Pitney Bowes Inc. (NYSE:PBI) Q2 2020 Earnings Conference Call July 30, 2020 8:00 AM ET

Company Participants

Adam David - VP IR
Marc Lautenbach - President and CEO
Stan Sutula - EVP and CFO

Conference Call Participants

Ananda Baruah - Loop Capital
Shannon Cross - Cross Research
Anthony Lebiedzinski - Sidoti & Company
Allen Klee - National Securities Corp
Basel Kanaah - Northcoast Research

Operator

Good morning, and welcome to the Pitney Bowes’ Second Quarter 2020 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 speakers for today’s conference. Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations.

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

Adam David

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our earnings press release, our 2019 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations.

Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize many of the points we will discuss during the call. These slides can also be found on our Investor Relations website.

Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few operating remarks. Marc?

Marc Lautenbach

Thank you, Adam. And thank you everyone for joining us. I'd like to begin the call by thanking all the essential workers, including the Pitney Bowes team, for their dedication to the work in what is precedented time. And likewise, our hearts go out to all who have lost loved ones to this terrible virus.

We continued [indiscernible] in challenging times and unchartered territories. And as I mentioned in our last call, times of economic dislocation and this is certainly that. Our times with market share changes hands. Our focus from the outset has been to come out of this period better than [indiscernible].

I will let Stan take you through the specifics of the quarter. But from my perspective, the quarter was quite good. We had excellent execution and made the best [indiscernible] difficult situation. Looking at the quarter from a longer-term perspective against our objective of coming out stronger. Similarly, we hit the ball well.

First and foremost was the health and wellbeing of our employees. We made the necessary changes to how we did business to keep our employees safe, and we got high marks from our team. Likewise, we put a premium on our balance sheet. We exited the quarter in a much [indiscernible] position.

We had already refinanced much of our debt. And in the second quarter we substantially increased our quiddity exiting the quarter with over $1 billion of cash and short-term investments. We will continue to be diligent about our balance sheet and liquidity position.

In our Global Ecommerce [ph] business, we grew 100 new customers and [indiscernible] unprecedented volumes. I have heard others in our industry talk about volumes consistent with the holiday peak. Our domestic delivery volume in the second quarter were over two times holiday peak.

I won't say we were terribly efficient in dealing with the volume as the [indiscernible] touch off guard. But the bottom line has been moved an unprecedent number of parcels. The net effect of the new customers [indiscernible] will achieve scale [indiscernible].

We will accelerate some investments and will take some time for our expanded team in our new facilities [ph] to hit their stride. But they've already made great progress in handling the new volume levels.

Global Ecommerce [ph] business [indiscernible] now over $1 billion and grew over 40% in the second quarter. This is a business that didn't exist eight years ago.

Our Presort business performed better than the market and was able to make an important acquisition. The ironic effect of decreased volumes in the Presort world is fewer clients and third parties have sufficient volume to achieve five digit densities, which is what drives the economic [ph] [indiscernible] in the Presort world. Net-net our Presort businesses has clearly [indiscernible] this pandemic in a stronger market position.

And our mailing business. Our investments in online offerings [indiscernible] digital channels really pay us in the quarter. Our online offerings in addition to our new central mail session, obviate the need for field service teams to physically install an asset in [indiscernible] digital channels are very well suited for offices being shut down.

If you look at the quarter from a longer-term perspective, the investments we have made to move our business to ecommerce shipping, build capacity for that business. Investments at Pitney Bowes commerce cloud, new offerings and new channels all paid off. We’ve built a more agile, flexible and contemporary business in the second quarter is a clear proof point.

The obvious question we are asking ourselves and you and our investors will ask us is [indiscernible] for mailing and parcel volumes going forward? The honest answer is we don't know for sure. Mail volume saw drop through the second quarter. But we are seeing a slightly improved trend through July.

In the world of ecommerce [indiscernible] have taken a material stair step up. Not clear if volumes will stay at these elevated levels. But there's no doubt that buying behaviors change. Customers are buying online more frequently and the number of brick and mortar stores [indiscernible].

The second quarter was also notable and that for the first time in Pitney Bowes’ [ph] history, shipping revenue with the majority of our total [indiscernible]. Our going forward portfolio is weighted towards growth markets. Were in markets where we have a clear right to win and in fact, we're winning today.

So it’s hard to be precise about our going forward mail and parcel volumes. I like how we're positioned and I have no doubt that we're going to come out of this terrible time in a much better position.

Now I will turn it over to Stan.

Stan Sutula

Thank you, Marc and good morning. Our continued focus remains on the health wellbeing and safety of our employees, clients, partners and communities. As we discussed in our last call, employees that can work remotely continued to do so.

Within our facilities, we are enforcing safe social distancing, staggered shifts and breaks, mandating protective masks, conducting temperature checks in higher risk locations, and sanitizing multiple times a day.

All areas of our business have been impacted by COVID; some positively and some negatively. In the US market ecommerce as a percent of total industry retail sales increased more than 10 points from 16% in 2019, to more recently 27%.

We are also experiencing a dramatic shift to ecommerce, which fueled our strong revenue growth this quarter. In the second quarter, revenues associated with our shipping products comprised 51% of our total revenue, which is the first time our shipping revenues have outpaced mailing.

As anticipated, we are experiencing pressure within the mailing related businesses. We are leveraging the investments we have made over the last several years to address opportunities and help mitigate some of the pressure.

