Pitney Bowes Inc /De/ Q2 FY2020 Earnings Call

Good morning, and welcome to the Pitney Bowes’ Second Quarter 2020 Results Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today’s call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce your speakers for today’s conference. Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and 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. These slides can also be found on our Investor Relations website. Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few operating remarks. Marc?

Thank you, Adam. And thank you everyone for joining us. I'd like to begin the call by thanking all the essential workers, including the Pitney Bowes team, for their dedication to the work in what is unprecedented time. And likewise, our hearts go out to all who have lost loved ones to this terrible virus. We continued to navigate in challenging times and uncharted territories. And as I mentioned in our last call, times of economic dislocation certainly exist now. Our focus from the outset has been to come out of this period better than before. I will let Stan take you through the specifics of the quarter. But from my perspective, the quarter was quite good. We had excellent execution and made the best of a difficult situation. First and foremost was the health and wellbeing of our employees. We made the necessary changes to how we did business to keep our employees safe, and we received high marks from our team. Likewise, we put a premium on our balance sheet. We exited the quarter in a much stronger position. We had already refinanced much of our debt. And in the second quarter, we substantially increased our liquidity exiting the quarter with over $1 billion of cash and short-term investments. We will continue to be diligent about our balance sheet and liquidity position. In our Global Ecommerce business, we grew by 100 new customers and handled unprecedented volumes. I have heard others in our industry talk about volumes consistent with the holiday peak. Our domestic delivery volume in the second quarter was over two times the holiday peak. I won't say we were terribly efficient in dealing with the volume as the surge caught us off guard. But the bottom line is we moved an unprecedented number of parcels. The net effect of the new customers will help us achieve scale and will accelerate some investments; it will take some time for our expanded team in our new facilities to hit their stride, but they've already made great progress in handling the new volume levels. The Global Ecommerce business is now over $1 billion and grew over 40% in the second quarter. This is a business that didn't exist eight years ago. Our Presort business performed better than the market and was able to make an important acquisition. The ironic effect of decreased volumes in the Presort world is that fewer clients and third parties have sufficient volume to achieve five-digit densities, which is what drives the economic benefits in the Presort world. Net-net, our Presort businesses is clearly positioned stronger during this pandemic. And regarding our mailing business, our investments in online offerings and digital channels really paid off in the quarter. Our online offerings, in addition to our new central mail session, eliminate the need for field service teams to physically install an asset as digital channels are very well suited for offices being shut down. If you look at the quarter from a longer-term perspective, the investments we have made to move our business to ecommerce shipping and build capacity for that business are now evident. Investments at Pitney Bowes Commerce Cloud, new offerings, and new channels all paid off. We’ve built a more agile, flexible, and contemporary business in the second quarter, and this is a clear proof point. The obvious question we are asking ourselves and you will ask us is what do we expect for mailing and parcel volumes going forward? The honest answer is we don't know for sure. Mail volume saw a drop through the second quarter. But we are seeing a slightly improved trend through July. In the world of ecommerce, we have taken a material stair-step up. It's not clear if volumes will stay at these elevated levels. But there is no doubt that buying behaviors have changed. Customers are buying online more frequently and the number of brick and mortar stores is decreasing. The second quarter was also notable, as for the first time in Pitney Bowes’ history, shipping revenue exceeded mailing revenue. Our going forward portfolio is weighted towards growth markets. We’re in markets where we have a clear right to win and, in fact, we are winning today. So, it’s hard to be precise about our future mail and parcel volumes. I like how we're positioned, and I have no doubt that we're going to come out of this difficult time in a much better position. Now I will turn it over to Stan.

