Pitney Bowes Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 10 speakers on the call.

Operator

Good afternoon. Welcome to the Pitney Bowes Second Quarter 2024 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.

Operator

I would like to introduce parties on today's conference call. Mr. Lance Rosenzweig, Interim Chief Executive Officer and Board Member Mr. John Wittig, Interim Chief Officer and Mr. Alex Brown, Director, Investor Relations.

Operator

Mr. Brown will now begin the call with the Safe Harbor overview.

Speaker 1

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 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 2023 Form 10 ks Annual Report and other reports filed with the SEC that are located on our website at www.pb dotcom and by clicking on Investor Relations. Please keep in mind, we do not undertake any obligation to update forward looking statements as a result of new information or developments.

Speaker 1

For non GAAP measures that are included 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. We have also provided a slide presentation and a spreadsheet with historical segment information on our website. Finally, in our prepared remarks, revenue comparisons will be on a constant currency basis with other items such as EBIT, EBITDA, EPS and free cash flow on an adjusted basis. At this time, I would like to turn the call over to our Interim CEO, Lance.

Speaker 2

Thank you, Alex, and good afternoon. I'm very excited to join you for my first quarterly earnings call with Pitney Bowes. Just a couple of months ago, at the end of May, I outlined our commitment to accelerating the transformation of this iconic shipping and mailing company by focusing on 4 strategic initiatives. Today, I am proud to share that we have made significant strides in delivering on that commitment. We have taken decisive steps to position Pitney Bowes for enhanced profitability and sustained value creation, while also delivering strong results for the quarter.

Speaker 2

I will begin by providing a high level overview of our Q2 results, which reflect our commitment to quickly becoming a more efficient, profitable and cash generating enterprise. We maintained relatively steady revenues and executed on our priorities within Semtech and Presort, resulting in $46,000,000 in adjusted EBIT for the period, a 43% year over year increase compared to the Q2 of last year. Adjusted EPS was $0.03 a share, an improvement of $0.05 over the prior year. And perhaps most notably, free cash flow was $83,000,000 an improvement of $94,000,000 year over year. The performance of Pitney Bowes in Q2 reinforces that we have a significant opportunity for continued cash flow and earnings growth as enhancements continue to be implemented across the enterprise.

Speaker 2

John will provide more details on our strong quarter momentarily. Let me now turn to our momentum on our 4 strategic initiatives. A key highlight is the completion of our strategic review of our global e commerce or GEC business, which resulted in us identifying an exit path for this business that will ultimately maximize value for Pitney Bowes shareholders. We completed our review of this segment after working with independent legal, restructuring and financial advisors to thoroughly assess numerous strategic alternatives for the business. This path was determined to be in the best interest of the company and the GEC entities after an extensive review process.

Speaker 2

Notably, the GEC segment has been struggling to achieve profitability over the past several years in the face of macroeconomic and industry headwinds. We weighed all potential options against a standalone future and the need to stem the losses and bring the process to a timely and well defined conclusion. Ultimately, the Board determined that the optimal path to maximizing the value for Pitney Bowes and limit ongoing business losses and liabilities was to support the decision of GEC's independent fiduciaries to sell a majority interest in the GEC entities to an affiliate of Hilco Global, which intends to conduct an orderly liquidation of the GEC business through a Chapter 11 process. In connection with this exit, we completed that sale and the transaction closed earlier today. Today, GEC and its subsidiary filed Chapter 11 bankruptcy cases to commence a liquidation of the business.

Speaker 2

GEC's fulfillment business, which we sold to Steward in July, will not be part of the liquidation. We expect this exit path to eliminate substantially all of the losses associated with the GEC business, which were approximately negative $136,000,000 for 2023, while positioning Pitney Bowes to deliver stronger full year results in 2025 as we become a more focused, streamlined company. To be clear, Pitney Bowes will not go through any in court restructuring process as a corporate entity. The company's Centek and Presort businesses will continue to operate in the normal course and should not expect any impact. Additionally, the Pitney Bowes Bank will not be affected by the GEC exit and will also continue to conduct business in the ordinary course.

