Good morning, and welcome to the Pitney Bowes Second Quarter Earnings Conference Call [Operator Instructions]. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today's conference call: Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the Safe Harbor overview.

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2018 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations website. Now our President and Chief Executive Officer, Marc Lautenbach, will start with a few opening remarks. Marc?

Good morning. And thank you for joining the call. Overall, we turned in a solid performance in the second quarter, making progress against our strategic initiatives and improving from the start of the year. In particular, our commerce services top line performed very well and exited the quarter with good momentum. E-commerce’s domestic parcel volumes through our network grew 42% in the second quarter to 35 million packages processed. Additionally, SMB revenue performance improved sequentially and had good momentum heading into the third quarter. At the end of May, we hosted Investor Day. At that time we laid out our long term plan for continued top line growth and expansion of shareholder value. I won't spend this morning rehashing the presentation. However, there were several significant key messages that we delivered that I do want to reinforce and start providing the signpost to which you can measure our progress. The first is that we will continue to grow revenue and the growth rate will improve. In the second quarter, revenue grew 2% when adjusted for currency and the exit of direct operations in six smaller European markets which we announced earlier this year. The portfolio continues to shift to growth, particularly around shipping which comprised 35% of our revenue this quarter. The growth in shipping is largely attributable to our commerce services group which contributed 48% of our overall revenue. As a reminder, two years ago commerce services comprised less than 30% of our portfolio. At this rate and pace this segment is well positioned and in line with our long term plan of being nearly 60% of our overall revenue. Our second key message was around the path to profitability in the global e-commerce business. Lila Snyder, the President of our Commerce Services Group lay out the strategy which…

Thank you, Mark. And good morning. Our second quarter performance was a substantial improvement from the start of the year and positions as well for the second half to achieve our full year targets. Before I discuss the details of our second quarter, it's important to note a few items. As in the past, unless otherwise noted, my statements going forward will be on a constant currency basis when talking about revenue comparisons and on an adjusted basis when talking about earnings related items, including cash flow. Reconciliations of all non-GAAP to GAAP measures can be found in the financial statements posted with our earnings press release and on our Investor Relations website. Also as a reminder, results in both current and prior periods reflect the new lease accounting standard, or ASC 842, which was implemented on January 1st. We have posted a file on our Investor Relations website with the updated recast financials. Additionally, earlier in the year we announced the sale of direct operations in six small European markets which did not qualify for discontinued operations treatment and as such prior year has not been recast. Turning to our results. The portfolio continues to shift to higher growth markets, commerce services comprised 48% of revenue which is the third consecutive quarter where it is the largest component of our overall revenue. Our shipping related revenues made up 35% of total revenue in the quarter and that contribution continues to grow. For the second quarter, revenue totaled $861 million, which was flat to prior year. When you take the market exits into consideration, revenue grew 2% from prior year. Looking at revenue by group, commerce services grew 14%, SMB declined 4% when you exclude the impact of the market exits and software declined 20% from the prior year. Adjusted…

Thank you. [Operator Instructions] And our first question here will come from Shannon Cross with Cross Research. Please go ahead.

Thank you very much for taking my question. I guess, my first is just on cash flow. I understand it's a back end loaded year. But can you talk maybe a bit about you know what the key drivers will be to be able to meet your cash flow target for the year? And then I have a couple of follow ups. Thank you.

Sure. Good morning, Shannon. So first as we looked at first quarter and second quarter if you look at the first half in total and compare that on a year-to-year basis you know, our attainment is roughly two points below where it was last year. And if you look at the back half of the year and compare, I think it will become clear that this is a doable target. Last year we did nearly $250 million of free cash flow in the back half of the year and to hit the midpoint of the guidance, we need to do about $180 million or so. But here are the drivers. First and foremost, net income as we expect to continue to improve as we go through the back half of the year. Then the other big driver would be working capital. We mentioned accounts payable specifically in the prepared remarks. And I think if you think about the business shifting more and more to the back end of the year that will make sense that accounts payable will also improve as you go through the back end of the year. Now we continue to work on things like DSO and cash recognition. So we're confident our ability to deliver that free cash flow in the back half of the year.

Okay. And then when we think about your cash - your cash balance, how much cash do you need to run the business. And basically I'm wondering you know mentioned I think using some existing cash to pay down debt. And clearly I assume you're going to try to roll the debt in various ways. So you know, what do you need right now, given the changes in your business model, sort of you know, from an inner quarter standpoint to make sure that you have enough to run the business?