Thank you, Marc, and good morning. Our continued focus remains on the health, wellbeing, and safety of our employees, clients, partners, and communities. As we discussed in our last call, employees that can work remotely continued to do so. Within our facilities, we are enforcing safe social distancing, staggered shifts and breaks, mandating protective masks, conducting temperature checks in higher risk locations, and sanitizing multiple times a day. All areas of our business have been impacted by COVID; some positively and some negatively. In the US market, ecommerce as a percent of total industry retail sales increased more than 10 points from 16% in 2019 to 27% recently. We are also experiencing a dramatic shift to ecommerce, which fueled our strong revenue growth this quarter. In the second quarter, revenues associated with our shipping products comprised 51% of our total revenue, which is the first time our shipping revenues have outpaced mailing. As anticipated, we are experiencing pressure within the mailing related businesses. We are leveraging the investments we have made over the last several years to address opportunities and help mitigate some of the pressure. We estimate that the incremental costs related to COVID in the quarter were approximately $12 million. These costs largely relate to higher bad debt expense and ensuring the safety of our employees, primarily associated with PPE, supplies, and quarantine pay for exposed employees. In addition, we saw higher postal costs related to injecting parcels directly into the USPS and bypassing our network to better serve our clients. And, of course, during these uncertain times, we continue to keep a tight focus on our liquidity position and cash. Let me briefly recap. We continue to maintain a strong liquidity position. We ended the quarter with over $1 billion in cash and short-term investments. Free cash flow was $148 million, which is a significant improvement from the end of the first quarter. Through the first half, free cash flow totaled $101 million, up $68 million year-over-year, which leaves us well positioned for the second half of the year. We have worked on strengthening our balance sheet and addressing our debt profile. We have no bond maturities until October 2021, and that amount is manageable at $172 million. We will continue to stay focused on our balance sheet. We also announced a drawdown of $100 million on our revolving credit facility which took place in April. There remains no immediate need for the funds, but we believe this was a prudent thing to do given the continued uncertainty in the market. We remain focused on working capital. And we continue to reduce discretionary spending throughout the organization. For the first quarter, we improved DSO by three days, and we also reduced OpEx by about $20 million. We are reprioritizing our capital needs around essential and necessary investments to support our long-term objectives. Last quarter, we estimated that we could reduce our discretionary capital spending by $30 million to $40 million this year versus our original plan to spend approximately $140 million. Based on the accelerated demand in ecommerce that we are seeing, we estimate that we will reduce our annual CapEx spend more likely around $20 million for the year. Within Wheeler Financial, we expect new originations to be no more than $25 million in 2020, as compared to our original plan of $80 million. We remain committed to building out our financial services over the long-term. We will continue to be prudent when it comes to committing capital. Assumed in our cash flow for the year is our intention to continue to maintain our current dividend at an annual run rate of $34 million, and we are limiting M&A transactions, and we will not repurchase shares in 2020. Let me now take you through our second quarter results and discuss some of the trends we saw in each of our businesses. Unless otherwise noted, my statements going forward will be on a constant currency basis when talking about comparisons, and on an adjusted basis when talking about earnings related items, including cash flow. Reconciliations of all non-GAAP to GAAP measures can be found in the financial schedules posted with our earnings press release and on our Investor Relations website. For the second quarter, revenue totaled $837 million, which was growth of 7% year-over-year. Adjusted EPS was $0.04 for the quarter. GAAP EPS was a loss of $0.02 and includes charges of $0.07 for taxes related to the settlement of certain investment securities, as well as charges of $0.02 each for restructuring, asset impairments, and discontinued operations. This is partly offset by a $0.05 gain on the sale of an equity investment. EPS this quarter also includes $0.02 from insurance proceeds that we received related to the malware attack that we experienced late last year. This partly offsets the estimated incremental costs related to COVID of approximately $12 million or $0.05 of EPS in the quarter. Free cash flow was $148 million. And GAAP cash from operations was $153 million. Free cash flow increased over prior year as a result of higher accounts payable and accrued liabilities driven by growth in the business and higher customer deposits, of which a portion is timing related. We also saw a higher runoff of finance receivables which benefited free cash flow. Let me briefly recap where we are on our capital position through the end of the second quarter. As I stated earlier, we ended the quarter with just over $1 billion in cash and short-term investments. During the quarter, we used free cash flow to return approximately $9 million to our shareholders in the form of dividends. We made $5 million in restructuring payments and spent $34 million on capital expenditures. From a debt perspective, we ended the quarter with $2.7 billion in total debt, which includes the $100 million drawdown from our revolving credit facility. In terms of our net debt, when you take into consideration the billion in cash and short-term investments, in addition to our finance receivables of $1 billion, our implied net debt position on an operating company basis was approximately $650 million at the end of the quarter. Turning to P&L, starting with revenue performance by line item as compared to prior year. Business services grew 27%, and rentals grew 2%. We had declines in financing of 7%, support services of 10%, supplies of 29%, and equipment of 32%. Gross profit was $284 million with a margin of 34%. This is a decline of 8 points from prior year, which largely reflects the shifting mix of our portfolio and the impact of COVID. SG&A was about $118 million or 28% of revenue, which was down about $7 million from the prior year, reflecting over 2.5 points as a percent of revenue. The improvement from prior year was a result of actions we have taken around lowering discretionary spending. R&D expense was about 6% of revenue, which was down $6 million from prior year. EBIT was $48 million with an EBIT margin of 6%. Compared to prior year, EBIT declined $31 million and the EBIT margin declined by 4 points driven primarily by the gross profit decline, which was partly offset by lower SG&A and R&D spending. Interest expense, including financing interest expense, was $38 million, which was down slightly from prior year. The provision for taxes and adjusted earnings was about $4 million, and our tax rate for the quarter was 36%. Weighted average shares outstanding at the end of the quarter totaled 172 million, which is about 6 million shares lower than the prior year due to share repurchases completed in 2019. Let me now discuss the performance of each of our business segments this quarter and what we are seeing through July. In our commerce services group, revenue was $517 million, which was growth of 26% over prior year. EBIT was a loss of $6 million and EBITDA was a positive $19 million. Within Global Ecommerce, revenue was $398 million, which was growth of 41% over prior year. We are experiencing a dramatic shift in the market to ecommerce, which fueled our overall revenue growth this quarter. We signed over 100 new clients in the quarter, including some sizable clients and competitive wins, which are a testament to our value proposition and evidence of our position as a key player in this market. We are diversifying our client base, making it less reliant on certain volume clients. It's also important to point out that most of these new client volumes are not yet in our second quarter results. In addition, market disruptions internationally have created opportunities to expand our U.S. inbound solutions ahead of the new UPU regulation that went into effect on July 1. We processed 62 million parcels, a record number in our domestic parcel services, nearly doubling what we did last year and 80% more than that of the first quarter. We saw a continuous ramp up in volumes for the second quarter driven by our delivery services. Our domestic revenue grew 36% over prior year, led by strong growth in our digital shipping API volumes. Our cross-border revenues declined 6% from prior year, but the trend through the quarter improved. This decline was expected, given continued restrictions on international flights in addition to a large cross-border logistics client who suspended shipments in mid-March but has since started to ship again with us toward the end of the quarter. Overall Global Ecommerce revenue accelerated through the quarter from 12% growth in April to 45% growth in June. To-date in July, we are seeing similar trends from the second quarter across the ecommerce business. We entered the third quarter with pent-up demand for some of the new clients as well as some backlog from the second quarter. Typically this business experiences a step down in the third quarter from the second quarter due to seasonality. Given the current environment, we expect that paradigm to change, with the third quarter being in line with the second quarter levels on the notion that people are traveling less, working remotely, and continuing their online buying habits. Looking at EBIT, we recorded a loss of $19 million in the quarter. And EBITDA was a loss of $1.6 million. Both of which marked a $10 million improvement from the first quarter despite the impact of COVID. The second quarter EBIT margin of negative 4.7% was an improvement both sequentially from the first quarter and over prior year, reflecting scale-related benefits and transportation and warehouse costs per parcel, which reached 31% and 45% respectively from the first quarter. The second quarter demonstrates that with scale, the model works. We got leverage out of our warehousing and transportation costs per unit. This was partly offset by higher COVID-driven labor costs due to expected demand. Compounding this, we increased our costs by 80% in 90 days. Labor and