Speaker 2

Selling a controlling interest in GEC to Hilco positions GEC as an independent business from Pitney Bowes, undergoing a liquidation under the ownership of Hilco. In connection with this path, Pitney Bowes anticipates that it will incur one time cash costs not to exceed approximately $150,000,000 including providing certain GEC entities subject to the approval of the bankruptcy court with approximately $45,000,000 in a delayed draw term loan to support the efficient liquidation of GEC through the Chapter 11 process. We anticipate that the liquidation and wind down process, which will require certain court approvals will conclude in early 2025. Pitney Bowes will remain an industry leader in both mailing and shipping going forward. The solutions our Sentek business provides to clients are best in class in both mailing and multi carrier shipping technology.

Speaker 2

Our presort business will continue to provide large enterprises and smaller businesses with industry leading mail sortation services. And our Global Financial Services business continues to help our clients reduce their financial complexities of mailing and shipping. Pitney Bowes has entered into amendments to the company's credit agreement and note purchase agreement to allow for the GEC exit without triggering any events of default for Pitney Bowes and also releases the guarantees and liens provided by the GEC entities. This was an important step towards solidifying Pitney Bowes financial position and setting up the company for long term success. The additional financial flexibility we have secured will allow us to make accretive investments in our core businesses, pursue high margin growth initiatives and take other steps to enhance shareholder value.

Speaker 2

We appreciate the support of all of our lenders who continue to recognize that it is a new day at Pitney Bowes. As a result of exiting GEC, we expect to recognize a pre tax loss of approximately $200,000,000 which we expect will be partially offset by the benefit of tax losses. Before moving on, I want to express our appreciation for the customers, vendors and other partners of GEC. A top priority of Pitney Bowes is to minimize disruption and maintain the highest level of service during GEC's transition. We have reached out to other providers and will assist clients to the fullest extent possible in transitioning to the best alternatives in the market.

Speaker 2

I also want to pause for a moment to express our sincere gratitude to GEC employees. Their hard work is deeply appreciated and this decision to wind down the business is in no way reflective of their performance. We understand the impact of this decision on all involved, but after years of unsustainable losses, these changes are essential to preserving the company as a whole and positioning the remaining business segments for future growth. We are providing severance payments and outplacement services to the GEC team to ease their transition. Our second initiative is focused on driving operational excellence and cost efficiency.

Speaker 2

We have been making the tough yet necessary decisions to support our efficiency and cost rationalization efforts. Pitney Bowes announced last month that we successfully implemented approximately $70,000,000 in annual cost savings at the corporate level as well as within our core businesses. These cost savings were in addition to all savings directly related to exiting GEC. We reiterate our anticipated target range of total savings of between $120,000,000 $160,000,000 much of which we anticipate will be addressed over the remainder of 2024. We are confident in our ability to deliver on the full range of cost savings we've outlined and we will continue to look for additional opportunities in the quarters to come.

Speaker 2

3rd, we have made significant progress in our cash optimization efforts, primarily in 3 areas: the repatriation of international cash, the upstreaming of cash from Pitney Bowes Bank and the reduction of cash needs in the U. S. Post GEC. We announced in May that we were working to free up $200,000,000 of cash through better cash management. I am pleased to share that we have already repatriated $100,000,000 of international cash and have freed up approximately $40,000,000 of cash from Pitney Bowes Bank year to date.

Speaker 2

Accordingly, we now estimate that we will be able to reduce our go forward cash needs by $240,000,000 increased from our initial goal of $200,000,000 We expect to repatriate an additional $25,000,000 of overseas cash during the second half of the year and have implemented a global cash pooling structure, which will enable us to maintain lower levels of cash in international jurisdictions moving forward. Our final strategic initiative is around deleveraging the balance sheet. We believe that exiting GEC, reducing non essential expenses and optimizing cash positions will allow us to materially accelerate our deleveraging objectives. These efforts will be supported by the previously mentioned reduction in cash taxes. As we execute on our strategic initiatives, we plan to prioritize the reduction of high cost debt and near term maturing debt.

Speaker 2

We will also focus on enhancing our credit ratings. Looking forward, I am confident that the future is bright for our core businesses. Sendek's solutions are at the forefront of evolving mailing and digital shipping needs, providing innovative and efficient options for our clients. Presort continues to deliver significant value as a result of distinct expertise and technology, excellent execution and favorable market dynamics. And we have plans for our global financial services offerings, including Pitney Bowes Bank to further grow its already meaningful cash and net income contributions.

