Canon Inc (CAJ) 2003 Q4 法說會逐字稿

Welcome to the Imagistics International third-quarter earnings release conference, hosted by Marc Breslawsky, Chairman and Chief Executive Officer. Today's meeting will be tape recorded. Taping and broadcasting of this call are prohibited without express permission of Imagistics. After the initial remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). After the initial remarks, there will be a question and 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 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.

Good morning, ladies and gentlemen, and thank you for joining us for our fourth-quarter and year-end conference call. I have with me today Joe Skrzypczak, our Chief Financial Officer, Nat Gifford, our Vice President of Product Development and Marketing, and Tim Klahs, our Vice President of Corporate Communications and Investor Relations.

I will speak to you briefly about fourth-quarter results and our outlook for 2004, then Joe will cover some of the financial details. We will then devote the rest of the time to addressing your questions. I am going to make the assumption that you have all have the opportunity to read our earnings announcement along with the financial schedule that we released earlier this morning, a copy of which is available at our investor website, www.IGIinvestor.com, where it will also be archived.

As you know, we reported a 50 percent increase in earnings per share from last year's fourth quarter to 33 cents per diluted share from the 22 cents per share a year ago. This represents another record quarterly earnings for us as a public company, and we have again exceeded the First Call estimates by 3 cents per share. We continue to focus and execute our strategic plan, which is to generate topline growth in our core copier MFP business and to capture improvement in our margins by effective sourcing selections, disciplined pricing and efficient operations. While some of our competitors report a less than robust market for their products, we continue to make important inroads in growing equipment sales and rentals and increasing print volumes in our core copier MFP business. Just as important, we are achieving these revenue gains while simultaneously improving our margins. Our experience here, again, may be in contrast to some reports about overly aggressive pricing in the marketplace. For ourselves, we believe that as long as we can demonstrate our value in the marketplace, profitable pricing will be a natural outcome of a well-negotiated sale. As a reminder, the basis of our revenue strategy is to grow copier MFP revenues by leveraging our strong customer base and our growing excellent reputation in the copier MFP marketplace across all of our sales platforms, national, commercial and business product sectors. As a benchmark of this strategic focus and our long-term success, we're very pleased report a 7 percent growth rate in our copier MFP revenues this quarter. This is the eighth consecutive quarter in which we have increased year-over-year copier MFP revenue. That is to say, for each and every quarter since the spinoff and since that time, we have averaged a 6 percent quarterly year-over-year growth rate. The engine of this growth continues to be increasing print volumes overall and especially strong color placements. This quarter, color revenues more were more than double the level of a year ago to where it now represents over 13 percent of our copier equipment sales. Also remember that we are moving more and more towards plug-and-play type installations with easy connectivity designed into all of our new products, both color and black and white. We believe these connected office solutions, which offer our customers clear productivity gains, are the important driver of increasing volume of distributed printing on our MFPs.

An Imagistics MFP can serve as the hub for an entire office document need by replacing older and less efficient and more costly desktop based print technologies. It is this customer-centric, value-added approach that has gained us the awards in recognition that we have received this year.

Earlier this year, we were awarded the number one copier multifunctional product in overall customer satisfaction among business uses in a tie, and received top scores in both product and service in the JD Power & Associates 2003 Copier Customer Satisfaction Survey. We also received in 2003, the most outstanding Multifunctional Product Line of the Year Award by Buyers Lab. This past quarter, we received further recognition yet by another independent rating entity, this time overseas. Imagistics was awarded in the UK the 2003 Excellence Award for Product and Service, the highest in each category. These awards are sponsored by the Business Equipment Digest, one of the primary office equipment publications in the UK for corporate purchasing managers. This now represents the third time this year that an independent organization has distinguished Imagistics from our peers in the copier MFP business. We're very proud of that.

Including both copier MFP and fax, this quarter's total revenue declined 3 percent. Excluding the significant decline in revenue attributed to the sale of Pitney Bowes Canada, total revenues declined less than 2 percent. As of the end of the quarter, copier MFP represented over two-thirds of our total revenue versus 56 percent in the year 2000. In other words, the effect of sales growth rates in copier MFP is now twice the impact of any declines in the facsimile business.

As we continue to grow our copier MFP business and continue to hone our best-of-breed strategy, I would note here that our new product introductions will keep coming. Since inception, we have introduced 21 new products, seven during the past year, and we have further introductions planned for as early as this coming month. Our offerings are not only expanding our product line, but also, deepening it as we broaden our sourcing to include at least two vendors for each of our market segments. We believe that overall sourcing strategy has been an integral factor in contributing to the margin improvement we have experienced. This quarter, we have again significantly improved our gross margin over the previous year's numbers. For the fourth quarter, our sales gross margin of 41 percent represents a 4.8 percentage point improvement from last year. And again, this improvement occurred despite the headwind of our business mix continuing to shift away from fax towards the lower margin copier MFP business. We have made these gains by capturing much of the benefit of the lower product costs that we have negotiated, as well as by having lower inventory obsolescence charges and a relative shift away from lower margin business in Pitney Bowes Canada, where sales declined 22 percent.

