Pitney Bowes Inc /De/ Q4 FY2021 Earnings Call

Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes, and I'd like to welcome everyone to the call this morning. We very much appreciate your participation. Part of my duties includes covering the usual and customary safe harbor information for these calls. So please bear with me for just a few minutes. Included in today's presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. For more information about these risks and uncertainties, please see our earnings press release, our 2020 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures that are used in this press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we provided a slide presentation on our Investor Relations website that summarize many of the points we will discuss during today's call. Our format today is going to be familiar. Marc Lautenbach, our President and Chief Executive Officer; will begin with opening remarks, which will be followed by Ana Chadwick, our Chief Financial Officer, who will provide a deeper discussion of our financial results. I'd now like to turn the presentation over to Marc. Marc, the floor is yours.

Thanks, Ned, and good morning, everyone. Thank you for joining us this morning. I want to express my gratitude to not just the Pitney Bowes team but also to our industry colleagues and all other essential employees who worked diligently during the holiday season. There's no doubt that the collaborative efforts of so many people have contributed to our country and economy being in a much better place than otherwise would have been the case. As our customers have been, I will provide a perspective on the year, and Ana will discuss the quarter in detail. I will also provide my take on the quarter in a moment. There are many different crosscurrents running through the period. Presort performed exceptionally well, and SendTech successfully navigated some difficult supply chain challenges, turning in a solid quarter. GSE had a successful peak season in terms of providing good service to our customers, but there were changes in consumer buying behavior that created different financial results than expected. Let me elaborate on the annual results first. I have said for a while that the final chapter of a successful transformation is profitable revenue growth. In 2021, we grew revenue and earnings per share. For sure, not everything was perfect, but we are making another important step forward. SendTech and Presort had very good years, and in aggregate, these two businesses grew revenue and profit for the year. Notably, our GEC's revenue and profit improvements outpaced declines in our traditional businesses, which may have been characterized as melting icebergs. In 2021, that paradigm changed, and new initiatives in Presort and SendTech have put those sources on a different trajectory. Now all of our businesses have a clear line of sight to revenue growth and profit growth. This was unimaginable a few short years ago. For GEC, 2021 was a year of building capabilities and capacity. We invested in new facilities, new automation, transportation, and most importantly, we invested in our people. We believe the e-commerce shipping market continues to have very attractive long-run tailwinds, albeit with some difficult to predict short-term dynamics. Our capabilities and value propositions continue to resonate in the market. After record revenue growth of 41% in 2020, we grew on top of that in 2021, and we continue to win new customers, adding 198 new logos with 387 new signings during 2021. Importantly, our customer satisfaction continued to improve in 2021, which is a vital indicator of future success. However, our profit performance in the fourth quarter turned out different than we thought due to what has been a well-reported change in consumer buying behavior, as the pandemic and supply chain issues continued to linger for the retail sector, including our clients. First, the good part: Presort had an absolutely outstanding quarter, and SendTech had a very good quarter. Most of these businesses are on an excellent trajectory. In GEC, our principal motivation for the fourth quarter was to deliver a successful holiday peak season for clients, and we did that. Our service levels improved dramatically from 2020, ensuring our client shipments made it to consumers in time for the holidays. That said, the financial performance of the business was not what we expected, and that was disappointing. To summarize, we had planned for a certain volume of parcels, and we probably overbuilt our capacity based on that anticipated volume because we were determined to deliver successfully for clients. In fact, we never got the volume we expected. The consumer response to the supply chain issues coupled with COVID and the holiday season resulted in new ways to shop that provided certainty of delivery. There was accelerated in-store purchases, more traffic in stores, and increased utilization of online gift cards and in-store pickups. To this end, we adjusted our labor and transportation until late in the quarter. Once we decided to scale back on transportation and labor, we did so quickly; we felt disappointed with our financial results as a result of the unexpected changes in consumer buying behavior during a period characterized by the pandemic and ongoing global supply chain issues. To be clear, we do believe that this year's operations are indicative of longer-term e-commerce trends. That said, we have taken a series of actions to insulate against this outcome in the future, including enhancements to our analytics and our client forecasting process. We believe we've made great strides in reducing variable costs, even in a couple of weeks. I remain very confident in the e-commerce logistics market opportunity, our business model, and mostly the capabilities we are building, particularly our team. To sum it up, while this year was different in some ways than I expected, I characterize the year as successful. We started off the year with a successful debt refinancing, built substantial capabilities in our GEC business, improved client satisfaction, generated significant cash flow, and reduced debt. Our team is navigating the challenges posed by COVID while remaining highly engaged, resulting in an increase in revenue and EPS for 2021. We still have more to do, but we continue to strongly believe we're on the right path across our entire portfolio. Thank you for your time and your attention. And now let me turn it over to Ana.