We estimate that the incremental costs related to COVID in the quarter were approximately $12 million. These costs largely relate to higher bad debt expense and ensuring the safety of our employees primarily on PPE, supplies and quarantine pay for exposed employees.

In addition, we saw higher postal costs related to injecting parcels directly into the USPS and bypassing our network in order to better serve our clients. And, of course, during these uncertain times, we continue to keep a tight focus on our liquidity position and cash.

Let me briefly recap. We continue to maintain a strong liquidity position. We ended the quarter with over $1 billion in cash and short-term investments. Free cash flow was $148 million, which is a significant improvement from the end of the first quarter.

Through the first half free cash flow is $101 million, up $68 million over prior year, which leaves us well positioned for the second half of the year. We have done a lot of work around strengthening our balance sheet and addressing our debt profile. We have no bond maturities until October 2021. And that amount is manageable at $172 million.

We will continue to remain focused on our balance sheet. We also announced a drawdown of $100 million on our revolving credit facility which took place in April. There remains no immediate need for the funds, but we believe this was a prudent thing to do given the continued uncertainty in the market.

We remain focused on working capital. And we continue to reduce discretionary spend throughout the organization. For the first quarter, we improved DSO by three days and we also reduced OpEx by about $20 million. We are reprioritizing our capital needs around essential and necessary investments to support our long-term objectives.

Last quarter, we estimated that we can reduce our discretionary capital spend by $30 million to $40 million this year versus our original plan to spend approximately $140 million. Based on the accelerated demand in ecommerce that we are seeing, we are estimating that we will reduce our annual CapEx spend more likely around $20 million for the year.

Within Wheeler Financial, we expect new originations to be no more than $25 million in 2020, as compared to our original plan of $80 million. We remain committed to building out our financial services over the long-term.

We will continue to be prudent, when it comes to committing capital. Assumed in our cash flow for the year is our intention to continue to maintain our current dividend at an annual run rate of $34 million and we are limiting M&A transactions, who will not repurchase shares in 2020.

Let me now take you through our second quarter's results and discuss some of the trends we saw in each of our businesses. It's in the past, unless otherwise noted, my statements going forward will be on a constant currency basis, when talking about comparisons, and on an adjusted basis when talking about earnings related items, including cash flow.

Reconciliations of all non-GAAP to GAAP measures can be found in the financial schedules posted with our earnings press release and on our Investor Relations website. For the second quarter, revenue totaled $837 million, which was growth of 7% year-over-year. Adjusted EPS was $0.04 for the quarter.

GAAP EPS was a loss of $0.02 and includes charges of $0.07 for taxes related to the settlement of certain investment securities, as well as charges of $0.02 each for restructuring and asset impairments and discontinued operations. This is partly offset by a $0.05 gain on the sale of an equity investment.

EPS this quarter also includes $0.02 from insurance proceeds that we received as it relates to the malware attack that we experienced late last year. This partly offsets the estimated incremental costs related to COVID of approximately $12 million for $0.05 of EPS in the quarter.

Free cash flow is $148 million. And GAAP cash from operations was $153 million. Free cash flow increased over prior year as a result of higher accounts payable and accrued liabilities driven by growth in the business and higher customer deposits, of which a portion is timing related.

We also saw a higher run off of finance receivables which benefited free cash flow. Let me briefly recap where we are on our capital position through the end of the second quarter. As I stated earlier, we ended the quarter with just over $1 billion in cash and short-term investments.

During the quarter, we used free cash flow to return approximately $9 million to our shareholders in the form of dividends. We made $5 million in restructuring payments and spent $34 million on capital expenditures.

From a debt perspective, we ended the quarter with $2.7 billion in total debt, which includes the $100 million draw down from our revolving credit facility. In terms of our net debt, when you take into consideration the billion in cash and short-term investments, in addition to our finance receivables of $1 billion, our implied net debt position on an operating company basis was approximately $650 million [ph] at the end of the quarter.

Turning to P&L, starting with revenue performance by line item as compared to prior year. Business services grew 27% and rentals grew 2%. We had declines in financing of 7%, support services of 10%, supplies of 29% and equipment of 32%.

Gross profit was $284 million with a margin of 34%. This is a decline of 8 points from prior year, which largely reflects the shifting mix of our portfolio and impact of COVID. SG&A [indiscernible] million or 28% of revenue, which was down about $7 million from prior year [indiscernible] over 2.5 points as a percent of revenue.

The improvement from prior year as a result of actions we have taken around lowering discretionary spent. R&D expense was [indiscernible] of revenue, which was down $6 million from prior year. EBIT was $48 million in EBIT margin was 6%.

Compared to prior year, EBIT declined $31 million and the EBIT margin declined by 4 points driven primarily by the gross profit decline, which was partly offset by lower SG&A and R&D spent. Interest expense, including financing interest expense was $38 million, which was down slightly from prior year.

The provision for taxes and adjusted earnings was about $4 million. And our tax rate for the quarter was 36%. Weighted average shares outstanding at the end of the quarter, $172 million, which is about 6 million shares lower than prior year [indiscernible] the share repurchases completed in 2019.

Let me now discuss the performance of each of our business segments this quarter and what we are seeing through July. In our commerce services group revenue was $517 million, which was growth of 26% over prior year. EBIT was a loss of $6 million and EBITDA was a positive $19 million.

Within Global Ecommerce, revenue was $398 million, which was growth of 41% over prior year. We are experiencing a dramatic shift in the market to ecommerce, which fueled our overall revenue growth this quarter.

