Pitney Bowes Inc /De/ Q2 FY2025 Earnings Call

Good afternoon, and thank you for joining us. Included in today's presentation are forward-looking statements about our future business and financial performance. Forward-looking statements involve risks, along with uncertainties that could cause actual results to be materially different from our projections. More information about these items can be found in our earnings press release, our 2024 Form 10-K and other reports filed with the SEC that are located on our website at www.pb.com and clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update forward-looking statements as a result of new information or developments. Also included in today's presentation are non-GAAP measures. Specifically, EBIT, EBITDA, EPS and free cash flow are all on an adjusted basis. You can find reconciliations for these items to the appropriate GAAP measure in the tables attached to our press release. We have also provided a slide presentation and a spreadsheet with recast historical segment information on our Investor Relations website. With that, I'd like to turn the call over to our CEO, Kurt Wolf.

Thank you, Alex, and thanks to everybody joining today's call. I'm here with Paul Evans, our newly appointed CFO, who will also participate in today's Q&A. A few quick comments on our new CFO. Paul has prior experience as a public company CEO and CFO and knows Pitney Bowes extremely well due to his previous service as a Board member, Audit Committee Chair and Value Enhancement Committee Chair. It's rare that a Board member is willing to give up their seat to take an operating role, but Paul sees the same opportunities that I do and was eager to roll up his sleeves and get to work. Paul and I have a great history of working together, dating back to our days on the GameStop Board during that company's turnaround. We had tremendous success working there together, and I'm incredibly excited about the prospects of what we can do at Pitney Bowes. A quick note on the changes we've made to our earnings process. We are now issuing a short CEO letter to accompany our press release. This provides you with immediate context alongside our earnings press release rather than making you wait to hear prerecorded commentary. This saves you time and will provide more time for questions, the latter of which is important as we are optimistic that we'll see significant growth in our research coverage over the coming months. Finally, this is a much more efficient process. And as with all things at Pitney Bowes, I'm striving to instill efficiency as a guiding principle in everything that we do. Next, I'd like to briefly touch on a few highlights from the quarter. Our businesses continue to drive significant earnings and cash flow growth on a year-over-year basis. We continue to honor our commitment to return capital to shareholders by almost exhausting our $150 million share repurchase authorization and by increasing our dividend by $0.01 for the third quarter in a row. Additionally, the Board has increased our share repurchase authorization to $400 million. Given our strong free cash flow, liquidity position and increased financial flexibility as a result of our adjusted leverage ratio now being below 3x, we are comfortable with our ability to aggressively repurchase shares at prices we believe to be attractive. During the quarter, we initiated the first phase of our strategic review, which is focused on internal improvements. This has yielded numerous opportunities for value creation, and I look forward to speaking about them on future calls. I'd like to conclude with an update on full year guidance. We reduced our revenue guidance range by $50 million, tightened our EBIT margin range by bringing down the high end of our range, reiterated our free cash flow guidance and increased our EPS range by $0.10. The reduction in revenue guidance is largely due to decisions by prior management to accept customer losses rather than offer price concessions to at-risk Presort customers. These concessions would have allowed us to keep these customers, albeit at lower margins. I'm incredibly frustrated with this unforced error, and we have addressed the issue. The reduction in the top end of our EBIT guidance is driven by the aforementioned loss of Presort customers, partially offset by continued improvements in execution across the entire organization. The increase in EPS is largely driven by our ongoing share repurchases. That concludes my comments. And with that, operator, please open the line for questions.

Kurt, just going back to your comments on the execution of the share buyback. Obviously, you bought a significant amount of shares in the last 120 days. And I'm wondering, with the new authorization, do you intend to continue buyback in 2025? Or do you want to wait, make sure, see how the business is performing, see what free cash flow is, before reengaging with the buyback?

Thank you for the question, Kartik. I can't comment on future market activities or purchases. However, the rate and prices at which we've been buying shares historically indicate our perception of value in the company. Additionally, the incentive structure I negotiated for myself is largely based on options without strike prices of 12, 14, and 16, which gives you an idea of my own view of the company’s value. While I cannot predict our future actions, I believe you can infer our value perspective from this information. Furthermore, achieving a leverage ratio below 3.0 has enhanced our access to restricted payments. Even if we move back above that ratio, having dipped below it has essentially replenished those financial provisions. Regardless, we still have around $300 million available in those provisions.

