Pitney Bowes Inc /De/ Q2 FY2022 Earnings Call

Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes. I’d like to welcome everyone to the call this morning. We very much appreciate your participation. Part of my duties this morning include covering the usual and customary Safe Harbor information, so please bear with me for just a moment. Today’s presentation will include 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 on these topics, please see our earnings press release, our 2021 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 provide updates to forward-looking statements as a result of new information or developments. Also, for non-GAAP measures, the reconciliations to GAAP accounting can be found in the tables attached to our press release and also on our Investor Relations website. Additionally, we provided a slide presentation on our website that summarizes many of the points we will discuss during today’s call. Our format this morning is going to be familiar. Marc Lautenbach, our President and Chief Executive Officer, will begin with opening remarks. He will be followed by Ana Chadwick, our Chief Financial Officer, who will provide a deeper discussion of our operational and financial results. I’d like to turn the presentation over to Marc. Marc, the floor is yours.

Thanks, Ned. Good morning and thank you for joining today’s call. While there are many positive aspects to the quarter, second quarter results were disappointing and below our expectations. The quarter played out against the most complicated market environment I have ever experienced. We were not able to overcome the effects of the growing strength of the dollar and the COVID lockdowns in China. SendTech and Presort turned in solid results in a very challenging environment and those businesses in the aggregate grew revenue for the quarter. Equipment sales in SendTech were strong and our loan originations in Global Financial Services showed solid improvement. And importantly, finance receivables stabilized in the quarter. The overall performance of these businesses bodes well for the future. While trends are rarely a straight line, Presort and SendTech are well positioned going forward. Growth in SendTech and Presort was unthinkable a few short years ago and is the result of smart investments, focus and solid execution. Often, there are concerns when companies broaden the focus away from their historic core business that they lose focus on the core. The trajectory of SendTech and Presort is solid evidence to the contrary for our company. There are a few examples of companies overcoming secular decline, but there are precious few companies that have been able to reinvent their core, and we have done it, and we continue to do it. Results in Global Ecommerce were mixed. But the big picture view of activity in the quarter continues to support our long-term thesis for this business. In particular, our long-term model is centered around growth in the domestic parcel market and continuous operational improvement to expand profitability. In the second quarter, our service levels were strong. This enabled us to attract and win new customers. Importantly, our pipeline is excellent for the second half of the year. Our gross margin per parcel and the overall margin of the domestic delivery business showed substantial improvement year-over-year. Our significant operational improvements bode well for future profitability when we were able to achieve higher volumes, which we should achieve, based on our improved operational capabilities and as macroeconomic conditions improve. That being said, current economic conditions present some short-term pressure on the business, with a moderation in volume growth, longer sales and customer integration cycles. Also, the COVID lockdown in China, coupled with pricing pressures, created headwinds in our domestic parcel business. China inbound volume as part of our domestic parcel business, because we don’t manage any cross-border logistics for it. Despite the dramatic drop in China inbound business, our domestic parcel business grew 6% for the quarter. While it’s hard to make predictions regarding COVID in China, for the moment, the country seems to be moving in the right direction. In our cross-border business, we saw a negative impact in outbound United States demand due to the rapidly strengthening United States dollar. We expect that the dollar will remain strong versus the euro for a while, creating a headwind for our cross-border business. To sum up, the team is making good progress finding new opportunities and operational improvements to manage costs, but we are very aware of the short-term challenges in the cross-border businesses. This is probably a good segue to address our decision to sell Borderfree to Global E. First, the transaction allows us to focus on what we do best, the logistics aspect of our cross-border business. Second, the deal also opens up a set of cross-border logistics opportunities with Global E that we see as meaningful. Third and more broadly, the transaction shows how even as we are confident in our long-term thesis on our e-commerce business, we make adjustments to specific aspects of the strategy as conditions dictate. And finally, it is also a clear affirmation that we will take every opportunity available to the company to unlock value for our shareholders across our portfolio just as we have consistently done for the last decade. Our first priority for capital allocation continues to be invested in our business and opportunities for profitable growth, as we believe that smart investments in the business will create the most enduring value. Next priority has been debt reduction to maintain appropriate levels of financial leverage, which we have. We reduced debt by $1 billion over the past four years. As we enter a more uncertain economic environment, we intend to use the Borderfree proceeds, at least initially, to operate with a stronger liquidity profile, knowing that approach offers incremental strategic and financial flexibility as well. Challenging macroeconomic environments often provide companies unique business opportunities. That being said, we look at all investments on a risk-adjusted basis, as the macro environment is more uncertain, the threshold for those investments goes up. We will be prudent in how and when we commit capital. Let me conclude this very important topic by emphasizing that capital allocation, including return of cash to shareholders, is a continual topic with the Board, and all options are on the table. The sale of Borderfree is also relevant to a topic that I get asked about from some of our investors. Specifically, the sum of the parts of Pitney Bowes and whether it would be better to separate the company into independent entities. Just like capital allocation, this is a regular topic with the Board and something they evaluate on an ongoing basis. We believe that the portfolio changes we have made have created a strategically coherent portfolio with meaningful synergies across the business. There is also a logical consistency in the way we help clients simplify and manage their mailing and shipping needs. Nevertheless, the Board is always open to different ways to create value for our shareholders. Importantly, our view that the current construction and strategic intent of the company is the right one for now is not just our internal belief. We have tested the market in meaningful ways. The consistent conclusion from those dialogues is that the best way to maximize shareholder value is to execute against the existing plan. In addition to these assessments with active market participants, the Board recently commissioned a leading consulting firm to evaluate our approach. They, too, concluded that maximizing shareholder value will be driven by further development of GEC within the broader Pitney Bowes enterprise. From my vantage point, I think, the most important takeaway from those conversations is an affirmation of the current overall strategy, and it is crucial for us to develop positive and consistent profit margins in our GEC business to achieve higher valuations. Of course, the Board will continue to revisit this topic on a regular basis and will explore any opportunity that maximizes long-term value. To conclude, the second quarter was not what we had hoped for and the macroeconomic environment going forward is uncertain at best. That being said, as I look underneath the hood of the business, my confidence in our future continues to be very high. I will now let Ana take you through the details of the quarter.