We signed over 100 [ph] new clients in the quarter, including some sizable clients and competitive wins, which is testimony to our value proposition and evidence of our position as a key player in this market.

We are diversifying client base, making it less reliant on certain volume clients. It's also important to point out that most of these new client volumes are not yet in our second quarter results. In addition, market disruptions internationally have created opportunities to expand our U.S. inbound solutions ahead of the new UPU regulation that went into effect on July 1st.

And we are seeing some volumes, [indiscernible] platform during the second quarter, as a result. We expect this to be a go forward opportunity. We processed 62 million parcels, a record number in our domestic parcel services, nearly doubling what we did last year, and 80% more than that of the first quarter.

We saw a continuous ramp up in volumes for the second quarter driven by our delivery services. Our domestic revenue grew 36% over prior year led by strong growth in our digital shipping API volumes.

Our cross-border revenues declined 6% from prior year, but the trend through the quarter improved. This decline was expected, given continued restrictions on international flights in addition to the [indiscernible] a large cross-border logistics client who suspended shipments mid-March, but has since started to ship again with us toward the end of the quarter.

Overall Global Ecommerce revenue accelerated through the quarter from 12% growth in April to [indiscernible] growth in June. To-date in July, we are seeing similar trends from the second quarter across the ecommerce business. We entered the third quarter with pent up demand for some of the new clients, as well as some backlog from the second quarter.

Typically this business experiences a step down in the third quarter from the second quarter due to seasonality. Given the current environment, we expect that paradigm to change here, with the third quarter being in line with the second quarter levels on the notion that people are traveling less, working remote and continuing online buying habits.

Looking at EBIT, recorded a loss of $19 million in the quarter. And EBITDA was a loss of $1.6 million. Both of which $10 million improvement from the first quarter despite the impact of COVID.

The second quarter EBIT margin of minus 4.7% was an improvement both sequentially from the first quarter and over prior year. Reflecting scale related benefits and transportation and warehouse cost per parcel, reached 31% and 45% respective from the first quarter.

The second quarter demonstrates that with scale the model works. We got leverage out of our warehousing and transportation cost per unit. This was partly offset by higher COVID-driven labor imposed due to expected demand. Compounding this, we increased our course by 80% in 90 day.

Labor in postal cost are opportunities where we can improve our performance over time, both through productivity and as demand becomes more predictable. As expected, we also saw higher direct expenses related to sanitize and safety procedures and higher bad debt expense. All of which are due to the impact of COVID.

We’re estimating that approximately half of the EBIT loss this quarter is attributed directly to incremental costs related to COVID, of which, most of these will continue during this pandemic. I'm pleased to report that we did not have to shut down any of our facilities during the quarter due to COVID.

The investments we've made over the last few years in our technology, our network and especially the two new flagship facilities on each coast at the end of last year have been instrumental in allowing us to handle the volumes we are seeing.

We've always said there are two pieces to getting margins to our long-term targets. Number one is scale. Number two is operational efficiency. The accelerated shift in ecommerce has grown volumes certainly faster than we anticipated, especially as it relates to our domestic delivery services, which today is at a lower margin than the overall ecommerce margins.

However, we still need to continue to invest in automation and operational efficiencies in order to better take advantage of this growth. As demonstrated with our investments in our new flagship facility, it is important to invest ahead of the growth opportunity.

And we will continue to do so as long as we see that opportunity. As a result, the second half of this year we'll be adding three additional facilities, and expanding one other. These new facilities will be smaller in size as compared to the flagship ones we added last year.

This will increase our footprint to better meet the growing client volumes and improve service levels to consumers in those metro markets. Looking at Presort Services, revenue was a $118 million, which was a decline of 8% from prior year.

Our Presort business saw significant impact on volumes from COVID during the second quarter, but better than the market. First Class Mail volumes which comprised about [indiscernible] process in this business declined 5%.

Marketing Mail volumes declined 22% from prior year. We have talked about the investments we are making in Marketing Mail Flats and Bound Printed Matter in order to expand this business to build a new revenue and profit stream. In the second quarter, our Marketing Mail Flats and Bound Printed Matter volumes grew 36% year-over-year and contributed to an overall increase in our revenue per piece.

Overall, for Presort, the lower average daily volumes were relatively consistent through the quarter. In July, we are seeing an uptick in daily volumes as compared to the second quarter. First Class volumes are declining similar to the second quarter in the low single digit range. And although, we're seeing some improvement in Marketing Mail volumes, those volumes continue to decline double-digits.

Marketing Mail Flats and Bound Printed Matter volumes continue to grow in the high double-digit range. We would expect our Presort mail volume trends to improve from current levels over time as the U.S. returns back to more normal behaviors in a more stable environment. But naturally, this is contingent upon the depth and duration of COVID.

EBIT was $13 million and EBIT margin was 11%. EBITDA was $20 million and EBITDA margin was 7%. While down from the prior year, margins were flat to the first quarter despite significant lower volumes and revenue. EBIT and EBITDA included a portion of the insurance proceeds received this quarter as it relates to the malware attack late last year, which was offset by the impact of COVID.

Through productivity initiative put in place and synergies with our e-commerce network, we're seeing improvements in our transportation cost per unit. We are seeing higher [indiscernible] driven cost related to sanitizing and safety procedures which is impacting labor cost. We remained focused on productivity initiatives and investing in automation in this business [ph].