Speaker 2

These businesses represent the core foundation for our company's future growth and success. Given these significant changes at the company, we recognize it may be difficult to model the company's economics. As such, we have included an illustrative EBIT bridge on Slide 19 of the Q2 investor presentation on our IR website, which is based on trailing 12 month EBIT, adjusted for the estimated impact of the GEC exit and the midpoint of our estimated $120,000,000 to $160,000,000 in cost reductions resulting from our ongoing strategic initiatives. This is not a forecast, but an effort to illustrate what we deem to be the very strong underlying earnings potential inherent in Pitney Bowes without the e commerce debtors and the costs we are in the process of removing. While we are encouraged by the progress we've made, I want to be clear that today is not a victory lap.

Speaker 2

Pitney Bowes is still in the early innings of its transformation, and we firmly believe that there is a lot of opportunity and upside ahead. As we look forward, we will continue to leave no stone unturned when it comes to improving our profitability, effective capital and cash management and overall financial strength. I will now turn the call over to John Wittig to discuss our financial results for the Q2 in more detail.

Speaker 3

Thank you, Lance. I will now go over our Q2 results and our updated outlook for the rest of the year, which incorporates our solid first half performance and the strategic actions Lance just described. Starting with results, consolidated revenue, including GEC, was $793,000,000 up 2% over the prior year. SenTek and Presort both had great quarters and continue to make strong progress against our key initiatives. Productivity and cost reduction efforts across the entire enterprise drove meaningful bottom line improvement with consolidated EBIT increasing 43% year over year to $46,000,000 in the quarter.

Speaker 3

EPS improved $0.05 to 0 point 0 $3 per share driven by improved operating results and a timing related tax benefit in the quarter and was partially offset by higher interest expense. Cash flow was a terrific story in the quarter. 2nd quarter free cash flow was $83,000,000 which was $94,000,000 higher than Q2 last year. This improvement is better on a year to date basis with free cash flow $137,000,000 higher through the first half of twenty twenty four. Operational performance mainly from cost takeout and strong SendTech and Presort results is driving the improved cash flow.

Speaker 3

Working capital and finance receivables also materially contributed to the improvement. Semtech had a great quarter as the business continues to progress on its initiatives of product migration, shipping growth, cost reduction and better leveraging its financial services capabilities. In the quarter, Semtech generated revenue of $320,000,000 a decline of 2% year over year, driven by lower mailing related revenue and partially offset by growth in our shipping offerings. EBIT was $101,000,000 up 4% due to better revenue mix and cost reduction initiatives. Mailing related revenue declined 4% year over year in the quarter, primarily driven by near term headwinds related to our product cycle, which includes a higher mix of lease extensions versus new leases.

Speaker 3

I'll expand on the impact of this dynamic a little later in my remarks, but the net of it is lower equipment revenue upfront, which impacted 2nd quarter results. In this environment, we are seeing positive demand for our mailing products with our total written contract value up year over year. We also made solid progress on our product migration. 83% of our total installed base and 88% of our low to mid volume meters are now on the new IMI technology. As a reminder, USPS requires all low to mid volume meters to be converted by the end of this year.

Speaker 3

Shipping related revenues grew 10% in the quarter and now comprise 16% of segment revenue. We remain encouraged about the performance of our digital shipping offerings, which drove most of the 33% year over year improvement in this quarter's business services revenue. Similar to last quarter, lower in period equipment and professional services moderated overall shipping growth. Segment gross margin expanded 160 basis points and gross profit dollars were flat year over year. Semtech's digital shipping offering, which includes SaaS subscription revenue, drove margin expansion in the quarter.

Speaker 3

Our product mix modestly higher financing revenue and cost actions also contributed to the improvement. Operating expenses declined $4,000,000 or 4% year over year from headcount actions and were partially offset by $2,000,000 in higher non cash pension expense. Higher pension expense was a headwind in the Q1 of this year as well and we expect it to remain a headwind in the second half of the year. Net finance receivables were $1,200,000,000 down 3% year over year from a decrease in lease receivables, which was primarily a result of higher level of lease extensions. As Lance mentioned, we see a significant opportunity to improve cash conversion and better leverage the value of the bank.

