Canon Inc (CAJ) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Imagistics International First Quarter Earnings Release Conference hosted by Marc Breslawsky, Chairman and Chief Executive Officer. Today's meeting will be tape-recorded. Taping and rebroadcasting of 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 and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements.

Information concerning certain factors that could cause the actual results to differ materially is included in the company's 2002 Form 10-K and other filings. The Company does not intend to update any forward-looking statements made during this meeting. At this time, I would like to turn the meeting over to Mr. Marc Breslawsky, Chairman and Chief Executive Officer. Mr. Breslawsky, you may begin.

Thank you. Good morning, ladies and gentlemen, and thanks for joining us on our first quarter earnings conference call. 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.

I'll speak briefly about our first quarter results and the outlook. Then, Joe will cover some of the financial details. We'll then devote the rest of the time to answering any questions that you all might have. I'm going to assume that you've all had the opportunity to read our earnings announcement along with the financial schedules that we released earlier this morning.

As you know, we reported a 42% increase in earnings per share from last year's first quarter, to 27 cents per diluted share from the 19 cents of last year. Our operating and financial results are clearly on track with our plan, and we continue to prove that we can execute our strategic plan and deliver shareholder value even in a slow economy.

As a reminder, our strategy calls for us to grow our copier revenues by leveraging our strong fax presence in the Fortune 1000 accounts and to continue to improve the level of profitability for each revenue dollar that we generate. In addition, our near-term strategy is to invest in the company's future.

You've seen, over the last few quarters, that we continue to invest in advertising and in the ERP project as well as major investments in sales and service training. Our copier rental revenue growth is our primary focus and critical to our long-term success.

Although our total revenues declined 3% in the quarter, we are particularly pleased with our copier rental revenue growth of 8%, consistent with our strategy and our overall copier revenue growth of 1%. Since the spin-off, we have increased copier rental revenue in each consecutive fourth quarter.

The total revenue decline reflects lower facsimile demand, a slow economy with some deferral of capital spending decisions, as well as some diversions to rental from sales as a result of our strategic focus on renting copiers to large national accounts. Revenues in the short term have been and will continue to be impacted by our disciplined focus on improving profit margins and accepting only business and terms and conditions that meet our profitability criteria.

Again this quarter, there was business that we didn't accept because it didn't meet our profitability criteria. Our focus is to profitably build our copier rental business, which will allow Imagistics to sustain its high level of recurring profitable revenues.

This first quarter earnings results were achieved through improvements in our sale and rental growth margin and lower interest expenses, partially offset by higher selling, service and administrative expenses primarily associated with our continuing investment in a major advertising campaign. Despite a sluggish economy, we've made an excellent start in 2003.

At this time, we're revising our outlook for the full year 2003 earnings per share to $1.10 from our previous guidance of a $1.05 per share. This upward movement in guidance is a reflection of stronger margin performance.

We also expect growth in earnings per share in excess of 20% in 2004. During the first quarter, we continue to generate strong positive cash flow from operations.

We also continued to buy back shares, buying back 642,000 shares of our stock during the first quarter for a total value of $13m. Since the repurchase program began and started in March of last year, we've bought back 2.6 million shares for a total value of $49m against our current repurchase authorization of $58mIn January, we launched our copier and multifunctional product line in the United Kingdom, where we had previously only been marketing our facsimile products.

We also launched two next-generation digital color high-speed multifunctional systems with the ease and efficiency of scanning, printing and copying documents in everyday color at everyday prices--offering increased speed and a number of performance improvements, while lowering the cost of digital color technology to our customers.

The color market represents an important growth opportunity for Imagistics, and the new model cm3120 and the cm2020 provide breakthrough affordability and speed for both color and monochrome applications.

To summarize our first quarter results, we're continuing to make excellent progress in the execution about strategic business model; and our operational financial results are consistent with our strategic direction.

We have a consistent established customer base with a strong dependable recurring revenues stream. We continue to make substantial investments in the rental assets to sustain our high levels of recurring revenues.

In the first quarter, this recurring revenues stream consisting of rentals, supply sales, and service revenue was 76% of our total revenues, consistent with historic our experience.

Our strategy is to make the necessary infrastructure and other improvements to position the company for longer-term growth in both earnings and revenues.

Examples are the investments we're making in ERP technology, our continuing advertising campaign -- which by the way, last week, was awarded the "Best TV AD Campaign" for 2002 by the American Business Awards. Our investment in sales and service training, our investments also in the new state-of-the-art distribution center which is in Columbus, Ohio.

Although these investments may inhibit growth in the short run, we believe we're positioning the company correctly for longer-term growth in earnings and in revenues. For the balance of the year, we will continue to focus on profitable gross margin expansions and growing our share in the copier market.

We are very well positioned for the future and look forward to the future with confidence in our ability to generate significant value for our shareholders. Now, what I'd like to do is turn it over to Joe for further comments on our results and outlook.

