Pitney Bowes Inc.

Good morning and welcome to the Pitney Bowes second quarter 2021 earnings conference call. Your line's been placed in 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. Mark Lautenbach, President and Chief Executive Officer, Ms. Anna Maria Chadwick, Executive Vice President and Chief Financial Officer, and Mr. Adam David, Vice President, Investor Relations and Financial Planning. Mr. David will now begin the call with a 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 2020 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 gap measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we 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, Mark Lautenbach, will start with a few opening remarks.

Mark.

Thank you, Adam, and thank you, everyone, for joining today's call. We delivered a solid quarter and first half of the year and continued to make progress against our overall objectives. Every business grew revenue and improved EBIT from prior year. Overall, revenue at constant currency grew 6% and EBIT grew 16%. Santec and Presort both grew revenue, albeit as expected given the easier compare and both businesses grew EBIT. Pre-sort continues to see a nice recovery in volumes from pandemic levels and EBIT margins remain in the double-digit range, moving back toward the long-term model. Centec's revenue growth was led by a strong performance in our CENPRO product family in addition to continued double-digit growth in our SaaS-based shipping portfolio. The business recorded its third consecutive quarter of year-over-year EBIT growth and continues to maintain its EBIT margin above 30%. Global e-commerce grew revenue this quarter, despite a tough prior year comparison, and importantly, also improved quarter to quarter. EBITDA turned positive in a quarter, and both EBIT and EBITDA improved meaningfully over prior year and Prior Quarter. The path to profitability for e-commerce is an integrated approach around talent, training, automation and execution. We've made several important additions to our team and the new management talent, along with the maturation of our existing workforce, are clearly yielding results. We continue to work to optimize our shipping lanes and continue to focus our investments toward more automation We continue to make good progress with substantial opportunity still in front of us. Entering the second half of 2021, I like where we sit. The revenue comparisons will get more difficult in the second half of the year compared to the first half, but this quarter was a glimpse into what the business can look like when we hit on all cylinders and that improved profitable revenue growth is within our grasp. Over the course of the last year or so, I have said that Pitney Bowes will come out of this pandemic a bigger and better company. And while we are not out of the woods with the pandemic, we're certainly on the trajectory of being a bigger company and we're working every day at becoming a better company. With that, let me turn it over to Ana.