Compared to prior year, we improved pieces fed to our equipment per hour resulting in 100,000 less processing hours. We continue to look for opportunities to expand our network. At the second quarter, we closed on a small acquisition in the Dallas Fort Worth region, which was less than $10 million. This is expected to bring in over $230 million additional mail pieces into our network on an annualized basis and expand our reach in a competitive region.

Turning to our SendTech segment, revenue was $321 million, which was a decline of 15% from prior year. As we discussed last quarter, we saw the greatest impact on the in-period revenues related to equipment sales, which were down 32%, as he saw longer sales cycle times in the quarter, as well as an elongated install scheduling due to COVID.

As businesses reopened, we saw the equipment sales trend improved through the quarter from down over 50% in April to down just under 20% in June. Supplies declined 29%, as they relate to demand and usage, which has been impacted by COVID.

Similar to the equipment sales trends, the decline in supplies improved from down 30% in April to down about 12% in June. Based on the backlog and expected shipments in the third quarter, which are leading indicator for equipment sales, we expect sequential improvement on equipment sales in the third quarter, but still a double-digit decline from prior year similar to what we saw in June driven by a tough prior year comparison.

In the second quarter financing and support services revenues declined driven by the lower portfolio and decline in client activity. We've discussed in the past our investments for long term potential across all of our businesses.

Within SendTech, we've invested to diversify our business model and have evolved from purely a hardware-based mailing model to a cloud-enabled shipping and mailing solutions model with analytical capabilities. Our investments are in three primary areas, new product technology, channel capabilities, and developing a new revenue profit stream around shipping. These investments are starting to pay off.

In new products technology, we launched our new central mail station, a first of a kind device with a meter in the cloud capability. Investments in digital web capabilities, we shipped over 5000 units in the quarter since launching, exceeding our expectations.

We have invested in our channel, especially in building our digital channel capabilities, including direct web sales. In North America, 65% of our supplies transactions are now through the web. Within SendTech shipping, we've invested in digital capabilities, leveraging the API's from Global Ecommerce and adding in [indiscernible] like multi-carrier capabilities.

Shipping revenues grew over prior year. [Indiscernible] SendTech shipping revenue was about $30 million. Within this we have built out an innovative online SendPro shipping service, and in the second quarter, the number of paid subscribers grew nearly 40% prior year.

We have also invested in our multi carrier shipping [indiscernible] which is getting good traction more than just doubling the shipping label volume through prior year. Through these investments, we now have an end-to-end solution for our clients to transact with us, both through our physical devices and/or in an online manner, which is a key differentiator for us.

Our business [indiscernible] itself in enhanced capabilities by adding new revenue and profit streams. During these times customer preferences for consumption models have accelerated. We are well prepared to meet these changing preferences during these market shifts through the channel digital based investments we have made.

These will also help accelerate the SendTech transformation. Despite the decline in SendTech’s revenue, the EBIT margin remain solid and within our long-term model range. EBIT was [indiscernible] million. The EBIT margin was 32.5%, EBITDA was $113 million and EBITDA margin was 35%.

We monitor delinquency rates on a daily basis. And not unexpectedly saw a slight uptick in the second quarter with greater than 30-day delinquency increasing from first quarter results. To date in July, early stage delinquency in our leasing portfolio has improved from what we saw earlier in the second quarter, which is an important indicator for future potential write offs.

Within our postage lending portfolio, we are seeing a nominal increase in early stage delinquency, largely tied to the resurgence of COVID in certain areas of the US. Although as businesses have reopened, we are seeing more customers pay their bills on time and in full versus making minimum payments, which is another promising side.

Despite some signs of progress, we remain vigilant and focused on [indiscernible] in our portfolio. Before we take your questions, let me recap. The current environment has created a dramatic shift to ecommerce and this quarter had a number of notable items.

For the first time our shipping revenues outpaced those associated with mail. We exited the second quarter with just over [indiscernible] in cash and short-term investments. Our next bond maturity is in October 2021 [indiscernible] $172 million.

We continue to take actions within our capital and cost structure across the business to maintain adequate liquidity [indiscernible] the external environment worsens. While we continue to reduce discretionary spend, we will continue to invest a portion back into the business around keeping our employees for social distancing, providing [indiscernible], sanitizing equipment and all facilities on a regular basis. This has an impact on our labor productivity, but we will not compromise when it comes to keeping our employees safe.

While historically, our third quarter revenue is typically lower than the second quarter based on the trends we saw in June and so far through July, despite the uncertainty in the macro environment, we expect modest improvement in the third quarter as compared to the second.

This is being driven by the continued ecommerce, along with some improvement in our mailing related businesses. As a result of the revenue improvement, we would expect EPS to also modestly improve in the second quarter, the additional COVID related costs, which we expect to continue to impact our results.

And while we are cautiously optimistic [ph] about improving trends in the second half of the year versus our first half, there is still a great deal of uncertainty, particularly in the U.S., around the resurgence of COVID. We are seeing states already start to take actions on modifying the original phasing and reopening plants.

Given the continued level of uncertainty around COVID consistent with the direction we provided last quarter, our annual guidance for 2020 will remain suspended.

With that, we will now take your questions. Operator, please open the line.

Question-and-Answer Session

Thank you. [Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital. Please go ahead.

Q - Ananda Baruah

Hi, good morning guys. Appreciate all that detail that's really helpful, given all the business crosscurrents. I guess a few, if I could. Marc, I believe way back into your prepared remarks with regards to ecommerce, a comment was made around achieving scale sooner than anticipated.