Thank you, Marc. Good morning, ladies and gentlemen. I would like to provide some further comments on our first quarter results. Let me start with revenue first.

Our total revenue for the first quarter declined 3% compared with the prior year. Revenues from our copier product line increased 1%, while total revenue from our facsimile product line declined to 8%. We are pleased that we have achieved copier product line revenue growth in a market that has been, to say the least, somewhat difficult as some of our competitors have announced an overall decline in copier revenues.

We ended this quarter with copier product revenues representing 61% of our total revenues, while facsimile represented 39%. Two years ago, in the year 2000, the copier product line represented 56% of our total revenue.

As Marc mentioned, copier rental revenues grew 8% compared with the first quarter, last year, and continued their improving quarterly trend. This growth in copier rental revenues is a result of our strategic progress on renting copiers to large national accounts, as well as increased placements of high-end digital black and white products and color products.

Copier rental revenues have now grown sequentially every four quarters, since the spin-off, consistent with our strategic direction. Total rental revenues declined 3% from the last year, as the 8% growth in copier rental revenues were more than offset by a 9% decline in fax rental revenues reflecting, as expected, lower pricing and a lower install base.

Total sales of equipment and supplies declined 3% versus last year. Copier sales declined 1% and fax sales were down 7%. The total sales decline reflects lower fax demand, a slow economy, with some deferral or capital spending decisions, and some diversion of sales to rentals as a result of our strategic focus on renting, rather than selling copiers and multifunctional products to large national accounts.

A rental brings in significantly less revenue in the current period than a sales contract with service. As Marc mentioned, our revenue results are also a function of our disciplined focus on improving profit margins, which means that currently, on a go forward basis, we're not going to take business that doesn't meet our profitability criteria.

Our first quarter support services revenue from service contracts declined 3% from last year, reflecting lower fax service revenue and a lower install base of copiers that have been sold, as we continue to focus on renting copiers, which include service in the rental price.

Let me talk a little bit about margins. Our disciplined focus on improving profit margins as a result -- resulted in further improvement in our first quarter gross margins.

Our first quarter sales gross margin improved 3.6 percentage points to 38.1%, primarily attributable to lower provisions for obsolete inventories and a lower product cost, partially offset by an increase in mix of copier and multifunctional product sales which generally have a lower gross margin than facsimile sales.

We are also continuing to make good progress on our objective of improving our rental gross margin, despite an increase in the mix of copier rentals, which have a lower gross margin than fax rentals.

Our rental gross margin of 66.4% improved 3.8% points compared with last year. The improvement was primarily attributable to our profitability emphasis on rental contracts and lower product costs, partially offset by the impact of the changing mix towards lower margin copier and MXE rentals, rather than FAX rentals.

Our selling service and administrative expenses increased $1m, or 2% in quarter.

The increase was the result of higher advertising expenses, higher information technology expenses for legacy systems that are paid to Pitney Bowes and higher provisions for bad debt partially offset by the impact of lower employee levels as the company continues to streamline many administrative, distribution and service functions.

Our first quarter investment in the enterprise resource planning project or ERP, was approximately $5m, of which $2m was expense and $3m was capitalized.

We are nearing the completion of the second phase, the order to cash phase, which also includes service dispatch and inventory management modules. We expect to go live with this phase during the second half of this year.

With the completion of the second phase, we'll have separated our information technology systems completely from Pitney Bowes. With that said, charges from Pitney Bowes for legacy systems will be eliminated.

However, we do expect that there will be a lower capitalization rate on the project development costs as a greater percentage of the project costs will be for training and implementation, which the accounting rules require us to expense.

Once we go live with Phase II, we'll embark on the third and final phase of the project, which is geared towards sales automation and call center management. We expect that the project will be completed during the first half of 2004.

While we continue to make investments in our rental asset phase to sustain a high level of reoccurring revenue, invest in our ERP project and invest in our advertising campaign, we generated $23m of cash flow from operations in the first quarter and invested $15m in capital expenditures.

During the first quarter, we continued to generate strong positive cash flow from operations. But as we expected and mentioned on our last conference call, the positive cash flow was moderated somewhat due to an increase in working capital related to the timing of inventories and other payments and seasonal factors including the payout of the 2002 incentive compensation.

The stock repurchase program reached its one-year anniversary in March 2003. As Marc mentioned during the first quarter, we bought back another 642,000 shares for a total value of $13m.

Our total program share repurchased since the stock program began now totals 2.6m shares for a total value of $49m and represents approximately 13% of our original shares outstanding at the time of the spin-off.

We ended the first quarter with a strong balance sheet, which included a cash balance of $27m, debt of $74m and a debt to total capitalization ratio of 22%.