postal costs are areas where we can improve our performance over time, both through productivity and as demand becomes more predictable. As expected, we also saw higher direct expenses related to sanitization and safety procedures as well as higher bad debt expenses. All of which are due to the impact of COVID. We estimate that approximately half of the EBIT loss this quarter is attributed directly to incremental costs related to COVID, most of which will continue during this pandemic. I'm pleased to report that we did not have to shut down any of our facilities during the quarter due to COVID. The investments we've made over the last few years in our technology, our network, and especially in the two new flagship facilities we opened at the end of last year have been instrumental in allowing us to handle these volumes. We've always said there are two pieces to getting margins to our long-term targets: number one is scale, and number two is operational efficiency. The accelerated shift in ecommerce has grown volumes certainly faster than we anticipated, especially as it relates to our domestic delivery services, which today operate at a lower margin compared to the overall ecommerce margins. However, we still need to continue to invest in automation and operational efficiencies to better take advantage of this growth. As demonstrated with our investments in our new flagship facilities, it is important to invest ahead of the growth opportunity. As a result, the second half of this year, we will be adding three additional facilities and expanding one other. These new facilities will be smaller in size compared to the flagship ones we added last year. This will increase our footprint to better meet the growing client volumes and improve service levels to consumers in those metro markets. Looking at Presort Services, revenue was $118 million, which was a decline of 8% from prior year. Our Presort business saw significant impact on volumes from COVID during the second quarter, but it performed better than the market. First Class Mail volumes, which comprised about 55% processed in this business, declined 5%. Marketing Mail volumes declined 22% from prior year. We've talked about the investments we are making in Marketing Mail Flats and Bound Printed Matter in order to expand this business and build a new revenue and profit stream. In the second quarter, our Marketing Mail Flats and Bound Printed Matter volumes grew 36% year-over-year and contributed to an overall increase in our revenue per piece. Overall, for Presort, the lower average daily volumes were relatively consistent throughout the quarter. In July, we are seeing an uptick in daily volumes compared to the second quarter. First Class volumes are declining similar to the second quarter in the low single digit range. Although we are seeing some improvement in Marketing Mail volumes, those volumes continue to decline in the double-digit range. Marketing Mail Flats and Bound Printed Matter volumes continue to grow in the high double-digit range. We would expect our Presort mail volume trends to improve from current levels over time as the U.S. returns to more normal behaviors in a more stable environment. But naturally, this is contingent upon the depth and duration of COVID. EBIT was $13 million and EBIT margin was 11%. EBITDA was $20 million, and EBITDA margin was 7%. While down from the prior year, margins were flat to the first quarter despite significantly lower volumes and revenue. EBIT and EBITDA included a portion of the insurance proceeds received this quarter related to the malware attack late last year, which was offset by the impact of COVID. Through productivity initiatives put in place and synergies with our ecommerce network, we are seeing improvements in our transportation costs per unit. We are witnessing higher COVID-driven costs related to sanitization and safety procedures which is impacting our labor costs. We remain focused on productivity initiatives and investing in automation in this business. Compared to the prior year, we improved pieces fed to our equipment per hour, resulting in 100,000 fewer processing hours. We continue to look for opportunities to expand our network. At the end of the second quarter, we closed on a small acquisition in the Dallas-Fort Worth region, which was less than $10 million. This is expected to bring over $230 million additional mail pieces into our network on an annualized basis and expand our reach in a competitive region. Turning to our SendTech segment, revenue was $321 million, which was a decline of 15% from prior year. As we discussed last quarter, we saw the greatest impact on the in-period revenues related to equipment sales, which were down 32%, as we experienced longer sales cycle times in the quarter as well as an elongated install scheduling due to COVID. As businesses reopened, we saw the equipment sales trend improve through the quarter from down over 50% in April to down just under 20% in June. Supplies declined 29%, as they relate to demand and usage, which has been impacted by COVID. Similar to the equipment sales trends, the decline in supplies improved from down 30% in April to down about 12% in June. Based on the backlog and expected shipments in the third quarter, which are leading indicators for equipment sales, we expect sequential improvement in equipment sales in the third quarter, but still anticipate a double-digit decline from the prior year similar to what we saw in June driven by a tough prior year comparison. In the second quarter, financing and support services revenues declined driven by the lower portfolio and decline in client activity. We've discussed in the past our investments for long-term potential across all of our businesses. Within SendTech, we've invested to diversify our business model and have evolved from purely a hardware-based mailing model to a cloud-enabled shipping and mailing solutions model with analytical capabilities. Our investments are in three primary areas: new product technology, channel capabilities, and developing a new revenue profit stream around shipping. These investments are starting to pay off. In new products technology, we launched our new central mail station, a first-of-its-kind device with meter-in-the-cloud capability. Investments in digital web capabilities saw us ship over 5,000 units in the quarter since launching, exceeding our expectations. We have invested in our channel, especially in building our digital channel capabilities, including direct web sales. In North America, 65% of our supplies transactions are now through the web. Within SendTech shipping, we've invested in digital capabilities, leveraging the APIs from Global Ecommerce and adding in functionalities like multi-carrier capabilities. Shipping revenues grew over prior year, with SendTech shipping revenue amounting to about $30 million. Within this, we have built out an innovative online SendPro shipping service, and in the second quarter, the number of paid subscribers grew nearly 40% from the prior year. We have also invested in our multi-carrier shipping platform, which has gained traction, more than doubling the shipping label volume through the prior year. Through these investments, we now have an end-to-end solution for our clients to transact with us, both through our physical devices and/or in an online manner, which is a key differentiator for us. Our business has improved its capabilities by adding new revenue and profit streams. During these times, customer preferences for consumption models have accelerated. We are well prepared to meet these changing preferences during these market shifts through the channel digital-based investments we've made. These will also help accelerate the SendTech transformation. Despite the decline in SendTech’s revenue, the EBIT margin remains solid and within our long-term model range. EBIT was $76 million. The EBIT margin was 32.5%, while EBITDA was $113 million, and EBITDA margin was 35%. We monitor delinquency rates on a daily basis and, not unexpectedly, saw a slight uptick in the second quarter with greater than 30-day delinquency increasing from first quarter results. To date in July, early-stage delinquency in our leasing portfolio has improved from what we saw earlier in the second quarter, which is an important indicator for potential future write-offs. Within our postage lending portfolio, we are seeing a nominal increase in early-stage delinquency, largely tied to the resurgence of COVID in certain areas of the US. However, as businesses have reopened, we are seeing more customers pay their bills on time and in full versus making minimum payments, which is another positive sign. Despite some signs of progress, we remain vigilant and focused on maintaining the health of our portfolio. Before we take your questions, let me recap. The current environment has created a dramatic shift to ecommerce, and this quarter had a number of notable items. For the first time, our shipping revenues outpaced those associated with mail. We exited the second quarter with just over $1 billion in cash and short-term investments. Our next bond maturity is in October 2021, totaling $172 million. We continue to take actions within our capital and cost structure across the business to maintain adequate liquidity if the external environment worsens. While we continue to reduce discretionary spending, we will continue to invest a portion back into the business to keep our employees safe through social distancing, providing PPE, sanitizing equipment, and all facilities on a regular basis. This has an impact on our labor productivity, but we will not compromise when it comes to keeping our employees safe. While historically, our third quarter revenue is typically lower than the second quarter based on the trends we saw in June and so far through July, despite the uncertainty in the macro environment, we expect modest improvement in the third quarter as compared to the second. This is being driven by the continued ecommerce growth, along with some improvement in our mailing-related businesses. As a result of the revenue improvement, we would expect EPS to also modestly improve in the second quarter, despite the additional COVID-related costs, which we expect to continue to impact our results. While we are cautiously optimistic about improving trends in the second half of the year versus our first half, there is still a great deal of uncertainty, particularly in the U.S., surrounding the resurgence of COVID. We are seeing states already starting to take actions on modifying the original phasing and reopening plans. Given the continued level of uncertainty around COVID, consistent with the direction we provided last quarter, our annual guidance for 2020 will remain suspended. With that, we will now take your questions. Operator, please open the line.