Did I hear that accurately? And if so, could you give us some context around it? And sort of get it that you're adding the three new facilities. But could you kind of walk us through, given that you were essentially breakeven this quarter in ecommerce or darn close to it, how we should think about kind of ecommerce margins going through the rest of this year?

And then I have a couple of follow ups as well. Thanks.

Marc Lautenbach

Sure, I did say that. So you heard it correctly. First of all, I apologize that the recording line on this side was a little bit fuzzy. So if you didn't hear things, please feel free to clarify. So there's no doubt that in the second quarter we certainly saw it in our results.

But you've seen it in UPSs results and you see it in USPS volumes, FedEx volumes that there was a stair step increase in ecommerce shipping. So if you think about what the market was pre-COVID, think about of 10% to 15% linear increase, we obviously saw something three or four times that in the second quarter.

So that stair step increase will allow us to get to scale sooner. The unknown is how much of that stair step increase sticks. So if you look at the volumes in the second quarter and you assume that's the new reality, you come to one set of conclusions.

And if you assume some of that volume is going to stick, but some of it's going to dissipate, then that's another scenario. In either case, our projections are that that business gets to scale sooner.

In terms of your second question about margins, I'll let Stan elaborate. But our expectations, we continue to see margins improve as we go through the balance of the year. I'd reiterate something that Stan said, because it's really hard to underestimate the impact.

80% of the workforce in that business was new. And there's just a certain learning curve as you come up, the experience curve in terms of how you work your way around those facilities. So if for no other reason, just the team hitting their stride, we'll get more efficient. But clearly scale continues to be an important dynamic.

So I'll let Stan elaborate.

Stan Sutula

We give a little bit more color. Ananda, good morning. The three new facilities, they are smaller facilities so think 100,000 square feet, plus or minus. And they're needed to kind of fill up spots in our, in our network that we need to optimize.

And when you think about that, from a CapEx point of view, more like $5 million to $10 million and from on OpEx maybe about $5 million or so, a little bit less than $5 million for the rest of the year. So, we're adding capacity to better serve our clients.

Let me spend just a minute on the margin and mark a couple of the important points. So, the Q2 volume would put us roughly on a $250 million annualized run rate. But there are two components driving improved EBIT margins, scale, and then operational efficiency.

So, let's start with scale. We've invested ahead of demand with the two new flagship sites we opened in Q4. That strategy actually enabled us to handle this dramatic surge in volumes and volumes doubled on a year-on-year basis.

But we are seeing the benefits of scale and we're seeing it in two areas; transportation cost and by roughly a third, and then fixed warehouse costs improved by over 45%. We're not seeing it yet is in labor. And in labor, this really manifests itself in our workforce, as Marc mentioned, growing 80% in 90 days, you can't do that efficiently.

And this bit came largely through temp labor, but adding multiple shifts across the network. And so we're doing that, you combine that with a COVID-impacted spend on the Global Ecommerce business, which was roughly $10 million, or roughly just over half of the impact on EBIT, you can see that headwind that we have.

I think, there's good news within that though. We are going to get better at the operational efficiency in particular around labor. And then adding these new facilities will allow us to better operate on a M2M basis.

So, we've been investing for operational efficiency, which is the second part. So, investing in the network that accelerated growth to ecommerce is certainly faster than we anticipated that gives us a great opportunity to leverage operational efficiencies.

We're in the middle of doing time and motion studies as an example. And that will improve our ability to operate that labor in a more efficient manner. And then the addition of those facilities will certainly help us.

And Nick Smith and his team, I think, deserve a big nod of the hat for being able to handle that surge in volume and that compressed of a timeframe. I mean, typically, we start planning for peak in first quarter, and this all hit in a very sudden fashion.

Ananda Baruah

That's all very helpful. As a quick follow on to that and then I'll just leave the floor. You guys mentioned that new customer wins, new market opportunities, is share gain a fair way to think about it? And if not, just any context there? Because what I'm really trying to paint a picture for is regardless of how volumes ebb and flow given COVID, do you think you sort of gained some stickier customer opportunities and relationships so that you exit this just from a stronger conviction, then you went into a structurally stronger position?

Marc Lautenbach

I’d say we gained share. I'd say we gained customers. I think, the important part of those 100 new customers I mentioned was they contributed very little incremental revenue to the quarter. So that revenue is still in front of us.

So we'll see over the next coming days, but I don't have any doubt that if you look at, as I said, if you look at our peers in history, they're talking about volumes that are consistent with peak, we were well above peaks, I think, by any measure will have gained share. I think that's structural to your point.

Ananda Baruah

Okay, great. Thanks. Thanks a lot.

Marc Lautenbach

Thanks, Ananda.

Operator

Our next question comes from Shannon Cross with Cross Research. Please go ahead. Please go ahead.

Shannon Cross

Thank you for taking my questions. So first is, in terms of ecommerce it sounds like, obviously you've signed a lot of new customers and that. How's the negotiation going in terms of pricing and scale? As ecommerce became more of an important way of getting products to people during the pandemic, do you have pricing power? I'm wondering if anything is shifted there. And then I have a follow up. Thank you.

Stan Sutula

So, Shannon, on pricing in the negotiations. So, this has been an interesting time for us going through this. So, we've added over 100 new clients, their primary mission was getting product to consumers, and that's where we have stepped in and stepped up.

So, we have done some limited price targeting in areas that helped balance out the network and areas that where we're experiencing increased costs, but this is also going to come through scale. So as we bring additional efficiency, it allows us to modify our pricing through directing to coast, for example, on inbound from overseas. But we do see some pricing leverage in the market and we expect the volumes that that will continue on going forward.