Our rental gross margins also improved in the fourth quarter, rising to 70 percent, 4.7 percentage points higher than it was in the fourth quarter of the previous year. This improved rental gross margin was primarily attributed to the continuing trend in lower product cost, and also, replacing older rental contracts with customers with new contracts, having disciplined profitability standards for both pricing and terms and conditions, as well as getting greater volume. As was true of our sales gross margins, the improvements were partially offset by the continuing shift in product revenue mix towards the copier MFPs and lower margin than the fax product line.

In order to raise these levels of financial performance and operational excellence to an even higher plane, we have continued to invest in the infrastructure of our business, especially in our ERP project. We have now completed our successful transition off of the legacy systems that we inherited from Pitney Bowes and are engaged in the cleanup and stabilization that we anticipated would incur under the new system.

To summarize our operating results, we achieved healthy 7 percent growth in copier MFP revenues through a 6 percent growth in sales and an 8 percent growth in rental. The gross margins of our sales business increased by 4.8 percentage points while rental margins increased by 4.7 points.

Last year at this point, we related to you our belief that we could reach EPS for 2003 of $1.05 per share. As we move forward in the year, we became even more confident in our ability to execute our strategy and tactic and adjusted that number upward accordingly, finally delivering for you this year $1.19. As we look ahead towards next year at this early point in the year, we are offering guidance of fully diluted EPS of $1.45, which is again, in excess of the 20 percent that we have talked about in the past. We believe that 2003 was a year of promises fulfilled with results exceeding expectations. Our customers and the marketplace fully recognize the value of our solution port (ph). The awards we've received clearly validate our best-of-breed strategy, which we have described to you before as the basis of our value proposition in the marketplace. Our customers know we understand the business of documents and our numbers bear that out.

For our 2004 performance, we have again raised the bar. Given the energy and enthusiasm that our company possesses by the entire management team and the employees, I have no doubt that we will again meet the challenges ahead for 2004. I'll look forward to reporting to you again each quarter on the progress of the Company.

Now what I would like to do is turn it over to Joe Skrzypczak for further comment about the results and the outlook for the year.

Good morning, ladies and gentlemen. I would like to provide some further comment on our fourth-quarter results. Starting off with revenue, total revenue from our copier MFP product line increased 7 percent. Once again, we're very pleased to deliver this healthy topline copier MFP growth. Our copier MFP revenues have experience eight consecutive quarters of year-over-year growth, consistent with our strategic direction. As Mark mentioned, we continue to increase the proportion of our revenues attributable to the copier MFP product line. This quarter, copier MFP revenue exceeded two-thirds of our total revenues. Copier/MFP sales increased 6 percent, a rate that would have been higher without significantly lower sales to Pitney Bowes Canada. The sales increase reflects an improvement in our color product segment and in midmarket digital black and white MFPs as well as in sales of the associated supplies. Copier/MFP rental revenues increased 8 percent from last year, primarily reflecting higher page volumes. Facsimile revenues declined 18 percent this quarter. Fax sales were down 26 percent. There was a pronounced decline in both equipment and supply sales, reflecting the anticipated industry-wide reduction in facsimile usage and the replacement of stand-alone facsimile equipment with up-segment copier MFPs. Rental revenue from the facsimile product line declined 12 percent in the fourth quarter, reflecting a continuation of the decline in the installed base, coupled with lower per unit pricing and new placement and in renewals.

Total revenue for the fourth quarter decreased 3 percent to $155.8 million. Excluding the significant decline in revenue attributable to sales to Pitney Bowes Canada, total revenue declined less than 2 percent. Total sales of equipment and supplies decreased 5 percent to $79.8 million, while total rental revenue declined 3 percent to 54.8 million. (Indiscernible) service revenues from service contracts increased 6 percent to $21.2 million, reflecting higher copier MFP service revenues partially offset by significantly lower facsimile service revenues.

Let me talk about margins. As Marc mentioned, the sales gross margin of 41 percent increased 4.8 percentage points, primarily due to lower product costs, lower inventory obsolescence charges and a relative shift away from lower margin business in Pitney Bowes Canada, where sales declined 22 percent. The rental gross margin of 70 percent had an almost equal improvement, increasing 4.7 percentage points compared with the fourth quarter last year. This improvement -- this improved rental gross margin was primarily attributable to continuing trends of lower product cost and replacing older rental contracts with new contracts having disciplined profitability standards for both pricing and terms and conditions. Rental margin improvements were partially offset by the continuing shift in product revenue mix towards lower margin copier MFP product away from the facsimile line.

Selling, service and administrative expenses of $81.2 million in the fourth quarter increased 3 percent from the prior year. SS&A represented 52.1 percent of total revenue this quarter compared with 49.2 percent in the prior year. The increase was primarily the result of the anticipated higher percentage of ERP outlays that were expensed as well as higher related administrative expenses. The increase was partially offset by lower service expenses as the Company continues to improve the efficiency of its service operations, reduced employee benefit costs and has somewhat lower advertising expenses.