Sure. So let me give you a feel for the overall cash. So today we have cash and short term investments of 830 million. That kind of breaks down of 770 in cash and 60 in short term. If you take a look at that, there are different components of the cash Shannon. First, the cash that's associated with PB Bank is around $250 million right now and that is not accessible for parent needs. We can use that cash to fund our third-party financing initiatives. If we take a look at what we need from a working capital basis, we basically look at around $300 million to run that business and use that. Now one other aspect of this is the amount of cash that's in the U.S. versus non-U.S. Right now we're running about 80, 20. That will change and it goes up and down. We continue to work in clean up intercompany loans and things like that. As a matter of fact, we did some work intercompany loans this quarter, repatriated an additional $24 million and that was some great work by my Tax and Treasury team. So we continue to work that cash balance, but roughly you need about working capital of around $300 million worldwide.

Great. And then there's this one last question for Marc. From a geographic standpoint, clearly a number of companies have called out weakness in Europe. I was curious I know you sold off some of the smaller countries and moved to distribution. But just in general, maybe if you could talk about you know, what you're seeing in end markets and you know sort of obviously there's been a pretty good response to your new products. So I'm just curious if you've seen some of the concerns that - that others have talked about? Thank you.

Yeah, I would bifurcate between macro conditions and micro conditions. At a macro economic perspective, I see the same thing what everybody else sees. You know, you see from a European perspective no concern, deeper concern candidly in the U.K. as you get closer to Brexit. Indonesia, obviously the issues that are going on in China and candidly on a bilateral level between China United States are concerning. So those are the macro economic things we see, pretty much the same as everyone else. From a microeconomic perspective, from a Pitney Bowes perspective, our international business was minus 3%. So pretty darn good performance. And as we contemplate the next several quarters, that performance coupled with new product it gives us the degree of optimism that we will weather whatever macro economic storm occurs.

Thank you.

And we'll go to a line of Ananda Baruah with Loop Capital. Please go ahead.

Hey. Good morning, guys. Thanks for taking the question. If I could just, just sticking with the business environment questions, Marc, it doesn't sound like you guys feel like you're seeing you know sort of the sales pressure, demand pressure intensifying. Can you just give us some context about what you're experiencing the quarter was?. You know just from like a week by week basis with regards to demand environment? And I have a couple of follow ups. Thanks.

Yeah, it's a good question. And you know candidly as we exited the first quarter we pointed towards momentum as we exited March into April. I would say that same trend continues in the second quarter. If you look at how the second quarter evolved, and I put software off to a aside for a second because I think that was - those issues were internal to us. The quarter accelerated both from an SMB, as well as a global e-commerce perspective. SMB partially because of the new product, partially because some pretty clever marketing programs, as well some very good sales execution you know had, I would say increasingly good performance as the quarter evolved global e-commerce. Again, I think that they performed well. But you know, we're just camped out in global e-commerce in a market that's got such strong growth to it, that you know we're doing better than market for sure. 42% increase in parcels through our network is a heck of a lot better than the network. But the answer is the same, is that the demand environment for us improved throughout the quarter. And candidly I think that same trend will exist throughout the back half of the year. We're very confident the back half of the year from a top line perspective.

And could you just provide a little more context with regard to the remarks about adding capacity and the volume that you're actually seeing in China?

Sure. So the added capacity takes on a couple of different dimensions. We've added a couple of different nodes to our network. We've added four nodes to our network and we've consolidated replace kind of upgraded another two. So that's to both consider increased geographic presence, which is important for the economics of that business, but it's also if you look at our sites you know, candidly they need to get bigger as they accommodate more volume. So that's how the network will continue to evolve or add some sites. We've got two important nodes that are coming on online in the East Coast and then one in L.A. that will be important for peak. So you know, we continue to invest in demand there and again we do that ahead of demand and we do that because you know, if you think about when we bought the logistics [ph] business and hadn't done that, you lose a lot of clients because you can't accommodate service level, so you've got to build that network in front of - in front of demand. So that's kind of the basic personality of the investment and the dynamic of that business. China, to answer your question China inbound, again notwithstanding the tensions between the two countries China inbound is a very fast growing business for us and one that were - we talked about $100 million businesses in the Analyst Day in May. This will be our next new $100 million business

In terms [ph] of context. And just last one for me is at the Analyst Day you guys gave a lot of good context around plans for you know sort of handling the debt portfolio holistically. Can you just give us an update there, maybe thoughts sort of how you're thinking about it? Yeah, I think it were – this is back in May, and maybe any context you'd give around timing at least to the higher level would be helpful too? Thanks.