As we had indicated our first quarter results are clearly on track with our near term, as well as, our long-term strategic direction. We have revised our outlook upward for the full year to $1.10 per share compared with our previous guidance of $1.05 per share.

Our financial model assumptions for this year includes slightly lower revenues and increase in gross margins and a slight increase in selling service and administrative expense as a percent of revenue.

Despite the weak economy, we're confident that we'll continue to deliver excellent earnings growth and provide significant growth and shareholder value for our shareholders. Now I'd like to turn it back to Marc.

Thanks a lot Joe. Now I'd like to take your questions. Can we have the first question please?

Thank you sir. Our first question comes from Shannon Cost, from Cost Research. Please state your question.

Good morning guys.

Hi, Shannon.

Hi, Shannon.

I had a couple of questions the first of which if you can talk a little bit about -- you talked about increased cost to PBI for Info Technology and then you said that that will go away in the second half of this year but we're going to be expensing more than we've been capitalizing. Are you basically trying to tell us, I guess, in the second half not to expect a big boost from the runoff of that cost associated with Pitney Bowes and then can you give us an idea of the magnitude?

Sure. Long term we will see a boost because we do expect that these charges from Pitney Bowes will be completely eliminated. What happened between 2002 and 2003 is the rate of expenditures to Pitney Bowes or the rate that they were charging us for the legacy systems went up, they went up significantly. That had an impact on our SG&A, negative impact on the SG&A for the first quarter.

However with that said, when we expect when we do go wide with phase two those charges will all go away. Including the base charges we had in 2002 plus in the increase on those base charges that we experienced in the first quarter.

Was it -- okay was it a contractual thing that the rates gone up so much?

It was part of our transition services agreement.

Okay.

However, with that said just to give you an idea of some -- order of magnitude when these costs do go away we expect them to be in excess of $5m pretax per year.

Okay. And then looking, but what you said in terms of expensing more than rather than capitalizing the cost of ERP, I'm assuming, near-term, we're not going to see that benefit?

What you've seen over last few quarters, Shannon, is our cash outlays has been almost very consistent quarter over quarter--approximately $5m a quarter. $3m of that will be capitalized and about $2m expensed quarter to quarter as we complete this phase two and return towards the training and implementation side of the project. Those dollar figures, the $5m we don't expect to change, but you may see a shift between the cap -- the method we capitalized versus expense. So, you might see an input or higher level of expense then the $2m run rate that we've been are experiencing.

Okay. And then you guys have said bad debt increase -- are your reserves increase can you give us an idea why?

That basically is part of our effort in taking a look at all of our files and delinquency rates, we have a pretty standard formula. As accounts age we basically set aside certain provisions. We feel those provision are adequate and prudent thing to do and we'll continue to follow that policy that we had.

Do we expect another step up or do you think you're sort of in a steady state now?

Well, I think we can see - you'll always see some normally -- some normal AR [ph] write-offs but I don't think you'll see a big boost.

Okay. One more small thing and then a sort of macro question. In terms of your reserve for obsolete inventory, that also declined. Was there something specific there or it just?

Yes, last year we took a look at our entire inventory base and we did have a lot of analog products still in our warehouses. Mostly associated with service parts.

So last year we took, we did the right thing we took the right steps and provided for all of that. We are adequately reserved against all analog exposures at this point and this year that was not necessary since we are well provided for that analog parts inventory.

Okay. Great and then finally from a more macro standpoint, can you give us an idea of what your savings from national accounts from the standpoint of transitioning. Obviously, your copier rental revenue has been increasing, which is great especially in this market. But what percent of your account are now taking copier that was purely a fax business?

It's still a small percentage of the accounts but they're from fairly substantial accounts there. What we do when we do get into the accounts typically since we haven't sold them a copier or a multi functional product before is, they will give us a part of the network not -- and typically a small part of the network to start.

And we would think [indiscernible] for some period of time, we would get a larger share of the network. But we've gotten nice growth, rental growth, by converting at this point, I think, a small piece of the opportunity. So there's still a large piece to go.

Okay. And then with color, what are you hearing from your accounts, it appears that there's been some pick up overall in the market.

Yes. Color for us is a by far the highest growth area. The new color products we've introduced, in addition, to having some great features have significantly lower costs than the last generation color.

So, for us this is has proven to be an exciting opportunity. Our sales force is very, very excited about color. And it's actually caught us by surprise also. We didn't expect at this point color sales to take off as quickly for us.

Okay. Great. Thanks guys.

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

Hi, Rob.

Hi. How are you.

Good. Thank you.

My question has to do with the revenue trends that you are seeing -- in the quarter that was down about 3% overall. Do you expect that, sort of, run rate for the full year or was this quarter particularly weak or not?

No, it isn't quite always this weak at all. The drop in fact -- the drop is in fax. Okay.