Speaker 3

In the quarter, the bank generated $26,000,000 of cash contribution to PBI, up over 100% year over year, a benefit partly fueled by the bank's participation in the financing of $13,000,000 of captive lease receivables, which is a quality addition to the bank. Presort also had an excellent quarter and it continues to drive significant profit growth with productivity improvements. Presort's string of impressive quarters reflects the quality of our team and the value we provide to our clients. In the quarter, we sorted 3,600,000,000 pieces of mail. Revenue grew 3% to 147,000,000 dollars and EBIT was $27,000,000 up 32% year over year.

Speaker 3

Our team continues to raise the bar on labor productivity. Process improvements along with prior investments in automation and analytics drove pieces fed per labor hour up 10% year over year. Across our network, this equates to reduction of over 150,000 labor hours versus prior year. We also continue to drive better transportation efficiency. Unit transportation costs declined 5% year over year due to lane optimization through Domestic parcel volume was $ Domestic parcel volume was $60,000,000 up 21% versus prior year.

Speaker 3

Higher volumes drove a 7% increase in revenue to $326,000,000 in the quarter. Revenue per piece remained under pressure due to client mix and continued market overcapacity. The decline in RPP offset productivity gains and fixed cost leverage from the higher volumes. EBIT was a loss of $31,000,000 and benefited from a $7,000,000 or 15% improvement in operating expenses year over year. Outside of the business units, our unallocated corporate expenses were $51,000,000 in the quarter.

Speaker 3

The $4,000,000 year over year increase was driven primarily by variable compensation where last year we were well below targets and this year we are outperforming our targets. Our variable compensation is determined by our stock price and performance against metrics laid out in our proxy. Excluding variable compensation, unallocated corporate expenses decreased $12,000,000 year over year. Now let me turn to the outlook. We are updating our guidance to reflect the exit of GEC, incremental cost reduction actions and a strong first half performance.

Speaker 3

Our updated guidance is on a continuing operations basis and excludes financial results from the GEC entities, which we expect will be reflected in discontinued operations in the Q3. We are holding revenue guidance to the prior target of flat to low single digit decline. Our prior guidance assumed revenue growth from GEC and therefore holding guidance implies improved revenue performance from Semtech and Presort compared to previous expectations. Moving to profitability, we expect the continuing operations of the company to generate between $340,000,000 $355,000,000 in full year 2024 EBIT. This is more than double our 2023 reported EBIT of $172,000,000 inclusive of GEC.

Speaker 3

Let me walk through several key drivers in our outlook as we head into the second half of the year. Both Semtech and Presort remain well positioned in their markets and we expect both to continue to execute well in the second half of the year. For Semtech, I'm going to take a minute to expand on the near term headwinds that result from the current phase of our product lifecycle. At a high level, we expect 2 related dynamics to impact our revenue and gross profit in the second half of the year. First, the business has done a great job navigating its product migration cycle year to date.

Speaker 3

To this point, we outperformed our expectations in the first half as our client team successfully migrated clients to new products. This benefited 1st quarter and second quarter results. In the second half of the year, we expect the remaining portion of our installed base to be more difficult to transact, resulting in a higher cancellation rate. This aligns with our experience from previous product migrations. 2nd, we expect our mix of transactions to shift more towards lease extensions and away from new leases in the second half of the year.

Speaker 3

This is expected as the first wave of IMI products released 5 plus years ago are coming up for renewal. Over the full term of the lease, lease extensions are more profitable transactions for us since we lock in continued monthly cash flows without incurring the cost to produce new equipment. However, revenue from extension is recognized over the term of the lease as financing revenue versus upfront as equipment sales with a new lease. This dynamic creates near term pressure on the P and L in a similar way as a software company transitioning from a license and maintenance model to a SaaS model. Over the long term, revenue will stabilize as a high margin annuity flowing through our financing revenue.

Speaker 3

These transactions are better for cash flow due to better profitability and less investment in inventory and net finance receivables. So to summarize, lease extensions are lower equipment sales in the near term, produce higher financing revenue over the long term and cash flow positive. Turning to Presort, the business performed well in the first half of the year and has great momentum. We remain encouraged by the value of our offering to our clients, which is evident in our strong performance in new logo sales and competitive takeaways. The recent investments we have made in automation and technology over the past several years are resulting in meaningful efficiencies across our network.