Thank you, Marc, and good morning, everyone. 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. Let’s start with a high-level review of the year-over-year comparison of our financial statement data points, followed by a discussion of our segment results, the balance sheet, cash flow and our outlook. Total revenue for the quarter was $871 million, which is down 2%. Gross margin for the company was $274 million, compared to $301 million for the same period last year, a 9% decrease. As a percentage of total revenues, gross margin decreased 200 basis points to 31.4%. Total EBITDA was $82 million, down from $96 million. EBIT was $39 million, down from $56 million. Interest expense was $34 million, down from $36 million in the prior year, driven primarily by reductions in total debt outstanding. Our tax rate returned to more normal levels and was 26% in the quarter. Adjusted EPS was $0.02, compared to $0.11. Last year’s $0.11 figure included tax benefits and insurance proceeds that totaled $0.04. At the end of the quarter, weighted average diluted shares outstanding were approximately 177 million. Turning to cash flow, GAAP cash from operations was $35 million for the quarter, compared to $79 million in the second quarter of 2021. Free cash flow was $6 million in the quarter, compared to $87 million in the prior year. Approximately 75% of the $81 million delta was driven by reductions in client deposits, a result of timing difference in postage spend versus account replenishment. Free cash flow was also affected by lower net income, the timing of insurance premium payments and was partially offset by a decrease in capital spending. Capital expenditures for the quarter were $32 million, down from $40 million in the prior year. For the first half, capital expenditures were $64 million, compared to $84 million in 2021. As I shared in our last call, capital expenditures overall are expected to be lower than last year. During the quarter, we paid $9 million in dividends and made $5 million in restructuring payments. Looking at our balance sheet, cash and short-term investments were approximately $582 million at quarter end, not including the cash from the sale of Borderfree, which closed on July 1st. Of the $582 million total, almost 40% is at Pitney Bowes bank. Approximately 25% is held internationally, and the balance is in our domestic accounts, mainly to cover usual and customary working capital needs. As Marc mentioned, the proceeds from Borderfree will augment our financial flexibility should the macro environment become even more challenging. Also, our $500 million revolver remains undrawn. Total debt was $2.2 billion, compared to $2.3 billion at the year-end 2021. Adjusted for operating leases and cash, operating company debt was $593 million, compared to $533 million at year-end. The following segment information is summarized in our press release and slide presentation, both of which are posted to our Investor Relations website. Let me start with Presort. Presort revenues were $139 million in the quarter, which is a 3% improvement from last year. New customer additions and increased revenue per piece more than offset volume declines. Total sortation volumes of 3.8 billion pieces were down 8% compared to the prior year. EBIT for the quarter was $13 million, compared to $16 million a year ago. EBIT margin was 9%, compared to 12% in second quarter 2021. The decline in margins was driven largely by increased labor and transportation costs, including the change in our allocation methodology that we discussed last quarter. Additionally, our fuel cost doubled year-over-year. Looking to the second half of the year, we are optimistic that we can return to mid-teen EBIT margin levels driven by two key factors. First, adjustments in the USPS work share discount program will enable us to recover costs we are already experiencing. And second, productivity gains from our multi-phased sorter refresh will help with labor costs. We are also increasing the number of in-source transportation lanes by utilizing excess capacity, which we believe will lower the cost of transportation. The bottom line is, we continue to feel very good about second half growth prospects for Presort, driven by better revenue per piece, an increased mix of marketing mail and the above referenced cost measures. Moving to SendTech. SendTech reported revenues of $339 million in the quarter, a slight increase over the prior year, which, as Marc noted, is a significant accomplishment for a business that has natural headwinds. The revenue stability was driven by 7% higher equipment sales and a 2% increase in supplies, as well as better business services revenue. Shipping-related revenue, which is now 12% of