Let's talk about the ERP project. Our fourth-quarter expenditures in ERP, slightly more than $7 million, was somewhat higher in the third quarter. But as I mentioned earlier, most of this, approximately 90 percent, was expensed. This compares to approximately 60 percent that was expensed in the third quarter. As Marc mentioned, we have completed the implementation of Phase Two of our ERP system, by which we have successfully transitioned off the legacy systems that we inherited from Pitney Bowes.

As would be expected in any large project of this kind, we are now engaged in the period of stabilization and cleanup that we anticipate will be completed during the first half of this year. Beginning in 2004, Imagistics will begin to enjoy the longer-term benefit of the elimination of duplicative IT costs, a substantial reduction in the future level of ERP spending, and perhaps most importantly, all the efficiencies of a fully integrated system, tailored to our own needs for managing our business.

In the short term, we have experienced two negatives affecting our working capital requirements. First, we experienced a significant decrease of $9.8 million in advanced billings during the fourth quarter, as we rescheduled our facsimile product line billings to coincide with our copier MFP billings.

Second, as we had planned for, during the early stages of the transition, our Accounts Receivable increased as we temporarily suspended our invoicing during the conversion to the new system. Beginning in October, invoices were experiencing delays of slightly more than one month and being sent out. Correspondingly, our cash receipts declined sharply, beginning in late October and into the third week of November, which was their lowest period. During the quarter, our Accounts Receivable increased $35.5 million. I might add that since November -- this November low point -- our daily cash receipts in January have now returned to pre-conversion levels. We anticipate that our receivables will return to normal throughout the first half of 2004. As this period of stabilization draws to a close, we will be prepared to embark on a third and final phase of the project, which is geared toward sales automation and call center management. Because of the short term effects of our ERP implementation for the fourth quarter, we used 1.3 million of cash for operations. But given our financial strength, we were still able to invest $9.3 million in capital expenditures, primarily through to replenish our rental asset base.

We have maintained a very strong balance sheet. Total debt is now $63.4 million or 19 percent of total capitalization, down from 22 percent last year. We have also maintained a significant cash balance of $22.9 million. In the quarter, we continued to execute our stock buyback program, albeit at a reduced pace, repurchasing 64,000 shares for a total value of $2.2 million. Since the beginning of the stock buyback program, we repurchased 3.2 million shares or 16 percent of the shares that were outstanding when Imagistics was spun off. As of the end of the year, we still had approximately $13 million remaining of the $78 million approved by the Board for our stock repurchase program, and we no longer have the 20 percent repurchase limitation that was dictated by the terms of the spinoff.

As we have indicated, our fourth-quarter results put us in an excellent position for achieving our long-term financial and strategic objectives. We have targeted $1.45 per share for 2004. And we are confident that we will continue to deliver solid earnings growth and significant additional value to our shareholders. Now I would like to turn it back to Mark.

Now what I would like to do is take your questions. Operator, can we have the first question please?

(OPERATOR INSTRUCTIONS). Marsha Clinton, Merrill Lynch.

It's Marisha Clinton. In terms of your $1.45 EPS estimate for 2004, what are your expectations for topline growth? And also, what trends in sales and rental gross margins have you assumed?

We believe the revenue growth in copier will be at about -- the copier MFP -- will be at about a slight increase from where we are today. We believe that fax will continue to decline at a fairly rapid rate, with the sales probably declining a little bit faster than the rental line.

I think what we will experience in 2004 as facsimile becomes less and less of our overall revenue portfolio, the decline of facsimile will have less of a bearing on the revenue decline that we have been experiencing. So overall in 2004, we think total revenue will be up slightly.

Moving to the balance sheet, it looks like you guys tapped into your credit facility and utilized $1 million. I am assuming you did this to preserve cash for small acquisitions, etc. Do you expect to tap into this credit facility in the near future? And also, do you have a targeted debt to capital ratio for '04?

Basically, we used the credit facility more or less for working capital needs at this point. Our debt levels are so low, it's not a concern. So really the only tapping that we are using or utilizing is for working capital needs. As far as a goal for debt to capitalization, we have always kind of figured that we should always stay under the 30 percent mark, which is where we are. And we are significantly under that at this point. But we don't have a target for '04.

Lastly, what percentage of your revenues were recurring during the quarter? And can you discuss your ability to continue to leverage your selected vendor relationships to support your cost competitiveness within the various segments of the copier and printer markets?

I will talk about the vendor relationship, and Joe can talk about the recurring revenue. We have more relationships today with suppliers than we had a year ago. We deal with many major companies. And as I mentioned in my opening remarks, today in our product line, we try to keep in each market segment, two different suppliers. We have very broad product line. We think it's by far and away, today, the best in the industry. I thought it was best in the industry even a year ago. But it is significantly better today. People are happy to do business with us. They make money off of us. We are an incremental source of sales since we sell under our own brand name for any of these companies. So they are all in the marketplace. Every one of these companies sells directly under their own name in our marketplace. This is incremental profitability for them. We work very hard at maintaining those relationships. That is one of our, I believe, our strategic advantages. We deal with the manufacturers directly; we deal with the engineers. We deal with them in the country of origin.