Speaker 3

To that end, we achieved our highest labor productivity in the Q2, beating our previous record set in Q1 of this year. All of this gives us confidence that Presort is set up to continue to perform well in the second half of the year. Finally, cost reduction. As Lance mentioned, we are moving with urgency to streamline the organization. About a month ago, we announced that $70,000,000 of annualized savings had already been initiated with the majority of those savings coming from completed headcount reductions across our support functions.

Speaker 3

We have also initiated savings from indirect spending and we'll continue to see benefit from these reductions. Indirect savings will take longer to take effect, but we expect these actions to contribute to our 120,000,000 dollars to $160,000,000 gross annualized savings target. With that, I thank you and I'll pass it back over to Lance.

Speaker 2

Thank you, John. Pitney Bowes is better positioned than at any time in recent memory to capitalize on opportunities in the company's core cash generating businesses. New leadership from the boardroom to the management team is aligned with shareholders when it comes to driving the acceleration of value creation. We look forward to continuing to report on our progress as we execute on our previously announced strategic initiatives and accelerate the Pitney Bowes turnaround. This now concludes the presentation portion of today's call.

Speaker 2

We'd now like to open the call for Q and A.

Operator

And first, we go into the line for Anthony Lebenzinski. Please go ahead. Anthony, please check your mute button.

Speaker 4

Can you hear me now?

Speaker 3

Yes.

Speaker 4

Okay. Sorry about that. Yes. Sorry, I was on mute. All right.

Speaker 4

So thanks for taking the questions and good to see the conclusion of the GEC review come to an end here. So I guess just first, just a quick clarifying question. So in terms of the one time cash costs of $150,000,000 Is that mostly severance and lease termination costs? Or maybe if you could just touch on that first? And then I have a few other questions as well.

Speaker 3

Hey, thanks for the question. This is John. It's actually a combination of a few items. There are going to be some expenses that the parent will bear. There'll be some pre petition professional fees, etcetera.

Speaker 3

That 150 is also going to be inclusive of the DIP funding that we're providing. And then we're also going to have outside of the professional fees certain other wind down costs that I believe the parent will bear.

Speaker 4

Okay. Thanks, John. Okay. So now that GEC is no longer part of Pitney Bowes and the business has been simplified. How should we think about unallocated corporate expenses going forward?

Speaker 2

Unallocated corporate expenses are coming down significantly. Our cost cutting program that we've put in place is largely in corporate charges. And I think you'll see in the coming quarters a significant reduction in those charges.

Speaker 3

Yes, absolutely, Lance. I mean you mentioned it in your script earlier, the first $70,000,000 actually went across all areas, business units as well as corporate unallocated.

Speaker 4

Okay. Got you. Okay. And then so now you have the Centek and PreStored left. So I guess within Centek, you talked about the shipping related revenue now being 16% of your overall revenue.

Speaker 4

Do you guys have a goal in mind as to like how high that can be, because that seems like it's really, certainly a growth driver for that segment?

Speaker 2

Yes, it is, Anthony, the key growth driver and we anticipate that growth continuing. So over time, it will become more and more material as an overall percentage of CEMTECH's revenue mix. Okay.

Speaker 4

All right. That's good to hear. And then, so now as far as presort business, obviously, that's been an attractive segment for you guys for a while. So I know that segment has grown through some acquisitions in the past. How are you guys thinking about that longer term?

Speaker 4

Do you think there are some additional opportunities to grow that business organically and perhaps inorganically?

Speaker 2

Yes. We're excited about the Presort business, and I think a lot of credit to the Presort team. The company is executing extremely well and continues to improve its performance metrics and its utilization rates, etcetera. There are also ongoing operations ongoing opportunities for tuck in M and As and we are actively considering additional M and A targets. They're very important.

Speaker 4

Okay, got it. Got it. Okay. And then, last question for me before I pass it on to others. So now that you've done this strategic review and done a lot of work in a relatively short period of time, I mean, do you guys have any updated thoughts on the dividend versus debt reduction, just the overall capital allocation thinking, that'd be great.

Speaker 2

Sure. We did announce a dividend, this quarter, consistent with recent quarters. The Board takes capital allocation very seriously. In each quarter, we do an extensive review of our cash and availability in terms of evaluating dividends or other uses of cash.