segment revenues, improved 21% versus the prior year. Finance revenue was down 7%, largely as a result of a revenue mix shift resulting from equipment upgrades. At present, roughly 40% of our SendTech client base has undergone an equipment refresh and we expect the balance to upgrade over the next few years to ensure compliance with USPS security requirements, which we think bodes well for equipment sales going forward. EBIT was $96 million, compared to $107 million and EBIT margin was 28%, down 270 basis points from second quarter 2021. The changing revenue mix, along with inflationary pressures in component costs were the primary causes for the margin decline. For financial services, we are very encouraged by stability in net finance receivables, which bodes well for future results and our continued improvement in portfolio quality. Specifically, 30-day delinquencies were down 40% from the prior year and flat to last quarter. As of quarter end, net finance assets were $1.15 billion, compared to $1.14 billion for the prior year. Let me shift to Global Ecommerce. Within GEC, revenue in the quarter decreased 5% to $394 million. Gross margin in the quarter was $38 million, compared to $45 million a year ago. Segment EBITDA for the quarter was negative $7 million, compared to positive $8 million in the second quarter of 2021. Year-to-date EBITDA is breakeven. EBIT for Global Ecommerce was a loss of $29 million, compared to a loss of $11 million a year ago. EBIT margin was negative 7%, compared to negative 3% in the prior year. While the headline numbers are obviously lower, we are seeing two very distinct undercurrents inside our Global Ecommerce segment, essentially divided by operations with a domestic component versus operations with an international component. I will start with cross-border, which is where the primary challenges exist in Global Ecommerce. Our cross-border business is largely focused on helping our clients move parcels originating in the U.S. to international destinations. It is roughly 25% of segment revenues. Cross-border revenues were down mid-teens in the quarter, similar to first quarter. Weaker overall economic conditions, especially in Europe, are dampening Ecommerce spending and with a strong U.S. dollar, products originating in the U.S. and sold into international markets, which describes our cross-border client base, are simply less competitive on price. Additionally, Borderfree, which has been a part of our cross-border operations and was sold on July 1st, represented roughly one-third of the revenue decline in cross-border revenues in the quarter. Bottom line is that macro conditions are negatively impacting Global Ecommerce international operations. Let’s switch to Domestic Parcels, which is over half of segment revenues, where the news is more encouraging. First, we continue to believe the Domestic Parcel market is our biggest opportunity, with a large and growing addressable market. It has been a significant focus of our business investment over the last several years. The headline is, we are making very good progress growing revenue and profit for Domestic Parcels. While total volumes in the quarter decreased from $44 million to $39 million, if you exclude parcels that originate in China and are processed by our Domestic Parcel network, volumes grew 4%. Said another way, parcel volumes from North American clients grew and we believe we outperformed the domestic market based on a range of market data. The decline in parcels originating in China, and again, processed by our Domestic Parcel network was roughly $6 million in the quarter and was driven largely by the well-reported lockdowns that country experienced in the second quarter. Despite the downturn in China volumes, Domestic Parcel revenue increased mid-single digits as a result of much better revenue per parcel. In terms of network efficiency, we continue to make excellent progress in generating better gross margin per parcel. Year-to-date, we have increased per parcel margin by $0.35 compared to the first half of 2021. When one multiplies this figure across hundreds of millions of parcels flowing through our network, the improvement in efficiency turns into meaningful dollars. Let me talk about service levels, another contributor to our volume and revenue growth. The investments we have made in technology, systems and people have allowed us to create a fully integrated automated national network that provides us with more predictable service and costs. In the second quarter, that work has culminated in a dramatic improvement in on-time performance and we are now consistently delivering market competitive services. Better on-time performance has helped drive substantial