Canon Inc (CAJ) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Imagistics international fourth quarter earnings release conference call. Today's meeting will be tape recorded. Taping and re-broadcasting this call are prohibited without expressed permission of Imagistics. After the initial remarks there will be a question and answer session. During this meeting, Imagistics Management will make comments that constitute forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions, expectations and are subject to risks and uncertainties that cause actual results to differ materially from those projected in such forward-looking statements. Information concerning certain factors that could cause actual results to differ materially is included in the Company's 2001 Form 10K and other filings. The Company does not intend to update any forward-looking statements in this meeting. At this point, I would like to turn the meeting over to Mr. Marc Breslawsky, Chairman and Chief Executive Officer. Mr. Breslawsky, you may begin.

Good morning ladies and gentlemen. Thanks for joining us for our Q4 Earnings Conference Call. This has been a quarter that we're very, very proud of.

I have with me this morning Joe Skrzypczak, our Chief Financial Officer, Nat Gifford, our Vice President of Product Development and Marketing and Chuck Wessendorf, our Vice President of Corporate Communications and Investor Relations.

First I'd like to speak to you briefly about our key accomplishments and the progress that we've made in our first full year of operations as a public company and also to talk about our Q4 results. Then, I'd like to have Joe cover some of the details of our results and the outlook. We'll then devote the rest of the time to addressing any questions that you all might have.

I'm going to assume at this time that you've all had the opportunity to read our Earnings Announcement along with the Financial Schedule that we released very early this morning.

Our $0.86 diluted earnings per share for our first full year of operations increased by 32% from 2001. I am extremely pleased that we've accomplished our 2002 objective of enhancing the fundamentals of the business. That includes improving our profitability and strengthening the balance sheet.

We continue to demonstrate with each successive quarter that we have the management team in place to execute the strategic plan and also to deliver shareholder value.

Let me remind you, we started the year with an earnings outlook and then proceeded to raise it three times during the course of the year, in spite of the effects of a sluggish economy.

We've made significant progress in our operational and financial results in 2002. I think it's important to cover a few of the key accomplishments during the past year.

We're beginning to see the results of our strategic focus on transitioning our existing Fortune 1000 customer base-- our facsimile customer base to increase copier and multi-functional product rentals. In fact, our copier rental revenue increased 9% for the full year and we've won a number of new digital copier contracts from these customers.

We've made major changes in our sales force compensation, pricing structure and terms and conditions of customer contracts resulting in improved profitability, while at the same time we increased commercial sales rep., and field service productivity.

We increased in both sales and service; sales in rental and service growth margins. We launched 13 new "best of breed" products during the last twelve months, including our new flagship high volume digital printer copier solution at 85 pages per minute.

We also launched two next generation digital color high speed multi-functional systems designed to provide users with the ease and efficiency of scanning, printing and copying documents in every day color. Offering increased speeds, higher volume ceilings and a number of performance improvements while we actually lowered the cost of digital color technology to our customers. The new CM3120 and the CM2020 product at 31 and 20 color copy pages per month respectively provide break-through affordability and speed for both color and monochrome applications.

While achieving operational and financial improvement, we also made a number of investments in the business during the year. In mid-2002 we initiated a major brand awareness campaign using television, radio and print-ads in major financial and trade publications, including The Wall Street Journal, Business Week and Forbes, which is starting to pay off for us in terms of building customer awareness and more of the consideration for Imagistics.

The ad-campaign has increased Imagistics recognition and the quality of recall and reinforced our key message of excellent reliability and also, dependability.

We completed phase 1 of our $50m plus ERP project on time and within budget. We are now well into the second phase of the ERP, which is the audited cash phase. We've made major investments in sales and service training which positions us to both begin to drive top line growth and achieve even greater customer satisfaction from an already high level in the industry.

As part of our investment strategy to improve customer service in operational efficiency, we are establishing a new state of the art distribution center in Columbus, Ohio. We've already started our investments also in that area.

As far as our financial performance is concerned, we improved our net income by 31%.

We also substantially strengthened our balance sheet, which Joe Skrzypczak will cover for you later on, but I just want to hit on a few of the highlights, such as improving our day's outstanding accounts receivable by 9 days from 59 days to 50 days by generating an amazing $92m in free cash flow, by paying down our debt by $43m and we repurchased $37m of our own stock. During the weak year we also were added to the standard import Small Tax 600 Index and also the Russell 2000 Index.

Turning to the Q4, improvements in our sales and rental gross margins coupled with lower selling, service and administrative expenses enabled us to report earnings of $0.22 per share compared to a loss of $0.01 last year in the same quarter. In the Q4 we generated $30m of free cash flow and we bought back another $7m in our stock. Since the stock re-purchase program began last March, we have now brought back the total of 1.9m shares of our stock for $37m. That represents approximately 10% of the shares issued at the spin day in December of 2002. This program continues in the first quarter of 2003.

Our focus for 2003 again is improving the quality of our revenue, which should show up in terms of profitability. Despite a weaker economy, declining revenues from our facsimile product line and our absolute focus on writing only business that meets our profitability criteria, we have been able to maintain our total revenues at a level that is only slightly below last year's revenue.

Revenues in the short-term have been and will continue to be impacted by our disciplined focus on improving the profit margins of that revenue. Clearly, again this quarter, there was business that we didn't write because it just didn't meet the profitability criteria's that we've established. Our focus is to profitably build our copier rental business, which will allow Imagistics to sustain its high level of recurring revenue.

I'm particularly pleased with the consistency of our results in 2002, which had been enabled largely by our predictable recurring revenue stream of rentals, supplies and service contracts, which in total represent about 75% of our total full year revenue.