Speaker 4

Okay, got it. Well, thank you and best of luck.

Speaker 2

Thank you.

Operator

Thank you. And next, we're going to the line for Matt Swope from Baird. Please go ahead.

Speaker 5

Thank you very much guys and congratulations. Could you talk a little bit more on GEC process on sort of how this is going to play out from here? What the timing Does this I know the transaction was announced today. When does the filing happen? When will be the timing on the cash out?

Speaker 5

I guess, I wasn't quite clear when you talked about the max of $150,000,000 does that include the dip or is the dip separately from that?

Speaker 2

Yes, let me take a general stab at it John and then you can dive into more details. So the sale of the majority control to Hillco closed today and the Chapter 11 filing happened today. So both of those are in process. It's moving forward on an accelerated timetable, very highly organized plan that the Hillco team has put together with the GEC team. We expect that to happen expeditiously during the course of 2024.

Speaker 2

John, do you want to fill in some and your final question on the $150,000,000 that is inclusive of the DIP financing, within the $150,000,000

Speaker 3

Yes. And the $150,000,000 also just to mention, I didn't mention earlier, not only does it include the DIP, but it also includes the severance payments for the team. And as far as timing you had asked, I'd like to think of it this way as we're modeling it as it will be front end loaded in the second half of this year and then sort of taper off as we get into the first half of next year.

Speaker 5

Great. That's all helpful. And given that it is a dip, is there a chance typically we think about dip as a loan that has a chance of producing some value back to you. Should we think of that $50,000,000 as potentially coming back or should we think of that as out the door?

Speaker 2

We're modeling it as part of our $150,000,000 total cost. And we'll see bankruptcy always has some uncertainty to it. We're always hopeful for upside, but we'll sort of see how that plays out over the coming couple of quarters.

Speaker 5

Got you. That's great. And then Lance, you talked about the high cost debt and near term debt reduction. How soon do you think that can start? You've done a great job of freeing up cash like you said you were going to do, you have the sulfur plus 6.90 notes sitting there that I know the call protection expires soon.

Speaker 5

How do you see the debt reduction part of the plan progressing?

Speaker 2

Yes. Our lenders, I'll first say, have been very supportive of us and we appreciate their support in our recent restructuring of our notes. We believe that our credit is going to get significantly improved as time goes by over the near term. And we intend to take advantage of our improved credit as we look at refinancing opportunities. We don't have a specific timetable though.

Speaker 5

That's fair. And to that end, you talked about maybe some ratings improvement. Do you have a leverage target? I mean, back a few years ago, Pitney Bowes was an investment grade company. Is that a goal to get back to investment grade?

Speaker 5

How do you look at that going forward?

Speaker 2

We would certainly love that. But we don't have a stated goal as to our kind of investment ratings going forward. We are just trying to prudently run the business to optimize cash, to use our cash to improve our balance sheet and to emerge a significantly stronger company over time.

Speaker 5

That's great. Well, congratulations again guys. Thanks for all the time.

Speaker 2

Thank you, Matt.

Operator

Thank you. And next, we go on to the line for Peter Sagan from Credit Suisse. Please go ahead.

Speaker 6

Hi. On Centek, thank you for the detail on that. Can you comment on what your expected churn will be for the remaining part of the year?

Speaker 3

I'm sorry, Peter, can you repeat the question? You expected what?

Speaker 6

How much do you expect churn to be at SunTek? My recollection was a sort of mid single digit decline on the number of units. Could you refresh your memory on that and your expectations going forward?

Speaker 3

Yes. Thanks, Pierre. Now I have it. Yes, I mean, if you think about the second half of the year and where we've been with the migrations with the IMI, we're in a spot right now where I think the more difficult transactions are coming in the second half of the year. And as such, I would expect that the cancellation rates would tick up, I'd say, fairly significant from what we've seen up to this point.

Speaker 3

And that's all in our guidance. So what we're modeling through the second half of the year assumes that tick up in churn.

Speaker 6

Yes. But I'm more interested in what the actual amount is and how many units you're expecting to move this year.

Speaker 3

Yes. We're not going to disclose that today, Peter.

Speaker 6

Okay. Thank you.