client wins. We completed 112 new signings in the second quarter, up from 56% in the first quarter of 2022. For example, we recently signed an agreement with Quiet Platforms, which is the logistics operation owned by American Eagle Outfitters. We expect the arrangement to begin generating meaningful volumes into our network beginning in the fourth quarter. These new signings will help provide momentum and offset the headwinds that are appearing in the domestic e-commerce market. Third-party e-commerce data for the quarter indicates that volumes are down mid-single digits. But in the context of inflationary trends, dollars spent are flat to slightly higher. Let me now complete the financial discussion on Global Ecommerce. We experienced higher operating expenses in the quarter, including an increase in research and development, as well as an accounts receivable write-off from a client bankruptcy. Those factors also contributed to the overall decline in segment EBIT. In the end, our increases in Domestic Parcel revenue and profit were more than offset by lower cross-border performance. Recently, we have received inquiries about the United States Postal Service reseller program. Let’s start with some background. The current USPS reseller framework was established in 1992 with a handful of designated firms that are essentially outsourced postal service sales representatives. They recruit small- and medium-sized shippers to drive USPS parcel volumes. Recent trade press articles have suggested that the USPS will discontinue the program. What does this mean from the Pitney Bowes perspective? We believe the USPS is looking to adjust how it works with and compensates third parties that drive volume to its network. While we are not a reseller, we have been one of those parties driving USPS volumes, and we believe strongly we can do so going forward with our ecosystem relationships and state-of-the-art technology. For digital offerings within our SendTech business, we believe our new arrangements with the USPS will enable us to maintain the same economics we have now. Also, our physical network inside of Global Ecommerce, both domestic and cross-border, are not related to the reseller program at all. For digital offerings that reside inside of Global Ecommerce, there is work to do in assessing the potential positive or negative effects, and how our services and technology will fit into the new USPS reseller landscape. We do believe that the capabilities we have built over the years support substantial volumes in the USPS network and integrate well with USPS’ strategic intent. That combination should enable us to create attractive economics for Pitney Bowes going forward and replace the limited, but non-zero potential decline in our gross margin should the program be discontinued. Lastly, let me provide some perspective on the outlook for the full year. Based on uncertain macroeconomic conditions, first half results and the sale of Borderfree, we are updating our full year outlook as follows. The company expects full-year revenue on a constant currency to range from a low single-digit percentage decline to a low single-digit percentage increase. The company expects full-year EBIT to range from a high single-digit percentage decline to a mid single-digit percentage increase. We also expect to generate solid adjusted free cash flow for the full year 2022, though, at a lower level than last year. The primary differences are driven by lower client deposits, strengthening of finance receivables, shifts in working capital against sizable benefits in 2021 and partially offset by a reduction in capital spending. For the third quarter, we expect overall financial results to be roughly comparable to second quarter 2022. As Marc and I both shared, second quarter numbers were disappointing. Nonetheless, there is more progress happening inside the organization than what the financials illustrated in the second quarter, especially in Global Ecommerce. We believe the operational detail we provided adds perspective on that front. Looking ahead, we expect solid results in Presort and SendTech in the second half. We are working to drive volumes into Global Ecommerce Domestic Parcel operations, which will leverage the scale we have built and help generate the profitability everyone expects. And while our adjusted free cash flow expectations are lower, first half EBITDA, less CapEx, interest expense and taxes represents a solid improvement versus the prior year. We remain committed to being a consistent cash flow producer with appropriate amounts of liquidity as we all tackle a more challenging macro environment. We look forward to your questions. Operator, please open the queue. Thank you.

