Good morning and welcome to the Pitney Bowes Fourth Quarter Earnings 2022 Results 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 your participants for today’s conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Ned Zachar, Vice President, Investor Relations. Mr. Zachar, will now begin the call with the Safe Harbor overview.

Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes and I’d like to welcome everyone to the call this morning. We very much appreciate your interest and participation. Part of my duties include covering the Safe Harbor information for these calls. Included in today's presentation are forward-looking statements about our future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. For more information about these risks and uncertainties please see our earnings press release, our 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 update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures that are used in the press release or discussed in our presentation materials you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our website. Additionally, we have provided a slide presentation and a spreadsheet with historical segment information on our Investor Relations website that summarizes many of the points we will discuss during today’s call. You may have seen that one of our shareholders recently announced director nominations for the 2023 annual meeting. We issued a press release on January 23 with our response and we will not be answering any questions relating to the nominations on this call. Our format today is as follows: Marc Lautenbach, our President and Chief Executive Officer, will begin with opening remarks which will be followed by Ana Chadwick, our Chief Financial Officer, who will provide an in-depth discussion of our financial results. I’d like to now turn the presentation over to Marc. Marc, the floor is yours.

Thanks, Ned and good morning everyone. I appreciate everyone joining our call this morning. For the quarter, revenue is flat on a comparable basis after adjusting for currency, a divestiture, and a revenue presentation change that Ana will detail shortly. EBIT grew slightly and cash flow for the quarter was up strongly. SendTech and Presort continued a solid and predictable performance. In aggregate, the two businesses were essentially flat from a comparable revenue and profit perspective, and both businesses made good progress shifting their portfolios to growth. In Presort, this means marketing mail and bound to printed matter and for SendTech, shipping revenue. In North America SendTech, over 40% of our revenue is now coming from new products. They include our most recent award winning IoT device, the Cube, Mail Station, and [parcel point] [ph]. These products sit along our SaaS offerings, including PitneyShip and PitneyAnalytics. This is a direct result of investments we have made in this business. Margins at Presort continue to improve and are again within the long-term model. Again, these improvements in margin are a direct result of investments we have made in automation in the Presort business. In aggregate, these two businesses continued to perform well in a choppy market. I would also be remiss if I didn't add our financial services business performed very well. Finance receivables, an important harbinger of future growth, grew for the quarter and credit losses were minimal. Deposits, collections, and funding activities were all very well managed. In GEC, the headline is this. We made substantial progress across many important write-downs, but we're expecting to make even more progress. Specifically, our customer satisfaction increased 23 points over the course of the year. In the quarter, our network performance improved over 10 points on a year-to-year basis. These items helped…

Thank you, Marc, and good morning everyone. Before I begin my financial review, I'll note that the year-over-year revenue information I'm going to discuss is on a comparable basis. Adjustments include the impact of currency, the border free disposition effective as of July 1, and a change started in the fourth quarter due to a contract modification with USPS in the presentation of certain revenue from gross to net of pass-through shipping costs for our digital solutions. This revenue presentation change primarily affects Global Ecommerce and to a lesser extent SendTech. The change does not affect the profitability of those revenues. Also, unless otherwise noted, I will speak to other items such as EBIT, EBITDA, and EPS on an adjusted basis. The following is a high level review of the year-over-year comparison of our fourth quarter results. Total revenue for the quarter was 909 million, which is flat on a comparable basis. Gross profit for the company was 288 million, compared to 283 million for the same period last year, a 2% increase. Gross margin was 32%, up from 29% last year. EBITDA was 88 million, down slightly from 89 million a year ago. EBIT was 49 million, up from 47 million a year ago, which is a 5% increase. Interest expense was 37 million, up from last year's 35 million level. Corporate expenses for the quarter were 63 million, up 19 million from prior year, driven by the timing of variable compensation accrual. For the year, corporate expenses were 2% lower. Adjusted EPS was $0.06 in the quarter, the same as prior year. Turning to cash flow. GAAP cash from operating activities was 167 million in the quarter, compared to 85 million in 2021. Free cash flow was 108 million, compared to 39 million last year. The improvement in…

Thank you. [Operator Instructions] Your first question comes from the line of Matt Swope from Baird. Please go ahead.

Good morning, guys. Could you talk a little bit further on the Global Ecommerce side and how you're looking at strategic alternatives for that business? I think, I can hear the disappointment in another negative EBITDA year, would you be open or consider selling part of the business, shutting part of the business? And I know you talked about being EBITDA positive this year, but what are other options you might explore?

