必能寶 (PBI) 2002 Q1 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes first quarter 2002, earnings conference call. The lines have been placed on a listen-only during the conference until the question and answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines. I would now like to introduce your speakers for today's conference call, Mr. Michael J. Critelli, Chairman and Chief Executive Officer, Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer and Mr. Charles F. McBride, Executive Director of Relations. Mr. McBride will now begin the call with a safe harbor overview.

Good afternoon. The forward-looking statements contained in this presentation involve risks and uncertainties, and subject to change based on various important factors, including changes in international or national, political or economic conditions, timely developments and acceptance of new products, gaining product approval, successful entry into new markets, changes in interest rates, and changes in postal regulations as more fully outlined in the company's form, 10-K annual report filed with the Securities and Exchange commission. And now our Chairman and Chief Executive Officer, Michael Critelli, will review with you the results for the quarter. Mike?

Thank you very much Charlie. I would like now to briefly review our results for the first quarter. Most of you should have received the press release which contains more detailed information about the quarter. If not, you can find the release on our web site at www.pb.com.

Despite the effects of weakened economies across many of our major markets around the world, I am pleased to report that we achieved our earnings and revenue targets for the quarter, which included diluted earnings per share of $53 cents on $129.5 million in net income, revenue growth of 9 percent to one billion $50 million. If the impacts of recent acquisitions in foreign currency are excluded, revenue would have declined 0.8 percent, I should note though. However, based upon the success of integrating the acquisitions into our business, it's becoming more difficult to accurately assess what revenue would have been without those acquisitions. But the key numbers, 9 percent with the large acquisitions, minus 0.8 percent without them and with foreign currency excluded.

At the same time, the fundamentals of our business remains sound. We have free cash flow of $189 million excluding special items and 168 million including payments associated with special items from the prior year. We re-purchased 1.7 million shares during the quarter, leaving $228 million of authorizations for future share we purchase. We continue to focus on providing value both to our share holders and our customers, especially in this economic environment, which highlights the value of our integrated mail and document management solutions for organizations of all sizes and the value of the additional security, our mailing systems and outsourcing services can provide to our customers' operations.

During the quarter, we launched several new products to meet our customers needs for efficiency and security. The U580 mail processor for the creation and distribution of professional looking mail, the office write mailer which saves time and money by automating envelope inserting from low volume mailings, so this is below any products we previously had in the market in terms of size of customer and size of mailings. In the Olympus II MT, a high speed sorter, designed to enhance the efficiency for high volume presort service bureaus and commercial mail centres. Also our management services division has developed a three tiered secure mail handling service to match the leading edge technology and expertise with the customers' desired level of security. There is much we have done and more we plan to do to enhance our position and for long term growth.

We continue to invest the new products and services and later this month, we will enter an exiting new phase in our history with the introduction of a new family of digital networks mailing systems. These new systems will provide our customers, as well as postal services, with convenient access to valued postal services and products, and information to help them manage their mail and document flow work efficiently, securely, and cost effectively than ever before. In addition, our recent strategic acquisitions provide us with the people and products we need to further enhance our market position and potential for growth.

As we look to the future we see numerous opportunities to expand globally into new markets. And speaking of the future, the current economic uncertainty still presents near-term challenges to our business. However, we expect revenue growth for the second quarter to be in the range of eight to ten percent and diluted earnings per share in the range of $58 to $60 cents. And for the full year, we maintain our guidance of revenue growth between seven and eight percent and diluted EPS between $2 and 37 cents, and $2 and 40 cents. Now we will be happy to take your questions. operator: Good afternoon and welcome to the Pitney Bowes first quarter 2002, earnings conference call. The lines have been placed on a listen-only during the conference until the question and answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines. I would now like to introduce your speakers for today's conference call, Mr. Michael J. Critelli, Chairman and Chief Executive Officer, Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer and Mr. Charles F. McBride, Executive Director of Relations. Mr. McBride will now begin the call with a safe harbor overview.

Good afternoon. The forward-looking statements contained in this presentation involve risks and uncertainties, and subject to change based on various important factors, including changes in international or national, political or economic conditions, timely developments and acceptance of new products, gaining product approval, successful entry into new markets, changes in interest rates, and changes in postal regulations as more fully outlined in the company's form, 10-K annual report filed with the Securities and Exchange commission. And now our Chairman and Chief Executive Officer, Michael Critelli, will review with you the results for the quarter. Mike?