Marc Lautenbach

I just add a little more color. I mean, if you look at the industry, our colleagues in this area are taking price up. We've done a little bit of that in the quarter. But I think there's another opportunity in front of us to think about that. The negotiations with customers are different in the sense that there's only a certain amount of capacity in the industry and the industry's at that capacity. So it does provide pricing opportunity.

The other thing that's perhaps not as obvious is once your business gets to scale, the marginal economics of another five million parcels isn't the same as when you're below scale. So it makes you think about incremental volume in a slightly different way and gives you a little bit more courage, if you will, to think about pricing.

Shannon Cross

And I guess how much of the -- do you have any idea, I'm sure you do, but when the crossover to where we'll really start to see the improvement in margin could come and I know there was a pandemic in that you're not giving guidance.

But I mean, is this a couple quarters away, just in terms of the volumes that you expect? Is this more you're going to have to spend more and that so it's maybe further out? Just if you can give us an idea of how quickly you think you can start to benefit from some of the scale?

Stan Sutula

Yes, Shannon. So obviously, it's an important question that we've stared at a lot. And we have a number of scenarios that we have modeled out. But this is a pretty unpredictable environment. So what we've looked at is we've demonstrated that improvement in scale in transport and warehouse.

We're confident that we'll continue to make inroads on the labor side. But that's going to take some time. A little bit of unpredictability is in the overall COVID impacts. And we see it across the U.S. in different areas seeing spikes up. And we can see that flow through some of our numbers.

What I would tell you is that as we go through the back half of the year, we expect that this business will continue to make progress on a quarter on quarter basis. But we're not going to predict the inflection point of when it cuts over. But you should expect that we'll continue to see benefits. I mean, we're encouraged by where we are now and we're encouraged by what we see in the month of July from the volume continuing.

Marc Lautenbach

[Indiscernible] just some raw numbers of we're at a $150 million looking at Stan parcels on annual basis before this were 250 now. The original plan called for layering in capital and automation slightly before you saw those increased volumes.

So I got to make a judgment about how much of that volume sticks and that will dictate the pacing and the sequencing of the capital on the automation. So if it all sticks and we'll move more quickly in terms of building the incremental capability to handle that officially. Right now we're throwing people at it, which is good. And we're able to accommodate the client requests as best we can, but it's not the most efficient.

Shannon Cross

Thanks. That was helpful. And then, Marc, can you talk a little bit, you had a leadership change during the quarter or actually, I guess after the quarter with Gregg taking over Global Ecommerce. Do you anticipate any changes or I mean, obviously you sort of had to jump in with a lot of volume running through the system? So do you can maybe just stress out a little bit?

Marc Lautenbach

Yes. So important to understand the structure that we had. So as you mentioned [indiscernible], it was a great colleague and we miss her and wish her well, left within the last 30 days. She was responsible for Global Ecommerce and Presort.

Within Global Ecommerce, Gregg ran most of it. Didn't run the operations, Nick Smith does that. So from that perspective, it's less of a change than it seems. Gregg was involved along with Nick and James Fairweather and [indiscernible] in the strategy. He was certainly on point for all the client relationships.

He was the Chief Commercial Officer who was responsible for the revenue. So it's perhaps less of a change than meets the eye. It was a pretty collaborative fluid team, they operated as a foursome, so we won't miss a beat.

Shannon Cross

Okay, thank you so much.

Marc Lautenbach

Thanks, Shannon.

Operator

Our next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Anthony Lebiedzinski

Yes, good morning. And thank you for taking the question. So, just looking at the Global Ecommerce segment, that just digging into that a little bit more. So, obviously the fourth quarter tends to be the highest in terms of, because of holiday shopping season and so on.

So, I guess with the new facilities that you're opening, or will be opening up soon. Can you give us a sense as far as what the potential will be for improved scale and as far as efficiencies? And also, I have a follow up to that as well.

Stan Sutula

Sure, Anthony, thank you. Good morning. So as you mentioned, the fourth quarter is typically the peak. And as I said earlier, we typically start planning peak right after we finished the last one. And so Q2 was a hit in a very sudden level of volume coming through.

We would not have been able to handle that had we not invested ahead last year in particular with the two new flagship facilities. Even with that we are now running essentially 24 hours a day with downtime to do maintenance, and temperature checks and things like that across most of our facilities.

So adding these three new facilities and expanding one other is going to enable us to be more efficient, have a better spread of labor and parcels across our network, better serve our clients. And importantly, as we head into peak, and we expect that these will be up late in the third quarter, but as we head into peak that will enable us to handle those volumes.

We expect that, with that additional scale, both the volume and the ability to handle it through the network, that's what gives us confidence that the margin will improve from Q2 to Q3, and from Q3 to Q4. And that's why we've made those investments.

We're also investing and things I mentioned the time and motion studies, but we're investing in operational efficiencies. Some of that for automation, but a lot of it is improving our processes and taking the best practices across our facilities and leveraging that to improve our overall efficiency.

And I'm confident that our team is going to be able to take the experience from Q2, and be able to leverage that. And as Mark mentioned, when you bring on that much workforce and that shorter period of time, just the learning curve alone is challenging. So we anticipate and are confident that we'll be able to see improving margins as we go through the back of the year.

Anthony Lebiedzinski

Okay, thank you for that. And then when would you expect to complete the time and motion studies?