As you know, historically, Imagistics has had reoccurring revenues of approximately 70 to 75 percent. At the end of the fourth quarter, we were at 73 percent.

Shannon Cross, Cross Research.

Can we dig a bit more, your gross margins were really strong and impressive. What I am trying to figure out is how much of this is recurring, how much of this was -- I don't know -- all the gods coming together and benefiting you in this quarter as opposed to -- just to try to figure out how it's going to run through the model over the next couple of years. Because the 70 percent gross margin in rentals is great. Then if we can also talk a little bit on the SS&A side, there's obviously 52 percent of revenue. I understand there was substantial costs associated with the rollout and they were anticipated in the quarter. But can you just give us some idea of when you think you are going to be able to really bring those costs, in maybe a little bit more granularity than you were able to in your scripts? And how to think about that over the next year or so as you are able to take out some of the administrative overhead that was associated with the Oracle implementation?

Let me address your margin question first. There are a number of dynamics that impact our overall margin, and one of them is really product mix. Not only between fax and copier -- copier generally yields lower margins than facsimile. So as the dynamics of revenues switch between those two product lines, so does margin in a negative way. Another factor is the percentage of sales that we have to Pitney Bowes Canada, where that's another factor that -- the mix change between what we're selling to our customer base versus what we're selling to Pitney Bowes Canada has an impact as it did in this quarter, where our sales to Pitney Bowes Canada was down 22 percent. Those are very low margin sales for us that we're selling off to them. So the low percentage of revenues that we earned from selling to Pitney Bowes Canada, the higher our margins would be.

As far as operating expenses are concerned, we experienced higher expense levels, primarily in ERP. ERP, we are guided by the accounting rules as to how much we can expense and how much we can capitalize. Just this quarter, we spent $7 million on the ERP project, of which $6.4 million was expensed. It's only because of the stage at which we are in the project, more has to be expensed versus capitalized. And I would compare that to let's say the third quarter, where we spent $7 million but only expensed $4 million. What we would expect to see is, as this project becomes -- starts to wind down in '04 -- we would expect to see lower expenditures for overall expenditures for ERP. But the nature of them will probably be more towards the expense side. We did staff up in the administrative area to handle some of the learning curve that would be incurred. That is part of it. And I would expect to see benefits and reduced costs associated with these admin costs as well as the overall ERP project costs in the latter part of '04. The benefit, the one benefit that we will get in early '04 will be that we will not be paying Pitney Bowes for IT costs. So that's another offset that we will see in '04.

Can you talk a little bit about currency? Obviously, it was a headwind this quarter -- not totally. I think you do currency sharing with some of your vendors. But from the standpoint of the relationship. And then with some of the talk of the Chinese currency, if you can give us your thoughts there?

Generally, we bring new products in all the time. A heavy percentage of the sales goes into new products. So we, obviously -- the Yen right now is about $1.06; I think a year ago, I think it was about $1.20 or so, so that would have gone in the opposite direction. Most of our contracts are in dollars. We do have a number of contracts still where there is a sharing clause even in dollars. So the Yen has obviously worked against us. But it has been offset by adding new products to the product line, which have a lower cost. And there is dual selection of suppliers, where one supplier product might provide a higher margin than somebody else's. We are going to always work in that environment. If the Chinese currency gets re-evaluated, then again we have to go through the same exercise we did as the Yen exercise. It could, for a short period of time, if that happens, have a negative impact on us. But ultimately, currencies and what you pay for a product, for everybody, catch up with what you sell the products for. Most products do, today, in our industry -- most of them do come from China. So competition would be impacted pretty much as we would today. I don't think we are disproportionate to most companies in the industry when it comes to that.

One follow-up, it seemed like when you're talking about gross margin that you talked about an awful lot of headwind, that you might be facing, in terms of mix, and potentially if sales pick up with Pitney Bowes Canada. Are you basically intimating that the levels we are seeing -- the we saw in this quarter may not be sustainable and we may see a little bit of give back on margin in the next few quarters?

I think a lot is contingent on how much Pitney Bowes does sell or purchase from us. That is very hard to estimate at this time. But it does play a significant factor in our overall margin. When their revenues were down 22 percent this quarter, it obviously had a big impact, a favorable impact, on our overall margin for this Company. It's hard to gauge that.

But the relationship remains strong?

Yes.

They are a reseller of the product. As you probably recall, we had some contracts that -- where we locked in price, which expired during the year. So our guess is that they would buy more in the third quarter than the fourth quarter from us. That happened -- what their sales rate is for 2004, I think ultimately probably has little to do with our overall operation and profitability. We still don't make a huge amount of money off them. It still is substantially less than what we would make in the commercial marketplace. The way I look at it is just incremental. That's why we always back out for you and let you see a separate number with and without Pitney Bowes Canada. We, ourselves, by the way, again, do plan to launch a direct operation in Canada also.