We have been dropping in fax instead even at the time of the spin. Fax was going to see continued drops. Effectively people are always using fax machines less and less using fewer machines, and we are getting less supplies revenue from fax. That's nothing new; that's being consistent with what's being going on. The copier area is up, it's up nicely.

If you look at our competitors, our major competitors, their copier revenue would be down for the most part. So we think we're capturing-- we believe we're doing better than most of our competitors. We do believe that we'll start seeing growth in revenue early next year. And we think we'll be seeing amore favorable trend even as we go through this year in revenue.

Okay. Thank you. Another question on your capital expenditures for the quarter, you said, $15m for the quarter and about $3m for your ERP systems. How does the rest break up in terms of rental assets versus other business in expenses?

Sure. The rental assets in capital expenditures for this quarter were $10.4m. We are very pleased to see that pop up versus where we were in the fourth quarter last year, where we recorded $9.5m. We had a 9% increase in capital expenditure for rentals, which is directly linked to our success and improving our copier rental line.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Matt Campbell from Natt Partners [ph]. Please state your questions.

Hi, good morning.

Morning.

I hate to do this, but I'm new to the story. Could you possibly explain why you're doing much better than the competition?

Well...

I know, it's a long winded...

I loved the question, actually. I think the reason we're doing better is we have a lot larger opportunities than they have. We have a huge national account states in facsimile. We really, in the past, had not done a great job at offering copier products too.

We've spent the last year or so -- year and a half training our sales organization, improving dramatically on the product line, improving dramatically on the surface and then targeting that marketplace that loves us in the product line we had offered them.

So even getting a small percentage of them to convert -- and remember the copier market itself is over 10 times larger than the fax market. So the opportunities are much, much bigger in this area. So we just think we have a much better opportunity. We have a loyal customer base. We have a better opportunity.

Then our customers -- we have the unique business model in that, we offer "best of breed" products. So we get our products from many manufacturers. We look at each segment of the marketplace. We look for the best product, put it through heavy testing at each segment.

And so we don't have one manufacturer or even just two manufacturers, deliver the best is what we try to negotiate -- is the one we try to negotiate with. Again, we think, with the great "best of breed" product line, a loyal customer base, a focus on training itself in service, we should be able to consistently outdo our competition.

That's helpful. What percentage of your copiers are digital?

Well, of the copiers, we placed--the new placements, mostly all of them are digital. Okay. We looked at our base. The base keeps -- digital keeps increasing.

The base of digital, last year, was a much more percentage than it so. So we've made major improvements, and we are every quarter in the base of digital products. We also sell our products through a direct national sales organization. So we're not relying upon sources we do not control to sell the product.

Again -- one of the strategies we've had is we sell just direct. So you won't see our products in stores, in Staples or in a Office Depot. You won't see us selling through dealers that we do not own. We had acquired dealers a number of years ago, but we own those dealers 100%; so they're a part of the Imagistics -- of the Imagisitics' organization.

So, again, our strategy is more unique. We think our service productivity has improved dramatically. And there is also a direct service organization we have. So there is a lot -- I'm giving you too long of an answer now, I think; and, we're probably boring some of the other participants that are here; but we're happy. Any time you do have questions or want more detail, please just give us a call.

One quick follow up, if I may. Can you repeat for me why your gross margins are expanding?

Yes. You know, we're in an environment, where prices are actually dropping; but we -- because again, I think, we're so powerful, we've been able to negotiate much better prices with the manufacturers. So that the prices we're acquiring at now -- the products at now are much -- allow us the much better gross margin.

Okay. Great. Thanks very much.

You're welcome.

Thank you. Our next question comes from Barbara Klosmach [ph] from Rodel [ph]. Please state your question.

Hi, there.

Hi, Barbara.

I was just curious as how drastic you expect the decline in facsimile sales to be over the coming new year and whether any part of that step will be taken up by an increased demand for MST units [ph].

Well, facsimile has consistently been declining about -- in the area of about from -- anywhere from 7% to 12% depending on which quarter. It is -- and there is not lot of consistency there in quarters. A lot of the focus shifts to the multifunction or machines or the copiers. So our business plan was built on fax declining, copier and multifunctional increasing; and that's what we're seeing.

Okay. And just one quick follow-up. Compared - I'm not quite sure of what your comparatives numbers are as far as sales versus rentals are concerned for fax. But do you think that's going to be similar in the multifunction field, that the same percentage will be sold as opposed to rental?

It's really not the product; it's the market we sell into -- okay -- where sales versus rental would be affected. Primarily, the national account markets or rentals, primarily, the commercial market would be purchased or leased. So it would be much more. As we continue to be successful on national account, the rental percentage should stay very, very high.

We like to rent, because we like the recurring revenue. It does hold back on what you see as revenue growth on a short-term basis but provides us with more consistency on a long-term basis.

Thank you, very much.

You are welcome.

Thank you, your next comes from Shannon Cost with a follow-up. Please, state your questions.