Hi, good morning guys. Appreciate all that detail, that's really helpful, given all the business crosscurrents. I guess a few questions, if I could. Marc, I believe way back into your prepared remarks with regards to ecommerce, a comment was made around achieving scale sooner than anticipated. Did I hear that accurately? And if so, could you give us some context around it? And sort of get it that you're adding the three new facilities. But could you kind of walk us through, given that you were essentially breakeven this quarter in ecommerce, how we should think about kind of ecommerce margins going through the rest of this year? And then I have a couple of follow-ups as well. Thanks.

Sure, I did say that. So you heard it correctly. First of all, I apologize that the recording line on this side was a little bit fuzzy. So if you didn't hear things, please feel free to clarify. There's no doubt that in the second quarter we certainly saw it in our results. But you've seen it in UPS's results, and you see it in USPS volumes that there was a stair-step increase in ecommerce shipping. So if you think about what the market was pre-COVID, think about a 10% to 15% linear increase; we obviously saw something three or four times that in the second quarter. So that stair-step increase will allow us to get to scale sooner. The unknown is how much of that stair-step increase sticks. If you look at the volumes in the second quarter and you assume that's the new reality, you come to one set of conclusions. And if you assume some of that volume is going to stick, but some of it's going to dissipate, then that's another scenario. In either case, our projections are that this business gets to scale sooner. In terms of your second question about margins, I'll let Stan elaborate. But our expectations are that we continue to see margins improve as we go through the balance of the year. I'd reiterate something that Stan said, because it's really hard to underestimate the impact: 80% of the workforce in that business was new. And there's just a certain learning curve as you come up, the experience curve in terms of how you work your way around those facilities. So if for no other reason, just the team hitting their stride, we'll get more efficient. But clearly scale continues to be an important dynamic. So I'll let Stan elaborate.