Thank you, Marc. Let me start by providing an update of the full year, followed by details of our fourth quarter. Unless otherwise noted, I will speak to revenue comparisons on a constant currency basis and other items such as EBIT, EBITDA, EPS, and cash flow on an adjusted basis. For the full year, total revenues grew 3% to $3.7 billion. This is our fifth consecutive year of consolidated revenue growth. EBIT was $203 million, 6% lower than the prior year. As Marc mentioned, the aggregate growth of Presort and SendTech was more than offset by lower global e-commerce results and somewhat higher unallocated expenses. I'll come back to global e-commerce performance momentarily. Adjusted EPS for the year was $0.32 versus $0.31 last year. GAAP EPS was a loss of $0.01. As a reminder, GAAP EPS includes unusual items primarily related to our debt refinancing expense and other restructurings. GAAP cash from operations was $302 million, flat to last year. Free cash flow was $154 million despite the anticipated increase in our capital spending. For the year, capital spending was $184 million versus $105 million a year ago. In addition, over the course of the year, we have made strides in improving our working capital efficiency as days sales outstanding improved to 40 days at year-end from 45 days in the prior year. Looking at our balance sheet and capital allocation, liquidity remains strong as we ended the year with cash and short-term investments of $747 million and an undrawn revolver. We also took advantage of the favorable real estate market by organizing a sale and leaseback of our Shelton facility, which is expected to generate approximately $50 million of proceeds in the first quarter. Total debt has declined by $241 million since year-end 2020 to $2.3 billion. When factoring in our finance receivables, cash, and short-term investments, our implied operating company debt is $533 million. Next, let's look at the specifics of the P&L, starting with full-year results versus the prior year. For the year, equipment sales grew by 10%, and business services increased by 6%. Support services and financing were down 3% and 15%, respectively. Supplies and rentals were each down marginally. Gross profit was $1.2 billion, and gross margin declined by 190 basis points to 32%. This decline is largely driven by the shifting mix of our portfolio. SG&A was $922 million, $41 million lower than in 2020. SG&A as a percentage of revenue was 25%, 200 basis points better than last year. Unallocated corporate expenses were $208 million, an increase of 4% largely due to higher insurance expenses. EBITDA was $366 million versus $376 million for the prior year. The EBITDA margin was 10% for 2021, a decrease of roughly 60 basis points. Interest expense was $144 million, down $10 million from the prior year. Our tax rate was 3%, and as we previously stated, we expect to return to more normalized levels in 2022. Diluted shares outstanding were approximately 179.1 million. Turning to the details of the fourth quarter. Total revenue for the period was $984 million, which was a decline of 4% from the prior year. As you are all very aware, year-over-year comparisons continue to include the impact of COVID on many other companies. Compared to 2019, total revenues were 18% higher, and for our Global Ecommerce segment, the increase was 46%. While revenues in the quarter were down from the prior year, it's important to note that we have held on to the vast majority of the revenue gains we have experienced post-COVID. Adjusted EPS was $0.06, and GAAP EPS was $0.01. Free cash flow was $39 million, and cash from operations was $85 million. During the quarter, we paid $9 million in dividends and made $7 million in restructuring payments. Capital expenditures totaled $43 million in the quarter. Let me now turn to each segment's performance. Within Global Ecommerce, revenue in the quarter declined 9% to $473 million, driven primarily by lower-than-expected domestic parcel volumes. Inside Global Ecommerce, revenue from digital services was fractionally lower in the quarter, while cross-border revenue was down low single digits. Domestic parcel revenue experienced low double-digit declines. As you consider this quarter's top line performance, we think there are important contexts as we all wrestle with the challenges associated with COVID-19. Compared to 4Q '19, Global Ecommerce revenues were up 46%. Specifically on volumes, we processed 47 million domestic parcels in the quarter, up from 41 million in the third quarter, though down from the COVID-impacted fourth quarter of 2020, where we handled almost 65 million parcels. EBITDA for the quarter was a loss of $20 million while EBIT was a loss of $41 million. Let me unpack those numbers. We budgeted and planned for 4Q domestic parcel volumes that were approximately 20% more than we actually received. We built that plan based on our own models, our experiences in previous peak periods, and with terrific cooperation and input from our clients. We also built that plan with an eye on delivering very strong service levels, which was an imperative in the context of our efforts to build a world-class logistics operation. At the end of the day, 99% of the parcels we shipped reached their destination in time for the holidays. As a result, the feedback from our clients has been gratifying, which contrasts to peak 2020. In addition, average delivery times in the quarter improved by 25% compared to early 2021. We are much better positioned with our clients as we continue to improve service levels and win new business. As I noted earlier, domestic parcel volumes ran below our expectations, driven by three primary factors: first, well-reported supply chain issues for our customers limited their available inventory for e-commerce; second, it's also been noted that many customers chose to shop via brick-and-mortar rather than online to ensure they could obtain what they were shopping for in a timely manner; and lastly, some customers who shopped online opted for in-store pickup or gift cards to guarantee certainty by the holidays. On the cost side, we retained variable transportation and