And then, Kurt, just on the strategic review, obviously, you've been undertaking that for a while, as you said, since you became CEO. Obviously, new CFO in the fold. And I'm wondering, does that change the timing at all for the strategic review? And if not, any commentary on when you think that might be finished and you might be finished with the process?

Yes, Kartik, regarding that, I think having Paul join us will hopefully speed up the review process rather than slow it down. Paul and I have a strong working relationship. He has been on the Board for 9 months and is very familiar with the business, which is not common for a new CFO. We collaborate effectively. In terms of timing, we have described the process as a two-step approach; the first step is an internal review, and once that is completed, we will proceed to the second phase. We are being very thorough in this initial step. I want to emphasize two points: first, during this review, we have identified several opportunities to enhance shareholder value, which is a positive outcome. Second, we must learn from our past mistakes, using GEC as a case in point. There were two main issues that hindered our growth there: we were not operating efficiently enough to compete in the logistics sector, and our expectation of leveraging shared transportation between Presort and GEC did not materialize. Before making any decisions, we need to thoroughly assess how to operate more effectively and efficiently, ensuring that we understand our business well enough to avoid errors when deciding the best course of action for our shareholders. Regarding timing, I realistically expect the internal review to extend throughout the rest of 2025, with a fuller review starting sometime in 2026.

Perfect. And then just one last question, Kurt. Just on the Presort business, it seems like you're taking a little bit different strategy than previous management, as you indicated. Is the thought that maybe if you go after some of these larger customers with lower EBIT that fell pressure margins? Or are there opportunities to take cost out either through automation or other ways and be able to maintain margins in that business?

Sure, I see it in two ways: margin and dollars. To me, the most crucial aspect is dollars. As long as our EBIT dollars are increasing, it's acceptable to sacrifice a percentage of margin. Regarding the opportunity, I want to emphasize that we have an exceptional operation backed by a leader, Debbie Pfeiffer, who excels at managing an efficient organization. Our data suggests we are the most efficient in the industry, delivering mail to our customers faster than many competitors, and our service levels are among the best. Therefore, if we can't serve a customer profitably, we doubt anyone else can either. Historically, there were instances where we lost large customers that we could have retained profitably, even if it meant our margin percentage decreased, as it would have positively impacted our revenue and EBIT dollars.

So first, on SendTech, in previous conference calls, you guys had talked about the shipping subsegment within SendTech, how that's grown. Can you give us an update how that's tracking so far this year? And how do you see that shipping subsegment doing for the balance of the year?

Yes, Anthony, I'll answer your question. First, it's important to note that we've recast our shipping segment. When we exited GEC, one profitable part of our business was related to shipping. Moving forward, we'll differentiate between core shipping and overall shipping. Overall shipping includes core shipping plus this specific relationship we have in the shipping space, which focuses on handling packages and is distinct from our core shipping software business. For the quarter, overall shipping revenue decreased by 2.5% year-over-year, largely due to significant declines in the noncore segment. If we exclude that one customer relationship, we actually achieved 6% growth. While we strive for double-digit growth each quarter, we saw a year-over-year growth of approximately 6% for this quarter.

Got you. Okay. All right. So as far as that, I was more kind of interested in that SaaS piece, shipping as a software. So in terms of that business, do you still have a positive outlook on that, how that's going to grow going forward?

Yes, the SaaS business continues to perform very well. The growth there was up 17% year-over-year for the quarter, and we expect that to keep exceeding the underlying core shipping revenue.

Got you. Okay. All right. And then in terms of the Presort, so in your letter, you talked about reversing the losses. Have you already been able to do that so far in the third quarter? Or is this more of an expectation that you think you will be able to reverse the customer losses?

What I would say is I think we're very close to starting to reverse some of those losses. But to this point, we've not reversed any of it yet.

Got you. Okay. All right. And then the prior CEO was open to doing acquisitions in Presort. What is your view on that strategy?

I think it's incredibly appealing. We are always looking for opportunities. As many CEOs have pointed out, these acquisitions are made at very low multiples. Once integrated into our system, the efficiency we achieve is unmatched in the industry. This results in a significant boost in profitability. Therefore, these acquisitions are extremely beneficial to the business, and we actively seek them out whenever possible.

Understood. Okay. All right. And then just lastly, I guess, more of a housekeeping question here. So in terms of your increased EPS guidance, what are you guys assuming for the diluted share count for the back half and for the full year?