Yes. So, appreciate the question. The first thing is, we did have the expectation to do slightly more. It would not be accurate, however say we're disappointed. There's a lot of progress there. So, I'd start with that. In terms of alternatives that we work for not just Global Ecommerce, but for any business, what I've said for 10 years is if a business is worth more to somebody else than it is to us then it's a serious offer. We would certainly contemplate that. And if you look at the last 10 years, whether it be divestiture of the software business or [indiscernible] or other assets, [we've hold through] [ph] that. Most recently, the divestiture of Borderfree, I think, speaks to your question. That was a portion of Global Ecommerce. It was something that we like the business. We continue to be in cross-border, but it was worth more to globally than it was to us. So, we would look at any alternative that we think unlocks value for our shareholder whether it be shutting something down, selling something or indeed selling the whole business, but we do think, as I said, that business continues to be a coherent part of our portfolio and we're optimistic about how we go forward.

I appreciate that, Marc. Thank you. And would you mind commenting further on SendTech? You talked a couple of interesting comments I thought. One about 40% of your sales coming from new products now, but also seeing declines last year in finance rentals and supplies that were partially offset by shipping. Can you talk about some of the dynamics in SendTech and how you see that on a unit basis for 2023?

Sure. So, I mean there's two different currents running through the SendTech business. The first is the Mail business, which continues to experience secular decline, that hasn't changed. The other current is shipping revenue, which continues to be a good market. And aggregate those two markets together are about a $6 billion business that's growing. So, our expectation is shipping revenue becomes a higher and higher percent of the total business and continues to grow. You know Ana said, 20% that those two dynamics begin to cancel each other out. And as you look at SendTech overall, it was essentially flat last year. From a unit perspective, equipment revenue is probably the easiest way to think about that. Equipment revenue was up low single digits for the quarter and for the year. That's kind of the confluence of those two dynamics coming together. So, I like that business. I would say SendTech and Presort together provide balance for the business in our balance sheet as we continue to improve Global Ecommerce.

And Mark, when you say Mail continues to experience secular decline, could you quantify that secular decline number at all about where you guys continue see that?

I mean, so First Class Mail is, I would say down high-single-digits, you know 5% to 10% depending on the quarter, marking Mails down a little bit less. So, it's – I would say single-digit declines depending on which segment of mail.

That's great. And then just a last one for me. Ana, could you comment on just expectations for free cash flow for 2023? I think you gave us pieces, but just curious from your model how that looks on a total free cash flow basis for 2023?

Yes. So, as you commented, I gave you the pieces there on EBIT CapEx, interest, and tax. The hard one to call here is a little bit around working capital and that's why we gave you the pieces. As the business moves to seasonal adjustments greater in the fourth quarter and calling out the movements in working capital is a little harder. That's why we moved the [path here] [ph] to give you the components.

Got it. Thank you both for your help.

Your next question comes from the line of Anthony Lebiedzinksi from Sidoti & Co. Please go ahead.

Yes, good morning and thank you for taking the questions. So, first on GEC. So, you talked about that the mix overall had a higher than expected volume of light weight parcels of hurting profitability or maybe less than expected, I guess, this is a better choice of words, but was this really, you think more of a result of new client wins that these new clients that you signed on, did that have most significant impact from this or was it just a mix of old clients just shipping more light volume? Just wanted to get a better sense of that.

That's great question. So, there's a couple of things that are true. We had a very successful quarter in bringing on new clients. I would say those new clients did have a slightly lower weight than average. However we plan for that. What was different than what we expected is from our existing customers, think of that as same store sales for lack of a better term. In weeks 49, 50, and 51, read that as the last couple of weeks of the quarter, we didn't get as much volume from them as we expected. We still got more volume than we had the previous quarters and good performance, but we're expecting slightly more. So, if you look at same store sales, they were – we got good increases from many of our clients. It was just slightly less than we expected those last two or three weeks.

Understood. Okay. So, now looking forward, when you're going out and targeting new clients, are you going to be more, kind of diligent as far as who you assess as to who you, kind of bring on to make sure that you have a better mix of heavier weight parcels? Is that how you're thinking about managing that or maybe could you just talk a little bit more how are you thinking about trying to be more profitable in GEC?

Sure. So, one thing that I understand that's really important and I don't want people to lose sight of is, even the light weight parcels were positive from a gross margin perspective. So, as long as our network is under capacity, we'll take that volume. It adds to profitability, it's accretive to absolute margins etcetera. We will within the total pipeline be more diligent if you will, in terms of realizing the higher weight stuff and we will skew our marketing and sales resources to get more higher weight stuff too. So, it's not that I don't like the lower weight stuff, I like it. As long as our networks under capacity, we'll take more of it, but it's also true that our sales and marketing and our management system will be more skewed to ensure that we get higher weight stuff. And that's, you know – my comment on the backlog is important. So, we've got a big backlog right now and we've got plenty of higher weight stuff in there. We just need to get that stuff into the network.