We give a little bit more color. Ananda, good morning. The three new facilities, they are smaller facilities, so think 100,000 square feet, plus or minus. And they're needed to fill up spots in our network that we need to optimize. When you think about that from a CapEx point of view, it's more like $5 million to $10 million, and from OpEx maybe about $5 million or so, a little bit less than $5 million for the rest of the year. So, we're adding capacity to better serve our clients. Let me spend just a minute on the margin and mark a couple of the important points. The Q2 volume would put us roughly on a $250 million annualized run rate. But there are two components driving improved EBIT margins: scale, and then operational efficiency. So let's start with scale. We've invested ahead of demand with the two new flagship sites we opened in Q4. That strategy actually enabled us to handle this dramatic surge in volumes, and volumes doubled on a year-on-year basis. But we are seeing the benefits of scale in two areas: transportation costs reduced by roughly a third, and fixed warehouse costs improved by over 45%. We're not seeing it yet in labor costs. This really manifests in our workforce growing 80% in 90 days—you can't do that efficiently. This was largely through temporary labor, adding multiple shifts across the network. So we're doing that, and you combine that with COVID-impacted spending on the Global Ecommerce business, which was roughly $10 million, or just over half of the impact on EBIT, you can see that headwind we have. I think there's good news within that, though. We are going to get better at the operational efficiency, particularly around labor. Adding these new facilities will allow us to better operate on a more manageable basis. So, we've been investing for operational efficiency, which is the second part. Investing in the network that accelerated growth in ecommerce is certainly faster than we anticipated, and that gives us a great opportunity to leverage operational efficiencies. We are in the middle of doing time and motion studies as an example, and that will improve our ability to operate that labor in a more efficient manner. The addition of those facilities will certainly help us. Nick Smith and his team deserve a big congratulations for being able to handle that surge in volume and that compressed timeframe. I mean, typically, we start planning for peak in the first quarter, and this all hit in a very sudden fashion.

