the business to preserve cash during this time. As I mentioned at the onset of my remarks, based on the level of uncertainty around the depth and duration of COVID-19 in addition to the impact on each of our businesses, we are suspending guidance for the current financial year. We are monitoring operations, metrics, and trends on a daily basis in order to take the appropriate actions in a timely manner. With that, we will now take your questions. Operator, please open the line.

Your first question comes from the line of Kartik Mehta. Please go ahead.

Hey, Marc. Good morning. I wonder, I know you gave some thoughts about what's happening in April. I'm just wondering, if you could give maybe a little bit more granularity around businesses, at least trends you saw in April? I know you provided some for Global Ecommerce, but I'd be interested in what else you're witnessing out there?

Yes, I'd be glad to. So if you start with SendTech, I would say that customers are starting to be a little bit more acceptable. So if you think about what is required to consummate a sale, given that many of our clients were working at home, the first is, you got to be able to find them. So I would say in March what we saw the last couple of weeks, is that our contact rate with clients, read that as telephone calls that actually reach a client, were pretty low. What you would see in April, is those contact rates were kind of back at reasonable levels, at or above pre-COVID. If you look at contracts out, it was slightly below average, but again, stronger than March levels. If you look at how that comes to, I would say our written business, which is getting customer agreement, was better than end of March, our shift was better than end of March, our installed was consistent with the end of March and that's simply because the difficulty of getting service people on site to install the equipment. So that's kind of how April went up versus March. Let me pause there and see if that makes sense and I'll move on to Presort.

Yes, no, that makes sense. I was just wondering, Marc, in the SendTech business, is the biggest issue net adds for you currently, just because we might see an increase in small businesses, unfortunately going out of business?

No, the biggest issue is the combination. If you look at our net additions in the first quarter and in April, you can see new customers thanks to some of the new online products we've introduced, which are fitting given the number of clients working from home, as well as our lower-end products. We're gaining a fair number of new customers, so there's no issue there. The concern over time, as you mentioned, relates to customer bankruptcies. So far, when you break down the delinquencies and the number of clients we’re discussing in terms of different terms, it’s a minimal amount compared to the total size of the balance sheet. However, we are still in the early stages. The biggest vulnerability, to address your question, is our installed base and customer bankruptcies. But again, so far so good, and if you look back at 2008-2009, as Stan referenced, we performed better than the industry during that time. Regarding SendTech, Presort is performing reasonably well. If we examine the mix of our business, first-class mail, which makes up 80% of our volume, was down low single digits, which is better than USPS by a reasonable margin. Meanwhile, marketing mail was down significantly, around 40% to 50%. Those trends have remained consistent from March to April with not much difference. An interesting point is in Global Ecommerce; our domestic network is operating at peak levels. It resembles the volume experienced during the holiday season, from October to December, amid all the stress in the ecommerce network, and that volume continues to grow. Our domestic network is at capacity. In terms of the digital business, particularly the API business, we are seeing triple-digit year-to-year increases, which is expected. However, we are facing some challenges with cross-border traffic, which was typically reliant on commercial flights. With fewer commercial flights available, we have to use alternative carriers, which are scarcer and more costly. That captures the trend from April to May. Stan, would you like to add anything?

Yes, the only additional point I would make, Kartik, is that we noticed a decline in returns, which does create a mix issue that affects EBIT. Although we typically don’t disclose these figures, I’ll share some preliminary revenue insights for April. Global Ecommerce is experiencing solid growth in domestic parcel services, which is contributing to revenues that we expect to be in the double-digit range for April. Regarding Presort first-class volumes, they are down in the low single digits, while marketing mail is experiencing a more significant impact; marketing mail accounts for about 20% of our total volume, and we anticipate Presort for April to decrease by around 10%. As for SendTech, there is also a decline in equipment sales and supplies impacting this quarter. However, it’s important to highlight that while we are signing new deals in SendTech, some of these require installation before revenue can be recognized. Currently, we have about $10 million in contracted revenue that will be recognized once installations occur as locations become operational. We expect SendTech, primarily driven by equipment sales, to see a decline of approximately 20%. Overall, when you put all of this together for the month of April, we are looking at a decline in high single digits, which aligns with our expectations based on the volume mix.

Stan, that's really helpful. And just one last question, Marc, on Global Ecommerce, as you continue to grow revenue and fortunately the brands are not going in the right direction in terms of profitability, I realize this quarter had some unique aspects to it because of COVID-19 and some of the increase in expenses. But where do you stand in terms of what you need to get, in terms of profitability. In the past you've talked about a number of parcels. I don't know if that's how you still think about it, or if there is another metric you're looking at, to have an idea as to when it gets to profitability?