Our first question comes from Kartik Mehta at Northcoast Research. Please go ahead.

Good morning, Marc and Ana. Marc, just on the Global Ecommerce business, obviously, you laid out some headwinds out of your control, but that might persist for a little time, I guess, difficult to say for how long. But are you making any changes to the business as a result or is there enough other growth in the business that you will continue investing?

Great question. And you are right, it is hard to predict how long these headwinds will occur, but our working assumptions are they are going to last for a while. So I don’t think this is a short-term phenomenon that’s going to right itself in the third quarter. To your question, we are making changes. First of all, every aspect of cost in our cross-border business is under review. We are making investments, but we are making the investments principally in U.S. to Canada lanes, where we think we are a little bit more insulated from the currency disruptions, and candidly, we have got enough density in our volumes to have critical mass and comparative advantage versus others. So we are paring back the investments overall in places where we think are going to be facing some headwinds and we are doubling down in some places where we think we have got some natural advantages that are less susceptible. And I would say, in some ways, while I wouldn’t say that Borderfree was a response to the currency dynamics, it certainly speaks to that overall thesis.

I have a follow-up question, Marc. Earlier in the call, you mentioned that you asked a consulting firm to evaluate the business. I’m curious about their conclusion regarding keeping the company together. Was it due to dissynergies or other factors? I understand it might be a lengthy report, but could you provide a summary of their reasoning?

Sure. Listen, I think there were a couple of findings. First of all, it affirmed the overall thesis in the strategy. The second thing, I’d say, is, while there are synergies, while there were synergies rather, that are meaningful across the two or three businesses. That wasn’t the positive factor. The most important factor was, for GEC, in particular, that business needed to be further along in terms of volume and profitability and ability to kind of stand on its own two feet. So that was kind of the principal findings.

Thanks, Marc. I really appreciate it.

Our next question comes from the line of Ananda Baruah, Loop Capital.

Yeah. Good morning, guys. Thanks for taking the questions and tricky environment out there for everybody to be doubt about it. I guess just kind of two, if I could. SendTech, Presort has held up well. Are you hearing sort of anything from your customers in terms of with regards to macro increasing trepidation, any context there or is it just sort of very cleanly steady as she goes right now, even in your contextual conversations with them?

I would say across the board we are hearing consistently from clients that this is a very tricky environment and some are seeing near-term signs of recession than others. But across our entire portfolio, every customer we are talking to, and candidly, every CEO I am talking to, sees a challenging environment. I would just say, SendTech and Presort, and candidly, even our Domestic Parcels business and GEC operated pretty well in pretty difficult market conditions.