That's all very helpful. As a quick follow-on to that, you guys mentioned new customer wins and new market opportunities. Is share gain a fair way to think about it? And if not, just any context there? Because what I'm really trying to paint a picture for is regardless of how volumes ebb and flow given COVID, do you think you have gained some stickier customer opportunities and relationships so that you exit this just from a stronger position than you went into, a structurally stronger position?

I’d say we gained share. I'd say we gained customers. I think the important part of those 100 new customers I mentioned was they contributed very little incremental revenue to the quarter. So that revenue is still in front of us. So we'll see over the next coming days, but I don't have any doubt that if you look at our peers in history, they're talking about volumes that are consistent with peak; we were well above peaks. So I think by any measure we will have gained share. I think that’s structural to your point.

Thank you for taking my questions. So first is, in terms of ecommerce it sounds like, obviously, you've signed a lot of new customers and that. How's the negotiation going in terms of pricing and scale? As ecommerce became more of an important way of getting products to people during the pandemic, do you have pricing power? I'm wondering if anything has shifted there. And then I have a follow-up. Thank you.

So, Shannon, on pricing in the negotiations. This has been an interesting time for us. We've added over 100 new clients; their primary mission was getting products to consumers, and that's where we have stepped up. We have done some limited price adjustments in areas that helped balance out the network and areas where we're experiencing increased costs, but this will also come through scale. As we bring additional efficiency, it allows us to modify our pricing to control costs, for example, on inbound from overseas. But we do see some pricing leverage in the market, and we expect the volumes will continue going forward.

I just want to add a little more color. If you look at the industry, our colleagues in this area are taking prices up. We've done a little bit of that in the quarter. I think there's another opportunity in front of us to think about that. The negotiations with customers are different in the sense that there's only a certain amount of capacity in the industry, and the industry's at that capacity. So it does provide pricing opportunity. The other thing that’s perhaps not as obvious is once your business gets to scale, the marginal economics of another five million parcels isn’t the same as when you're below scale. So, it makes you think about incremental volume in a slightly different way and gives you a little bit more courage, if you will, to think about pricing.