As far as the future is concerned, we believe the market opportunities for Imagistics' products and solutions both in the United States and internationally are significant. The office document imaging market in the United States alone is expected to grow to $34b by 2006. Last month, we are proud to announce that we began selling our copier line in the United Kingdom also, which previously had only sold facsimile equipment.

Our "best of breed" product sourcing strategy have a highly respected direct sales force which, by the way, has been named the 10th best sales force in the United Sales by selling our magazine. Our strong national service distribution network enables us to be very competitive and provide an important opportunity to satisfy our customers' documented imaging needs and to grow our business profitably.

I am very pleased to refine our 2003 diluted earnings per share outlook to the upper end of our previous guidance. We are now expecting earnings growth in excess of 20% for 2003 to $1.05 per share. We also expect that the earnings will grow at the same level in 2004 and beyond. We believe we're well positioned for the future and we look forward to the future with confidence and in our ability to generate significant value for our shareholders.

Now what I'd like to do is turn the call over to Joe for further comment on the results and the outlook.

Thank you Marc. Good morning ladies and gentlemen. I'd like to provide some further comment on our Q4 results and our outlook for 2003.

Our reported revenue for the Q4 increased 1% compared with the prior year, but on the comparable basis, excluding sales of equipment and supplies to Pitney Bowes, Canada, our revenues declined 3% in the quarter. As mentioned before, as part of our spin-off from Pitney Bowes, we entered into a reseller agreement with Pitney Bowes, Canada, under which Pitney Bowes, Canada sources, copier and facsimile products from Imagistics. Accordingly under our reseller agreement with Pitney Bowes, Canada, revenues are recorded as external sales in 2002 rather than inter-company transfers. For 2003, we won't have this issue because 2003 total revenues and 2002 total revenues will be on a comparable basis.

Sales revenue excluding sales to Pitney Bowes, Canada declined 3% versus last year. Copier sales continued their gradually improving trend quarter by quarter this year and increased 1% compared with the last year.

Facsimile sales were down 8% reflecting declines in equipment and supply sales. The total sales decline reflects lower facsimile demand, a slow economy and our strategic focus on renting rather than selling copiers and multi-functional products to large national accounts.

Clearly a rental brings in significantly less revenue in the current period than a sale contract. As Marc mentioned, our revenue results are also a result of our disciplined focus on improving profit margins, which means that currently on a go-forward basis, we are not going to write business that doesn't meet our profitability criteria.

Total rental revenues declined 4% last year. Consistent with our strategy, copier rental revenues increased 8% in the quarter as our newer high end digital products continued to do well in the market place. We continue to win new digital copier contracts from Fortune 1000 Facsimile customers, as well as new customers.

Facsimile rental revenues declined 11% reflecting, as expected, lower pricing and a lower install base.

Our Q4 Support Services revenue from service contracts declined 3% from last year, reflecting a lower facsimile install base.

Now, let me turn to gross margins. Our Q4 sales gross margin, excluding the sales to Pitney Bowes, Canada, improved 5.2 percentage points from the Q4 last year and was primarily attributable to our emphasis on improving profit margins and lower product costs, partially offset by the increase in the mix of our copier and multi-functional product sales, which have a lower gross margin than facsimile sales.

We are also continuing to make good progress in our objective on improving rental gross margin, despite an increase in the mix of copier and multi-functional product rentals which have a lower gross margin than fax rentals. Our rental gross margin of 65.3% improved 3.2 percentage points compared with the Q4 last year. The improvement was primarily attributable to our profitability emphasis on rental contracts and lower product costs.

As I mentioned, this improvement was partially offset by the impact of the changing mix towards lower margin copier rental and fax rentals. Our selling service and administrative expenses declined $4m or 5% in the quarter and represented 49.2% of revenues, compared with 52.3% last year.

The overall year over year improvement was the result of lower ERP and information technology expenses, lower bad debt charges and the impact of lower employee levels. These improvements were partially offset by advertising expense associated with our major brand awareness campaign.

The reason the ERP and information technology expenses were lower than last year's Q4 was that we had disproportionately high expenses last year to jump-start the ERP project, as well as costs associated with the initial spin from Pitney Bowes.

Our Q4 2002 cash spending on the ERP project totaled $6m compared with $7m in the Q3, but because of the phasing, proper accounting treatment required us to expense a proportionately lower amount. In the Q4 approximately $2m was expense and $4m was capitalized.

So far this year we have spent $21m of which $8m was expense and $13m was capitalized.

The ERP project has been in full swing. We have been focus on phase, the audited cash phase, which is the most challenging phase. We anticipate that the ERP project will be completed in the first half of 2004 and will represent an investment of over $50m.

During the year we spent approximately $10m on our advertising and brand awareness campaign. The campaign heavily advertised our new name and effectively communicated our strategic methods to customers regarding reliability and dependability. We will continue this campaign in 2003.

Our total stand-alone expenses in 2002 were approximately $26m compared with $13m for the 2001 full year. We expect our total stand-alone expenses will be about the same in 2003.

We continue to streamline many of our administrative and service functions as well as our supply chain. As part of our investment strategy to improve customer service and operational effectiveness, we are establishing a new state of the art distribution center in Columbus, Ohio.

Our Q4 selling services administrative expense included a $1.4m employee severance charge associated with the streamlining initiatives.

While we continue to make investments in our rental asset base to sustain a high level of reoccurring revenue, invest in our ERP project, invest in our brand awareness campaign, as well as incur additional costs to establish us as a separate legal entity, we generated free cash flow of $13m in the Q4 and $92m for the 2002 full year. We used our free cash flow of $92m for the full year to reduce debt by $43m, buy back 1.9m shares of stock for a total value of $37m and increase our cash balance by $12m.

I'd like to point out that our original debt level at the spin date was $150m. We have reduced that amount by 50% which leaves us with a debt to total capitalization ratio of 22%.