Since you brought that up, what is the timing on that? Are you still just investigating?

Investigating, negotiating, however you want to use the word. We are going to go into Canada the same way we go into cities we are not located in in the United States. The least expensive way to get there is not to open an office up, but it's to try and acquire a small dealer or try to acquire a few small dealers. Our goal is to start that in Toronto and then build out from Toronto. But it is an objective we have in 2004. One of the objectives is getting into Canada directly, at the same time, still providing Pitney Bowes Canada with product also. Also an objective is to grow the copier multi-functional marketplace in the UK.

Herb Hardt with Imagistics.

The company is Monness, by the way. The first question is, I noticed the capital spending line dropped a bit. Is that a combination of stretchouts on the rental line, or things were the crosscurrents in the fourth quarter?

Actually two things, Herb. The amount of investment in the rentals came down a little bit. Last year in the fourth quarter, we spent about $9 million in rental assets compared to $7 million in the fourth quarter of this year. But the big factor is how much we are capitalizing that ERP, because that gets classified in capital expenditures also. And I mentioned earlier we expensed a lot more than capitalized. And if you look at where we were last year in the fourth quarter, we capitalized about $4 million of ERP versus this quarter, where we capitalized about $800,000.

Just as absolute copier units go, the new units -- the bulk of our sales -- have a much lower cost than the units of year ago. And so, we would expect that line, on a normal basis, to keep decreasing our depreciation -- our depreciation to keep decreasing.

Another question is, I noticed some new people hired in London. Is that going to take awhile before you can comment on it?

Actually, we brought on a new management director. His name is Adam Shepherd (ph). He has a number of years of copier/MFP experience in the UK marketplace. We are very pleased to have him on board. He actually started this week.

Remember we have been in the facsimile business for many, many years in the UK and have done very, very well in the facsimile business. But the growth is in the copier business. So we did need -- we have learned you need somebody experienced in that specific business to grow this marketplace.

Brian Alexander, Raymond James.

Going back to that last question for expenditures for fixed assets, you said last year you had 9 million for rental fleet, this year, 7 million. Is all that ASP decline? Or is there a unit decline, as well? Is that a good predictor of future rental revenue or not?

Actually, it's a good indicator as to what's happening in the rental line. Except for the fact that you have to factor in what is happening with product cost. Because that line is created by product cost. It is costs associated with inventory moving from the inventory line into rental assets. And it's at a cost basis. So we are reducing our product costs -- that will have an impact on it also. But obviously, the number of units we put into rental assets will be an indication of how many new contracts that we have on rental.

Remember, the key factor for us is the revenue we get from customers. It's not the absolute unit. Basically, what we do a lot better today than we did in the past years is we place units where we get a lot more volume out of the unit. The volume gives us a higher revenue. But our cost of the product would be lower this year than it was a year ago. The revenue, because of our better marketing and sales efforts, would give us a higher revenue factor, because the volume -- the actual cost per click, effectively, has gone down just like everybody else. The average number of clicks, copies -- I say clicks -- copies per machine continued to improve for us. That you know, a key success factor. Again when you look at margins, and you just say what you get as a base charge, the base charge itself has very little to do with a total revenue on the machine. So we focus our organization on volume levels that create a very acceptable margin for it. So the absolute dollars that go into the rental, the cost of rental equipment has had in the last few years, very little to do with the rental base because -- the rental revenue factor -- because the costs have been decreasing from year to year to year. But the revenues have done very well and the margins have done very well.

As you price your new service and supply contracts, I am not sure how they are bundled or not, but are you able to rise prices per click if that's how you price your contracts?

No, per click, on average, has gone down for everybody in the industry. But it's not the per clicks that make us successful. It's the number of clicks that we have. Machines operate more efficiently from a service point of view at the right level. So if we did a midrange machine, and say the machine was specked at about 15,000 copies per month. One that ran at 15,000 copies per month would have a much lower operating cost for us than that same machine running at 5000 clicks per month. And obviously, the revenue for us would be much higher on that product also.

That's helpful. It looks like you're looking for a little bit better than 20 percent earnings growth this year. You talked about some puts and takes to gross margin. I'm just trying to understand with modest topline growth, what are you sort of factoring in for that earnings growth in terms of gross margin improvement versus expense reduction?

We don't break it down and have never broken the forecast down to the level of what you pick up in operational efficiencies versus what you pick up in gross margin. And it's very difficult for us to project gross margins. We could get a major contract somewhere at a lower price than norm, which could take the gross margins down, but be incrementally very positive on the bottom-line for us. So our target is to always improve gross margins; it doesn't mean we will always succeed at that. Our target is also to bring operating costs down also. We think there is a very large amount of room in operating costs, very large amount. We thought we started high. And you saw our 52 percent number this quarter; that was even higher, and again a lot of that had to do with the ERP. But there is certainly a lot of room for long time -- not for a quarter or two, but for a number of years -- two, three, four years on operating expenses -- that the margins will be what they are. We will do our best to have products that are very reliable to customers. When they are reliable to customers, it's great for us because it's less service cost with that. We will continue to have two products in each segment, so that if a customer wants a low-cost product with little features, we will still have a decent margin. And if they want a more feature-rich product, we will have a decent margin on that also. But it's impossible to project. I cannot tell you if margins will go up or go down on a quarter-to-quarter basis.