Yes, I mean, number of parcels is still the ultimate measure of getting to profitability. Underneath that, as Stan mentioned, the mix of the kind of parcels is becoming increasingly more important. So we have kind of a sweet spot in terms of volume for our network, it tends to be smaller parcels, but not too small. So there are six or seven different metrics, but far and away the most important one is the number of parcels. But embedded in that are a lot of productivity measures within the distribution centers and as Stan mentioned, because of things like temperature checks, social distancing, moving volume around, and candidly we had two sites that we brought online, and we still have the old site and in the first quarter. So there is a lot of moving pieces in the quarter. But we expect the profitability of that business to continue to improve this year and I'm still very optimistic.

Next, we'll hear from Ananda Baruah. Please go ahead.

Hey, it's great to know that things are going well for you. I have a question for both of you. First, I really appreciate the details about April, Stan, that’s very helpful. Although you're not providing guidance, should we consider the trends from the April quarter when looking ahead to the June quarter? Also, Marc, do you believe the June quarter will likely be the lowest revenue quarter of the year? I have a few follow-up questions after that. Thank you.

So let me start with the last question. I certainly expect the second quarter to be more challenged than the first. In terms of how the rest of the year unfolds, your guess is as good as mine. A lot of it depends on the states opening up and how the virus is able to be contained. So as we do our internal modeling, we do think the second quarter is a trough. But that's precisely the reason we suspended guidance, is our ability to give responsible guidance at this point as well. In terms of the color on April, I'm not going to tell you how to do your models. We felt in this particular moment that transparency was important for our investors. So it's a data point and no, I have a reasonable amount of confidence in our data points. A couple of weeks of a time when you get into June, it just becomes too hard to predict.

That's totally fair and you guys mentioned during the prepared remarks $30 million to $40 million in lowering of the discretionary spend. A lot of moving parts, but does it make sense for us to remove that from the cost base?

Yes. Ananda, that comment was around CapEx explicitly. So as we look, we've told you that CapEx runs about $140 million, and we think within that there is a discretionary component. Now, I want to reemphasize, we're still going to invest in the business and you see us doing that, but we're going to be prudent about it. So we may make different decisions on cash versus lease. But we believe that within that framework, we can extract about $30 to $40 million, which will preserve cash, as we go through. There are a number of actions we're taking overall that will help us also conserve cash and reduce spend. So obviously we're reprioritizing the CapEx we talked about, certainly travel, conferences, all that is done. We are hiring freezes and some other and some other headcount actions. We're going to manage our marketing spend to align with where we see the demand, and obviously we're doing things like consolidating facilities within ecommerce and dealing with third-party spend. All designed to reduce spend and preserve cash until we get some better clarity on how this will play out.

Got it. That's helpful. Stan, I have one more anecdotal business question. Given that you aren't providing guidance and there are many moving parts, is it still possible for the ecommerce margins in the December quarter to be positive? I'm trying to establish a framework for ourselves to think about the types of programs we might consider.

I appreciate the question, Ananda. It's quite challenging to forecast what will occur due to the uncertainty, which is why we decided to withdraw our guidance. However, we are experiencing significant volume growth, especially in our delivery segment. We are confident that we will improve our fulfillment processes, and we've already seen some positive indicators. Our margins have shown improvement compared to last quarter up until February, but with the onset of COVID, which is a labor-intensive challenge, we faced substantial impacts in March. Our operational expenses have decreased year-over-year thanks to several actions taken by the team. We anticipate that the benefits from these productivity initiatives will more than double in the second quarter. Nonetheless, the unpredictability surrounding the situation, especially with many of our clients being retailers and the ongoing news cycles, complicates our ability to forecast positively as we approach the end of the year. I am confident that the steps we are taking will yield improvements, but we need to observe how the macroeconomic landscape stabilizes, whether it will follow a U, V, or another pattern of recovery.

Let me expand on that point. The wildcard in all of this, especially in the retail sector, is how things will unfold. Generally, we are observing that clients with digitally native businesses are thriving, while those with more traditional brick-and-mortar models are facing difficulties, which is evident in the headlines each morning. While I can share insights into our own business, the broader customer environment remains challenging to forecast at this time.

Next, we'll go to the line of Shannon Cross. Please go ahead.

Thank you very much for taking my question and thank you for all of what your employees are doing. I think those involved in the postal stream, whether the workers of the USPS or companies like yours are incredibly important right now and doing a lot of things that are sort of scary behind the scenes. So again, thanks. The question I had, I guess maybe more for Stan, just on cash flow, I know you gave some details. But I'm curious as we think about the potential for benefit from finance receivables, or how we should think about, in general, working capital, to the extent you can talk about it over the next few quarters, whether or not you think it'd be a source or use of cash and what the various segments might do? Thank you.

