Good morning, and welcome to the Pitney Bowes’ First Quarter 2020 Earnings Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today’s call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce participants on today’s conference call: Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President, Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations. Mr. David will now begin the call with the Safe Harbor overview.

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2019 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations website. Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few operating remarks. Marc?

Good morning. I hope everyone is staying safe and in good health. Clearly, we're all operating in unprecedented times and unchartered territory. The COVID-19 pandemic has increased uncertainty around the world, impacting the accounting, business, supply chain and customer demand. It is important to note that businesses engaged in mailing and shipping, which obviously includes Pitney Bowes have been designated as an essential service by the Department of Homeland Security. The sending of mail and parcels is critical to our economy. In the first quarter, through the disruptions and distractions, Pitney Bowes processed about 34 million domestic parcels in our ecommerce business and 4.6 billion pieces of mail and presorts. Some of this came at a higher cost but we understand how vital service this is for our clients. This morning, I'd like to discuss our first priority, which is around health, well-being and safety of our workforce, clients, partners and suppliers. Then I will take you through where we stand today as a company, financially and operationally. Stan will then take you through how we are addressing the impacts of COVID-19 throughout the business, our first quarter results, and where we are through the end of April. For our part, we continue to take the necessary and required steps to ensure our work environments and employees are safe and healthy. We have business continuity plans in place that are designed to address various threats and vulnerabilities, including response to the pandemic, high absenteeism, and an emergency response methodology. We have specific protocols in place if an employee becomes infected with or exposed to the virus and we’ve adjusted our sick leave policies so employees can get paid but do not have to use their sick time if they're asked to self quarantine. Our senior leaders are communicating with their…

Thank you, Marc, and good morning. I share Marc’s sentiments and hope everyone is staying safe and in good health. And while there are a large number of things going on, our primary focus is the health, well-being and safety of our employees, our clients, partners and communities; remain our highest priority during these uncertain and unprecedented times. Before I turn to the quarter, I'd like to first spend some time drilling down into some of the areas Marc discussed. First, our liquidity position. We ended the first quarter with $730 million in cash and short-term investments on our balance sheet. Total debt is $2.6 billion, which is down $625 million from a year ago. Of our total debt, $1.1 billion is associated with our finance receivables. Taking this all into consideration, our implied net debt position on an operating company basis is roughly $0.8 billion. We have taken several actions and made significant progress in strengthening our balance sheet over the last few years, but especially over the last nine months. Since the beginning of 2018 we've reduced our debt by $1.2 billion; renewed our credit facility; and utilizing cash on hand and new issuance proceeds, we materially reduced our debt towers through 2024, putting our debt in a very manageable position over the next several years with no bond maturity to address until October 2021. We are also performing within our covenants and have stress tested these ratios under multiple scenarios to ensure we maintain access to adequate liquidity. We have drawn down $100 million of our revolving credit facility. We continue to have access to the remaining balance of $400 million and are in compliance with all of the financial covenants contained in our credit facility. We believe the draw down was the prudent thing to at…

[Operator Instructions]. Your first question comes from the line of Kartik Mehta. Please go ahead.

Hey, Marc. Good morning. I wonder, I know you gave some thoughts about what's happening in April. I'm just wondering, if you could give maybe a little bit more granularity around businesses, at least trends you saw in April? I know you provided some for Global Ecommerce, but I'd be interested in what else you're witnessing out there?

Yes, I'd be glad to. So if you start with SendTech, I would say that customers are starting to be a little bit more acceptable. So if you think about what is required to consummate a sale given that many of our clients were working at home, the first is, you got to be able to find them. So I would say in March what we saw the last couple of weeks, is that our contact rate with clients, read that as telephone calls that actually reach a client were pretty low. What you would see in April, is those contact rates were kind of back at reasonable levels at or above pre-COVID. If you look at contracts out, it was slightly below average, but again, stronger than March levels. If you look at how that comes to, I would say our written business, which is getting customer agreement, was better than end of March, our shift was better than end of March, our installed was consistent with the end of March and that's simply because the difficulty of getting service people on site to install the equipment. So that's kind of how April went up versus March. Let me pause there and see if that makes sense and I'll move on to Presort.

Yes, no, that makes sense. I was just wondering, Marc, in the SendTech business, is the biggest issue net adds for you currently, just because we might see increase in small businesses, unfortunately going out of business?