Thank you very much Charlie. I would like now to briefly review our results for the first quarter. Most of you should have received the press release which contains more detailed information about the quarter. If not, you can find the release on our web site at www.pb.com.

Despite the effects of weakened economies across many of our major markets around the world, I am pleased to report that we achieved our earnings and revenue targets for the quarter, which included diluted earnings per share of $53 cents on $129.5 million in net income, revenue growth of 9 percent to one billion $50 million. If the impacts of recent acquisitions in foreign currency are excluded, revenue would have declined 0.8 percent, I should note though. However, based upon the success of integrating the acquisitions into our business, it's becoming more difficult to accurately assess what revenue would have been without those acquisitions. But the key numbers, 9 percent with the large acquisitions, minus 0.8 percent without them and with foreign currency excluded.

At the same time, the fundamentals of our business remains sound. We have free cash flow of $189 million excluding special items and 168 million including payments associated with special items from the prior year. We re-purchased 1.7 million shares during the quarter, leaving $228 million of authorizations for future share we purchase. We continue to focus on providing value both to our share holders and our customers, especially in this economic environment, which highlights the value of our integrated mail and document management solutions for organizations of all sizes and the value of the additional security, our mailing systems and outsourcing services can provide to our customers' operations.

During the quarter, we launched several new products to meet our customers needs for efficiency and security. The U580 mail processor for the creation and distribution of professional looking mail, the office write mailer which saves time and money by automating envelope inserting from low volume mailings, so this is below any products we previously had in the market in terms of size of customer and size of mailings. In the Olympus II MT, a high speed sorter, designed to enhance the efficiency for high volume presort service bureaus and commercial mail centres. Also our management services division has developed a three tiered secure mail handling service to match the leading edge technology and expertise with the customers' desired level of security. There is much we have done and more we plan to do to enhance our position and for long term growth.

We continue to invest the new products and services and later this month, we will enter an exiting new phase in our history with the introduction of a new family of digital networks mailing systems. These new systems will provide our customers, as well as postal services, with convenient access to valued postal services and products, and information to help them manage their mail and document flow work efficiently, securely, and cost effectively than ever before. In addition, our recent strategic acquisitions provide us with the people and products we need to further enhance our market position and potential for growth.

As we look to the future we see numerous opportunities to expand globally into new markets. And speaking of the future, the current economic uncertainty still presents near-term challenges to our business. However, we expect revenue growth for the second quarter to be in the range of eight to ten percent and diluted earnings per share in the range of $58 to $60 cents. And for the full year, we maintain our guidance of revenue growth between seven and eight percent and diluted EPS between $2 and 37 cents, and $2 and 40 cents. Now we will be happy to take your questions.

At this time, we are ready to begin the question and answer session. If you would like to ask a question, press star one on your touch tone phone, will be announced prior to asking your question. To withdraw your question, you may press star two. Once again if you would like to ask a question, please press star one on your touch tone phone. Okay, just a moment, as a remainder it is star one on your touch tone phone. At this time, we are showing no questions, again. we are ready to begin the question and answer session. If you would like to ask a question, please press star one on your touch tone phone, you will be announced prior to asking your question. To withdraw your question, may press star two.

I want to make sure -- we have never -- we have never had a meeting or a call where we haven't had questions, so are you sure that there is no technical problem, where people are unable to get their questions registered.

Very good. I did test that and we are having someone test it again.

Okay, because we do not have -- we have a group of analysts that always have good questions.

Just one moment. At this time we have a question from Ben Reitzes. Ben Reitzes?

Hi, Ben Reitzes sir, of course I had a question. I have been hitting it for 30 minutes. OK. Couple of things, just big picture, the post office has been in the news over, there may be some issues, they have the three cent postage hike I believe June 30th. There has been talk about discounts on bulk mailing and highlighting of some of their own problems.

I was wondering what you thought, big picture, mail volume effect would be, as well as the effect may be on your, new meters and may be hike can save people money because it seems to me that, you know the cost of first class mail obviously going up 9 percent increasing peoples' cost and then they are going to give discounts to bulk mailers. So on the surface there could be some forces that may be take some mail volume out of your core, if peoples tried to save money and is that logic correct or do you have products and services that are going to save people enough money to, you know, completely buck that trend and make an advantage and then I have some follow-ups.