Got you, okay. [Multiple Speakers]

Hold on a second, if you will. If you look at our revenue per piece for last year in our domestic business, it was up double-digit. So, I know there's always a fear that you chase lower margin stuff, but if you look at our revenue per piece last year, it was up 12% to 15%. So that gives you a fair amount of assurance that the team is focused on bringing in the right mix at the right price.

Okay. Thanks for that explanation. And then as far as the unallocated, the corporate expenses, those came in higher than expected? I know, Ana, you talked about the incentive comp or timing of that impacting, going forward, how should we expect unallocated corporate expenses to flow through for the year?

Yes. So, what we're expecting is, as a company for performance, we expect to replenish or relevelize some of our incentive compensation as we move into 2023. And we are continuing as I mentioned last quarter to have a very strict cost program. So, the net of those two you should see pull through.

Okay. Thanks. And then lastly, as far as the 2023 guidance, can you give us a sense as to how should we think about the different segments? And as far as quarterly progress, given what's going on with the economy, do you expect things to be softer in the first half versus the back half or I don't want to put words in your mouth, but how should we think about the quarterly progression, if you could give us any color as far as the revenue outlook for the year that would be very helpful? Thank you. Sure.

Sure. As I mentioned, I think the biggest driver here will be the growth in Global Ecommerce, especially around our Domestic Parcel and we anticipate that to be more back-end loaded in the year, probably more fourth quarter than everything. So, I would anticipate our profile as a company to follow that as well.

I also think, the entire – [indiscernible] a really important point, which I know you guys get. You know the seasonality of Global Ecommerce is heavily skewed to the fourth quarter and you can see it across the entire market. So, as I think about it, you've got SendTech and Presort that are pretty consistent throughout the year. You have GEC that is entering a more seasonal business, and it's also true as we bring on more customers that will also be realized in the back half of the year. So, it's a different, kind of skew than we're used to seeing, I think the market is seeing, but it's consistent with the overall dynamics within the industry.

All right. Well, thank you and best of luck.

[Operator Instructions] Next, we'll go to the line of Peter Sakon from CreditSights. Please go ahead.

Good morning. Following up on the weight of the parcels, you talked about targeting a higher weight package, can you talk about what the average is now and the strategy to gain with additional higher weight volume?

Average is about 2.5 pounds, I mean, between 2.4 pounds and 2.5 pounds. In the last couple of weeks of the quarter, it went closer to 2 pounds. I mean, so that was kind of the variance that we saw. We like that 2.5, I mean, you know, as I said, even at 2 pounds it’s got a positive contribution margin to the overall business. So, it's not that we don't like those business. It's just we've got to ensure that we get the right absolute number of higher weight parcels. So, we don't think about this as mix. We think about this, you know if we're targeting 200 plus million parcels within that, we need the right absolute percent of heavyweight – right absolute number of heavyweight parcels.

Can you talk about how you'll achieve this? Like what are the strategies that were important to improve this?

So, as I said, within our backlog, the mix is – there's plenty of heavier weight parcels there. So, we'll have a higher degree of focus on those parcels. I would also say if you look at the mid-market in general, which is kind of where our principal hunting ground is, the mid-market within retail and marketplaces tends to have more higher weight parcels. So, I mean our [bias] [ph] in, kind of our go to market model is already skewed towards heavier with stuff. And I would say our compensation system is as well. So, we pay sensitive to profit, which is largely – although exclusively driven by weight and price.

Okay. What do is the capacity utilization of your network currently? And what's the target here over 2023?

So, right now, our exit rate of the year, which we said in the fall of the year was between 195 million to 200 million parcels. I would say, we're kind of on the north end of that. So, a little bit above 200 million parcels. Think about a network that's got capacity for 300 million parcels. Our objective this year for that business is probably to be north of 220 million to 230 million parcels. So, that's kind of the basic math that we're looking at. So think of a market that's 70% or 75%.

Okay. And on capital allocation, can we talk about CapEx and the mix by segment for 2023 in a quarterly – I see a disclosure roughly 40% for Global Ecommerce in 2022? And so, what's the sort of your expectation for each segment for 2023?

Yes. The expectation would be – we'll be down, as I mentioned, on a year-over-year basis. And the expectation would be that we will have a little bit of a higher decline in globally commerce, so global ecommerce will be around [40-ish percent] [ph] still of the total. The interesting thing here to point out is that as we mentioned in 2022, we will continue to spend on optimization of the network rather than that expansion of capacity. We feel good with the capacity as Marc just noted. And the other segments will keep roughly similar proportions than what they've had in the past.