labor costs well into the fourth quarter to ensure we generated outstanding service levels for our clients, as we believed e-commerce volumes would pick up as the quarter progressed. While we achieved our service level goals, our expense levels were structured to handle higher volumes, which resulted in financial performance that did not meet our expectations. It bears repeating that our experiences in the fourth quarter of 2020 and 2021 illustrate the significant challenges associated with planning and executing in a COVID world. In December, we began to scale back our variable costs. We have seen meaningful improvement in labor cost per piece, down by 40%, and we're making steady progress on transportation cost per piece with early results showing a reduction of about 20%. Going forward, we will focus our investments on network efficiencies, reducing per parcel costs, and further improving service for our clients. We expect to reap the benefits of investments made in automation, including high-volume sortation and robotics. Additionally, we will continue to optimize network routes and insource transportation resources to move away from high-cost alternatives. As previously announced, we initiated our general rate increase on January 1 across all lines of business and we expect those increases to hold, given our performance in peak and overall market conditions. Importantly, we continue to work closely with our clients and have seen our weekly volume forecasting accuracy return to pre-peak levels. While our financial results did not meet expectations, the operational shifts made during 2021 created a much improved experience for our customers this peak season, which is a positive takeaway for the long-term health of the business. Turning to Presort, revenue was $156 million, 16% better than the prior year. EBITDA was up 43% to $30 million despite double-digit increases in labor and transportation costs. EBIT improved 80% to $23 million versus Q4 2020. This is the fourth consecutive quarter of revenue growth, driven by volume gains, especially from Marketing Mail, along with higher revenue per piece. We continue to experience significant benefits from network and technology investments, as well as process improvement measures that resulted in year-over-year productivity gains. We're optimistic about Presort's prospects heading into 2022, particularly in the first half, driven by continued market share gains in Marketing Mail and efficiencies gained through 5-digit sorting plus the opening of two new markets: Las Vegas and Orlando. Moving to the SendTech segment, SendTech revenue was $354 million, down 5% from the fourth quarter of 2020. EBITDA was $116 million, and EBIT came in at $109 million, both decreasing by 9%. Margins declined mainly due to lower high-margin financing revenues. Shifts in business mix and much higher freight costs were the primary factors in this margin decrease. Lower credit reserves provided some offset. To be clear, we continue to implement price increases to offset higher freight costs, a theme prevalent across the global supply chain landscape. Equipment sales were down 7% for the quarter, partly due to ongoing supply chain challenges, as well as a tough comparison from last year's fourth quarter. For the year, equipment sales were up over 10%, powered by increased penetration of our ongoing product refresh. Our SaaS-based subscription revenues grew 10%, and paid subscribers for our SendPro Online product were up 52% year-over-year. SendPro Online is a cloud-based product that enables customers to manage and track their mail and parcels with multi-carrier options to find the best rates and delivery alternatives. Our new SendTech products are gaining traction in the marketplace, with the SendPro family being an all-in-one system to select carriers, track parcels, gain postage discounts and manage expenditure. In North America, more than 28% of our revenue comes from these new products, and we have begun to launch these products in select international markets. Additionally, we are seeing strong demand for our SendPro mail station, which was launched in April 2020, and to date, we have shipped over 50,000 of these devices. In Global Financial Services, we are pleased with the portfolio credit performance and continue to expand our financing offerings. Lastly, we are noticing improving trends in total finance receivables, which bodes well for future financing revenues. Let me now turn to the outlook. For 2022, we expect annual revenue and EBIT growth in the low to mid-single digits. For the first quarter, we anticipate the year-over-year EPS comparison to be affected by prior year tax benefits that will not repeat this year. Furthermore, we expect supply chain issues to persist in the first half, more so than in the second half of the year. Capital spending is expected to be lower after last year's meaningful network expansion in Global Ecommerce. Also, working capital benefits in 2021, mainly due to the aforementioned reductions in days sales outstanding, are not anticipated to continue at the same levels in 2022. I want to emphasize that we expect to generate healthy levels of free cash flow for the full year of 2022. Additionally, as our supply chain and COVID issues hopefully dissipate, we expect to provide more clarity on our future financial performance as the year progresses. I would like to close with a few comments about the key operational and financial progress the company made in 2021. We successfully completed a debt refinancing in the first quarter, significantly extending our debt maturity profile. As noted earlier, we reduced debt by $241 million to $2.3 billion. Despite a material increase in capital investment across the portfolio, we generated very healthy levels of free cash flow, which yield gains in productivity. Presort and SendTech, in aggregate, produced top-line gains in the year, which is impressive for mature businesses. In global e-commerce, we remain confident in the long-term growth prospects of this sector, given the value of the network we have created and our ability to improve efficiency as we scale the business.