Do you have any idea when we might start to see an improvement in margin? I understand there was a pandemic, and you're not providing guidance, but are we talking about a couple of quarters away in terms of expected volumes? Or will it require more spending, making it possibly further out? Could you share your thoughts on how soon you think you can start benefiting from increased scale?

Yes, Shannon. So, obviously, it's an important question that we've stared at a lot. We have a number of scenarios that we have modeled out, but this is a pretty unpredictable environment. What we've looked at is we've demonstrated improvement in scale in transport and warehouse. We're confident that we'll continue to make inroads on the labor side, but that's going to take some time. A little unpredictability is in the overall COVID impacts. We see it across the U.S., with different areas seeing spikes up, and we can see that flow through some of our numbers. What I would tell you is that as we go through the back half of the year, we expect that this business will continue to make progress on a quarter-on-quarter basis. But we're not going to predict the inflection point of when it cuts over. You should expect that we'll continue to see benefits. We're encouraged by where we are now and we're encouraged by what we see in the month of July from the volume continuing.

Just some raw numbers—we're at a $150 million looking at Stan parcels on an annual basis before this were 250. The original plan called for layering in capital and automation slightly before you saw those increased volumes. I have to make a judgment about how much of that volume sticks, and that will dictate the pacing and sequencing of the capital on the automation. So if it all sticks, we'll move more quickly in terms of building the incremental capability to handle that efficiently. Right now we're throwing people at it, which is good, and we're able to accommodate the client requests as best we can, but it's not the most efficient.

Thanks. That was helpful. And then, Marc, can you talk a little bit? You had a leadership change during the quarter, or actually, I guess after the quarter, with Gregg taking over Global Ecommerce. Do you anticipate any changes? I mean, obviously, you had to jump in with a lot of volume running through the system, so do you can maybe just stress that out a little bit?

Yes. So, it's important to understand the structure that we had. As you mentioned, our great colleague left within the last 30 days. She was responsible for Global Ecommerce and Presort. Within Global Ecommerce, Gregg ran most of it. He didn't run the operations; Nick Smith does that. So from that perspective, it's less of a change than it seems. Gregg was involved along with Nick and James Fairweather in the strategy. He was certainly on point for all the client relationships. He was the Chief Commercial Officer who was responsible for the revenue. So it's perhaps less of a change than may meet the eye. It was a pretty collaborative fluid team; they operated as a foursome, so we won't miss a beat.

Yes, good morning. And thank you for taking the question. So, just looking at the Global Ecommerce segment, digging into that a little bit more. The fourth quarter tends to be the highest in terms of volume because of the holiday shopping season and so on. I guess with the new facilities that you're opening or will be opening up soon, can you give us a sense of what the potential will be for improved scale and efficiencies? And I also have a follow-up to that as well.

Sure, Anthony, thank you. Good morning. So, as you mentioned, the fourth quarter is typically the peak. As I said earlier, we typically start planning for peak right after we finish the last one. Q2 was hit with a very sudden level of volume coming through. We would not have been able to handle that had we not invested ahead last year in the two new flagship facilities. Even with that, we are now running essentially 24 hours a day with downtime to do maintenance, temperature checks, and things like that across most of our facilities. Adding these three new facilities and expanding one other will enable us to be more efficient, have a better spread of labor and parcels across our network, and better serve our clients. Importantly, as we head into peak, and we expect these to be up late in the third quarter, this will allow us to handle those volumes. We expect that, with the additional scale both in volume and the ability to handle it through the network, that gives us confidence that margins will improve from Q2 to Q3 and from Q3 to Q4. That's why we've made those investments. We're also investing in things I mentioned, the time and motion studies, but we're investing in operational efficiencies. Some of that for automation, but a lot of it is improving our processes and taking the best practices across our facilities to leverage that to improve our overall efficiency. I am confident that our team will be able to take the experience from Q2 and be able to leverage that, and as Mark mentioned, when you bring on that much workforce in a shorter period of time, just the learning curve alone is challenging. We anticipate and are confident that we'll be able to see improving margins as we go through the back of the year.

Okay, thank you for that. And then when would you expect to complete the time and motion studies?