Thank you, Mark. Our second quarter results reflect solid momentum across all of our businesses. We continue to make good progress and are set up well for the second half of the year. unless otherwise noted, I will talk to revenue comparison on a constant currency basis and other items such as EBITDA, EPS, and cash flow on an adjusted basis. Revenue was 899 million and grew 6% over prior year. Adjusted EPS was 11 cents and included a 3 cent tax benefit in the quarter. Free cash flow was $87 million and cash from operations was $79 million, which was a solid performance in the quarter and in line with our expectations. Although down from prior year, it is important to remember that last year included a $66 million contribution from the decline in our finance receivables, which was largely COVID related. This was an item that we identified as a headwind to our free cash flow comparison earlier this year. During the quarter, we paid $9 million in dividends and made $5 million in restructuring payments. We spent $40 million in CapEx as we continued to invest in our network and productivity initiatives across the business. We ended the quarter with $814 million in cash and short-term investments. Total debt was $2.4 billion, which is down $289 million from prior year. When you take our finance receivable and cash into account, our implied operating debt is $567 million. Let me turn to the P&L, starting with revenue versus prior year. Equipment sales grew 46%. Supplies grew 14% and business services grew 6%. We had decline in support services of 1%, rentals of 2%, and financing of 16%. Gross profit of $301 million improved about $17 million over prior year on growth across all segments. Gross margin was 33%. which was slightly down from the same period last year but an improvement from the last two quarters. SG&A was $236 million and approximately $3 million higher than prior year. SG&A was 26% of revenue which was nearly a two-point improvement over prior year. Within SG&A, corporate expenses were $56 million which was up about $7 million from prior year largely due to higher employee variable related costs. R&D was $11 million, or 1% of revenue, which was up approximately $4 million from prior year. During the quarter, we received the remaining insurance proceeds of $3 million for the Ryuk ransomware attack. EBITDA was $96 million, an increase of $6 million over prior year and EBITDA margin was 11%, which was flat to prior year. EBIT was 56 million, an increase of 8 million over prior year, and EBIT margin was 6%, which was a slight increase over prior year. Interest expense, including finance interest, was 36 million. Our tax provision was a benefit of about $300,000 and includes a benefit related to a UK tax legislation change, which also contributed about three cents to EPS in the quarter. Shares outstanding were approximately 179 million. Let me now turn to each segment's performance. It is important to note that the year over year comparison includes the impact of COVID. Prior year results saw A positive impact on e-commerce revenue and an adverse impact on CENTEC and pre-sort. As such, I will also provide growth rates from 2019 to 2021 for the larger transactional parts of our business. Within e-commerce, revenue grew 3% to $418 million and also grew from first quarter levels. The revenue growth over prior year was driven by our cross-border services and partially offset by lower domestic parcel and digital services. Domestic parcel volumes were 44 million in the quarter. Compared to the second quarter of 2019, e-commerce revenue grew 48%. Demand for our services continues to be strong. as new business signings accelerated from the first quarter as we're getting merchants onboarded for peak season while balancing demand from current clients. We also continue to have success with bundling our services, which now represents close to 50% of all new business. EBITDA for the quarter was $8 million. EBIT was a loss of $11 million. Both EBIT and EBITDA were meaningful improvements from prior year. We also made significant progress sequentially where second quarters EBIT margins improved nearly 400 basis points as compared to first quarter as we were able to improve our productivity and work through some of the residual impact from last year's peak that we saw earlier in the first quarter. We continue to work to improve service levels and make progress against our productivity initiatives within our domestic parcel services, while still dealing with industry-wide concerns around high transportation costs and a competitive labor market. We made progress on several unit economics as compared to the first quarter, with the greatest being around labor and transportation cost per piece. We saw a reduction in our labor cost per piece in part due to the contribution of our new management talent along with the maturation of our existing workforce. Parcels processed per hour continue to improve from first quarter levels. Transportation cost per piece also improved versus prior quarter as we continue to better optimize our shipping lanes. Our improvements in execution coupled with better network balancing are certainly yielding results. We continue to invest in automation, including high-end sorters in our larger facilities and sort-to-light automation in our midsize facilities. We also announced our partnership with Ambi Robotics last month, which we will be rolling out across our network over the next few years. These initiatives take time to integrate, train