No, the biggest problem is the combination. I mean, actually if you look at our net adds in first quarter as well as April, read that as new customers, because of some of the new products that we have introduced, read that as online products, which certainly are appropriate, given the number of clients that are working from home, as well as our low end products. We're adding a fair amount of new customers. So no problem there. The concern over time is, what you said, kind of embedded in the second half of your question is, customer bankruptcies. So far, if you look at -- if you kind of unpack what stands out about delinquencies and the number of clients that we're talking about in terms of different terms. I would say, it's a de minimis amount relative to the size of the balance sheet. That being said, we're early stages in this. So I think it's -- the biggest vulnerability to answer your question is our installed base and customer bankruptcies. But again, so far so good and if you look back on 2008-2009 as Stan referenced, we performed better than the industry. So that's SendTech. Presort, I would say -- as Stan characterized it, reasonably well, if you look at the mix of our business, it's first class, it is 80%, that was kind of down low-single digits, which is better than USPS by a reasonable amount, and then marketing mail, which was down fairly substantially, read that as 40% to 50%. So those trends have basically been the same March to April. Not a huge difference. I think the interesting one and if you look at Global Ecommerce, if you look at our domestic network, it's operating at peak levels. So think of October through December, the holiday season and all of the stress and strain in ecommerce network and that's the kind of volume we're seeing right now and that volume continues to be growing. The domestic network is at capacity. If you look at the digital business, read that as the API business, we're continuing to see triple-digit year-to-year increases, which again makes sense. Where we're struggling a touch is on cross border, and what was probably not generally known as a lot of our cross-border traffic on commercial flights. So if commercial flights aren't going, then you have to go to a different kind of carrier, which is more scarce and more expensive. So that's kind of the April to May trend. Stan, I don't know if you'd add anything?

Yes, the only thing I'd add Kartik is, we saw the returns are also down, and obviously that creates a mix issue and you go through EBIT. When we hit the volume numbers, we don't normally share this but let me do a little bit on the month of April, with some preliminary kind of revenue. And as you saw the Global Ecommerce has some good growth in domestic parcel that's driving revenue, and we expect that revenue for the month of April, be roughly double digit. And Presort first class, as Mark said, the volumes are down low single-digit, but marketing mail is certainly feeling an impact and remember marketing mail makes up roughly 20% of our volume, and we expect that Presort for the month of April be down about 10%. Then SendTech, as you go through the impact on the volumes for -- particularly equipment sales and supplies, and that has an impact in the quarter. I want to emphasize a couple of things though. So when you look at SendTech, even a written business, so when you are signing new deals, we are doing new deals, but until you can get and install them, some portion of our portfolio requires installation for revenue recognition. So we have roughly about $10 million higher than where we were at this point last year, at the end of the quarter last year of revenue that's under contract that will be installed at some point in the future, as those sites open up. But we expect SendTech, driven primarily by equipment sales to be down roughly about 20%. So you kind of put that all together for PV for the month of April, we're kind of looking at down high single-digits, as we would have expected from the volume mix.

Stan, that's really helpful. And just one last question, Marc, on Global Ecommerce, as you continue to grow revenue and fortunately the brands are not going in the right direction in terms of profitability, I realize this quarter had some unique aspects to it because of COVID- 19 and some of the increase in expenses. But where do you stand in terms of what you need to get, in terms of profitability. In the past you've talked about number of parcels. I don't know if that's how you still think about it, or if there is another metric you're looking at, to have an idea as to when it gets to profitability?

Yes, I mean, number of parcels is the -- still the ultimate measure of getting to profitability. Underneath that, as Stan mentioned, the mix of the kind of parcels is becoming increasingly more important. So we have kind of a sweet spot in terms of volume for our network, it tends to be smaller parcels, but not too small. So there are six or seven different metrics, but far and away the most important one is the number of parcels. But embedded in that a lot of productivity measures within the distribution centers and as Stan mentioned, because of things like temperature checks, social distancing, moving volume around and candidly we had two sites that we brought online, and we still have the old site and in the first quarter. So there is a lot of moving pieces in the quarter. But we expect the profitability of that business to continue to improve this year and I'm still very optimistic.

Your next question comes from the line of Ananda Baruah. Please go ahead.

Hey, good to hear that you guys are good. Marc -- again, this could be for both of you. Two things, should we use -- I appreciate the April detail, Stan, that's really helpful. I know you're not giving guidance, but does it make sense or would it not make sense for us not to use those April quarter trends, as we think about the June quarter? And then you guys -- Marc, do you think it's -- is it your opinion that the June quarter will be the softest revenue quarter for the year? Then I have a couple of follow-ups after that. Thanks.

So let me start with the last question. I certainly expect the second quarter to be more challenged in the first. In terms of how the rest of the year unfolds, your guess is as good as mine, a lot of it depends on the states opening up and how the virus is able to be contained. So as we do our internal modeling, we do think the second quarter is a trough. But that's precisely the reason we suspended guidance, is our ability to give responsible guidance at this point as well. In terms of the color on April, I'm not going to tell you how to do your models. We felt in this particular moment, that transparency was important for our investors. So it's a data point and no I have a reasonable amount of confidence in our data points, a couple of weeks of a time when you get into to June, it just becomes too hard to predict.