Operator

Thank you. Thank you. And next, we go into the line for David Steinhardt, Conturia Capital. Please go ahead.

Speaker 7

Hey, all. Congrats on all of the moves today. Very exciting progress. I see that you've given a guide for EBIT. It looks like free cash flow is pacing well ahead of last year.

Speaker 7

I wonder if you're able to give a sense of where you think free cash flow might be for the year at this point?

Speaker 3

Hey, David, it's John. We don't give the free cash flow guidance, but I'd like you to think about it this way. It should look a lot like what we've seen in the first half of the year. We've got some very positive news built into our guidance. So I would expect it to be pretty consistent with the first half.

Speaker 7

Great. Thank you. And in terms of the expected payments related to the shutdown of Global Ecommerce, I think that the statement was up to $150,000,000 Obviously, that includes the dip. I wonder, can you give us a range of outcomes at this point in terms of what the low end might be?

Speaker 3

I wouldn't give you a range. As Lance mentioned earlier, there's a lot of twists and turns along the way of this journey. So we've best modeled it at that rate and we'll provide updates as we go.

Speaker 7

Understood. And in terms of the rest of the year for SenTek and Presort and beyond going into, I guess, 2025. I understand that the slide, the EBIT bridge is for illustrative purposes. But in terms of the cost takeout goals for through 2025, should we think that you'll be able to get through most of the cost savings through 2025? Or is it still too early to judge when you'll be able to attack the rest of the 140 to midpoint?

Speaker 3

Yes. So when we up the range to 120 to 160, we had a pretty good feel for what's going to fill that range. I would tell you we're making progress. And to kind of give you a sense, I think right now I would say that by the end of the Q1, we would be running at an annualized gross savings, well inside of that range. Just to kind of give you the idea of the pace that we're on.

Speaker 3

And when you think about the 120 to 160, again, 70 being behind us, the majority of what's coming is really around indirect spend. So that's going to take a little bit more time to transact. There are a number of transactions that we have to go through contracts, relationship, etcetera. So I expect that to take a little bit longer, but confident that it's going to be in that range.

Speaker 8

Understood.

Speaker 7

Thank you very much. Appreciate it. Thanks, David.

Operator

Thank you. And next, we're going to the line for Will Brunnman, Northcoast Research. Please go ahead.

Speaker 7

Hey, how's it going, guys? So I just wanted to make sure I understand the guidance for the second half of this year. How much of the $70,000,000 in cost cuts are included in the second half? I'm just trying to get an understanding of what the growth is in core EBIT?

Speaker 3

Yes. Hey, Will, thanks for the question. Of the $70,000,000 our guidance includes about half of that for the second half of the year.

Speaker 7

Okay. And then I was also going to ask, with the divestiture of GEC, will that eliminate all the lease responsibilities associated with the business? And will you have to dispose any real estate assets associated with them?

Speaker 3

Those transactions are all considered within the $150,000,000 There'll be a mix of a lot of those,

Speaker 2

And they will all be accomplished during the Chapter 11 proceedings.

Speaker 7

Okay. And then just one more, if you don't mind. The shipping revenue in Semtech has been growing really nicely. And I'm just curious about how much Semtech revenue is shipping and would you anticipate that business to continue to grow double digits?

Speaker 3

Yes. I mean it was double digit in the second quarter. It was about 16% of the segment revenue. So it's been pretty consistent growing double digit. Looking forward, I would expect it to be pretty much on that same pace.

Speaker 3

And some really nice things underneath the covers of that, particularly with our digital offerings growing well above 30% there. Okay.

Speaker 7

All right. Thank you guys. Really appreciate your help.

Speaker 2

Thanks Will. Thanks Will.

Operator

Thank you. And next we're going to the line for Justin Duprala for Domo Capital Management. Please go ahead.

Speaker 8

Hey, Lance. As an actual shareholder, I just want to say I appreciate the transparency in the very detailed earnings call.

Speaker 2

Thank you, Justin. I appreciate that.

Speaker 8

Yes, it's an incredible change from the previous management team. Going back to debt, I was wondering, do you guys have any idea of how much debt pay down you may be able to proceed with during 2024?