our employees and produce results. And while we're seeing some early benefits, we expect to yield additional benefits during the upcoming peak season. Also, as mentioned last quarter, we are in the process of opening two new sites and upgrading another. We expect to have this completed prior to the peak season, and it will allow us to handle volumes more efficiently. Ultimately, we expect transportation and labor productivity along with optimizing our final mile cost to be critical drivers in attaining our long-term e-commerce margins. And as Mark mentioned, we have made some important additions to our e-commerce management team in order to execute this plan. It is an exciting time and our e-commerce business is moving in the right direction. with substantial opportunities still in front of us. Our pre-sort services and CENTEC businesses both turned in solid performances which were in line with our expectations. Within pre-sort, revenue was $135 million and grew 14%. Compared to the second quarter of 2019, pre-sort revenue grew 5%. Average daily volumes grew 10% over prior year largely driven by growth in first class volumes of 4% and marketing mail volumes of 39%. EBITDA was $23 million and EBITDA margin was 17%. EBIT was $16 million and EBIT margin was 12%. EBIT and EBITDA dollars improved from prior year due to revenue growth and margin expansion. We remain focused on our productivity initiatives, having improved pieces fed per labor hour by 3%, resulting in 60,000 less processing hours versus prior year. Within CENTEC, revenue was $346 million and grew 6%. We continue to differentiate ourselves in the market with a wide range of end-to-end mailing and shipping offerings that are attractive to businesses ranging from large enterprises to small offices. Centex SaaS-based shipping products grew at a low double-digit rate over prior year to 31 million this quarter. The number of labels printed through our shipping offering grew over 30% and paid subscriptions grew about 70% over prior year. Additionally, shipping volumes that our U.S. clients' finance grew nearly 70% over prior year. Our end-to-end value proposition continues to resonate with clients as they adopt and use these new offerings, which bring value to their businesses. Equipment sales grew 46% over prior year. Compared to the second quarter 2019, equipment sales grew 1%, which is an important metric as this is a key indicator for future streams in the traditional side of the SendTech business. This also points to how our new sending products are resonating with clients and helping to strengthen our portfolio. We continue to see strong placement of our SendPro-C and mail station multipurpose devices. Our international operations also saw strong equipment sales growth and we continue to roll out new products in these markets. Through the quarter, we, like many others, experienced some transportation challenges related to our supply chain. We are proactively managing our inventory and are able to place a significant level of new equipment despite those challenges. Looking ahead at the second half of the year, We continue to closely monitor the semiconductor industry and potential supply shortage concerns. While it is still a bit too early to tell, we would expect the impacts, if any, to be more pronounced in the fourth quarter. We will look to mitigate any potential supply shortages by working closely with our suppliers and repositioning our solutions with our clients as necessary. EBITDA was $115 million and EBITDA margin was 33%. EBIT was $107 million and EBIT margin was 31%. EBIT and EBITDA dollars improved from prior year and was the third consecutive quarter of improvement for both metrics. Let me now turn to our full year outlook, which is in line with what we have previously communicated. As we all know, there's still a level of uncertainty in the macro environment, particularly as new COVID variants continue to ramp up and concerns around supply chain remain. And we will continue to monitor any potential impacts closely. We still expect annual revenue at constant currency to grow over prior year in the low to mid single digit range. We still expect adjusted EPS to grow over prior year and more specifically to be in the 35 to 42 cent range. We still expect free cash flow to be lower than prior year due to items that benefited 2020 and are not expected to continue at the same level this year. Prior year included a lower level of capex and finance receivables and higher customer deposits. We also expect our tax rate in the second half to be higher and return to more normal levels. Looking at the timing, we expect third quarter revenue to be in line with second quarter and the fourth quarter to be larger than the third, given a strong holiday peak season. Taking the midpoint of our adjusted EPS guidance into consideration, We currently expect our third quarter to represent nearly 20% of our full year attainment. Let me conclude on this. In the beginning of the year, we said that we expected revenue and adjusted EPS to grow, and we remained committed to this outlook. Each segment has delivered a solid performance through the first half of the year, improving revenue, EBITDA, and EBIT from prior year. We continue to generate good free cash flow and remain focused on maintaining a strong balance sheet. We also continue to make measurable progress and are confident in our ability to achieve our financial objectives. Thank you. Operator, please open the line for questions.