For 2003 we expect that our strong cash flow generation will moderate and opportunities to continue to improve our working capital are reduced.

Our total stock buy back orders authorization approved by The Board in October is for $58m and we intend to continue the stock repurchase program subject to market conditions. As Marc mentioned we have refined our 2003 outlook to the upper end of our previous guidance to $1.05 for the full year. Our financial model assumptions for 2003 include flat revenues, a modest increase in gross margin and a slight increase in selling service and administrative expenses as a percent of total revenue, mostly driven by additional ERP implementation and IT costs and training.

Despite the weak economy we are confident that we will continue to deliver excellent earnings growth and provide significant growth in shareholder value for our shareholders.

Now I'll turn it back to Marc.

Thanks Joe. Now what I'd like to do is take all of your questions, so why don't we open the phone up for questions. May we have the first question, please?

Yes, thank you. We will now begin the question and answer session. If you have a question you will need to press the '1' on your touchtone phone. You will hear an announcement that you have been placed in queue. If the question has been answered and you wish to be removed from the queue please press the 'pound'. Your questions will be queued in the order that they are received. If you're using a speakerphone please pick up the handset before pressing the numbers. Once again, if there are any questions, please press the '1' on your touchtone phone. One moment please. Once again, if there are any questions please press the '1' on your touchtone phone. One moment please. We have Brad Seercoppins (ph.) of Performance Capital on line with a question. Please state your question.

[No answer]

Thank you. Once again if there are any questions, please press the '1' on your touchtone phone. One moment please. We have Lloyd (ph.) from Bernstein Investment Research on line with a question. Please state your question.

Hi there folks.

Hi Lloyd.

Let's see, since it's so light, I might as well ask a whole bunch of questions.

Okay first of all, can you just run through your '03 expectations again because I was just busy writing something else. Flat revenues, slightly higher gross margin and what else?

The overall earnings we expect will increase to $1.05 a share, which is in excess of 20%.

Right. What about SG&A?

SG&A as a percentage to revenue will go up just slightly, associated with additional investments in the ERP project as well as training, so we expect that percentage to increase slightly.

We still have, as an organization, what I would call burly expenses that if you look - - a few years you shouldn't really see. The ERP expense is a heavy expense setting up a mega-center which will make us more efficient with customers, getting the product to them, we get it at a lower cost, will be a higher expense. I think you probably noticed from the earnings release, we took a $1.4m charge this quarter, which is included in the earnings, for setting up the mega-center and severance related to the mega-center. We still have advertising which would be at a heavier-- in general, at a heavier rate than it would be in future years. We're still doing a tremendous amount of training.

So our focus now is again on improving the business for the future we believe we can make significant improvements in the structure and quality of the business and still sustain an increase in earnings of at least 20%.

What I'd like to point out is that there are other opportunities for us. Part of that severance is associated with other areas where we felt we can streamline in administration, as well as service.

Okay. Could you tell me what you expect the ERP expense number to be like in '03? It was $8m in '02.

Well, our total cash burnt on the ERP was approximately $21m. So even though we generated $92m of free cash flow, it would have been significantly higher if we were not doing ERP. Of that $21m, $8m was expense, the rest was capitalized. I would think that you would see in 2003 the same type of quarterly trends that you've seen in 2002 as far as the ERP is concerned. But again, we are guided by GAAP as far as what we have to expense and what we have to capitalize. Depending on what phase we are in that project. So elements of training maybe have to be expense, while on the other hand items that are being programmed or developed would be capitalized and we just really followed the guidelines as provided by [Varsity].

Right, but in your expectation, a slightly higher SG&A relative to revenues-- I would imagine then that you would expect maybe a slightly higher expense amount for ERP in '03.

I think as we implement the order to cash cycle, we'll see a lot more training dollars go into the ERP project, which will be an expense.

The ERP numbers for the Q4, I believe you said there was $2m expense?

That's correct.

How much was capitalized?

The balance of that was $4m.

Okay, fine. Let's see, what about-- lets say advertising, promotional costs. Now essentially you had brand awareness in '02, I imagine maybe you'll ship some of that, since you may not need as much for brand awareness in '03. Could you give us some ideas to how much you spent in '02, what you expect in '03 and how you may be changing this program at all?

We spent in '02 approximately $10m. That was spent on television major stations, basic cable stations, business stations and also on a major publication. The focus was name awareness and in our surveys we had the amount of money we've spent, I think fairly good named awareness. We're still working out advertising campaigns through our canal campaigns etc., for 2003.

We'd prefer not to disclose the amount we would be spending because we really don't want competition to be aware of that level of spending or in fact how we'd be spending it. If we spend it properly it helps us get more business but if we announce how we're going to spend it, I think competition could react fairly quickly to it. So, I want to walk away from giving you a specific answer on advertising direct mails promotion other than the fact that we plan to continue doing it in 2003.

Okay, fair enough. Let's see. Could you tell us what the break down of capital spending was in '02 between rental assets and other?

Yes. Our total investment in rentals was approximately $9m and the rest was either in ERP or other fixed assets.

You said $9m?

Oh, that's for the quarter.

Okay, what was it for the full year?

For the full year 2002, our investment was closer to $47m in rental assets and fixed assets, about $6m and ERP was $13m.

Right. Okay. Could you give us some guidance on '03?

I hope that our rental base will continue to grow, especially in the copier area. Our plans call for that. So we would expect our rental asset base will be going up based on additional placements of copiers. However, with that said, we are always constantly looking at trying to reduce our procurement costs for these products-- that would be an offset against that. Net, we would expect to see some increase in rental assets. Again, I think I gave some guidance on ERP. Then other fixed assets are pretty much normalized, actually they'll probably go down somewhat as we made most of the investments in the mega-center this year we don't expect any other major investments outside of that for 2003.