Hi, Shannon.

Hi. Sorry. I apologize.

No problem.

Quick follow-up. Xerox -- they recently came out with a whole new set of segment Q-34 [ph] products. I'd like to know what your thoughts are? How you think they are going to be competitively positioned? They also have some new pricing out there, more on the low end.

Yes. It's business as usual. You know, we introduced, over the last year, 13 new products. We did them through -- we introduced them through the year. And when it comes to the pricing and lowering pricing, pricing has declined; it's been consistently declining in this business. So we didn't see anything startling in the Xerox's introduction at all. It's consistent with what everybody else, including, us has been doing.

It's that they hadn't had these products and possibly had, sort of, a hole in their product set. So are you concerned of that, if their price is essentially shrinking, you've now got another competitor out there?

We've always considered Xerox to be a major competitor. They are the major competitor. And so we've always considered; but, again, we didn't see any breakthroughs in products there. It's -- we'll introduce a new product tomorrow. So what?

Effectively, what makes a company successful? It's a combination of products, the distribution system, I believe, it's more critical than the products. But everybody's products today, I think, are improving. So there is nothing that could -- I'm sorry -- I believe any of other competition by surprise.

Okay. And then, finally, can you give us maybe-- I think, it's pretty high at this point -- but what percent of your contracts -- your OEM deals are in US dollars versus yen?

Joe? I know it's getting higher from quarter-to-quarter.

Actually, we're about 70% in US dollars.

Even contracts that are in yen generally have certain currency sharing clauses in them. So as the dollar was down 10% to the yen, we probably eat up 5% of that, if we didn't renegotiate the prices with the manufacturers.

Okay. Great. Thanks.

You're welcome.

Thank you. Our next questions comes from Ryan Cibidol [ph] from Maybeli Partners [ph]. Please say your question.

Hi, guys.

Hi, Ryan.

One question. You mentioned that falling prices with your vendors. What are you seeing on the as far as your question power to your customers. Isn't that some of that fall translating or you going to...

Yes. Pricing is in the copier of the functional area. And in fact, pricing has dropped this year in the single digits that offsetting that for us, we have lot more discipline in the pricing process itself.

So were as in the past, we've talked about having many contracts where our terms and conditions reduce the effected price that we've definitely firmed that up so the effected prices to us have been pretty good actually from our customers.

Okay. Now just, what's on the rental side? What's the average term for the contract?

Average rental typically goes back three years.

Okay. I guess on similar note again some of us want to know again the kind of discoveries as well. On the advanced billing line on your balance sheet, is that a deferred revenue type of line for rentals?

For rentals as well as service contracts. When we bill a customer and they pay us 100% for the full year. We recognize the revenues as we done it over a period of time and the balanced that is unearned is hung up on the balance sheet that's what we've seen.

Okay. That's way away for three years average.

Over the period, yes, it was a breech contract, it's by period-by-period.

Okay. You had mentioned last quarter about the business picking up a bit in the Europe wanted to come along [ph].

We launched the copier business - the copier multifunctional products, in the UK, not in Europe, but just the UK initially. And we just said at the beginning of that. It's too early to say what we sold some product that will be too early to give you a value on what that is. Total Europe , total UK is still a very small percentage of our business. But we are very optimistic about it.

Okay. Great. Last question is on last year you had (inaudible) revised three times during the year. Looking for this year, what things would have take to place for you to get a little more visibility and [indiscernible].

We think when we look at things we're fairly conservative as the year goes by, you have enough margin to hold though as year - as the year goes by if margins hold revenues are better than we anticipated.

We'd like to do better than our forecast, and we do try to forecast conservatively, but we forecast to the best of our ability each quarter.

Okay. Great. I will -- thank you very much and congratulations.

Thank you

Thank you. Our next question comes from Rob Brown with a follow up from Craig-Hallum Capital. Please state your question.

I'm wondering if you can comment on your second quarter expectations in terms of revenue growth and also EPS?

Again we give annual forecast, we've stayed away from quarterly forecast and I'd rather. I would rather do that stay away from any quarterly forecast.

Okay. Would you expect the seasonality to be similar to last year or would you rather not comment on that?

Yes, I would say that you wouldn't have a major previous given. I don't believe that the major revisions in seasonality. Occasionally if you get a huge order somewhere in the year that huge order would not repeat in the same cycle the following year.

So that's why again we stay away from the quarterly and go annual. You could have a very big sales, or into lot of big sales order which would distort the results in any particular quarter--might make it look better that year and then worse the following year. So I believe we've all much better of looking at this on a year-to-year basis, than a quarter-to-quarter basis.

Okay. Thank you.

Thank you. Our next question comes from Matt Subwood [ph] from Baker [ph] Capital Management and again if you've a question please press the "1" on your touchtone phone.