Our first question will come from Allen Klee of Maxim Group. Please go ahead.

Good morning. For the Global Ecommerce segment, could you give a little more detail about how you're planning to shift this to cash flow positive and then get to the longer-term margins? How should we think about 2022 as investors becoming confident in that? Thank you.

Sure. Let me start, and I'll let Ana add. We continue to be very confident in that market opportunity. We're confident in the business model that we have, and the team we have in place is fantastic. In terms of 2022, obviously, we're coming off a quarter where we didn't have great visibility. So we are cautious about being specific. However, I will say that we expect substantial improvement in that business from both an EBIT and EBITDA perspective. I expect it to be EBITDA positive in 2022. We believe that this will improve significantly throughout the year, with the stronger performance in the second half, partially due to the business's seasonal nature and some of the supply chain issues faced by our customers beginning to even out. So we anticipate substantial improvement. We expect to achieve EBITDA positivity this year, and the team has a plan to work toward EBIT positivity. However, we consider that plan to be high risk based on last quarter's outcomes.

Thank you. Our next question will come from the line of Shannon Cross with Cross Research. Please go ahead.

Thank you. I was wondering if you could discuss cash flow drivers in the future. Right now, your debt profile is fine, but you do have several maturities coming up in a couple of years. How do you see the model driving incremental cash flow? Are we still in a significant investment phase within e-commerce? And I have a follow-up. Thank you.