They're ongoing, Anthony. And look, we come out productivity in a number of ways. So we're looking at our cost modeling and pricing. This business is growing very rapidly with lots of new clients and capabilities. The time and motion studies are insightful. Because we are standing up new facilities, we're standardizing our footprint of how we want to operate. That gives Nick Smith and our operational team a lot more information on how to streamline the flow of parcels. We've made a number of changes already that resulted in our existing facilities handling far more capacity than they did last year. So those will be ongoing, but they will certainly help us heading into peak.

Got it, okay. And then in terms of improved truck routing capabilities, where are you with that initiative now?

This is a good example of our transport costs improving by over a third. Some of that is just pure scale; you're filling up the trucks more. It's also the ability to look at that network and how you do your routing. I'd tell you, though, that we spent a lot of time and money to reroute parcels to meet our client's needs during the quarter. Even though we improved our transport per parcel by roughly a third, I think there's more opportunity there because we had to balance between our facilities—in particular, the two coasts that were hit particularly hard from China inbound volume that would come in big surges, and we would need to offload to other facilities to try to balance out the network. That's why adding three new facilities is so important. We also expect that will improve our transport costs going forward.

Got it, okay. And the last question for me: as the incremental COVID costs for the third quarter, do you think those will be comparable to the second quarter?

It is really hard to predict that. We know there’ll be an impact; the pandemic isn't going away. What I would tell you, though, is our preparedness continues to improve. If you think back to where we were in March, most companies, including us, were getting PPE almost at any cost, so some of that has gotten better. We've also gotten better at handling how to do temperature checks, how to do staggered shifts, and how to clean in between shifts and maintain our facilities so our employees stay safe. I expect COVID will still have an impact going into the third quarter. We don't know if that's going to increase or decrease. Part of that was bad debt. The retail industry is challenging, and some of that could continue to manifest itself. Adding new clients is so important; it diversifies our base and gives us additional protection. But the team did a really nice job in collections through the end of June; candidly, collection through July was strong. Developing solid relationships with clients has helped manifest itself and improve our DSO. I would. Thank you, operator. First of all, let me just comment on the changes in leadership at USPS. We welcome the new Postmaster General; I have known him for a long time and look forward to working with him. At the same time, we wish Megan Brennan, the previous Postmaster General, well. Likewise, I would like to acknowledge the previous CEO of UPS, who is a great executive and solid industry colleague. So let me close with this: When you look at Pitney Bowes through a wider lens, you see a company with over $3 billion in revenue, growing mid-single digits in the middle of a pandemic. GDP results will come out today, but we're faring quite well. We've transformed our portfolio in the pockets of our businesses and shipping. It's worth noting that for 100 years, mailing has been the majority of our business. In the second quarter, those two lines crossed, and shipping going forward will continue to be a bigger portion of the business. But we didn't get a lot of questions on SendTech today; I will say, if you look at the SendTech results, they were great. As you think about the transformation of the company, the transformation of SendTech is instrumental to that, and we hope to talk more about that in the coming days. We've done the hard work around our balance sheet, and to Stan's last point, we have $1 billion in cash. So we're in a strong position from liquidity. Our debt is manageable, and we've got good cash flow. I want to be emphatic about full employment; we're going to come out of this situation a much better, stronger company, and that's going to be structural—not for reasons that are fleeting. The Global Ecommerce business is a version of a unicorn, with revenue over $1 billion, closer to $1.5 billion, and it grew 40% in the second quarter. That growth is expected to continue at an accelerated rate for the foreseeable future. Within that, we have successfully built three businesses from zero to $100 million. That's hard to do in any context, and that team has done it three times over. We're well positioned in ecommerce business; you can see it in results, and that's going to continue. You see it in client reactions, and the path to profitability has many different factors to it. However, largely now, the path to profitability for that business isn't exclusively, but it's largely inside of our four walls. We control our destiny. The investments we made in SendTech and Presort are paying off, as we see new revenue in the profit streams. These are largely around shipping again, which is very synergistic. There is an overall coherence to our portfolio going forward, and we're continuing to make the investments we need for long-term success. We're a 100-year-old company, and in many ways, you see that in terms of the values we have and many other positive things, but to me it feels like a startup. You can see it over and over in how this business is reinventing itself. So listen, unpredictable times for sure. We like how things worked out in the first and second quarter, but no one's taking a victory lap. We are mindful of what's going on in this country and around the world with the virus, and we express our sympathies to all those affected. With that, we'll close this call. We thank you for your interest, and we'll talk in the coming days.