Thanks. What's the situation like in terms of pricing overall?

Pricing is fairly level now. We were seeing fairly level pricing on the market. We're improving our margins from terms and conditions on contracts which had been more flexible in the past and also from product procurement. We're not getting improved margins effectively from putting a higher price tag on the products. It's the terms and conditions which make for a more consistent payment of revenue and again also, we've added other manufacturers to products, to the Imagistics brand name and with these [indecipherable] manufacturers, we've had better terms, conditions and prices.

Okay. In terms of the products, the segments of the copiers, how do things look at the higher end versus lower end?

Let me ask Nat Gifford to jump in here.

Yes, we're seeing a very robust finance for our 35 page per minute and higher products, both connected and unconnected, as well as our full color products that we've just launched late December. Those are areas that are growing faster than the lower end.

We've launched some great color products where the pricing point has dropped on these products, so the cost in making a color copier copy used to be very expensive, today it's getting more down to earth type of prices. Again, the products we believe are break-through products and very, very exciting products.

Okay great. You know what, I have few more things. I'll let somebody else get on. Thank you.

Thanks Lloyd.

Our next question comes from Herb Hardt from Monness (ph.). Please state your question.

Good morning.

Good morning.

I pushed the '1' button about seven times, so some people didn't get through, some people did.

I notice that you haven't paid any bank debt down from the September quarter and yet your cash has gone up. I assume your return on cash is less than what the banks are charging you. Is there something that the banks don't want any more money, or - - ?

Let me put it this way. The banks are not very pleased with us because our borrowings-- because we've been reducing our borrowings so much so, in effect, they haven't been very pleased with us. But, we feel that having a very strong balance sheet with a strong cash position in these economic times is a wise and prudent thing for us to do. There is nothing that we have awards yet for or anything like that, but we'd like to have a very strong cash position.

Okay. Second question is, can you give us a bit more information on the introduction in London of copiers and whether you, you're obviously comfortable since you're continuing it but any further thoughts?

Let me just say this. We just launched copiers in January with them. The launch went very successful. We've had several group meetings with our customer base, again don't forget in the U.K. which primarily sells facsimile equipment, they focus on very large national accounts there also. The response has been very good, as far as the customer's willingness to meet with us and talk about the prospect of adding on into their portfolio our copier line because they had been pleased with our facsimile products.

Okay.

We have the same opportunity in England as we have in the United States. We have the opportunity to basically go after the same customers that we've gone after who are very, very satisfied with our overall performance in the fax product line. The service organization, remember, is the same one, so they would service as fax or as copier, so they really like us and we believe it will give us a great entry point and a great opportunity in another very good market. We've always done well in the U.K. We've always been able to make good profits in the U.K. So, again, we're hopeful that in the U.K. our copier will be very successful.

Okay, thank you.

Thank you Herb. Next question please.

Our next question comes from Greg Frankfurt (ph.) from Neuberger & Berman. Please speak your question.

Hi guys.

Hi Greg.

I've got a few questions---not too detailed.

If I wanted to calculate the per-share impact of the charge, I guess I should tax affect it-- is that correct?

Which charge Greg?

The $1.4m.

That's correct.

Okay, so I mean, instead of earning what you reported, it could have been $0.05 or $0.06 more.

That's correct.

Okay. That's fantastic.

Thank you.

What is the CAPEX spending likely to be in 2003?

Again, I think you're going to see the same levels as far as the other fixed assets are concerned, the ones that are not ERP related. I think the rentals, as I mentioned earlier, the additions to the rentals will be a direct relationship as to how successful we are in copier. Our trends in copier have been very good, so I would expect to see some slight increase there also. But also, I just want to remind you that as we add more copiers to our rental base we have at the same time been working on procuring these products at lower costs, so there's an offset there also.

Something that confuses me, Joe a little bit is that if the rental revenue was down 2% for the year, just looking at rental revenues in 2002 versus 2001. On the balance sheet, I know it's a net item, not a gross item, but on the balance sheet the rental assets, the value at which your current rental assets is about 22%.

Right.

Why is that?

Well some of that is related to-- don't forget we have our fax contracts out there they get depreciated over five years as well as our copiers over three years. When they become fully depreciated they are retired and then we reduce our overall net rental asset base. It doesn't mean that we don't have opportunities for renewals on these contracts to earn profits on fully depreciated products, which happens quite often. Seeing that rental asset declined on the balance sheet doesn't necessarily mean that the portfolio of the business is changing, it just means that many of the products are becoming fully depreciated.

Which has positive implications for margins for the future?

Exactly. The other thing is, the product that we added back in the early part of the portfolio, the one's that are becoming fully depreciated had a higher cost and each year we work on reducing the cost and we've been very successful, as you saw on our overall margin. So the products that are coming off the rental base off the balance sheet had a very high cost, and the ones going on have lower costs.

Okay, thank you very much.

You're welcome.

Thank you Greg.

Our next question comes from Charles Whitmore (ph.) from Eagle Capital. Please state your question.

Hi, it's Merrill (ph.). Nice quarter guys.

Hi Merrill.

Thank you Merrill.

The inventory right off of $5m seems like a lot, given your business model. What's that? Is that sort of something in the [kitty] or something you missed prior or are you getting machines back that you can't do anything with that? What's happening with that?

One of the things that we're always studying, and taking a look at, is our inventory balances. As the company transitions and has been transitioning from analogue to digital, one thing I want to make sure is that we have a very conservative balance sheet and take the appropriate corporate reserves against that analogue base, which we have done. That's really what those charges relate to.

So that's on the printers?

That would be on analogue type copiers.

Yes, copiers, rather-- yes. But are these machines that are in the field? At customers or is that sitting in a warehouse of yours.