So the second question is about Domestic Global Ecommerce. Marc, do you have a sense that there has been any noticeable impact compared to your expectations for the macro environment? The metrics were solid, but did you expect them to be stronger, or is there no significant impact yet from the macro environment on domestic North America GEC?

There is definitely an impact. Currently, we are doing well in the market by acquiring new customers. Ana mentioned our 100 wins in addition to the 40 or 50 wins from the first quarter, which confirms that our value proposition resonates well. However, we also have existing customers facing significant business challenges. While we are adding many new clients, some of our current customers are experiencing decreased volumes. Additionally, considering the sales and integration cycles, as I previously noted, the process can be slow. For example, out of the 102 customers mentioned, we are particularly focused on a large one that we expect to launch in the fourth quarter, but the integration has been lengthy. It feels somewhat like running in quicksand. We are moving forward, which I think is distinctive versus others in the industry. But it’s certainly a more challenging environment, and candidly, the bankruptcy that Ana talked about as well is kind of another sign of distress. So it’s not that we are not seeing it. It’s just that Domestic Parcel business, in particular. I think we are operating in a difficult environment pretty well and best we can see versus competition at least holding our own, if not more. But the reason I like this dynamic is eventually the customers that are having distress right now, their business is going to come back. So you get the benefit of their business coming back and then, ultimately, all of these new wins coming online. So it is, for sure, in the short term, a little bit frustrating, particularly given all the good work the team has done on service levels and efficiency of the network and all that kind of stuff. But that’s why we are talking about the internal fundamentals as you kind of look under cover, we think are pretty solid.

Naturally you have a context. I appreciate it. Thanks a lot. Thanks, guys.

Sure. It’s a complicated quarter. I mean, it’s a complicated quarter for us to sort through and explain, I know it’s a complicated quarter for you also.

A lot of it is. No doubt.

Yeah. It’s the densest communication we have had since I have been here.

Yeah. Yeah. Thanks, Marc. Appreciate it.

Our next question comes from the line of Matt Swope, Baird.

Good morning, Marc, and Ana, and Ned. You guys gave some pretty good volume data on Presort and Global Ecommerce. Is there a similar kind of KPI for SendTech? Like, Ana told us that the Presort pieces were down 8% year-over-year. Is there any kind of volume measure or way to think about SendTech in terms of those headwinds the same way?

The short answer is that it's a slightly different business model. When you examine how Presort generates revenue, and to some extent how GEC does as well, it's based on throughput. In contrast, the SendTech business model revolves around equipment sales, financing revenues, and services. While we do have throughput metrics for shipping that can provide insight, the model itself is fundamentally different, and subscriptions are also crucial, becoming increasingly significant. We'll elaborate on that a bit further. Looking at that business, it's important to highlight the subscriptions because they represent a shift from short-term equipment revenue to longer-term subscriptions. This transition is beneficial and aligns with our goals for the business, which we have been gradually moving towards over the past few years. However, it does present a different profile regarding revenue recognition. We'll provide more details on this soon.

No. That’s very helpful, Marc. Could you just elaborate a little bit on that last piece you said, as the sort of lumpier equipment revenue was replaced by subscriptions? Are people just effectively renting that from you, so that smooth things and you get a longer commitment from them or how does that change that dynamic?

It’s, in essence, no different than any other software-as-a-service type company. So if you think about that transition that software-as-a-service companies go through, they are trading in-period short-term revenue for a longer revenue stream. That longer revenue stream is different contractual agreements with it. But as more of our offerings go online, that becomes a more prominent aspect of our financials.

I see. That’s great. And then if I just change gears sort of to the cash and liquidity commentary, could you comment on whether you guys have sort of a minimum cash number, I know you have been asked this before. But especially given that you have this undrawn $500 million revolver, now you have these asset sale proceeds that have come in. You are still paying the dividend, which is small, I know, but you have your bonds that have traded down a lot and you might have some opportunity to buy back bonds in the open market, too, at very attractive levels. Could you just sort of put all that together into how you think about cash and liquidity and opportunity?