Can you share with us what you're expecting for expense savings as a result of the ERP implementation? I am just trying to get a sense, off of the current SG&A base, how much should we expect that to go down due to the efficiencies from the ERP implementation, what is the timing of that?

We've said in the past, because we have been asked that many, many times, to consistently bring down our operating costs, our SG&A, to consistently bring it down. We do not know the bottom point. And again, we're not giving guidance as to each line here. But it should be pretty obvious that, in fact, the costs there have gone up. We have gotten none of the benefit out of this. We have gotten off of the Pitney Bowes legacy system and gotten onto our own system. We are going through today and probably will go through for a six-month period or so, what I would consider to be a clean up on that. And we should start experiencing the benefits after this is cleaned up. As we speak today, we still put in over time with this new system. So it's not operating anywhere near where we need it to. Now it's giving us the basics. But there's a ways to go there. But when it is accomplished, I think it will bring us some major efficiencies in the operation.

Two more quick ones if I could. Have you shared before and can you share now the average age of your installed base on the fax side and on the copier/MFP side? And the final question is, do you have a free cash flow estimate for this year?

We have not really broken out the average age of our installed base, no. What we expect for this year as far as free cash flow is concerned -- the first quarter is usually -- we experienced this last year also -- the first quarter is usually a quarter where we use cash and that it's a time to pay off bonuses. We have trips to pay for as far as incentives, that sort of thing. And basically, it's a time when we do use cash. In addition, we're still going through cleaning up, as Marc said, the ERP implementation where our receivables have gone up. So what I would expect is in the first quarter for us to be more or less cash neutral from a free-cash-flow perspective. However, with that being said, I think you'll see a very strong third and fourth quarter as receivables come down. We don't have the same type of expenditures that we normally have in the first quarter. And we will probably end up with free cash flow in the 45 to $50 million range.

James Clement, Sidoti & Company.

A quick question for you, I know that you had mentioned as long ago as last quarter and perhaps before that, the anticipated rise in receivables in the fourth quarter. What I can't recall your mentioning either way -- and I think this is somewhat related to what you were just saying -- it looks like you're payables spiked up a bit in the fourth quarter. Is that -- did you sort of use the payables as almost as sort of like a cash credit facility to deal with the rise in the receivables? Or is this sort of a rate we should expect to see going forward?

I think you're seeing a normal rate in Accounts Payable. It did go up somewhat in the fourth quarter. Nothing was done to treat it as a credit facility, because we have access to the cash through our bank facility. So no, it was not that. But basically what happens is in the first quarter, a lot of things that we have accrued for in the third and fourth quarter gets paid in the first quarter. And it's something that we have experienced over and over again. I think -- I don't know if the answers your question. But that is basically what we experienced there.

That is fine. I was just noticing the rise in payables from 3Q '02 to 4Q '02 as being a lot more modest compared to the rise from the third quarter of this year to the fourth quarter of this year. But that is fine.

Just to move quick, Marc, got a question for you. I think you said you have about $13 million remaining on the share buyback authorization. As you guys obviously know, $13 million does not buy as many Imagistic shares as it once did. I guess as you sort of get into the midpoint of this year or so, assuming a kind of free cash flow that you sort of mentioned, do you have any hesitation going to the Board and asking for another authorization?

You know, when I go to the Board to ask for the authorization, and they approve it, you guys will be the first to hear about it, the same time as everybody else. But we feel that we will have the ability to buy back stock, pay down debt, do the acquisitions to expand ourselves geographically that we have done in the past. We had slowed down the buy back when we went through this tight cash period. We have gone back to a higher level again, starting this year, again. We are more comfortable with the cash coming in again. And we have gone back to a higher level.

Remember, we had a limitation placed on us during the spin that we could not buy 20 percent back of the shares outstanding as of the spin during the first two-year period. This was an IRS regulation that would preclude the spin from being a tax-free spin. So we were very, very careful and I think we have said this in our previous conference call that we were going to slow down -- deliberately slow down -- the pace of purchases in the fourth quarter which is what we have done. But as Marc said, starting in January, we have accelerated that pace, since we have now breached that anniversary day, and we don't have that regulation (inaudible).

Margo Murtaugh, Snyder Capital.

I wondered if you could re-cap ERP expenses for this year -- for the whole year -- what was expensed, what was capitalized, and what you expect for 2004?

Our total expenditures in 2003 were $25 million. From that, we basically expensed $16 million. What you have seen traditionally is approximately $7 million -- let's say it is $7 million per quarter than (ph) the run rate you've experienced over the last few quarters. I expect that we will see that same level of expenditures probably for the first half of this year as we go through this cleanup process. The one other item that I did mention earlier is, we do not have to pay Pitney Bowes for the IT legacy systems. In previous calls, I have said that that number was approximately slightly higher than $5 million. So that is a benefit for us beginning in 2004.