Sure. First, we remain focused on the balance sheet. We highlighted this in our Analyst Day and you see as we walk through the rest of our performance here. If you take a look the first step is going to be our credit facility. Now that goes current in January of 2020, but our intention is to renegotiate that in the back half of 2019. And so that would be the first step as we go through this. And we do have several tranches of debt that are maturing over the next couple of years. It's our intention to pay down where we can opportunistically and then to proactively refinance the remainder. We have been working with our bank group for a number of months with the Treasury team and we're structuring a proactive refinancing plan that includes the diversity of funding sources and we'll leverage the capital markets as appropriate. So I think what you'll see is that we do this earlier for the credit facility and then we take a proactive approach to the debt maturities.

That's very helpful. Thanks a lot guys.

And next we'll go to the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Yes, good morning. And thank you for taking the question. So obviously I know you guys are pleased with the parcel volumes up 42% of revenue in double-digits. So I'm just wondering how should we think about the investments in the market growth opportunities, marketing programs and other initiatives. So just wondering, you know, that's one point that should we expect maybe a moderation in those investments?

So, first on the investments, I think you have to step back and look at where we're going. And if you look at - you cannot drive 42% volume growth with investing in a current quarter. This comes from a period of time of adding capacity, of adding the right marketing programs and building out the right types of offerings for our clients. If you look at that clearly it's resonating in the marketplace with 42%. But that happens over time. I think there are a couple of important points here. First, we launched over 60 new clients in Q2, so this is a big deal as we go through. We talked about our last 12 months in the last call. We've had better churn metrics. We're starting to see more cross-sell across our offerings and I think as we look at that Anthony, we're looking at what does it take to continue to grow this business to scale. So we're going to continue to make those investments. What you will see though is as we gain that scale you'll start to see the improvements in the economics and as we go through the back half of the year, I think you should expect that you'll see those improve over time.

I just add a point here. I mean, I think about this slightly differently, I don't think about when we're going to stop investing, I think about how much of this market I can capture. So this is a market that the economics are driven by scale. So the more scale the more volume I can put in my network, the more profitable ultimately this will be. So you know, as I said, it's unlikely that we're going get 42% volume growth every quarter. But candidly as long as you see that kind of demand and you're winning in the market, given how the economics of this opportunity works, you're going to do it. I'm going to do it, because you know there's first mover advantage and this is network economics and it's you know, at its core. So the more full the trucks can be, the more density you can have in particular lines, the more profitable you will be. So I think about that question in a slightly different context.

Got it. Got it. And I did not imply - mean to imply that you would stop investing. I was just wondering as far as kind of where we should see a pickup in profit…

When the demand begins to moderate.

Right, exactly. So as far as your guidance, just wondering what is kind of the embedded expectation for overall parcel volumes for the full year in 2019?

You know, I think as you think about this for the year end guidance. First, we're reaffirming our full year guidance. And that has the revenue growing you know, 1% to 3%, adjusted EPS of $0.90 cents to $1.05 and free cash flow 200 to 250. Global e-commerce is certainly a important part of that. And again as Marc said, we don't expect that the 42% is going to necessarily continue through the year. But we are expecting a healthy demand through the back half of the year and that's going to take place in just the physical parcels. But candidly we also expect to see increases in our print label through that part of the business. And as we grow here and add new clients we expect to get the benefits of that scale. So this - certainly global e-commerce is going to play an important part and I think that we'll see improvement as we go through the year.

The long term economics were - configure that business growing parcel volume 25%. I would just say as you point to the back half of the year, now stand captured the dynamics. Well, the only other thing I would point out is you know, we have wrapped on the currency issues from last year. So if you think about 2018 the dollar became disproportionately stronger in the second quarter. So the cross-border business had been a drag on our overall results. And it's hard to say that when that global e-commerce grows 19%, but cross-border was a drag on the overall results in the first half. I don't think the cross-border business is going to get crazy from a growth in the second half. But it should be less of a drag for sure.

Okay. That's very helpful color. And then on the Presort side of the business. So – and you touched on this already in your remarks, I just wanted to get a little bit more clarification. So you brought in a consultant to address some of the issues with profitability. Has that initiative been completed? And are there any other key learnings from that initiative that you want to make with – maybe want to touch on?