Sure. This is Ana. So in terms of cash and liquidity, as I mentioned in my remarks here, we think of it in three big pieces, right? So when you take our total cash, we have about 40% of that at the bank. We have about 25% in international. And that residual that we have in the U.S., and I will just speak to the U.S. cash, the way we think about it is we like to have about a week of outflows, not net of the inflows, just to have that in cash on hand for the U.S. needs. And that translates, when you do that math, to around that $200 million level. Of course, as our organization moves and needs change, that could change. But I hope that gives you a little bit of perspective of how we think of the cash.

No. That’s definitely helpful. And so then to the other pieces, so now you get these proceeds in from Borderfree and you were talking about sort of just supplementing your liquidity. Would you consider using those to more actively reduce debt or even to get more aggressive? Would you ever draw on the revolver to buy back bonds at the significant discount that’s available right now?

From a Board perspective, we continuously evaluate all options regarding capital allocation. We would like to gather more data and conduct further analysis before making any decisions about our future direction. It’s important to note that while we are considering various options, we aim to maintain flexibility both strategically and financially. Currently, we prefer to strengthen our liquidity profile. As mentioned, these situations often present opportunities. For instance, there are several smaller acquisitions in Presort that were not available to us a few quarters ago, but now they are available at attractive prices and are accretive. It's challenging to make broad statements, but I can assure our investors and everyone on this call that the Board is consistently reviewing all options. Regarding whether we would draw on the revolver to buy back debt, it seems unlikely at this stage, but we remain open-minded about how we approach this.

That’s great. Thanks, Marc and Ana, for candid responses.

Next question is from Anthony Lebiedzinski, Sidoti & Company.

Yes. Good morning and thank you for taking the question. So, just looking at equipment sales, so two quarters in a row that that increased here and the second quarter revenue from that segment was roughly in line with the first quarter. So was there anything specific that drove that as far as the equipment sales increase and just wondering how we should think about sustainability for equipment sales?

If I said brilliant execution, could I leave it at that? Yeah. Listen, I think it’s a great question. We think of that all the time. So, first of all, I do think the team executed quite well. So I think I wouldn’t drive through that. We are in a very good product cycle and we expect that product cycle to last, not just for the next couple of quarters, but candidly for the next couple of years. And then underneath that, as Ana said in her remarks, the USPS has put out new security requirements for the devices, which customers need to comply with. So that creates kind of a natural tailwind. I think, honestly, we are 40% or 50% of the way through refreshing that technology base. So we got some good tailwinds and some good momentum for the next extended period of time in that business. So we like how the team is executing. I really like the product cycles. And then we have got some tailwinds with some USPS changes and what they are requiring for security.

Thank you for the information. It's very helpful. Regarding the Global Ecommerce segment, as we move into the second half of the year, particularly the fourth quarter, I'm interested in your perspective on how the current challenging environment impacts seasonality. Specifically, is there a significant difference between cross-border volumes and domestic volumes in the latter half of the year compared to the recently reported quarter?

I am answering this question with a high degree of humility considering the current environment. We don’t have great visibility, and neither do our customers. I believe that the challenges related to cross-border operations will persist for the remainder of the year. The Federal Reserve raised interest rates by 75 basis points recently, while Europe increased theirs by 50 basis points, leading to significant disparities in interest rates between regions, which in turn affects exchange rates. I expect this trend to continue. My recent trip to Europe indicated that there are serious concerns about food and fuel shortages as we head into fall, suggesting that European monetary officials will likely proceed cautiously with further interest rate increases. The cross-border dynamics may face a couple of tough quarters until conditions start to stabilize. Regarding the domestic market, it’s harder to predict. We anticipate that there will be a peak in volumes this year, which is typical. We expect customer buying behaviors to align with our projections, and as the supply chain improves, we believe online deliveries will be reliable. Pricing is another variable to consider; there tends to be higher pricing in the fourth quarter, which is common in the industry, and we are preparing for some of that. However, the domestic business presents more variables that are challenging to forecast. We are also planning for some seasonal trends and anticipate exercising some pricing power as we have historically observed.