It would be inventory, the items that came back to play, it would be basically the service parts associated with the analogue base-- that would primarily be the bulk of it. As our analogue base of copiers out in the field diminishes and is being replaced by digital, we have less of a need for those analogue service parts.

Okay so it's service parts and not machines, because you depreciate over their contract life so?

Well it's a combination of both. We don't have a lot of analogue [indecipherable] equipment, but the bulk is service parts.

Okay. That's question one.

Just to repeat our depreciation policy, on copier, which are the primary items which we put on rental right now. We depreciate them over a three year period, at the end of the three years we have a zero residual value, so if we can sell them at the end of three years that's very good, but we're not counting on selling them after the three years. So they are full three year depreciation.

Right. That's why I didn't understand the big write-off. But I understand it at this part. Did you say your advertising expense for the quarter?

No. We talked about the advertising expense for the year. The quarter was pretty consistent with the year. But the year was about $10m.

Okay. So it was $3m in the September quarter-- so was there advertising before the September quarter?

I think we started doing some in June-- we started advertising in the second quarter.

So that would mean it's closer to six?

You know, I don't think we're disclosing it.

You're not saying it? Okay.

We did a good amount of advertising. As I am sure everybody has seen our ads. We done a huge amount of comment on our advertising and we did quite a lot of advertising October/November and early December.

And probably up from the third quarter?

Well - -.

Alright I've asked this three times, okay. The ERP, it seems to me that that's dragging on maybe a little bit longer than I thought it would, say, a year ago. Is that correct, or am I just totally off, it's just going along as you would have expected it to?

I don't know if I would say that. I mean if you think about substituting all of your systems and getting off Pitney Bowes systems, we really started that project in October of 2001. I think most companies that you speak to, you know, they try to get this all done within the two to three year time frame, that's a lot, that's a pretty aggressive target. Now we've been moving forward. We did get phase one which we did implement on time and on budget but we're right in the middle of phase two, which is audited cash which is the most difficult, but we've got a good shot at getting that done by the end of the year and they we'll go into the last phase which is phase three which will have fewer modifications and be less difficult than phase two.

Okay, so it's not necessarily worse than we thought it would be a year ago?

No.

It's going along.

No. To put a whole ERP system in within a couple of years is I think very very aggressive.

Then we would alter, I mean ERP never stops. You always have maintenance and upgrading charges, just like you have had in the past with any IT system. When it totally stops it means you're probably falling behind. So a lower cost of ERP, you know, it certainly wouldn't be at the level that we've been spending at, but there will always be some continuation costs related to the oracle system that we'd be putting in. Both in development and in product upgrade.

At the same time, I'll also just point out why we are solely anxious to complete phase two is at the same time that we have our own IT infrastructure and on top of that we are incurring costs of implementation of the new system. At the same time, we are also paying Pitney Bowes for their legacy systems.

Yes.

So, you know, we're very anxious to get off their system and stop paying them and reduce not only the cost, but implementation but also the costs that we're paying for these legacy systems.

Okay, let me just look here and see if I have anything else. Why is your interest expense so high?

For the Quarter?

Yes. Or shall I say debt.

Yes, actually if you look at just the quarter, our interest expense was up slightly and that's directly attributable to the fact that, while in the Q4 last year we were still part of Pitney Bowes, and they did not allocate interest expense to us for part of that quarter. So it's not a fair comparison, but if you look at the trends of our interest expense they are coming down - -.

Well no, but it's so it's 1.7% which annualizes to, what is it, 1.7 times 4 is 6.8 and your debt is 70?

Well today it's 75 but don't forget we've been paying it down throughout the year.

Throughout the quarter?

We started at $150m.

No but, what was it at the beginning of the quarter? It just seems like a high rate, is there some amortization of something more or some fees you're paying or - - ?

Part of it is the amortization of the original debt of the financing fees associated with that.

How big is that on an annual or quarterly basis or how you like to look at it? Or, what's the interest rate on the $75m?

Well it's about-- the third financing fees are about $5m that is spread over five years.

Okay, so that's something. Okay, thank you very much and once again, congratulations.

Thank you.

Thank you.

Our next question comes from Adam Playman (ph.) from Ferman Capital (ph.). Please state your question.

It's actually Mitch Upwood (ph.). I'd just wanted to ask you guys, if you look at '02, what do you think the head wind was that you were up against in terms of you had declines in the fax business and those are very high margin revenues. So what was the operating profit decline that you more than offset just on that fax side of the business?

Well, first of all, we don't break out the difference in margins but we have stated from the spin that fax margins were higher than the copier margins. But, going in favor of it, so you had that going in the wrong direction, that was well offset by negotiations on all product lines, fax, copiers-- the mix was a negative for us. More than offsetting that again, was the price reductions we got from our suppliers through all product groupings and also the focus on the revenue and the quality of the revenue we got also. Those two items obviously more than offset what you would have thought and what people thought in the beginning might have been a negative, has turned into a very strong positive.

Mitch, we actually saw margin improvement in the copier line, in the facsimile line, actual margin improvement in both of them. Even in the U.K. our margins improved also.

Does that challenge that drag on EBIT growth? Do you believe it will be around the same level in '03, do you think it gets tougher because fax revenues declines accelerate? How do you view the challenge of what you need to offset on tax decline this year versus last year?

Just remember as each year goes by our anticipation, specs will decline every year. Double digit-- low double digit. Our other assumption is that copier is going to continue to grow. So, fax today is a smaller percentage of our total portfolio than it was a year ago. So that decline effectively in relation to total revenue becomes less and less. But our assumption on fax alone again is it will decline at about the same rate in 2003 as it did in 2002.