Just a few questions, nice job as well. Actually I had the privilege of reviewing your annual reports. I had a few questions, and I wonder, I mean as part of your annual earnings guidance if you were willing to give anything in the way of a free cash flow guidance or expectations?

Difficulty we have in doing that is if we really do get some major audits in a rental. We then are buying the equipment and getting the money back plus a small profit over 36-month period.

So I think we've given guidance in general on where the cash would be - where cash would be before capital expenditure that you think you have as a pretty good guidance on that already sounded difficult forecast. Capital expenditures will be the most difficult areas to forecast.

Okay. So in terms of that if I, obviously I got to know your income. I guess depreciation I know. Bad debt and obsoletes will be somewhat comparable I guess?

Yes. There's a model that we have on our website, that has our cash flows, quarter by quarter. But if you look at some of the components in working capital, I think it's fair to say that, as we experienced in the first quarter, usually working capital does not improving in the first quarter because that's a time when we do make a number of expenditures for compensation related, benefit related charges, as well as, the sales trips, that sort of things.

So that's probably only seasonal factor. I would caution also that looking as you implement in ERP, sometimes receivables take a hit, temporarily. I would also caution that, as we move to our mega center for distribution. We will probably have some inventories temporarily in two locations. So that will have an impact on cash flow also.

But, again those are the things that are temporary in nature but, -- so, you can't always go by just last year’s trends.

Actually this relates to working capital, I mean you also made tremendous progress there, so I guess there's a moment to where can we expect in particular once you start growing the business?

We think we have a lot of room there, again with ERP and the mega center. We believe, we're growing in receivables and inventory.

But, again as Joe said, we're also practical enough to know everybody who launches these things. The first step is, you take one step back to go two steps forward and so, as well as, we think we're doing in this area. It still wouldn't surprise me that we'll be similar like every other company. We'll go long term, if we keep improving working capital.

Okay. And if I may, just one or two more quick questions. In looking at the, I don't know whether it's really comparable, but at least on a reported basis, you guys were shelling huge profits four and five years ago. Can you comment on what's different now versus then, is it the decline in the fax market, is there something else materially different?

Yes, I think probably, we have done that with so many people that are listening in now, quite a few times, that I think it would be best.

Okay.

If you go and speak to Chuck - but, five years ago, again, it was Pitney Bowes -- part of Pitney Bowes operation. It was -- the fax business was totally -- was totally different. The cost structure was different also.

In the business before we spun it off, we had been declining for a number of years. Obviously, now it's going -- now it's moving back up in the right direction for us. But there were a lot of -- what we have today are standalone expenses that we didn't have as part of Pitney Bowes. But anyway, there's been thorough analysis done on that and again if you -- if you give Chuck a call and speak to Chuck of that, I'm sure to be glad to walk you again through -- [indiscernible] I just don't want to...

Can I ask you one last question then. The declining dollar versus the yen, what, if any, impacts on having you're sourcing and your pricing.

You know, five years ago it would have had a major impact on us. Today, almost all of our products come from China and not Japan. But we buy it -- we do buy them from Japanese companies in China. Five years ago, I think, almost all of our contracts were in yen.

Today, it's about 30% in yen, with sharing clauses in most of those contracts. So it has not had a dollar -- has weakened effectively to the yen it has not had a major impact on us. If it had strength obviously -- we usually made margin improvements over the last year, so they would have slightly better. But the dependence on currency now is -- I would consider to be less significant -- substantially less significant than it had been in the past. We will continue that.

Okay.

And at that trend.

Okay. Lastly, if I may. Is there an optimal debt level in terms of you guys had made tremendous progress. You are obviously been buying in stock you have room to buy more...

Our debt to capital now is down to, I think, to 22% at the last -- 22% for the quarter we reported. And it's something we always -- we always look at. What we do with the – do we pay the debt down, do we buy back more stock. We like to invest some more in the business and do some more of that. We haven't done an acquisition in the -- in the United States or in Europe or in Canada in years, and we'd like to probably get in some locations where we haven't been before for seem [indiscernible] acquisitions. But we still haven't -- we haven't done that. We are looking more at that now.

So there's a lot of usage as in opportunities for the cash to invest it within the business. We felt buying back shares has been a great investment for the company. I think, again at the prices, we still think it's a good -- $23 a share I don’t know what is exactly right now -- but we still think it's a good investment for us. So we're continuing that. We have not stopped that. So we're continuing that also. We look at the debt (ph.) and what we do with it on a quarterly basis.

I would also just add that we feel very comfortable. At this level, 22%. We don't think that's a very high percent for a company of this size. And given the cash that this company close off.

Again, we think we're about strongest in the [indiscernible].

As you mentioned because in the sense your -- as you move more and more over to rental model your -- it's a long-term asset and arguably it should be funded with a long-term liability.