So, [just] [ph] CapEx, I want to make two additional points. Put that CapEx number in context, two years ago, I believe we spent $190 million on CapEx or $185 million, I mean somewhere in that range on CapEx. That was largely around the build-out of the network to accommodate those 300 million parcels. So, the [110] [ph] is kind of in that context. The other point that I would say, if you look at the capital consumption of GEC, it is, as Ana said, down dramatically. We're still targeting for EBITDA minus CapEx and working to have a plan that number is positive. I've said, I've become a little more cautious about that dynamic in 2023 given the macroeconomic environment, but that's still what the team is reaching for.

And just following up on ecommerce EBITDA, what – like how much of EBITDA on the domestic business versus the international business? And are those business – I'm guessing international is struggling more or they seem to be. Could you separate that or exit international? It doesn't turn EBITDA positive in 2023?

Yes. So the way – the easiest way to think about it is from a gross margin perspective. And I want to point out what we mentioned is the dynamics are changing and as we move into 2023, Domestic Parcel will become even a greater proportion of that gross margin. As I mentioned, 650 basis improvement and an additional at least 400 basis points more as we go into 2023. So, we anticipate that more and more of our profitability will come from that domestic parcel. And 75% of revenues are already in that domestic parcel. So, it gives you a sense of the proportionality.

This is my last question. But just to – I guess you could argue that just because something is a greater proportion doesn't necessarily mean or maybe if international is smaller, doesn't necessarily mean it's good, if you will or maybe if I could say differently, if it's still negative, is it worth keeping despite being a smaller proportion?

That is [indiscernible] the question specific to GEC?

Yes, the international portion of GEC.

Is it worth keeping? It depends a little bit on what you could fetch on the outside market. It's still positive from a gross margin perspective. I would say, as witnessed with the cross-border business and globally if it's worth more to somebody else than it is to us, then we would certainly consider any serious offer. So, our intend is all those businesses to contribute positively to the P&L going forward. I will say as you think about the business going forward, and the reason we're so fixated on the Domestic Parcel margins is that's where most of the appreciation comes from in the next couple of years.

Thank you for your time.

Your next question comes from the line of Alek Valero from Loop Capital. Please go ahead.

Hey, how's it going guys? It's Alek, I'm on for Ananda. So my question is regarding the December quarter. Maybe if you guys could provide a bit more color on to what extent macro impacted the December quarter relative to where Street expectations were at? Was it a little bit more macro focus or was Street just too high? Thank you.

I don't think the Street was too high. I mean, as I said, we had higher expectations for the business. The principal variance was in Global Ecommerce and it was in those two line items I mentioned. One was revenue per piece in weeks 49, 50, and 51 was a little bit less than we thought. That cost us about $5 million and transportation costs well, they improved meaningfully year-to-year, that would also improve meaningfully quarter-to-quarter. So, we said north of 20% improvement year-to-year was also about the same quarter-to-quarter. We are expecting another probably $5 million of benefit there. So those two together were $10 million of EBIT that's kind of – that more than closes the $0.02 to the Street.

Awesome. That was helpful. Thanks so much for that. And the second question, if I may. So, given your guidance of having EBIT outpaced revenue growth, you mentioned that was primarily – that's going to primarily be driven by Global Ecommerce. So, do you guys expect Global Ecommerce to be profitable in 2023?

To be EBITDA profitable in 2023?

Yes.

I mean think about this way. I mean, so it was [minus 22] [ph] from an EBITDA perspective last year, so EBITDA positive right there is $20 million to $25 million of improvement. We expect more than that, but that's just kind of the basic math. But you've got some headwinds of interest expense and other things that you're running against.

Got it. Got it. For sure. Thanks so much for that.

And at this time, there are no further questions. I'll turn it back to you for any closing remarks.

Thanks. So, listen last to unpack about the quarter. I do miss if I didn't. And by thanking the Pitney Bowes team, I am continued to be pleased and impressed with people's commitment to this business. You saw it in our distribution centers where we have lots of volunteers to help in the middle of peak and not just first or second shift and not just in the good cities, but all over and third shift and that's a true sign of folks dedication to this business and to moving forward. So, as I said, our headline for the quarter is, we made lots of good progress across many different dimensions in Global Ecommerce, we're expecting to touch more. SendTech and Presort continue to be [steady performers] [ph] and we expect that to continue. So, as we move into 2023 there's lots of different currents running through the economy. We're a little more cautious about how we call the year. We've got much more focus on providing flexibility to accommodate different things that may happen in the environment. That being said, our focus continues to be as we get out of this economic moment and get to more calm waters how this business is positioned and continue to wipe our hand. We will certainly look at any strategic options that present themselves along the way, but I like how we’re positioned. So, thanks for your time this morning, and we'll talk soon.

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.