Sure, Shannon. Thank you. When we look at the first quarter, we see much of this as timing, with $17 million compared to the previous year. We expect to recover $30 million of that timing within 2020. It's important to note that one of our strengths lies in the recurring nature of our revenue and cash flow, especially in SendTech. Approximately two-thirds of SendTech's revenue is recurring, and this recurring income accounts for about three-quarters of their profit. Equipment sales will be affected, and I will address your inquiry about finance receivables shortly, as it’s significant, while supplies are affected to a lesser extent. Nevertheless, these streams assure consistent cash flow. Regarding Presort Ecommerce, it relies more on volume. In terms of Presort, we've previously noted the effect on marketing mail and first-class mail, which is only down slightly. Considering the year ahead, I want to outline both the supportive and challenging factors. We anticipate recovering that $30 million of timing throughout the year and foresee a reduction in CapEx of $30 million to $40 million, which will also boost free cash flow. As mentioned earlier, we originated around $3 million in the first quarter, and we recognize the tough economic landscape. Consequently, we expect new originations this year to be capped at roughly $25 million, translating to over $50 million in cash flow benefits. This cash remains in the bank for corporate use while contributing to free cash flow. Additionally, from our experiences in the last recession, we observed a decrease in the financing portfolio, and we expect some level of that to happen again, providing a tailwind. However, there is a balance with new business; as COVID prolongs, the installation cycle becomes extended, which may lead to a decline before we can backfill with new installs. Another positive aspect to note is that we have insurance coverage from last year's cyber attack, and we have received around $4 million so far, with expectations to recover more proceeds over the course of the year. However, the positive effects will be somewhat countered by lower profit performance across our business units due to ongoing challenges, particularly anticipated to intensify in the second quarter. Furthermore, as I mentioned earlier, we expect to see an impact on working capital, mainly related to accounts receivable and collections. While we've not yet experienced a significant impact, we anticipate that it will rise. We are also focusing on managing our payables and inventory in collaboration with our partners. Overall, reflecting on the last recession, free cash flow, although variable, remained relatively stable. Therefore, we expect improvements in free cash flow and believe we will have the liquidity to navigate this crisis.

Thank you. That was very helpful. I guess my next question is on the write-off that you took in ecommerce. Can you give some more specifics on what drove that and what specifically you've considered impaired? Thank you.

Sure. If you go back and look at our Qs over the last several quarters, we've disclosed that we are below 20%, which is kind of our bright line on coverage. And what we looked at in the first quarter was, the weakness in the performance and COVID exacerbated that. So as you look at COVID, I think, it had an outsized effect here in ecommerce. So that became kind of a trigger point for our valuation. Now we did this with a third-party firm and then looked at scenarios out through the year, and this changed in trajectory due to the current macro environment, as well as the weaker than expected profit performance, is really what drove that action in the first quarter. Now, we still have confidence in the long-term model, but the ramp of getting there, we think has shifted a little bit and the difficulty of predicting how COVID will alter that was part of the challenge of looking at that in the first quarter. So we've come back. We did the analysis, and you saw we took a $198 million impairment. If you recall, we had just over $600 million of goodwill on the balance sheet for Global Ecommerce. As a reminder, it's obviously a non-cash event, and we still are confident in the long-term prospects for our Global Ecommerce business.

And at this time, there are no further questions.

Thank you, operator. I hope everyone on the call is doing well during these incredibly difficult times. I appreciate Shannon's kind remarks about our team, which truly reflects the remarkable efforts of people across the country who are doing exceptional work under challenging and sometimes dangerous circumstances. Regarding Kartik's question about new clients, I see this as an opportunity to assist our clients and potentially attract new ones, particularly in SendTech with our impressive online offerings, which are especially relevant now. Additionally, in Global Ecommerce, where domestic networks are at full capacity, many competitors may struggle to meet existing client demands. Situations like this often lead to shifts in market share, and our largest competitor in SendTech has significantly reduced their workforce. Over the past few years, we've made important strategic decisions to enhance our product portfolio and strengthen our balance sheet for the long term, including the sale of Production Mail, Software Solutions, and various smaller divestitures in international markets. These steps have simplified our focus on mail and shipping, which are crucial for our financing. We've taken advantage of tax reform to bring cash back and have positioned our balance sheet with reduced debt, making our financing terms manageable for the near future. We'll continue to invest in adjacent markets because we believe they offer attractive long-term growth and profit potential. Like everyone else, we are affected by COVID-19, but our efforts over the years to bolster our balance sheet and reposition our business have prepared us to navigate this crisis more effectively. Our goal remains to fulfill our essential roles in moving mail and parcels, supporting small businesses, and emerging from this crisis even stronger. I will now conclude today's call. Adam and Jim are available to discuss CECL and other accounting matters. Wishing everyone well, and I look forward to speaking soon. Take care.

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