Well, what we've been doing is using our free cash flow, our operating cash flow, to fund these things. So we've been able to generate strong cash from operations to help fund these.

Okay. Well, great. Thank you.

Thank you.

Thank you, our next question comes from Herbert Hart [ph] from Monaz [ph]. Please state your question.

First of all, congratulations on a really good quarter. And the fact that you've been able to track the changes in this business so tightly in terms of going to an ERP system on a rental base etc, etc, speaks quite well for a tight financial disciple. And all of the things you've talked about in the past are still -- going ahead, my question....

Thank you very much.

Okay. But my question is in the past there was an emphasis on training for people who had been just selling fax machines going over to copiers. First question is was that a bubble, the training ongoing but will be less as we get though this and in to next?

Okay. The products are becoming more and more sophisticated, which is a good thing. We actually -- you can get paid for that. As I just said in the example, today a much higher percentage of what we sell are connected products. They're most of all digital products but they're all connected year ago.

And a much smaller percent was connected. So that requires training not only in service but in sales also, because there are different functions -- different options when it comes to connectivity on the product.

But the customer applications with multi functional devices are becoming much more sophisticated. The sales reps and then the service reps need to talk with not only the head of purchasing or administration, but the head of IT also.

So we're constantly training the sales organization, introducing new products but the question will training dollars drop in the future--I guess at some point they would drop in the future but I'm not willing to say it's in the next 12 months.

Okay. Second question is on used bank warrants. Would you still have the $150m since there's $75m left?

Actually the $125 --

The $125m.

That's right. That's what's currently available and that something that we are actually taking a good hard look at whether or not we even that kind type of capacity.

Because I assume you pay for?

Yes we do, and so taking a good hard look at it and actually we're in some of discussions with our banks right now about that.

Third question is when would you expect your mega-center, out in Ohio to be on-stream?

I will let Nat answer that.

Thanks a lot, stream right now, we're just completing the total transition from Pitney Bowes, Newtown operations to the mega-center. It should -- its been when live on March 31st and we've been using the month of April and be in part of May here to complete this transition. It should be complete within next week or so and 100% of our spare parts will be shipping out of the mega-center by then.

Is that ahead of schedule?

No we right on schedule.

Okay. Again congratulations. Thank you very much.

Thank you.

Thanks. Your next question comes from Lloyd Weitman from Bernstein Investment. Please state your question.

Good morning folks.

Good morning Lloyd.

Let's see first of all, any complications for you -- excuse me -- given the current SARS situation given that more of your product is being sourced from China?

Nat, why don't you answer that also.

Now we are not expecting, nor do we have any problems with that. We are monitoring it obviously but we don't have any concerns at the moment.

Okay. Great. Also I think I know what your answer is going to be but I'll ask the question anyway. Any thoughts, given all the talk in Washington about dividend, tax exemption and you guys will see about another six months or so to be two years public for you, any thoughts on the dividend?

At this point we -- it is not something we'd put on the table at this point in time. We haven't discussed without the board at all. Obviously we had strong cash. But it's not something we've discussed internally yet.

Okay. And with the growth in Copier rentals, could you tell us how much is coming from new equipment and how much is coming from fully depreciated equipment?

Yes, a high percentage is coming from new equipment, new digital equipments. We do place fully depreciated equipments or also but the lion’s share is from the new digital equipment.

Okay. I know you said earlier, I believe Joe said that forecast and capital spending is pretty difficult. But I was just wondering, if you could give us any idea as to how much you might be spending for rental assets this year, let's say compared to last year's $48.1m figure.

That' the difficult component of our capital expenditures to forecast, we can forecast the ERP pretty easily, and in the others but the rental equipment, the rental really depends on our success in the couple of things. First our success in getting new business from major corporations and second our success in negotiating additional price deflections with our suppliers. So it's a tough number to just to forecast but I don't know, if I would use a rough number, I probably say similar to last year.

Okay. Great. Thanks very much.

Thank you, our next question comes from Kelly Granate [ph] from Chilton [ph] Please state your question.

Hi, can you hear me?

Yes, I can, Kelly.

This is Dan Leemus actually.

Okay. Dan.

Kelly is also on the line. Has there been any change in the depreciation schedule for the rental equipments? Our machines getting less than longer or shorter?

Well our depreciation policy for copiers is three years. And is the like of our contracts is three years, so basically at the end of the contract term, we own the equipment and it's basically been fully depreciated. We don't carry any residual values or anything like that or salvage value on our book.

If it's a straight line, at all straight and boring but it's nice to be straight and boring in this area. So, there is no real exposure for those, we haven't really seen any changes to that effect, we think that it's prudent policy to follow.

As far as our fax units are concerned, we depreciate them over five years. We know that even though the contract terms initially are 36 to 48 months on the rental fax machines, just staying out much longer than that actually even staying out longer than five years. So even then, we don't really see any exposures as far as that's concerned.