So in the first half, 7 million per quarter in ERP and then a lot of that is going to be expensed, right?

It all depends on -- you have to go through a pretty detailed calculation. And we take a look at these accounting rules very precisely. So to give you a forecast on how much will be expensed versus capitalized, I would rather not do that at this stage. But we are more interested in how much cash we're actually using on the project.

So the second half, then these expenses go way pretty much, the ERP expenses?

ERP expenses never go away completely. But they will not be at the same rates we have traditionally experienced in 2003.

What is depreciation, what do you forecast for depreciation expense in 2004 and capital spending?

We have not forecasted separate line items. As you know, we do not do that as a policy. However, with capital expenditures, I think what we have said in the past, which has fairly been true is, I think you can take a look at our normal run rates and that would be a good indication of what we will experience in the future, exclusive of the impact of the ERP.

Pitney Bowes Canada, what were the sales for the year? Maybe you have that somewhere. But I did not see it. I guess you don't have any thoughts about 2004.

Actually, it's on the last page of our earnings release. You can pick it up there.

What about --?

Sales to Pitney Bowes Canada in '03 for the full year was $28.9 million.

Any thoughts about 2004? Any ballpark estimate for revenues there?

You can ask them. We just don't know. We really don't have a good forecast from them.

Stanley Bogin (ph), Bernstein Investment.

Congratulations.

Thank you.

A great quarter. A couple of questions here -- more around ERP. I guess ERP expenditures are winding down in 2004, maybe skewed to the first half. What is going to take its place going forward, in terms of new directives for sizable cash expenditures?

Again, we think we will do more acquisitions in 2004 than -- we didn't really do that much in 2003. We did very little in 2003. So expanding in Canada should be an expense for us and utilize some cash to get into that market.

That is pretty definite, then?

Yes, definitely. Again, our strategy on acquisitions is really one of finding businesses that are good turnaround opportunities. So we try not to spend too much money to overspend and not have much of a negative hit on the bottom line -- hopefully have a positive hit the bottom-line, even initially. But if not, not have much of a negative anyway. We are not cash restricted. We do not foresee ourselves doing any major acquisitions. We don't foresee that now as happening. But if we can find good opportunities up in Canada; or there is a lot of locations in the U.S. where we need to expand also -- that these are cities we would not be located in, we would do that also.

How many cities are you in now?

I would say in total, about 100 or so.

So I presume that is all the major cities.

We are in every major city there is. And then we have presence in smaller cities also. But there is a lot of places in the country where we don't have enough coverage. A lot of the southern areas and the West, we would not have coverage there. So we need to expand those areas. There's one thing we need to do is service our national base a lot better. They could have factories out, they could have factories in those locations, or distribution points. So that helps us quite a bit when we do that.

Just as an example of our last acquisition, Stanley, we purchased an operation that was based out of Salt Lake City. We had a small presence there, but really the benefit of that acquisition is that it gave us an entrance into two other markets. They had operations in Las Vegas and Boise. Those are sizable copier markets for us. That's why we strategically bought them, not to just add revenue base, but to have a presence in those major cities.

It's worked out well?

So far, yes.

What sort of amortization schedule are you going to use on ERP? I see $9 million was capitalized last year. What is the total capitalization on the ERP and what sort of schedule are you going to use to write off?

We basically are -- we have been capitalizing approximately -- if you look at the whole life of the project, approximately 50 percent of the overall project has been capitalized.

In dollars?

That was about 25 to $30 million, I guess it is. That's $30 million of capitalization. What we'll be doing is amortizing that over seven years.

Straight line?

Straight line, yes. The other thing that we have changed also is that we have changed our depreciation policy on facsimile. So for a unit that went into place after October 1, we will be depreciating them over three years versus what we have done historically, which was five years.

But the ERP, if you divide 28 by 7 is $4 million a year compared to the expenditures you've been going through right now.

That's exactly right. So that would be an incremental hit, let's say on the next seven years going forward.

But minus the expenditure, minus the cost that was expenses, so it's a net positive, right?

Exactly, yes.

In Canada, does Pitney Bowes sell other people's products? Is that why your sales have done down? Or are they just not making an effort?

They sell our products. And remember the revenue we get from them does not necessarily tie to their sales. I don't know if their sales in Canada are up or down. It just ties to what they buy from us. They do have, like any distribution organization would have, they do have inventories and --

But do they sell other people's products?

No, they don't.

So that if you go into business, can one assume that they are going to drop out of the business?

No. I don't make that assumption at all. Just remember, like we sell products from other manufacturers, put our name brand on it. All companies do that. So we just become now -- in Canada, there could be ten or twelve companies selling -- so we become the 13th there. We would be less competitive with them than the big boys would be, than the Xerox would be or the Canon would be up there who they would be seeing all the time. We are just going to be a start-up operation up there.

Pitney Bowes must have a sales force on this.

They do, they have a sales force.

So when you develop your sales force, those people are either unemployed, go to work for you, or use somebody else's product. Something must be in the works, you must know that.