Stan Sutula

They're ongoing Anthony. And look, we come out productivity in a number of ways. So we're looking at our cost modeling, our pricing. And this business is growing very rapidly routing lots of new clients, lots of new capabilities.

But the time and motion studies are always insightful. Because we are standing up new facilities, we're standardizing our footprint of how we want to operate. That gives Nick Smith and our operational team a lot more information on how to streamline the flow of parcels.

And we've made a number of changes already that have resulted in our existing facilities to handle far more capacity than they did last year. So those will be ongoing, but they will certainly help us heading into peak.

Anthony Lebiedzinski

Got it, okay. And then in terms of improved truck routing capabilities, where are you with that initiative now?

Marc Lautenbach

So we can tell you -- this is a good example of our transport costs improved by over a third. Some of that is just pure scale, you're filling up the trucks more. And then it's also the ability to look at that network and how you do your routing. I would tell you though, that we spent a lot of time and money to reroute parcels in order to meet our client's needs during the quarter.

So even though we improved our transport per parcel by roughly a third, I think there's more opportunity there, because we had to balance in between our facilities in particular, the two coast guards are hit particularly hard from China inbound volume that would come in big surges, and we would use -- we would offload to other facilities to try to balance out the network. That's why adding three new facilities is so important. We also expect that that will improve our transport costs going forward.

Anthony Lebiedzinski

Got it, okay. And the last question for me as the incremental COVID cost for the third quarter, do you think those would be comparable to the second quarter?

Marc Lautenbach

Hey, it is really hard to predict that. We know there’ll be an impact, I mean, the pandemic isn't going away. What I would tell you though is our preparedness continues to improve. If you think back to where we were in March, most companies including us, were getting PPE almost at any cost, so some of that has gotten better.

We've also gotten better at handling how do we do temperature checks, how do we do staggered shift, how do we do cleaning in between shifts and maintain our facility so our employees stay safe. So I expect COVID will still have an impact going into the third quarter. We don't know if that's going to increase or decrease, we said look part of that was bad debt.

And the retail industry is a tough industry and so, some of that could continue to manifest itself. That's adding new clients is so important. It diversifies our base and gives us additional protection. But the team did a really nice job in collections through the end of June. And then, candidly collection through July, the developing strong relationships with the clients and as you saw that manifest itself and improve DSO.

Anthony Lebiedzinski

All right, well thank you and best of luck.

Stan Sutula

Thanks Anthony.

Operator

Our next question comes from Allen Klee with National Securities Corp. Please go ahead.

Allen Klee

Good morning. Two financial questions and then one follow-up. The financial questions are could you clarify on your income statement you have other income of $17.4 million of what that is? And then, for your free cash flow for the quarter alone, the number was, it was extremely high I mean, if you annualize so it's over a 150 -- 100% free cash flow yield. So can you go into what's like normalized in that or what were the things that affected that? Thank you.

Stan Sutula

Sure Allen. Good morning, so let's start with the other income. As we said in our prepared remarks, we sold an investment which is not in our operational results, but it is in our GAAP results. And that investment generated about $12 million gain. And that treatment is consistent with how we treated others in the past. So again, not in our operational results but it is in our cash balance obviously and then, our GAAP result.

This was a sale of a 50% joint venture that we had. And so that closes out our participation in that. Again about $12 million was the gain. And then if you go to free cash flow, your second question, free cash flow this quarter at a $148 million obviously, was a very big number. Let me break that down.

I’ll start with if you recall in the first quarter, we did not have a strong free cash flow. But if you look at the first half at a $101 million, that's up roughly $70 million year-to-year. Let me start with the second quarter. So for the second quarter, there's a number of drivers. The biggest one was accounts payable and accrued liabilities, that's up about a $120 million.

And if you peel that back, accounts payables was up about 25, customer deposits was up about 35, GEC volume which drives more payables etcetera was up about 25 and then taxes payable. Those are the big drivers and they are very operational. The other big driver was a run-off in finance receivables. That was worth about $75 million.

Now that's not how we want to generate free cash flow, but it represents kind of where we are. If you think about how this works as finance receivables roll-off the balance sheet, typically, we're re-adding new equipment sales. And with equipment sales down 32% in the quarter, we obviously added less.

Compounding that is the installs. So, not being able to get into clients, not being able to get client activity and get in and install equipment, our backlog went up about $7 million. So I expect as we go forward that we still have some finance receivable run-off, but that number will mitigate as we are able to do more equipment sales, we saw that improve through the second quarter and as we were able to do installs.

Now offsetting that, was obviously an increase in AR of about $45 million. So if I take that, that was Q2, if I take that to the first half, obviously net income is down and that's a driver. But working capital was better. And if you look at that I rattled off a number of the items, but a lot of these are operational. Accounts payables was better for the first half by 25, taxes payable by 25, advance billings by 20.

And so, yes, finance receivables we expect to mitigate, And I would not draw obviously a line off the Q2 but we're pleased with the free cash flow. The team did a great job on collections. It puts us in a good position for liquidity for the rest of the year. We're in compliance with our debt covenants. And when you combine that with a total billion dollars of cash and short-term investments leaves us in a good position for the second half.

Allen Klee

Thank you. My last question is more strategic and it relates to potentially splitting the company up. I normally wouldn't ask something like this on the public call, but it just seems so compelling and obvious in the current environment, where if you look at pure play e-commerce companies and even ones that are unprofitable, I mean, I can think of Overstock and Wayfair and a bunch of other examples.