Sure, maybe. This is Ana. Let me start by saying that we expect to continue to generate strong free cash flow into the future. As I mentioned earlier, given the uncertainties surrounding COVID and other variables, we aren't providing anything more specific at the moment. However, there are a few areas we will focus on. Firstly, we've made significant capital expenditures in 2021, and while we will continue to invest in Global Ecommerce, we will likely do so at a slower rate, focusing on capacity optimization rather than substantial expansion. Secondly, our team is doing an excellent job focusing on accounts receivable collections. I noted our days sales outstanding improved by about five days, and we will continue to concentrate on collections, but that rate of improvement will be challenging to maintain. Nevertheless, we believe the overall business will generate healthy free cash flow. Regarding the maturities coming up in '23, we are confident that our existing free cash flow plans can cover those obligations. Additionally, the pending sale leaseback of our Shelton facility, expected to generate approximately $50 million, provides further reassurance regarding our cash outlook over the next couple of years. I hope that answers your question.

Shannon, can I add just one point? We are highly confident in our balance sheet. When we look at the maturities and compare them against our cash flows and our cash on hand, we have no issues there, which is the most important aspect. To clarify Ana's point, regarding our long-term plan for the Global Ecommerce network, we have effectively completed most of what we need to do by 2021. The current capacity of our network is well beyond the volumes we are experiencing. We're in good shape regarding network capacity – our planned builds this year and next will be minimal, allowing us to focus on efficiencies and optimizing what we currently have. Moving forward, the primary driver of our cash flow will stem from earnings as Global Ecommerce continues to improve. Moreover, with Presort and SendTech being EBIT positive, they will contribute significantly to securing our debt and provide additional sources of cash.

Thank you. Our next question will come from the line of Anthony Lebiedzinski of Sidoti & Company.

So first, on Global Ecommerce, you discussed adding new customers. Could you comment on overall customer mix and if there has been notable churn? Have you lost any significant customers? A better understanding of client mix within Global Ecommerce would be helpful.

Absolutely. The customer mix is heavily skewed toward mid-market retailers, which is an important point. When we acquired this business in 2017, we had around 100 to 150 customers; now, at the end of 2021, we have about 430 customers. We've seen a significant increase in our customer base. Regarding customer churn, we have not lost any major customers. This is important because coming off the peak in 2020, when the industry struggled to provide good service, we were focused on maintaining a high level of service to retain our customers. Fortunately, we were able to not only retain our current customers but also expand the customer base further. We've also deferred some business we won in Q4 into Q1, being disciplined with capacity as we predict our network will experience stress. It's important that we never become complacent, as we continue to rely on service levels and pricing to win and keep customers. The trajectory of our customer base continues to improve, especially as the mid-market is traditionally underserved, allowing better economics.

Yes, I’ll add to Marc’s response. For Presort, we expect continued growth, understanding that 2021 was a significant year. In SendTech, there are initiatives to grow shipping, which are gaining traction, although this might take a few years to offset the decline in traditional mailing. We expect both Presort and SendTech to maintain similar trends in margins and healthy cash flows.

From a CapEx perspective, if you look at 2020, it was just over $100 million; last year around $180 million. The norm usually falls somewhere in between those figures. It is fair to expect a return to that normal level of capital expenditures.

Regarding tax rates, we expect that to return to more normal levels, in the low 20% range, as we progress into 2022.

In prior conversations, we discussed global e-commerce breakeven or the number of parcels needed. The criteria have largely remained the same. What we need to assess is how the new normal influences the unit economics. For example, transportation costs have more than doubled at the unit level since COVID. Conversely, prices have increased by 30% to 40%. Given these changes, it is difficult to pinpoint specifics with the economic fundamentals shifting. Nonetheless, I remain confident about this opportunity. We still believe crossing the 250 million to 300 million parcels threshold is significant, and it hasn't changed. If we can elevate from 200 million parcels to 300 million, fixed cost absorption increases, potentially adding approximately $100 million to our bottom line. We've experienced uncertain forecasting from clients despite historically high accuracy. As we interlock with our clients and improve our approach to operational data, we can provide timely updates and operational adjustments concerning parcel profiles. Our current methodology for financial planning remains unchanged while we recognize the necessity for enhanced tools and processes going forward. In summary, 2021 was a year of working through pandemic challenges; we have established a remarkable operational foundation and secured client trust through our delivery performance. The market is there, and we are well-positioned with our business model in a highly dynamic economic environment.