Yes. I don't want to give that simply because it would certainly give some sense of where we are or where we think we may be in terms of share repurchases. But if you take our EBIT guidance, apply an assumed interest rate, assumed tax rate and then look at our EBIT guidance versus our EPS guidance, that should probably give you some sense of where we might be on a diluted share count, but I don't think we...

Kurt, could you talk about the management changes that have gone on? I think everybody has been a bit surprised. I mean we knew you were deeply involved, but to see you step into the CEO role after Lance was made permanent in October. And then I know Bob was just made permanent in February. Are the management changes tied to sort of the unforced errors you referenced? Or could you just talk more broadly about that and sort of how we think about the management stability going forward?

Absolutely, there are two points I'd like to make regarding this. First, I want to address the recent change. The Board can discuss the transition in the CEO role, but regarding the CFO position, I want to be clear that this change does not reflect on Bob's performance at all. He is an excellent CFO. It’s just that I feel we have a unique opportunity to bring in someone as talented as Paul. I believe that as you engage with him in the upcoming quarters, he will readily address any relevant questions. It’s a rarity to bring someone of his caliber into the organization. Paul and I have collaborated for five years and share a strong working relationship built on mutual values and focus on business practices like urgency, discipline, and data-driven decision-making. This is really about the opportunity we had to bring someone of Paul's caliber on board. It's quite unusual for a Board member to relinquish a seat for an executive position, but it speaks to the tremendous opportunity involved, which I believe Paul recognizes too. Before Paul shares his perspective, I want to emphasize that change has historically been a major driver of value creation at Pitney Bowes. While corporate America usually moves at a set pace, my experience in startups has instilled in me a more aggressive approach to change. Whenever we see a chance to create more value than any potential disruption, we will take that opportunity. I believe every change we’ve implemented has led to significant value creation, even though I understand that the volume of change may seem unusual. With that said, I really think it would be beneficial for Paul to discuss his insights, as his contributions are remarkable and highlight the opportunities at Pitney Bowes.

Matt, nice to meet you over the phone. Yes, look, as I sat on the Board, and I've been on the Board for 9 months, and I was the Audit Chair and then the EC Chair, and so I was deeply involved. At heart, I'm still an operator, and I saw an opportunity to come alongside Kurt again and with an incredibly supportive Board and an incredibly talented management team, it seemed to be an easy decision for me and all the things that the company has in front of them, it's something that's in my wheelhouse to do. So I'm just really glad to be here and to accelerate returning this company to where it should be.

That's helpful, Paul. It's a pleasure to meet you as well. Kurt, do you see you and Paul in these roles for two years, three years? I understand it's difficult to foresee the future, but is this arrangement permanent or more of a temporary solution?

Yes. So Matthew, I can speak for myself. Paul can speak for him. I will serve as long as the Board and I both all agree that I'm the best person for the job. As you know, and probably everybody on this call knows, I have a tremendous amount of money invested in this company. There's nothing more important to me financially as well as just emotionally. And just from a commitment to success than seeing this company be successful. I'd like to believe that today, I'm the right person for the job. I'm committed to it as long as I am the right person. If the path that we end up on is not suited to my skill set, then we'll bring in somebody who's better suited to run the company. But for now, everything I've seen says I'm committed as long as I'm the right person.

Again I guess, to speak for myself, I don't have an end date. I'm going to be here until the job is done. And I don't think the job is ever done. So as long as the Board will have me and Kurt will have me, I will be here.

I appreciate both of those. Kurt, I admire the significant impact you have made in the company and I respect how much you have invested in it. You have truly put your money where your mouth is. As you go through the share buyback process, are you selling any of your personal shares or Hestia shares into the buyback?

Yes. So what I can say on that is any shares that I would execute would be filed by Form 4s. And I think it's been quite some time since any Form 4s have been filed. So I think it's pretty safe to assume that shares haven't been sold. Yes. And I would just highlight as well that I did have a 10b5-1 in place, and that did expire. So at this point in time, I do not have a 10b5-1 in place for myself or for Hestia.