The initiative is not complete. As we start - as you know these when you're dealing with this amount of labor in this type of market, I think it's important to step back and say it's not a point in time you're going to always drive productivity. I think if you step back, we clearly have progress in Presort. I met with the team earlier this week and if you take a look, revenue grew 4.4% and 2% volume growth. We saw an EBIT margin improvement of nearly 2 points year to year and a point quarter to quarter. So our work on these - and remember these areas include operations, scheduling, dispatch, logistics, pricing. We expect that we'll see continued improvement in the back half of the year and our arrangement with this consultant ensures that they participate in that and continue to help us drive that.

I would say the diagnostic is mostly complete although we continue to learn more. I would take a step back and you know what have we learned. I mean, this is a business that has been really successful for a decade and it's been successful by managing two basic variables, one is volume through the network and the second is five digit capture. Those two variables continue to be important. But what happened over the last 12 or 18 months is the labor market tightened up and transportation expense got increased. So the broader lesson is you've got to keep your eye on array of variables as macro economic, in particular labor and transportation conditions evolve.

All right. Thank you very much and best of luck.

And our next question will come from the line of Allen Klee with Maxim Group. Please go ahead.

Yes, hi. With Wheeler Financial can you tell us how much money was put to work providing financing during the quarter and do you still - and how much is this - do you still think the same amount can be put to work for the whole year that you originally thought? Thank you.

Yeah. Thanks, Alan. So just a reminder for those maybe you haven't aren't as familiar, Wheeler Financial is a subsidiary of the Pitney Bowes bank that we've set up to help drive small to middle market clients acquire assets they need to grow and expand their own business. So this would be third party lending, that could take the form of loans or leases. So we've started this and we've been very deliberate and I use that word specifically we want to do it right. We want to do it with meeting all the regulatory requirements, the right item for our clients and going out. So while we have haven't started writing this in Q2, we have not written a lot of new business yet. But we are encouraged since launching Wheeler you know the pipeline of deals has grown nearly 5Xs [ph] over 125 million now for the overall pipeline. So we're going to see how the progress goes in the second half of the year. What I would tell you though is that we are going to be deliberate. We're going to do deals that make sense. We've walked away from deals that don't make sense financially. We're looking to address the needs of our clients and do that in a proactive way. So we're going to see how the back half of the year plays out. I think we've gained some momentum here going through Q2. We're encouraged by the pipeline and encouraged by the first set of deals that we've announced.

Good. Thank you. And then shifting to global e-commerce. Can you expand on the comments of margins down to a mix shift to faster growing areas. What that means and does that have any implications on your longer term margin guidance for the segment? And then one other thing on the segment is, you talk about the domestic market and then cross-border. Can you help size us of how much of global e-commerce is domestic versus cross-border and the growth rates of each one? Thanks.

So the margin component here. So if you take a look at margins you know, we step back. We had good volume growth here and delivery of 42%. We talked about the investments that we've made. But we are seeing a mix in the business as was contemplated in our Investor Day presentation. You see that here with what we've announced delivery far outpaced the higher margin returns business and cross-border improved but it's still a drag. So that's kind of the mixed dynamic that you're seeing within the business is delivery which is the lower margin has far outpaced returns and cross-border. We expect that that's going to ebb and flow. But there are a few different items that I think you need to take into account. First, we are starting to see more cross-sell within that. And what I mean by that is, lining up shipping and the deliveries with fulfillment and selling them as bundles. That cross-sell as that grows I think has two things. One, we serve our clients better. They get a more end to end experience. Two, it also makes it stickier and allows us to build the margin profile across that business. So we expect that margins will improve as we gain scale through this, but as we do look we continue to see that returns is not growing as fast as delivery is. And that will ebb and flow through time. And your question about domestic versus cross-border, we haven't put out the exact sizing on that. What I would tell you is, we look at where the opportunities demand is and that we go after that demand. So China inbound, you know, Marc shared that we expect that could be our next $100 million business. That's growing. We're going to continue to go after that demand, but we're also doing domestic and we look at domestically added over 65 new clients this quarter in total. We're going to go where that demand is and where we can best leverage our network. Remember even a cross-border comes in and lands within our network domestically, that's why the two facilities Marc mentioned in California and on the East Coast are so important. So that's how I'd answer that question Alan.

I would say also that the lines were a little between cross-border and domestic. You know the example that Stan gave about China inbound I mean, candidly that's not - you can recognize that neither of the segment. So thought that we're trying to be opaque here. Its just it want to be a very useful metric to put out there.

Okay. Thank you. And then when you were regionally - in your - I think your fourth quarter of ‘18 earnings call when you gave your ‘19 guidance, you said that if the China tariffs got increased from 10% to 25% that would have something like $0.04 or $0.05 impact to your - to your guidance for the year and then that has happened. So is that going to have an impact on your full year guidance or do you think that you're offsetting that through other things?