Gotcha. One last question. I apologize for this one. You did such a good job on free cash flow for the year, that it makes the Q4 buy backs look very small in comparison and I was wondering if you could share your perspective on that in terms of whether it is reasonable to think that the buy backs will accelerate, given the very strong free cash flow you've generated?

The cash flow, again, is strong and we anticipate cash flow during the year will stay strong although it will probably vary from quarter to quarter, based on the inventories we buy and when we buy them or the receivables moving in one direction or another. We believe cash will stay strong. We have authorization to continue buying back more shares, we can only go up to the authorization that the banks have provided and The Board has-- The Board has allowed us. After we go through that, we'll have to see if we want to continue buying or not. Again, we have purchased since the spin, which is only a little over a year ago, we've bought back already 10% of our stock. We believe we're doing this not to support the price of the stock, that has nothing to do with our buy back, but we believe it's a tremendous investment ourselves, based on what we believe our future earnings will be.

Mitch I just want to comment also on your question regarding the Q4 purchases. We started the program a little bit later in the Q4. Two things, number one, we had to get Board approval and that didn't take place until October and then we're very close to earnings release, so we didn't want to start the program and cause any type of issues that we may have had information prior to the program ticking in with these earnings. So we actually waited until we released our earnings for the Q3, which was sometime in the Q4 and then we initiated the program at pretty much the same level that you saw in the third and second quarters.

Thank you and again, a great job on a good year.

Thank you Mitch.

Thank you.

Our next question comes from Michael Petrol (ph.) from Putnam Investments. Please state your question.

Yes, could you tell us about what percentage of your copier base has been transitioned with the new and favorable T&C's?

Everything we are placing, any new equipment these days is digital. We're not buying any new analogue equipment any more. But there is still a decent enough base of analogue equipment that's out there. We typically don't give a break down of the base again for competitive reasons. We haven't broken it down between analogue and digital but I can say that everything today is digital.

You know, I think maybe you didn't understand my question. I meant that the new terms and conditions and how you're optimizing for better margins.

I'm sorry I thought you were asking about the product. Everything we take is on new contracts, has the new terms and conditions. The old contract, remember had a life of about three years [indecipherable] on average, so we've been transitioning that but we're a little over a year into the transition, so as we go forward, it certainly is over a third of the base of old equipment, as the new terms and conditions [indecipherable]. Not every contract we wrote in the past had unfavorable terms and conditions to us either. Some of them did but not everyone did.

What sort of a conversion rate do you have and are your customers accepting the new--

Yes it's pretty good. You know, we've done a fine job servicing the customer, we've done a fine job as the products that we've had, I think in the past the only thing we didn't do a fine job at was making money while we were doing that. So obviously, I think the market itself in terms of terms and conditions has firmed up and the programs that put the suppliers at risk in the past, that so many companies were doing, I think many of our competitors have changed that also. I don't believe today that too many people are willing to take total risks on terms and conditions again.

Also, what percentage of your revenues were from faxes in 2002?

Basically our fax and copier break line is about 60/40. 60% of our business is copier and 40% is facsimile use, when you look at all the elements.

Okay, thank you.

You're welcome.

That'll keep moving towards copying as a higher percentage each year.

Thanks.

Next question please.

Our next question comes from Rob Brown from Craig-Hallum Capital. Please state your question.

Hi, this is Rob Brown from Craig-Hallum Capital.

Hi Rob.

My question has to do with your 2003 revenue visibility. What sort of percent of your 2002 revenue guidance, which I guess is flat is sort of already firmly contracted?

Again, you know, we say 75% of our revenue is recurring revenue.

Okay, that would apply for contracted for next year as well?

That would be rentals, supply contract and service contracts.

Okay, great, thank you.

You're welcome.

Our next question comes from Matt Shepler (ph.) from Investment Strategies. Please state your question.

Yes, good morning. Just a few. The fact that the projection [indecipherable] for the current year, copier/fax is 63%-- kind of 37% would that be the kind of trend you would move from 60%/40%.

I don't think we'll disclose that. I mean, you're moving in the right direction certainly but I don't we're willing to say at the end of the year, you know, we'll be 63%/37% or 65%/35% or whatever.

Okay.

One of the issues too, we didn't talk about this, is in the facsimile business, even though our revenue is declining, there is an element of renewals, where customers come back and say we like your products and we want them to stay in place but we're not willing to pay the same rental charge that we signed up for three or four years ago. So that has an impact on our overall rental revenue. But on the other hand, if that facsimile product is fully depreciated, it is very profitable for us and actually yields better margins. So, even though the fax rental revenue may be going down, in many cases items that are related to renewals will become a more profitable transaction for the overall company.

Okay.

Just the other factor that would confuse this even a little more is that many of the new products we sell are the multi-functional product. By multi-functional we mean they copy, they fax, they scan, they print, so they are a multi-functional product. So, many of the fax products that we replace will be replaced by multi-functional products. Multi-functional products will be more expensive than the fax products, some of those multi-functional products would [indecipherable] not the revenue actually, as opposed to fax revenue.

As we move out, it's going to become more difficult to say what goes into copier and what goes into fax. Many people today are calling copiers multi-functional products anyway, so some copier itself is going away, I keep using that term because most people do understand it as copiers, they're not a multi-functional product, to make it simpler. But in fact, if we have a copier out there that's getting say $40 a month or $50 a month and we replace it with a multi-functional product for $60 or $70 a month, that typically is a good thing for us.

Just a relay on that question. Would you, year over year, the average price of the multi-functional copier, how did that change in terms of maybe the kind of rental income that you're getting, is that - - ?

Prices of fax are dropping on average, copier prices have been fairly firm for us on average. Multi-functional is so new it would vary because what we had initially with multi-functional was very low speed multi-functional, and now we've brought out more high speed multi-functional. So everything would get confused in the mix.