Got you. Very helpful. And maybe I will take advantage of Paul's presence on the call as well. And I'll put on my debt hat for a second. And I was reading through and Kurt, in your letter when you talked about the potential refinancing of the bonds and the 2027 notes, in particular, not becoming callable at par until March of next year. Can I just ask how you guys are looking at as the high-yield market is as wide open as I've seen it for a while? We're seeing lots of deals get done right now at levels that people didn't foresee as possible before for whatever the call premium is right now, 1.7 points or so. Do you think it might make sense to refinance those bonds earlier than that call date and maybe you would make up more than the savings on the coupon that you might get by refinancing in such a hot market?

Yes, I will address that. We are indeed examining the situation. My focus is on understanding the average lifespan of our debt and the interest rates associated with it. There are still some lingering restrictions that we need to resolve to operate normally again. We are reviewing our revolving credit facility, term loan A, term loan B, and the 2027 bonds. We have the liquidity to pay off the 2027 bonds. We will weigh that option against the appropriate level of leverage for a company like ours. Clearly, we are generating a substantial amount of free cash flow, which gives us flexibility. Your perspective on this is part of our considerations.

And just to add to that, Matt, I really appreciate working with Paul because we share similar perspectives and collaborate effectively. Retiring debt and issuing new debt do not always need to happen at the same time. So, even though we are not currently considering calling the debt or paying it off, if there is a timing mismatch between raising and potentially paying off debt or if the call provision is expiring, Paul and I have discussed this. We are very value-driven, and it's a straightforward mathematical assessment of our cash returns, our costs, and the interest premiums or payments we might avoid. It's a simple calculation of the price at which we would consider buying back our debt. Hopefully, that clarifies our thinking on the matter.

No, that's helpful. And maybe just one last one for me. Congratulations on reaching 3x earlier than expected. You mentioned it earlier, and it seems like you might be open to going above 3x leverage again. Can you discuss that? How much higher than 3x would you feel comfortable going? Would that represent a new higher level, or would it be temporary for an acquisition or share buyback opportunity? How do you see leverage evolving from here, especially with Paul being new in this position?

I mean, look, philosophically, could we go higher? Sure, we could go higher. But to go higher and not have a use of that is not the best thing. We don't want to sit it on the balance sheet a bunch of negative ARBs that we'll deal with. But we clearly could go higher. And your idea, your suggestion, would you go higher if there was an accretive acquisition in front of us? Of course, we would. But right now, we're sort of staying around the 3x.

Paul and I have discussed this, and I believe everyone at this company feels we could maintain a leverage ratio above 3.0. We think it might even be higher. However, it's important to note that our belief differs from what the market believes, and we need to be aware of the market's perspective. While we are confident in operating at a higher level, we need to communicate our vision to the market and instill confidence in the company's future, which includes achieving revenue growth. We're optimistic about reaching that goal. Once the market recognizes this, I believe it will be more open to us increasing above the 3.0 ratio. At that point, we would seriously consider it. For now, we want to be mindful of the market and the opportunities it offers.

Paul, welcome to the company. Well to the CFO role. I'm sure you've been instrumental as a Board member. In the early innings of the strategic review, how do you see the Presort business and SendTech business working hand-in-hand with each other? Are they potentially distinct businesses? Or do you still see benefits in them operating together under the Pitney Bowes roof?

I think I'll take a shot at that as somebody who's just come off the board into management. And so holistically, I see an opportunity how they can complement each other. And so I don't think that that value has been recognized in our stock price. And so there's definitely things to do there. So I come to the table with those ideas, and Kurt and I will work with the team on how to optimize those businesses.

Yes, I would like to add that my background includes being an entrepreneur, and as an entrepreneur, I am always looking for opportunities. I believe we have discovered numerous synergies between our businesses, such as potential cross-sales. For instance, GFS could provide value to Presort customers, which is something we haven't traditionally pursued. However, as an investor, I have witnessed companies believe they are more knowledgeable than the market and attempt difficult executions. This has led to negative experiences when companies overreach and lose their way. We identify several opportunities to enhance value across our businesses, but currently, we are not evaluating any significant initiatives or imminent executions.

Understood. And this is more of a housekeeping question. In terms of the repurchase authorization, increasing from $150 million to $400 million, is there an expiration in mind for that authorization?

Yes. I don't think there's any expiration tied to it.

Kurt and Paul, congratulations on your appointments to CEO and CFO. It's fantastic having the GameStop dream team back together.

Thanks, Justin.