If you took the multiples that those type of stocks trade at and apply that to your ecommerce business, you could get a market cap or more than the whole market cap of your company today. And the market is just not paying you for your ecommerce business. And you could create tremendous shareholder value if the company was split up.

So the question is, is this something that you guys would consider?

Marc Lautenbach

Let me take a shot at not answering that question. So the first thing I would say is what we've said before. On a regular basis, the Board of Directors looks at all alternatives. That's something that's been true since I've been here. It will continue to be true.

The dynamic that you mentioned is obviously one that we've noticed as well. And we've studied. What I would say is what we've said all along is if an asset is worth more to a different set of owners than it is to ours, then that would be something that we would contemplate.

The second thing I said, and it's certainly true, is software as well as, when we sold a [indiscernible] timing's not an unimportant aspect of that. So we understand the dynamics well, it's something the Board works out on a regular basis. I'd reiterate what I said, if it's right for the shareholders, then that's something we do. But timing is not unimportant in terms of how we think about that.

Operator

And our next question comes from Kartik Mehta with Northcoast Research. Please go ahead.

Basel Kanaah

Hi, this is Basel for Kartik. I just want to ask a general view question. Based on the trends you have seen in ecommerce, do you expect this similar trend to continue into 2021?

Marc Lautenbach

Yes. I mean, just look at from a biobehavioral perspective. I mean, the amount of Global Ecommerce as a percent of retail went up 10 points, like 16% or 17% to 27%. Does it stay at 27%? I don't know. But it's clearly going to be a hell of a lot more than 16%. So I think that trend is clear then.

And if you look out from the other side, the number of bricks and mortar stores are going down partially because some retailers are going away. But also, for those retailers that are sticking around, they're changing their routes. So I do think the trends will go forward. The question is kind of not to me. Did the trends continue, it’s at what level does the trend continue?

Basel Kanaah

And my second question, as the Fed continue to maintain interest rates, at such a low level, are you guys looking to refinance even furthermost portions of the debt that are due in 2021?

Stan Sutula

So we look at the debt, I mean, obviously we've done a ton of work on this. If you go back to the end of last year with the sale of our software business, a new revolving credit facility, a new term loan A, new term loan B, and then using those proceeds to do a waterfall tender, which reduced our towers.

We are always looking at the opportunities in the market at all different solutions. Obviously, our next bond maturity is the $172 million in October of 2021. And we will deal with that opportunistically if that presents itself. But we are confident in our ability to refinance that.

So we're constantly evaluating the market on what the art of the possible is to make sure we put our money at the best use. So right now, if that presents itself, we'll take advantage of it.

Basel Kanaah

That's great. That's all for me. Thank you so much.

Stan Sutula

Thank you.

Operator

Thank you. Mr. Lautenbach, would you like to make any additional remarks?

Marc Lautenbach

I would. Thank you, operator. First of all, let me just comment on the changes in leadership at USPS. We welcome to the industry; I love to draw his long-term industry veteran and we look forward to working with him. At the same time we wish Megan Brennan, the previous Postmaster General well.

But likewise, [indiscernible] may inherit the CEO role at UPS. I've known Karl [ph] for a long time. She's great executive and wish her well. And likewise David Adam, CEO, previous CEO great executive and solid industry colleague. So let me close with this.

When you look at Pitney Bowes through a wider lens, you see a company with over $3 billion of revenue, growing mid-single digits in the middle of a pandemic. GDP results will come out today, but we're faring quite well. We've transformed our portfolio in the pockets of our businesses is now and shipping.

And I think it's worth noting, for 100 years now and has been the majority of our business in the second quarter, those two lines crossed and shipping going forward will continue to be a bigger and bigger portion of the business. But we didn't get a lot of questions on SendTech today.

I will say if you look at the SendTech results underneath what they are able to do, they were great. And as you think about the transformation of the company, the transformation of SendTech is instrumental to that and we hope to talk more about that in the coming days.

We've done the hard work around our balance sheet. And to stand last point and we got $1 billion in the bank. So we're in a strong position from liquidity. Our debt manageable, got good cash flow. Let me be emphatic about the full employment, we're going to come out of this situation a much better and stronger company. And that's going to be structural.

It's not for reasons they're fleeting. The Global Ecommerce business is our own version of a unicorn to the question, innovate business as well over $1 billion closer to $1.5 billion and grew 40% in the second quarter. And it's going to continue to grow at an accelerated rate for the foreseeable future.

Within that, and this is something again, we kind of mentioned in passing. We have built three businesses from zero to $100 million. That's hard to do in any context. And that team has done it three times over. We're well positioned in ecommerce business, you can see it in results, and that's going to continue.

You see it in the client reaction and the path to profitability has many different factors to it. But largely now, the path to profitability for that business isn't exclusively, but it's largely inside of our four walls, we control our destiny.

The investments we made in SendTech and Presort are paying off, you see new revenue in the profit streams. These are largely around shipping again, which is very synergistic. And again, there is an overall coherence to our portfolio going forward. And we're continuing to make the investments we need in a long-term success.

We're 100-year old company, and in many ways, you see that in terms of the values we have and many other positive things. But to me, it feels like a startup. You can see it over and over and how this business is reinventing itself. So listen, unpredictable times for sure.

We like how things worked out first and the second quarter, but no one's taking a victory lap. Know what's going on in this country and around the world with the virus is terrible. And we're mindful of all those who've been affected by what's going on. So with that, we'll close this call. We thank you for your interest, and we'll talk in the coming days.

Operator

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