Recurring revenue, as a percentage of total sales for the year and next year, do you have any sense?

Percentages shouldn't change very much. It's very solid as it is and, you know, I wouldn't-- one or two points in either direction depending on who does the best here but one major order could change it, you know, which could go as a rental or as a purchase, so its pretty difficult to forecast that.

Just two or three more quick ones. Depreciation, 81.6 for the year. Can you just split that roughly copier/fax?

We don't disclose the break out between the two.

Can you describe, give us any kind of parameters as to how that's moving.

Again, part of that will be associated with how successful we are in placing more copier units as we were in 2002, offset by lower product costs associated with those copiers. It's kind of difficult to gauge that. I would not expect significant change, I think those would be almost offset.

Yes, okay. It just seems to me that there is such a dramatic shift going on in your business and for reasons, I know you're describing as competitive reasons, it's hard to see those elements come out with a kind of consolidation of numbers. It seems a very vital move that's going on but it's being [inaudible].

The business itself I don't think it is. The business itself again is moving to single products because they are multi-functional. Okay. We're not trying to hide anything one way or the other-- Obviously, the value of equipment in the rental base, as we're adding much more copier than fax. Okay, the copier is depreciated more conservatively over a three year period, the fax is over a five year period. So a higher percentage of the depreciation is [indecipherable] depreciation. Both have no residual, we had no residual of fax, we show no residual in copying, the nature of the copier. The multi-functional products are depreciated to three years also. So if the fax product is replaced by a multi-functional product, it's getting a three year depreciation, just like the copiers are.

So we are becoming more conservative on the balance sheet but there are certain specifics you know, if you give them to your shareholders, competition is going to have them also and I don't think any of our shareholders want to give information to competition that we don't need to give.

Last question. Just for the year working capital, can you give a sense of where you think that'll come in?

I think, you know, obviously you saw $92m of free cash flow as a significant proportion coming from our improvements in the working capital, especially in days sales outstanding and lower inventory levels. Again, I think what you'll see in a free cash flow basis is really leveling off in that working capital for 2003, which would get us to free cash flow of approximately $13m to $15m a quarter.

Thank you very much.

You're welcome.

Our next question comes from Pete Enderlen (ph.) from Fison (ph.) Capital Management. Please state your question.

Yes. Thank you. I only pressed the '1' button three times.

Okay. Hi Pete, how are you?

Hi Marc, how are you?

Very good, thank you.

Going back to the 22% decline in the rental assets. I mean, we understand the gross dynamics of fax declining and rental copier base increasing at an overall shift from a small base so far to multi-functional equipment. Is it possible to talk a little bit about it in terms of units? What's happening with the number of units of the base in each case?

Well, again it's not something we talk about but, let me just give you some information. Let me talk about why on that, okay? The prices we sell a multi-functional or a copier at could be $3000 or it could be $80,000 for a unit, not the same unit, but it would be in the same area. In fax you wouldn't have such a great gap, what you sell them for or you rent them for. So the units themselves are not the issue but the fax units are down. Okay. The base itself, the whole fax units out there in major accounts are down, whether it's ours or in the market place.

I mean is that down in the order of 10% or 20% or would you say it's more than that?

I can't give you that answer because I just don't know it off my head. Okay? But the great impact is again, if we bought a fax machine five years ago and then we purchased one today, the cost of that today in general would probably be less than half of what it would have been five years ago. I don't have the numbers in front of me but it's a dramatic difference.

In copiers the cost would be, just the same product, would be significantly different also from three years ago. So what we're putting on versus what we're taking off is a dramatic difference in cost from those-- on those products. So when we have items that are fully depreciated, they get fully depreciated, that we still keep out on rental, as Joe said. It is very difficult, unless we publish the entire schedule on rental assets and the depreciation and show, you know, what goes off rentals, what we paid for the product five years ago or three years ago and what we paid today. It would be a very difficult calculation for you to do. What we look at primarily are the margins on the rental business which, you can see, continues to be very good and has got better.

Right. A couple more quick ones. With your brand awareness campaign, do you have any early metrics on how actual brand awareness has responded to that?

We had no official metrcs other than people telling us, our sales people when they call on customers, saying we've never heard of you before and we've seen your ad. It's just that wherever you go, you know, you have people in business, and they would respond they either bring it up themselves, or you can ask them. So it's, we feel it's important to still be out there. Obviously, we're not as well known and won't be as well known as Xerox would be or Canon would be but, you know, I think we're moving in the right direction.

Okay.

We need to continue doing that.

Right. How do you think the first quarter is progressing at this early stage so far, how does it look generally?

It's too early for us to tell. We always do a lot of business around the third month in the quarter, but it's just too early to tell.

Then just on a sort of longer term basis. After this year and after you get over some of these effects that have caused your revenues to be basically pretty flat, you know what do you think the company can reasonably expect to achieve in terms of revenue growth, top line growth overall?

Okay. We have a long-term goal of 8% growth in revenue. Okay. Our focus still in the early days is much more on the strong discipline that we have-- not that when we achieve the 8% we won't have discipline either but we'll be out of, hopefully out of the customers where they paid a small amount for the equipment and now, you know, they might not be happy with us for raising the price.

We still have cities that we need to get into. We are not in every city and town in the country. But we have populations, very large populations in cities where we're not even located in through the national account marketing, so we know we need to get into those cities. We last year decreased the size of our sales organization. We're not going to do that anymore. We believe that we need to strengthen the size of the sales organization, so when we see everything, we see the opportunities in the U.K. in addition to that we see some new product opportunities that at this point we focused so much of our efforts on the training from fax to copy and copy to fax so we'd be able to add new products. We see this as a revenue growth business on a long-term basis of approximately 8%. That is our internal goal.

Do you think you will be sort of wrapping toward that in 2004?