I wouldn't expect that to change with the declining importance of faxes.

Yes, I think so, I think how long we'll actually stay out there, it's going to be interesting though these units are staying out lot longer than we had anticipated.

But what we're seeing is people are using it less so therefore our supplies associated with those faxes, supply revenue associated is coming down.

But the units are staying up. There are people who still say, alright I'm not going to pay as much as I paid before, but I'll keep it out there, I just want to have it there just in case, and we're seeing that in many of the large national accounts.

Okay. Thank you. The -- and can you mention the, you've mentioned that you just take advantage of opportunities to source equipment from manufacturers that are offering the best value. Can you give an idea of, how many manufacturers you use for the copier equipment and provide the names of them?

We do not announce each of the companies we do business with, but we're doing it with, again depending on which segment, with quite a few different companies. So, we typically have not announced who they would be.

All the products are sold under the Imagistics name, which is very different than if you go to some of the other distribution companies where they'd be sold under the manufacturers name. The reason we do that is, many of these products are modified to need our steps location to reduce slightly different than the manufacturers initial product.

And, how does the complicated service of the equipment, I know that Danka went through, and Ikon, I think went through for some years back, stream lining the models that they, the manufacturers that they utilize, because it was just a, very difficult for them to keep their service staff trained in order to be able to manage the different brands out there?

Yes. You have to remember we've been very different than Danka or Ikon. Both those companies were built on acquisition of the dealers. So, they acquired so many dealers, each dealer became, basically had their own products that they were selling.

I don't know how I, myself could have controlled the situations like that. In our case, we have always been a centralized organization, so we haven't built this organization on the dealer market. The dealers we acquire are very -- pretty small part of our overall revenue.

So, we've been going to go through constant training with our organization, we do try to have more than one product, for manufacture, we try to prove them together. So say, the product we introduce that was, had a speed of 35 copies per minute. We also have the similar model at 45 copies a minute, where the product would have very high percentage of the same component, and operating systems in them.

So I think because we've centralize, we have had the same training throughout the whole country, and have had this service organization for a long time. We have not experienced that as an issue at all, and it is something we've been doing for a while.

Dan, if I just add one other comment to what Marc said, Marc's absolutely correct. We never disclose potential vendors that we have in the lab.

We're constantly looking at a variety of different manufactures in our labs, and we have confidentiality agreements with them as we test their products, and put them right through the ringer, to make sure we don't go out with a product that we're not going to be happy with nor our customers.

However, if you want to know who we're currently doing business with, we do disclose that. We have a complete list of that in our 10-K if you want. There could be companies like Minolta and Sharp, and there is a whole list there for you.

Great, now, that's very helpful. I appreciate it. One last question is, can you just make some comment regarding sales force and branch manager turnover. I know it's a difficult business to manage, and I would just like to understand how you guys are doing there?

Yes, the turnover is down from a year ago in the sales organization. So, it's improved. It still is it -- it's in different segment. Okay. The turnover in the national account segment is very low. The turnover in the commercial segment where sales reps who will be selling one or two machines at a time is high. Overall, the turnover is down from a year ago.

And how about the branch managers?

We...

That will be included also.

It's included in the total. I don't have the breakdown here. But I don't imagine it's going to be very different.

So very low would single digits and high would be the 25 percentish?

No, in the copier industry it's -- in the sales organization the commercial and turnover typically would run by most companies I think anywhere from probably 60% to 150%.

Okay. And the national accounts would be half of that?

National accounts is very low. 5% turnover in any business will probably be very bad for an organization.

Okay. So we're talking double-digit business but nowhere approaching the 60%.

That's correct.

Okay. Great. Thanks very much.

You are very welcome.

Thank you and our last question comes from Matt Campbell with a follow up from Natt Partners. Please state your question.

Hi, just curious which software you're using for your roll out of your ERP system and how that rollout's gone?

We are using Oracle, as well as we have hired -- we have IBM as the consulting group in helping us implementing. We -- as I mentioned in my comments earlier, we expect to go live with phase two in the second half of this year. And assuming we go through all the checklist and all the testing and all the training and get -- and make sure we're satisfied before we go live, that will put us completely off Pitney Bowes systems. And that will -- basically, the way I look at it is we put a whole ERP system up and running within two years, which I think is very good.

Great.

And so we're very proud of that.

Thanks, very much.

You are welcome.

Thank you very much for also -- again, let me just state we are very pleased with the quarter we just had. We think we had an excellent quarter. We're also very pleased that our -- we've revived our earnings forecast up to $1.10 a share. In this economy, you never know but again everything seems -- at least the first quarter seems to have started in a very, very positive manner. And we do believe that will continue. So again, thank you all for your strong support of Imagistics.

Thank you. Ladies and gentlemen, this concludes today's conference for today. You may all disconnect at this time. Thank you for participating.