That sales force isn't strictly dedicated to copier. They also are selling mailing machines and other products. So basically --

This is really an afterthought?

If you look at the history of the spinoff, one of the questions was, why didn't Pitney Bowes also give, or spinoff to copier business in Canada. One of the issues was the fact that their sales force was not distinct copier or (inaudible) mailing; it was a combination of both. It would be very difficult to split them . Out and I think that was probably the primary factor. In the meantime, they make money off of selling copiers. They really buy the products from us because -- and the reason they are paying a small margin on it -- is because they're really leveraging our purchasing power coupled with all the testing that we do and providing the best products that are out there. We do a lot of testing here, and the selection process is quite rigorous. They don't have to do that; they basically can rely on the work that we do.

But if they are on this conference call, they recognize now that you're going to go into this business you said in 2004, so they better make a decision, right?

Honestly, we told them two years ago when we did the spinoff that our intention was to go up into Canada. Two years later, the original agreement that we had said we could not enter that market for a two-year period. We did tell them that it was our intent to do that. We also told them that we would -- if they wish to buy from us, we would continue to sell to them. We do that; they get our newest products; they get very good costs on those products. We believe they can -- they are buying from us at very competitive prices today. But still, their real competition is not us. Their real competition is Xerox, Canon, Ricoh, you know, and all the other ten or twelve players up there. It really isn't us. And our target -- when we go to displace competitors as we enter this marketplace, Pitney Bowes is not our target either. Our target is the same as their target, our target is the Xerox customers and the Canon customers. And everybody else's is our target marketplace there. Because they are not the leaders in market share either there.

It also gives us a response to our national accounts here in the United States who have operations in Canada. During this two-year period, when one of our national accounts said well, can you serve our Toronto office, our response had to be well, yes, we can coordinate that through Pitney Bowes. Now we can say no, we have a direct sales force and you are going to get the same level of service that you get in the United States, the same training, all that. So getting into Canada is not only a good financial move for us, it's a very good strategic move in servicing our national accounts.

(OPERATOR INSTRUCTIONS). Ben Roberson (ph), Deroma (ph) Asset.

It looks like I am getting in near the end here. I just wanted to go back to the beginning of the call. You said that you thought there was some overly aggressive pricing in the marketplace. I am curious where you are seeing that; if you think that your competitors are doing unprofitable business; or they have a cost advantage? And also, there has been a lot of talk about the difference in profitability with color versus black and white. I have wondered now that it's 13 percent of your copier/MFP sales, is that turning out to be as good as people previously thought? What does it look like versus black and white?

We don't disclose the gross margins by segment.

Just a general idea, is it meeting expectations? Is it part of what's driving these higher gross margins?

Color is more than meeting our expectations; it's very, very good. Pricing has always been aggressive in our industry. You probably analyze our competitors as much as we do. So you know who makes money and loses money in that industry. Occasionally, someone will go in there and want to move some inventories, perhaps they will be stuck with excess inventories and we will move it. Pricing is aggressive. Our solution, again, to that is to find the customers who utilize the equipment properly and put the volume into the machines, so we can get the margins in place there. But in our industry, pricing has always been aggressive. I have been in this industry for a long time, and probably I can't remember a year when we didn't think pricing was very aggressive. It is very aggressive pricing in the industry. With that, again, we have managed through pricing disciplines and volume disciplines, through terms and conditions disciplines and through vendor selections, to do fairly well in this area.

There is nothing new in that?

I don't believe so.

That was just a general statement?

As a general statement, we will probably make that 10 years from today.

Is color part of what is helping you get these better gross margins?

Color is working out very well for us. Our new color products have been -- they are not even that new anymore. But they came out last year -- they have been very well accepted. The volumes on color are running nicely. Most color products are connected to the entire network of the customer, so they can -- if you use your printer to print color, if you use whatever printer you have on your computer, it is very, very expensive to do a color copier. If you shift that volume to a multifunctional, cost goes down significantly. And so our job is to go in and explain that to customers and hopefully, we are successful at convincing them to get off the printers or get some volumes off the printers and move them to the multifunctional product.

Do you think that is something that could lead to a higher sustainable gross margin than we might have previously expected going forward?

Our gross margins are very good. And as I said from quarter-to-quarter, our gross margins will vary. Movement in one quarter does not necessarily indicate that will be the future. But we think we will continue to have very good gross margins.

At this time, there no further questions. I will now turn the call over to Mr. Breslawsky for closing remarks.

Thank you, very much, for joining us on the call. We are all excited here, the whole team is excited here, about the quarter gone by, and also about our forecast for 2004 and beyond 2004. We continue to believe again that what we had said in the past -- our expectations for very good growth, both in the copier and multifunctional area, topline and total growth on the topline and bottom-line. We are pretty excited about those prospects. So I hope everybody also has again reviewed what we have done, and we will continue to communicate with you. The lines of communication are always open in this company. And we will continue to communicate with you as we move out. Again, thank you, very much.

Thank you for joining today's conference call. You may now disconnect.