Got it. Okay. And lastly, Ana, you mentioned that there was a write-off from a banker client in the GEC. Just wondering about the magnitude of that, how should we think about that?

Yeah. Yeah. It was around $2.5 million.

So it’s a really good question and it’s one of the things we are looking at carefully and I know the banks are as well is, what is the overall payment profile that we are even. So in the second quarter, I mean, DSO improved a lot. We looked at collections, they were pretty good. So there’s nothing in our dashboard or that we are seeing that would tell you that our customers are under unique stress. This one situation that Ana referenced was unfortunate. And can we let them get a little bit more out in front of us than we should have. But underneath that, the fundamentals are still pretty good in terms of how customers are paying us, but we are paying close attention.

Got it. Okay. Thanks and best of luck.

Thanks.

Our next question comes from Ananda Baruah at Loop Capital.

Thank you for taking my follow-up question. I would like to ask for some context regarding the USPS reseller framework. What timeline are you considering for any determinations or visibility generated up to this point?

Hard to know precisely. The reseller agreements timeout at the end of the third quarter. I want to just back up, because I think it’s important here to have a little bit of perspective of what the postal service, at least in my judgment, is trying to do, is trying to align their incentive systems with where value is being created in the ecosystem. I wholeheartedly and fully applaud that. And over time and it’s hard to be precise, that’s going to advantage Pitney Bowes, I believe, because we are all about creating value for the postal service and we have been doing it for 102 years. So as it relates to the reseller agreement, particularly, as Ana said, we know we are not a reseller. We do participate in some of the downstream economics of those resellers. We have mitigated all that in SendTech. GEC, it’s a little bit harder to know, but we are working pretty hard to land that plane sooner rather than later and there are multiple different kinds of options. One is a short-term accommodation of the postal service. Second is a longer-term type of agreement or some other way to place the economics of the marketplace. So we are pursuing all of those alternatives. But while it’s, I would say, short-term and settling, even though it’s not that much money, I do like the philosophy because I think it plays well to our strengths.

Is it possible that you could make more money from these situations if they take a fresh look at the value being created and decide to take a larger share of it?

Yeah. Yeah. The answer is absolutely yes.

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

Thank you. As we've discussed, this is quite a complex environment. I mentioned it in my remarks, and I believe it's a sentiment echoed by many CEOs. There are various factors influencing the market and our business, but we can simplify the situation. SendTech and Presort are performing well, even amid these complexities, and I believe they are positioned to continue to do so in the future. They have solid opportunities related to cost and pricing. In our long-term view of Global Ecommerce, the focus is on improvements in domestic parcels. While the cross-border and expedite segments are important, the core value growth for Global Ecommerce and, by extension, Pitney Bowes revolves around domestic parcels. The fundamentals for domestic parcels are strong; we are gaining market share, with revenue and parcel growth, excluding China delivery. Ana highlighted a significant improvement in gross margin of $0.35 per parcel, which translates to $70 million to $100 million in profit improvement, given the scale of 200 to 300 million parcels. Although a $0.35 improvement may seem minor on a per-parcel basis, when considered across such volume, it becomes a substantial gain. This reflects the continuous enhancement in our business fundamentals, including our bidding strategy, service levels, customer satisfaction, and network efficiency. The challenges in cross-border transactions may present temporary inconveniences. However, after a decade in this cross-border space, I know these fluctuations occur and will eventually stabilize again. I don't want to be overly optimistic as we acknowledge the tough environment ahead in the next couple of quarters, but the overall fundamentals of our business portfolio remain strong. We look forward to addressing more questions as you delve into our comments from this morning, and we appreciate your time today.

Ladies and gentlemen, that concludes our conference today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.