And ladies and gentlemen, if you wish to ask a question, please press 1, then 0, On your telephone keypad, you may withdraw your question at any time by repeating the 1-0 command. If using a speakerphone, please pick up the handset before pressing the numbers. And once again, if you have a question, please press 1-0 at this time. And our first question today comes from the line of Shannon Cross with Cross Research. Please go ahead.

Thank you very much. I was just wondering how we should think about Thank you. Sure. Thanks, Jen. So I think it's

It's easy to get lost in a sea of numbers. There's so many different dynamics and currents running through the marketplace. So if I might, let me kind of start with a macro view and then go to a micro view. So if you think about this from a macro perspective, e-commerce purchases as a percent of total retail last year went from roughly 16% to 26%, so over a 50% increase. Subsequently, that number has regressed a little bit, but it's still 24%, 25%. So slightly below last year, but substantially above pre-COVID. Within that overall dynamic, there's also quarter-to-quarter dynamics. So if you think about last year in the world of COVID, First quarter, we got two months in before the virus hit. Second quarter was kind of the tsunami. And not only did you have many customers moving to e-commerce and the internet for purchasing, but you had retail outlets that were essentially closed. So within the quarter-to-quarter dynamics last year, you had a particularly strong set of dynamics in the second quarter and to a degree that moderated a touch but lasted throughout the year. So second quarter was kind of, for all kinds of different reasons, an unusual quarter. From a micro perspective, I should make one other comment from a macro perspective, all of this was against an industry capacity that was really oriented towards pre-COVID levels. So think of an industry that had capacity to accommodate the 16 or 17% with this influx of demand. From a micro perspective, Pitney Bowes is a challenger. We tried to say yes to as many customers and as much volume as we could, partially because we saw it as an opportunity to to get to scale, partially because we are a customer-driven company and we wanted to help out as many clients. And candidly, many clients just didn't have choices next year as some of the other participants in the industry shut down. So I would say, in retrospect, we probably took a little bit more volume than we could handle well. And within that, we probably took some parcels and some particular lanes that in retrospect we just couldn't accommodate as much as we wanted to. So as we go forward, we are very focused on handling the volume that we think we can do exceptionally well. So that limits you to certain lanes where we've got capacity as the industry continues to be capacity constrained and can with certain size parcels. So our sweet spot within the marketplace is parcels that are one pound-ish, slightly above, slightly below. So within that, as you said, we saw a volume around 40 to 45 million parcels in the second quarter. We suspect that will be probably slightly higher in the third quarter as clients begin to prepare for peak. And then a fourth quarter that will be on top of that, perhaps slightly below last year. But our focus is on what we can do well, what we can do with a high service level to a client, and importantly, what we can do profitably. One of the things that happened last year is we got so much volume all at once, we had to throw a lot more cost at it, both from a labor and transportation perspective. We're clearly gonna try to accommodate as many clients as we can again this year, but we're gonna do it in a way that we can have the highest commitment to service levels at the same time, do it in a way that's economical and profitable to us. So hopefully, I know that's a long-winded answer, but I think it's important to kind of understand the overall dynamics.

No, I think that was really helpful, I guess one question or my follow up question is just how do we think about your opportunity to grow and this is over a longer term period of time. Is it incremental customers that are around that one pound level or will you develop your facilities such that you can handle a wider variety of parcels? I'm just trying to think about how you think about your CapEx investment and what you do. Thanks.

That's a really good question. If you think about going forward, you had this one-time step up with a slight digression. I suspect as you get into 2022, the out years, what you're thinking about for sustained growth, it goes back to the 10% to 15% growth that the market was clipping along at. In terms of how we're thinking about it, the gating factor on size of parcel isn't as much and many more. We're going to continue to build out our footprint. We've got a couple more sites that we'll bring online here in the second half of the year. We're going to tool them for what we think our sweet spot in the marketplace is. I'd say think about the 10-15% long term. We will continue to build out the network. I think the build out of the network, and we're looking at different scenarios, candidly. Right now, do you accelerate the build out and finish it, or do you do it over kind of a more staged process and kind of meter that out? But I think the overall capital spending for the quarter was $40 million. That was kind of a reversion back to what it was. That's kind of how we're thinking about it for the moment. If we change that and we decide that we're going to accelerate, we will. But the total build out of the network is, in the context of our balance sheet, certainly very manageable.

OK, great. Thank you so much.

And we do have a question from the line of Ellen Klee with Maxim Group. Please go ahead.

Hi, good morning. Two questions. One is the adding of the two new facilities for e-commerce plus optimizing another one. What percent does that increase your capacity in domestic parcel? And then second, you highlighted cross-border as an area that attributed to your global e-commerce results. Could you just go into a little bit of what's behind that? Thank you so much.

Yeah, I want to defer on the first question. I don't get back to you in terms of how much capacity that increased. I don't think it materially increased the capacity. It was more a modernization of the existing facilities. And as you think about the economics of that business, The deeper you can ingest into the postal network and the closer you are to be able to ingest deeper into the postal network, the better economics that you have. So it was more kind of a fine tuning of the footprint to improve our efficiency and our costs as opposed to something that dramatically improved our increased capacity. I'm sorry, what was your second question, Alan?

Cross-border.

So cross-border is a combination of a couple of things. First of all, exchange rates matter a lot in cross-border. So when you've got a relatively strong dollar to other currencies, that helps. We continue to invest in our cross-border platforms. We've got a couple of you know large clients that you know continue to give us more and more demand particularly from the United States into Canada and you know interesting enough we're able to protect pricing in that marketplace as well so it's you've got some macro things that are going for you with currencies and you know we've got a very good capability particularly US to Canada which is attractive to some of the larger clients with meaningful scale

Thank you.

And we do have a question from the line of Kartik Mehta with North Coast Research. Please go ahead.