Speaker 3

Hey, Justin, it's John. So I think the first priority as we get through 2024 and the first part of 2025 is to make sure that we successfully get the wind down done and all the expenses that go along with that. I think we're in a better shape as a business right now to produce strong cash flow and that will be the first priority. And then along with the 4th initiative around deleveraging our balance sheet will be a quick second here.

Speaker 8

Got it. And so I understand that EBIT of $481,000,000 is not official guidance for 2025, but my quick calculations show that results in about an earnings per share of $1.50 Does that sound accurate?

Speaker 3

We're not giving the guidance here. And keep in mind, Justin, it's really an illustrative exhibit. So we can maybe help guide you a little bit more on the modeling.

Speaker 8

Sure. That should be about $1.50 earnings per share, right?

Speaker 2

We Yes, we didn't provide any kind of EPS information, Justin. It's really kind of a retrospective sort of a look at the actual EBIT performance, adjusting it for the anticipated savings from GEC and cost takeouts.

Speaker 8

Got it. Okay. And then I guess the last comment. Well, I mean, I know someone else mentioned the notes that are yielding of over 12%. I think it's $275,000,000 the 20 28 notes.

Speaker 8

It sounds like that might be something you're prioritizing early next year, eliminating that should be about $33,000,000 a year, right, in interest savings?

Speaker 3

That's right. But I think our first priority would likely be more likely to 26 TLA.

Speaker 8

Got it. And the last comment I have is, I would imagine that your relationship with the post office is extremely important to your legacy businesses. And I would assume I would assume Exedy and GEC would improve that relationship. I think other people might have different opinions. I'm wondering if you guys have any conversations with

Speaker 6

the

Speaker 2

pretty consistently all the time. Pitney Bowes has been a partner of the USPS for 105 years. And we have a strong relationship across our big business segments and we work hard to maintain that relationship.

Speaker 8

Do you think exiting Global Ecommerce would improve that relationship?

Speaker 2

I'm very happy with how the relationship has been. I don't know whether that would make it any different really. We really value the team at the USPS.

Operator

Thank you. Next, we're going to the line for Jeff Harlib, Barclays. Please go ahead.

Speaker 9

Hi. So the $150,000,000 of one time costs, which I think you said will be mostly through early 2025, maybe you can just confirm that, but will that be funded through cash flow and the repatriation of cash, etcetera, or do you expect to raise new financing for

Speaker 3

that? Hey, Jeff, it's John. Let me just clarify. I said earlier that that's likely front end loaded for the second half of this year. So and taper off in the first half of next year and it will be funded through operational.

Speaker 9

Through operational free cash flow and the cash on the balance sheet that you're repatriating?

Speaker 3

That's right.

Speaker 9

Okay. Okay. And just for modeling purposes, the D and A of the e commerce business, is it in the $65,000,000 range, so we can kind of come up with an EBITDA number pro form a?

Speaker 3

It's Jeff, can you clarify your question? I didn't catch it.

Speaker 9

Yes. The depreciation and amortization of e commerce. You gave the EBIT. And I was just wondering what the D and A is that you're to come up with a pro form a EBITDA number?

Speaker 3

Yes. The D and A was about $14,000,000 in the second quarter. Okay.

Speaker 9

Okay. And maybe last thing, can you just talk a little bit about obviously, you've done a good job of executing on these cost savings. How do we get comfortable you didn't cut too deep in some of your core business areas?

Speaker 2

Yes. So risk management is very important to us, Jeff, and it's important at the board level as well. And prior to implementing our cost takeouts and prior to forecasting our new cost takeouts, we have a pretty extensive review process internally and with the Board on risk. And we're very confident as we implement these cost takeout plans that we've looked at the implications of our cost takeouts and really look to manage and mitigate any potential risk. And it's a very detailed process that we actually go through.

Speaker 2

We're pretty confident in it.

Speaker 9

Okay. Thanks very much.

Speaker 2

Thank you.

Operator

Thank you. There are no more questions. Mr. Brosensweig, would you like to make any additional remarks?

Speaker 2

Yes. Thank you everyone for joining us for this earnings call. We appreciate your support and questions and look forward to catching up again next quarter.

Operator

And that does conclude our conference for today. Thank you for your participation and for using AT and T Conferencing Service. You may now disconnect.

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Earnings Conference Call
Pitney Bowes Q2 2024
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