So first thanks for the question on the tariffs. Obviously it's been a dynamic environment here and it has changed, you are correct. What we said back in the fourth quarter was the tariffs we had assumed in our guidance were based off the 10%. The 25% percent tariffs are in effect, a good chunk of our business here. And in fact with this latest announcement of the next tranche of 10% tariffs that add on to that, we think that the total impact from tariffs right now is going to be somewhere in the neighborhood of $0.04 to $0.05. So higher than what was originally assumed in our guidance. And as we look at that you know you've seen what we've done through the first half, we are doing - working with our partners to try to mitigate that and offset it, but that is a headwind as we go into the back half of the year. If we take a look at some of the items that are doing, working with our supply chain partners, it is relocating the source of supply that's coming in. We did some strategic items around inventory and then we've looked at alternative suppliers. Some of these are short term and will help us and ‘19. Some are longer term that will help us in 2020. But it's clearly going to have an impact on the year and that headwind is going to be $0.04 to $0.05 versus an original assumption of $0.02.

That as we reaffirm our guidance.

Okay. Thank you so much.

And now we'll go to a follow up question from Ananda Baruah with Loop Capital. Please go ahead.

Hi. I appreciate it. Hey, Marc and Stan, just in the prepared remarks you had mentioned something about M&A, I believe you said kind of inorganic opportunity. Is there an opportunity or I would guess that I would love, just in context around the broader opportunity in shipping to be able to add scale over time in a material way? What does the landscape look like there? Thanks a lot.

Yeah. So first of all, you know I would say inorganic could be an acquisition, it could also potentially be a joint venture, or rather take other forms you know, beyond a pure acquisition. We've worked candidly at the landscape of potential acquisition targets for shipping. There is some decent targets out there. I hate the prices. So you know, right now I would say, we're not a likely buyer given these prices if price environment changes and the risk of some of these acquisition changes you know, we'd reconsider. But you know, along with our banking partners, we've taken a pretty robust look at what's out there. And you know while we're open to it as I said in the remarks, you know intellectually not these price levels.

Got it. Is there anything that you can share just about how their price - you feel like they're elevated above normal or are they sort of like typical, but you'd want to see it come in?

Yeah. So let me double click if I could. I mean, I would say the prices are high as you contemplate what's going on in the transportation logistics market overall. So you know there's a lot of demand. We probably could have gotten through that, but there's a second dimension which is more concerning that is the labor laws in particular, as it relates to many of the logistics companies are in flux. So that makes it really hard to contemplate the risk associated with any particular acquisitions. I'd say the prices are high. I'd say the risk because of some of the things that are going on in the legal world has become really hard to assess.

That's helpful, Marc. I appreciate it. Thanks.

And currently we have no further questions in queue. I’d like to turn the call back over to Mr. Lautenbach, if you have any closing comments?

I want to clarify one item. So Alan yes, about the tariffs, just so I'm clear, we are reaffirming our full year guidance, knowing that that tariff impact is $0.04 to $0.05.

Thanks. So listen I'll go back to the other questions. If you had to sum up the quarter in a single word, the word I would choose momentum. Momentum increased throughout the quarter. As we look at the month of July we see that momentum continue to increase. If you double click on the complexion of the business, SMB is got strong momentum, partially because of the product announcements and the pending product announcements, partially because a higher backlog that Stan pointed to as we exit the quarter. And I would say some pretty darn good sales execution around the world and some marketing programs in particular some marketing programs that are aimed at competitors, that are working. Within global e-commerce, listen it's a fantastic market. We're well positioned you know, within - you know what I would characterize as relatively small niches within the global e-commerce market, but niches that we think we can win in, niche as importantly that we can win and be profitable in over time. And you know candidly as we get to the back half of the year, now if you think about the revenue performance of the global e-commerce business you know going from 9% to 19% first quarter to second quarter, we see that momentum continuing into the second half of the year. I really like how we're positioned. Now software, candidly was disappointing second quarter, that said they've got a robust pipeline of deals in the second half of the year. We're certainly unfortunately accustomed to you know software having some up and down quarters but they've got a very robust pipeline as we get into the second half of the year and we continue to be very confident about our channel execution there. So all in all no good quarter, but excited about the momentum that bring in the second half. With that, we'll close this call and we'll look forward to talking to you all soon. Thank you.

Thank you. That does conclude the conference for today. Thanks for your participation and using AT&T Executive Teleconference. You may now disconnect.