Hi. This is Alex on for Kartik. Good morning. Our first question had to do with just the profitability of global e-commerce. Within this elevated demand environment, could you just talk about some of the factors that increased profitability for the quarter? Was it the in-source of new lanes, better use of the spot market, and variable label? Just some of those factors that improved this quarter.

I want to take a crack at that, and I'll add some color.

Sure. So we saw improvement in two key variables. I mean, we saw with the changes in management and labor strategies that we have been implementing in combination with the automation, we saw improvement in parcels per hour. So our labor productivity is improving. And the second factor that we also saw improvement was around our transportation. So we're continuing the strategy that we have mentioned about insourcing lanes and making sure we optimize the capacity of the trucks better. So those two factors I would say were at the top and of course we continue to work our postage and ensure we deliver at the best penetration levels that we can in the USPS. So I would put them in kind of that order.

I think Ana said it quite well. I would also add, so if you think about pricing, so pricing quarter to quarter, importantly, stayed pretty steady. So as the industry continues to be capacity constrained, pricing's holding. We expect pricing will actually go up in the second half of the year as there's more volume and more demand. as Ana said, you know, labor was an improvement quarter to quarter, pretty substantial improvement. But that's not really much of a product of the automation. That's just the labor model maturing. So if you think about, you know, what our labor strategy had been or what it was when we bought Newgistics, you know, a bit ago, it was all a temporary labor force. And it remained a temporary labor force, you know, well into last year. That's problematic because you just don't get enough you know continuity in the specific role so as we've moved to a more permanent workforce you know you can see the productivity improve so we're now at I think 40% of the workforce is permanent you know we want to get that you know a little bit higher which will allow you to kind of flex up and down with volume so you know I say that because it demonstrates and reveals the power of just having a more mature model. And also, importantly, the benefits of automation are still in front of us. So while we added some automation in the quarter and we kind of like what we're seeing, I would consider those as kind of test and learn and sandbox type initiatives. So it makes you very excited about that. Transportation improves, you know, good quarter to quarter. It's still well above last year. So if you look at the transportation unit costs from this year to last, it's still way high. So, you know, we still have an opportunity in front of us, you know, to be able to insource more of our own trucks. But, you know, again, there's lots of opportunity in both labor and transportation. And, you know, there is opportunity in our postal costs, which is the biggest single line item. But that's That's a function of being able to ingest deeper into the postal network. And I would say, you know, the other thing we kind of, I mentioned in my remarks in honor of mentioning her remarks. I mean, if you look at the 16 sites that we have now, we have 16 new leaders over the last 12 months. So we have a very experienced team right now. And I would say not just experienced in the world of warehousing and logistics, but experienced in the world of postal ingestion, which is kind of its own little world. And then on top of those 16 leaders, first of all, I would mention Nick Smith, who was really the architect of much of our strategy around global e-commerce, has moved to a product and strategy world, which is terrific. It gives them more time to kind of think about how we go forward. To the team, we've also added a new person running our 16 centers. It's from Amazon, as well as an individual from C.H. Robbins running our transportation. So what you're looking at now, you know, starting with Nick and team, you know, led by Greg Zegers, is a very experienced team that's been there and done that. And it's fascinating to see as you put these new leaders in place how quickly they're able to, you know, do the basic blocking and tackling, and you see improvements.

Okay, great. Thank you. And then also, in regards to the growth that you saw within the equipment sales, I know part of that growth was just from the comparison of last year, but was there anything major that was also contributing to that growth for this quarter? Was that the higher product sales within the ZenPro product family?

Yes, you're absolutely right. Part of that was, of course, the easy comparison that was mentioned, but we're seeing great attraction in the market from the CENPRO family, both the mail station and the CENPRO-C and the shipping capabilities that that tags along. So we're seeing that, and we started also some international Rollouts of the product.

Again, it's easy to kind of get lost in the year-to-year dynamics, and there's so much noise in the numbers. But, you know, Ana's comment about growing 1% versus 2019, you think about that, that's a meaningful accomplishment in the context of a market, a mail market that's still declining. And, you know, if you go back to 2019, that kind of takes out all of the comparison issues, and it leads you back to precisely the point that Ana made, is it's New product innovation. If you look at the new products that the CENTAC team has introduced, they're just doing great. And they're doing great domestically, and we're starting to roll them out internationally. And if you look at their overall revenue that's driven by new products, it's meaningful. So the innovation pipeline is really starting to hit the ball and hit the ball hard.