That's totally fair and you guys mentioned during the prepared remarks $30 million to $40 million in lowering of the discretionary spend? Lot of moving parts, but does it make sense for us to remove that from the cost base?

Yes. Ananda, that comment was around CapEx explicitly. So as we look, we've told you that CapEx runs about $140 million, and we think within that there is a discretionary component. Now I want to reemphasize, we're still going to invest in the business and you see us doing that, but we're going to be prudent about it. So we may make different decisions on cash versus lease. But we believe that within that framework, we can extract about $30 to $40 million, which will preserve cash, as we go through. There are a number of actions we're taking overall, that will help us also conserve cash and reduce spend. So obviously we're reprioritizing the CapEx we talked about, certainly travel, conferences, all that is done. We are hiring freezes and some other and some other headcount actions. We're going to manage our marketing spend to align with where we see the demand, and obviously we're doing things like consolidating facilities within ecommerce and dealing with third-party spend. All designed to reduce spend and preserve cash, until we get some better clarity on how this will play out.

Got it. That's helpful. And I am going to -- Stan, I am going to throw one more anecdotal question -- an anecdotal business question, in the context of that you guys aren't giving any guidance, there's a lot of moving parts. As you guys laid out, is it still possible for the ecommerce margins in the December quarter to be positive? I'm just trying to develop a framework for ourselves here, kind of broad strokes kind of think about the kind of programs?

Ananda, so I appreciate the question. I mean it's very difficult to predict what's going to happen here given the uncertainty, which is exactly why we withdrew the guidance. But we're seeing strong volume growth here, particularly on the delivery side of the business. We believe that we'll get better at fulfillment and candidly, we saw signs of that. Our margins improved versus last quarter through February and then as COVID hit, this is a very labor intensive business, that has an outsized effect in the month of March. The team there has -- opex is actually down year-to-year, so a number of the actions that they've taken are taking root. We expect the contribution from their productivity actions to more than double in Q2. But the uncertainty around what's going to happen out, and particularly a lot of our clients are retail clients, and you're seeing what's happening every day, when you open up online and look at what's happening in the press, makes that difficult to predict, whether or not that will be positive exiting the year. What I am confident telling you, is that those actions, I think will take hold and will deliver improvement. I think we need to see the macro environment, how that settles out, is this a U, V, or some other shape of recovery.

Let me just build on that point. I mean it's -- I mean the wildcard in all this, particularly in the retail sector is how this shakes out. Broadly, what we're seeing is, those there -- those two clients that are kind of born on the net, that have digitally native businesses. They are thriving and conversely, clients that have more of a brick and mortar business model and you see it in the headlines every morning, are struggling. So that's the part, I mean I can kind of tell you how it feels inside of our business, but the broader customer environment is really hard to predict right now.

[Operator Instructions]. Next, we'll go to the line of Shannon Cross. Please go ahead.

Thank you very much for taking my question and thank you for all of what your employees are doing. I think those involved in the postal stream, whether the workers of the USPS or companies like yours are incredibly important right now and doing a lot of things that are sort of scary behind the scenes. So again, thanks. The question I had, I guess maybe more for Stan, just on cash flow, I know you gave some details. But I'm curious as we think about the potential for benefit from finance receivables, or how we should think about, in general, working capital, to the extent you can talk about it over the next few quarters, whether or not you think it'd be a source or use of cash and what the various segments might do? Thank you.

Sure Shannon. Thanks. So as we look at first quarter, we view the majority of this as timing, $17 million versus prior year. But $30 million is timing within 2020. So we expect that we're going to get that back. I think as you consider free cash flow, it's important to keep in mind that one of our strengths is the recurring nature of our revenue and resulting cash flow, in particular in SendTech. So the SendTech revenue is roughly two-thirds recurring in nature and that recurring stream is actually highly profitable, so roughly three quarters of their profit is recurring in nature. Now equipment sales will be impacted and I'll get to your point on finance receivables, because its an important one, and supplies to a lesser degree. But those streams provide good reliable cash flow. Presort Ecommerce and more volume-dependent. When you look at Presort, we talked earlier about -- there's clearly an impact of marketing mail, but first class mail. Remember, most of our clients are large banks, insurance companies, they still need to get those invoices and statements out and first-class mail is down low-single digit. And as I think about the year, let me go into kind of a headwinds-tailwinds and let me start with the tailwinds. So that $30 million of timing we expect to get back through the year, and then the CapEx, we have a good line of sight on $30 million to $40 million of reduction, and that will also improve free cash flow. And then as you saw from Wheeler, we originated just around $3 million in the first quarter, and we see obviously a challenging economic environment. Given that, we expect that those new originations for the year will be no higher than $25 million or so. So that's…

Thank you. That was very helpful. I guess my next question is on the write-off that you took in ecommerce, can you give some more specifics on what drove that and what specifically you've considered impaired? Thank you.