We think-- you know, we don't believe we're going to go flat in 2004-- 8% in 2004 but we think we'll see steps in the right direction.

Okay great. Thanks a lot.

Our next question comes from Bob Pina (ph.) from Corvia (ph.) Capital Partners. Please state your question.

Hi, thank you very much. I too had a question about the timing of the ERP roll out. I guess I was under the impression that it was going to be wrapped up in mid '03. I guess one of the reasons I thought that was-- doesn't your contract with Pitney Bowes expire in June?

No actually, originally the spin off document had it at the end of last year and that was finally it was done with the IRS. We have a revised amendment with the IRS and with Pitney Bowes that allows us to continue onto their systems, actually for the end of this year with an automatic six month extension for the following year.

Okay, so there's going to be no change in the pricing of that.

No the pricing will be - -

The pricing is higher immediately, right in the first quarter the pricing was higher. It's the end of this year it expires, 2003.

Okay. So it was $5m was it around $5m last year to piggy back on the Pitney Bowes system?

It was slightly higher than that.

What do you expect it to be in '03?

We really would not, really want to talk about that, those are really-- it'll be higher.

Okay. With respect to the share repurchase, you said you had a $58m program in place. You did, was it $37m last year? Is there $58m remaining on your share repurchase program or is there only $21m remaining?

Just the delta.

Okay. I think that's it, thank you very much.

You're welcome.

Okay, I think we only have time for one more question, so why don't we ask the last question please.

Yes, our last question comes from Laurie Cudlum from Fahnestock. Please state your question.

Hi actually it's John Bosler from Fahnestock, thanks for taking the question. I'm a little new to the situation. Forgive a couple of primary questions, if you will.

Okay John.

On your sales margins sequentially from Q3 to Q4, I noticed a 238 basis point decline there, what was the reason for that?

A slightly higher mix of copier versus facsimile, coupled with slightly higher inventory adjustments.

Okay. Is that where the inventory charge went through then?

Yes, we go through that line yes.

Okay. I saw that sequentially also, as I am trying to understand the story the inventory went to 110 versus 89, is that a seasonal situation?

We came out with a whole slew of new products. When you come out with new products you have to have an inventory in place. Just as I was talking about those color products, we were out with a slew of new products which has created a huge amount of excitement in the organization.

On the distribution center, when was the completion of that?

Well you go in phases again. Just like you do in the ERP but the first phase will be here by mid-year.

When would you expect it to be completed then?

It's going to be what your definition of completed is. We're taking it one step at a time. This one was distribution for one element of the business. We ultimately believe we have very big upsides in upgrading the entire distribution system but we are literally in just one element of that.

Okay. Then lastly, if I could just follow up on the last gentleman's question. I think I read in the last 10Q as I was trying to get up to speed, about the transition from the Pitney Bowes and I think you used the term "significantly higher costs" on the going forward until you get to completely independent, as you're still using those systems. I mean, significant seems to be, if you will, you know, bigger than a bread box. You know, how do we model that or make assumptions for going forward?

Well, in all fairness to Pitney Bowes, I really would prefer not to disclose the actual amount that we've agreed to in using their IT systems for this year. But, what I will say is obviously all those costs that we are talking about have been incorporated in our $1.05 projections.

So when we see the numbers in Q1 on the next earnings release, will we be able to assume those as similar numbers going forward or will they be built in during the year, or will they be pretty stable at that time?

It's pretty much a flat charge throughout the year.

Okay, so we will be able to get a better idea after your Q1 then?

Probably, you will. You know, the charge for the IT is not probably large enough to have a major impact on that line. So you're still not going to be able to pick out exactly what that charge will be. The delta on that line, I would think you'd probably have trouble actually knowing, you know, we're paying, you know, $1m more or $3m more or whatever it is.

Okay. Then once again, congratulations on a great quarter and it looks like part of the success was also on the procurement side. Do we anticipate that that's an ongoing benefit or what are you seeing in that?

We just have a great procurement team. They are in Japan, in the United States in Europe. They get around. We have had more companies talking to us, manufacturers than we've ever had before. They have seen our advertising, they've seen our gain into major accounts and so it gives us the ability again to get better prices, not only from them but also from our existing suppliers who we have a very, very good relationship with. So prices, new products-- that never ends in our market place, that's a very competitive market place and we think the strength we gain in distribution will allow us to have very favorable results as far as margins go. As long as we use the pricing discipline in the market that we put in place with customers today, we think we have a tremendous formula for success.

Again, that's no different than the story that we presented to the initial shareholders when we did the spin off in December of the year ago. That we said was the direction and that has been the direction that we've accomplished, so we're very proud of that.

Great, thanks so much guys.

Thank you. You've had some great questions. We're sorry for the problems we had with the telephone in the beginning, that delay in the asking of the questions, but I think there were problems in recognition of the number '1'. You can be sure putting that arrow in. So, but I would just like, before everybody hangs up, to reiterate the fact that we're absolutely focused on the execution of our unique business model. That model has shown to be effective over the past year. We believe that will continue in the future. Our organization is very open to talking with investors, potential investors, we've done that. I've met many of the people on this call and we intend to keep doing that. If you'd like to meet with us, just call us up and we can set up an appointment.

Today, if anybody gets the chance, we will be ringing the closing bell on the New York Stock Exchange today, so we're excited about that. We rang the opening bell when we went public, so this is celebrating the one year earnings for us, so we are excited about that. We were excited after one year that we got recognition in The Wall Street Journal today, who published our earnings and had some comments about our earnings. So we've been pretty excited about that also that we're starting to get recognition out there on the market place. So I want to thank everybody and we'll talk to you again shortly.

Thank you.

Thank you. Ladies and gentlemen, that concludes our conference. Thank you for participating, you may now disconnect.