Okay, great. Thank you. Thanks for the insight.

and we do have a question from the line of Anthony Levodzinski with Sudoti and Company. Please go ahead.

Good morning and thanks for taking the question. So first on the global e-commerce side, so nice to see that you will be able to get that to be EBITDA positive for the full year. So in order to get that business to be EBIT positive, is that more of a function of gaining more productivity or more scale? Can you just... comment on your high-level thoughts there?

Yeah. So first of all, I'm going to take a small victory lap that we're actually EBITDA positive in the first half by a couple hundred thousand dollars. So we expect that to continue in the second half as we get more efficient and more productive and more volume. In terms of your broader question of the path for profitability, sustained profitability towards our long-term models for global e-commerce, I'm going to caveat this up front in that if you would have asked me that question 18 months ago, I would have given you an answer of how we get to the long-term model. The world's changed a lot in the last 18 months, not the least of which is pricing's gone up by 20%, 25%. Unit cost on transportation has gone up substantially. So we're redoing the long-term model. But with that caveat of how we think about the long-term, If you look at the path to the long-term margins, it will principally be driven by labor and transportation. So labor and transportation provide 60% of the total. If you think about the postal costs, that's another couple of points. If you think about the benefit, the mix between mix, scale, and pricing, that's a slight positive. But transportation and labor are the principal cost, then also warehousing kind of gives you a couple points as well. So labor and transportation are the things to keep an eye on. And I don't think that, I mean, we're going to fine-tune the long-term model. I don't think that'll change that much.

Okay, that's very helpful. And then switching over to the Centec business, so you posted your third consecutive quarter of improved EBIT. How sustainable is that? What are your thoughts there?

Well, we think it's the right long-term thought. It's something that I wouldn't lead you to believe that that's something you would expect in 2022, but as we think about the long-term model, we truly believe that that business is positioned to be able to grow revenue and grow profit. It's just got to get the shipping business into a lesser degree of the financial services business of a little bit more scale. So long-term, yes. Short-term, we might have a couple quarters, as we have, kind of getting our nose above water. Medium-term, we expect continued progress.

Got it. And just to follow up on that, actually, on the CENTEC piece, so how much of your revenue is now coming from shipping?

Well, it was $31 million out of the total.

Got it.

All right.

Thank you, and best of luck.

Thank you.

And we do have a question from the line of Anana Garhor from Loop Capital. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Hey, Mark, just on the – I guess on – on sort of the e-commerce marketplace and your thoughts about it, I guess, or at least the company's position that it does sort of go back to being a 10% to 15% revenue growth business. I guess, what are your thoughts on percentage of retail remaining online? And it sounds like, so a couple of things. Is it stronger, is retail online stronger now? I mean, maybe it's sort of just purchasing online being still 24, 25%. Is that higher than you thought it would be, you know, when we entered the year? And if it does stay elevated meaningfully above the mid-teens level, would that alter your thought process around the 10 to 15%? Or would it alter your thought process around long-term pitney? and I have a couple follow-ups, thanks.

Sure, so I would say there's been kind of an evolution of thinking on percent of retail over the internet. When COVID first hit, that was kind of the million dollar question is how much of this volume sticks. I think shortly after, shortly into the pandemic crisis, people became convinced that buying habits had changed substantially in a a more permanent way. So, yeah, I think, you know, you can argue whether it's going to be 24, 25, 26, you know, where it settles out, but it's going to settle out well above where it was. I think it's pretty clear. And certainly, you know, working from home over the last 16 months, it's been striking the number of deliveries that come to the door. I don't think that's ebbing at all. I do think once it kind of finds that new and many more. In terms of how that makes me think about the opportunity, I love this opportunity. It's an opportunity that's got strong secular growth. It's an opportunity that's got industry players that are responsible in terms of how they think about pricing and how they think about managing demand. It's an industry that leverages our relationship with the post It's an industry where we've got the right to win. If you think about it, you followed the company for a while. Presort is a postal ingestion model for mail. What our global e-commerce business is is a postal ingestion business for parcels. We understand this space. We have the right to win. We've got all the right intellectual capital to be an important player here. Again, we ride off the postal services scale, so we're able to participate in this marketplace with out having to buy planes, trains, and automobiles. I really like where we're situated. It couldn't be a better opportunity for us.