I have several questions. But first of all, I just want to commend you on the very aggressive share repurchases that have been made as well as the new plan you've announced. I mean this is exactly what shareholders have wanted and speaks to how important it is to have a CEO that's a large shareholder so that everyone is appropriately aligned.

Yes. Thank you.

Kurt, in your letter to shareholders, you mentioned expanding the coverage you received from research analysts. I'm just wondering if you can provide some additional commentary around the importance of that.

I appreciate the question. We have several companies covering us, which we value greatly. However, we believe we are doing something unique at this company. Currently, we have 3 or 4 analysts covering us who can help spread the word. The more we can expand that coverage, the more people will learn about what we are doing, which facilitates interest. I see it as a sales funnel; to attract an investor, we first need to spark their interest and encourage them to take the time to understand the company. Increased coverage provides more opportunities for potential investors to discover us and gain an initial understanding to decide if they want to explore further. This is particularly crucial for us since we are somewhat of an anomaly in the stock market and lack direct competitors, especially in the public sector. This lack of competition can lead to undervaluation, allowing us to buy back stock, which is a positive aspect. However, our goal is to achieve full coverage of the company. We believe that once people grasp our story, they will be very interested in investing. Therefore, we see this as very important for our growth.

It makes a lot of sense. I know you haven't provided 2026 guidance, but is it safe to say that free cash flow of over $300 million a year going forward is sustainable?

We don't want to comment on that. While we are very confident in the business, we do not provide guidance that far in advance. I appreciate your question, but it's not something we are addressing at this time.

I know in the past, you've talked about getting upgrades for your credit rating. Is that something you see as likely in the foreseeable future?

We will certainly meet with the agencies to discuss our performance, as it has lagged. While it's not mandatory for us to achieve investment grade, it can be beneficial in some aspects. I have a lot of experience in this area from my time at NRG in the '90s, and I look forward to explaining to them the reasons behind our rating delay.

Got it. I know, you guys have talked a lot about Presort and what happened during the quarter. I just want to ask, can you confirm that there's no signs of structural weakness in the business at all there?

Yes, we typically do not disclose internal numbers. I would say that roughly 90% of the reduction we're experiencing is directly related to Presort, primarily due to competitive losses that we could have otherwise retained. This situation is extremely frustrating as it was an unforced error. Without this issue, we wouldn't be adjusting our revenue guidance or our EBIT guidance. We have been successfully driving efficiencies across the organization. While these might have had lower margins, they still would have generated EBIT. It truly was an unforced error. Both Presort and SendTech are strong businesses with good margins and profitability, enhancing our competitiveness. Going forward, we aim to introduce our business leaders to the broader investment community, and we believe we have some outstanding leaders, including Debbie, who is actively working to regain existing customers and attract new ones. Our significant advantage is that we are effectively the low-cost provider in the industry, and by being aggressive in sales, we should be able to continue to gain market share.

Got you. This last question is a bit longer, and I'm not sure if you'll be able to answer it, but I noticed some commentary in your letter. Long story short, there's local news today in Milwaukee about Harley-Davidson forming a strategic partnership with KKR and PIMCO, which caused their shares to surge. They are unlocking over $1 billion in cash by transforming their Financial Services business into a capital-light financing model. They are selling existing and future retail loans but maintaining control. The Harley-Davidson Financial Services segment seems to have many similarities with Pitney Bowes Bank. I'm curious if you see a similar opportunity to unlock value for Pitney Bowes Bank.

What you've hit on is one of the reasons I wanted to come alongside Kurt. I think, it's an incredibly undervalued asset and the opportunity we have to bring value to our shareholders. Yes, I mean, that's a template that you have out there, and I'm sure folks will be calling us on that. So we're aware of it. We're studying it. And I would just say, just stay tuned.

Any more questions, Justin? Okay, great. I don’t see any more questions in the queue, so we’ll wrap it up. I want to share that my first 70 days at Pitney Bowes have been fantastic. I've learned that we have an amazing team here. I always recognized how great our businesses are, but it’s become even clearer just how exceptional our team is. As we build our leadership team and drive change and growth, I’m encouraged by the commitment of our employees, which I find quite unique given my experience as a consultant. It’s rare to see such dedication. I’m excited to discuss our path forward with our employees because once they understand our goals, I'm confident they will put in the hard work needed for the company's success. Shareholders should feel encouraged to know they have such a dedicated group of employees at the company. Thank you, everyone.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.