Sure. If you go back and look at our Qs over the last several quarters, we've disclosed that we are below 20%, which is kind of our bright line on coverage. And what we looked at in the first quarter was, the weakness in the performance and COVID exacerbated that. So as you look at COVID, I think, it had an outsized effect here in ecommerce. So that became kind of a trigger point for our valuation. Now we did this with a third-party firm and then looked at scenarios out through the year, and this changed in trajectory due to the current macro environment, as well as the weaker than expected profit performance, is really what drove that action in the first quarter. Now, we still have confidence in the long-term model, but the ramp of getting there, we think has shifted a little bit and the difficulty of predicting how COVID will alter that, was part of the challenge of looking at that in first quarter. So we've come back. We did the analysis, and you saw we took a $198 million impairment. If you recall, we had just over $600 million of goodwill on the balance sheet for Global Ecommerce. As a reminder, it's obviously a non-cash event, and we still are confident in the long-term prospects for our Global Ecommerce business.

Your next question comes from the line of Allen Klee. Please go ahead.

Yes, hi, For the new accounting for credit losses, could you explain that? And then the amount that you took a reserve of $0.05 per share, can you kind of explain what time period that's covering? And do we, is there any reason we should maybe think that this time going from 1% to 2%, 2.5%, this time it might actually -- the charge-offs might be a little higher than that? Thank you.

Thanks, Allen. So let me, let me take that one. So CECL, for those who may not have as much experience with this as the current expected credit losses, which is a new accounting standard that went into effect in 1/1. I would direct you to the charts that we produced. There is a chart in there that breaks down the CECL impact and how much went through retained earnings versus how much was in a quarter. But let me go through that now. So obviously Pitney Bowes has a financing business, which includes captive leasing as well as postage loans through an unsecured line of credit and third party leasing. We offer that through a PV Bank. Similar to other banks and companies of financing arms, we implemented CECL accounting standard effective January 1st, So when we implemented this, the standard calls for a 1/1 opening balance adjustment that goes to retained earnings. We recorded a $25 million credit charge reserve in retained earnings on the balance sheet. It's important to know, at that time, we looked at our portfolio and we've built a model that we've been through with our external auditors, and that model, uses a publicly published recession factor in it. That recession factor at the time was 30%. Now that resulted in a retained earnings charge and no impact to the P&L of $25 million. Now when you go, that becomes a 1/1 opening balance on the reserve. So then what happened, in the period is that, there is a number of factors. You have to look at this every quarter as you go through, and when we did that and we ran our model, the recession factor driven by COVID went from 30% to 100%. That change drove $11 million of impact in the…

And at this time, there are no further questions.

Great, thanks, operator. And listen, let end where I began and that is to -- hope everyone on the call is well obviously. Incredibly difficult times, I would like to acknowledge Shannon's generous comment about our people and its not just true with Pitney Bowes team, as Shannon alluded to, it's just a remarkable in this country that people that are doing incredible work each day, to support it has kind of been under difficult and sometimes really dangerous circumstances. So appreciate the call Shannon. Also on Kartik's question about new clients. I do see this as an opportunity to help clients and conceivably pick up some new clients, both in SendTech, because of our online offerings, which are terrific in general, but really terrific at this moment, but also and Global Ecommerce where as I said, domestic networks are operating at capacity, and in many instances and some of the others in the market will not be able to fulfill existing client demand. Moments like this are always opportunities for market share to change hands and our largest competitor in SendTech has taken 30% their team off the field. So there is lots of moving pieces. So let me conclude, over the last several years, we've taken significant strategic actions to strengthen our portfolio of products and our balance sheet for long term. We've executed on the sale of Production Mail, software solutions, as well as many other smaller divestitures in international markets. These actions collectively simplified our portfolio and also focus this on mail and shipping where we are underpinning financing. We've also leveraged and taken management tax reform to repatriate cash. We've used a combination of the strength of our balance sheet, reduce debt and our financing terms in the near term are modest until next year. We're going to continue to invest in adjacent spaces, because we think that the markets that we're pursuing -- still over the long-term have attractive end user growth characteristics and good opportunity to make profit. Like everyone else, we're going to feel the effects of COVID-19, but everything we've done for the last several years to strengthen our balance sheet, to strengthen our portfolio, to reposition this business, put us in a much better place, to weather the storm and our focus is to fulfill our roles in the central business and do the necessary things on a daily basis to continue to move mail, move parcels, finance small businesses, but importantly to come out of this crisis even stronger than before. So with that, I will close today's call, the conversation on CECL and some of the other accounting stuff, as commented, Adam and Jim will be available to take you through that. So again, I hope everyone is well, and we'll talk soon. Take care.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.