Going back to the conversation you and Shannon were having, is there an opportunity to change the tooling or add to the tooling in the warehouses and expand the TAM, I guess, at some point in the future that would make a difference to the business?

I don't feel compelled to have to expand the PAM. It's plenty big as is. So if you think about the addressable market of small parcels, we can grow substantially for a long, long period of time without having to focus on retooling our warehouses. So addressable opportunity is not the problem.

Okay, awesome. I got two more quick ones. Given what you've seen so far in the marketplace this year, do you feel any different about sort of the leverage points in the e-commerce model? Do you think you can get to some of them more quickly over time? And this maybe even doesn't take longer. I mean, I guess sort of what's your thought process six months into this year on the leverage points on e-commerce over time?

I still think 2024 is kind of the right thought for us in terms of getting to the long-term model as I look at what needs to get done and as we kind of refine the volume a little bit to be more congruent with our capabilities and letting the labor model and the transportation kind of mature. So as I said, we're updating the long-term plan now and we'll review that with you sooner versus later. But right now I think it's I still think the overall margin aspiration time frame is kind of correct. Some of the elements underneath it might be a little bit different. I mean, certainly pricing, I mean, well, we know they're different. Pricing is way different than what we thought 18 months ago as our transportation costs. So, you know, labor costs will kind of, I suspect, at an hourly worker, they'll go up, but we have such an important opportunity to automate that, you know, our focus is on how we bring in a more reliable labor base that stays with us and add automation to that.

That's helpful. And then just quick housekeeping. This one would be for Anna. Anna, can you quantify the benefit from the lower bed debt expense to the e-commerce unit?

Yeah, so the benefit was around $7 million for the quarter.

Got it. And any context around if that sort of going forward, if that will continue or change in any way?

No, I mean, we expect the levels that we have to be realistic. Of course, we have some seasonality, as you know, based on our buildings and everything, but we feel pretty good with our customer base and the types of credit that we have in our receivables. So based on what we see into the future, we think the levels should maintain.

And to the extent CSO is a predictor of this, which it is, DSO in that business is terrific. Their cash conversion in that business is crazy good. DSO is at industry best levels.

That's helpful. Thank you guys. Thanks a lot.

We do have a question for the line of Jeff Harlib with Barclays. Please go ahead.

Hi. Good morning. Can you go into a little more detail about the semiconductor and supply Shortages that you cited potentially in 4Q, in which products, in which businesses?

It's in Centec, in our CENPRO product line. So we use chips from principally Asia. So it's kind of the same chips that everyone else is vying for. We're vying for as well. We're pretty confident that we've seen our way through the third quarter. But you follow the space so you understand how dynamic that is. and, you know, it presents some risk, temporary risk to the fourth quarter. We see that risk, you know, as less than we did probably 30 days ago, but there's still a risk.

Okay. And then in CENTEC, can you just talk a little bit about the, in terms of the CENTRO refresh cycle, you've seen very strong equipment sales. You know, how much of your base do you see that rolling through? and when do you see that sort of maturing?

So we see it rolling through all of our base. If you think about that business, it's a lease business. So the normal rhythm is you have probably 20% to 25% of your products come up for renewal each year or trade-up to a new technology. So it's kind of rolling through on a fairly predictable basis. I think there's a couple more years left. and certainly most of the international opportunity is still in front of us.

Got it. Thanks very much.

And with no further questions in queue, I'll now turn the call back to Mr. Lautenbach for any additional remarks.

Terrific. Thank you. And thank you for joining today's call. Early in the year we said we were poised for improved profitable revenue growth. We characterized profitable revenue growth as the last chapter of a successful transformation. And we also said that global e-commerce would be EBITDA profitable this year. And while this year isn't done, I like where we stand on profitable revenue growth, and I really like where global e-commerce stands in terms of being EBITDA positive. Another data point in the second quarter. More work to do for sure, but I certainly like how we're situated as we get into the second half of the year. Thank you for your time, and we'll talk soon.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.