That's a very good question. Certainly, those mailers that are sensitive to the cost of first class mail, well, we think, what they do, and that always to our advantage, postal rate increases, tend to work in our favor because people who would otherwise not spend on systems that improve their use of the postal service will start to think of that. For example, we sell address systems -- addressing systems and the business case becomes more compelling when, by printing better bar codes you can get discounts for -- as a result of using our addressing systems. The address software, which prevents mail from being mis-routed or lost by going to the right address becomes -- the business case on that improves. So there are a variety of our products where the cost of higher first class mail increases the viability of the business case to make an investment in upgraded technology.

We also and the Olympus is a good example of this, are providing an increasingly full suite of products for high volume bulk mailers and the rate structures which are moving increasingly toward discounting for bulk mail and work sharing and partnership also work to our advantage. So we think that the rate case in both ways works to our advantage and while there may be some marginal reduction in first class mail volume, our systems are designed to work with all classes of mail except for consumer originated mail and even there, if that pushes a consumer to go to electronic bill payment, as I talked about in the past we get zero revenue from electronic bill payment, and we get zero revenue from home bill payment. We get some revenue from -- when that goes into electronic bill payment because it does work very-very well with the, you know, with the production mailers who sent out the check to those mailers -- to those mail recipients that can't receive electronic payments.

But the other thing and this will become clear when we announced our new generation of network mailing systems, digital mailing systems, those are designed to give customer discounted access to special postal products like priority mail delivery confirmation and some of the other special products the postal service makes available. So the business case for those will also become more compelling and that it -- it should incent people to upgrade from electronic meters to digital network meters. And we will have a full family of those products available, once we launch them later this month.

Any outlook from mail volumes this year and what you have seen quarter, year ?

Business originated mail volume as we have talked about in the past, first class mail we would expect to be essentially flat, marketing mail is down because of the general depression in the advertising spending in American industry and if you have seen some of the reports from some of the media companies that appears to be continuing into the first quarter of this year, but as I said, that is today not a -- we supply equipment and technology to that market place, we are not volume dependent on advertising mail and the special services like priority mail are down but, we would expect that those who do use those services, our new digital products will be far more advantageous for them than the existing electronic products.

What are the price to those new digital products, I mean, maybe you can't give me that exact price per unit, but you know, is it 10 percent higher or same as the existing meters?

The nature of those products is that we will have pricing schemes that will be dependent on what -- if they will allow over time a customer to acquire the services, either the full package, the basic package or something in between, but the -- I would prefer to wait until we have actually launched to talk about the pricing relative to the product that are in the market.

OK, but is it basically a little bit of a premium to what is out there already or is it too early to say?

I would to prefer to wait. When we will do the launch, we will talk about pricing and will talk about the concept -- some of the new concepts that we are offering with the digital network systems because they are truly not comparable -- they are not just boxes as we have had in the past but digital network systems that are gateways to new services.

OK and just to conclude here, capital services had a big positive surprise in my model and not normally talk about that, because it is so small, but on the margin side, not on the revenue side and the other two, I don't know about other people's models, but we have the two big segments little below, but it appears CAP services picked up some slack with a nice margin. Is that sustainable and do you expect, how do you expect the operating margins to go by segment throughout the year?

Let me -- let me answer the first two questions and I'll ask Bruce to talk about the second one. On Capital services, that's the function of strong action in terms of fees from specific transactions and obviously, it has received some benefit from lower interest rates during the quarter to cope with the prior year. I'd like to have Bruce talk about the, and as far as that goes, interest rate movement will obviously depend on what you think is going to happen to interest rates. These we -- at different times during the year, we get pops in terms of transactions, it tends to be somewhat of a lucky business. So, I wouldn't want to predict quarter by quarter on that one. I'd like to have Bruce talk about the operating margins by segment and the company's outlook on that.

Sure. Just as a general comment the growth margins in the various businesses held up extremely well this quarter and the fact that you analyzed it even as a whole the growth margin on an applet-to-applet basis was quite comparable. Where we did have some differences is on the EBITDA margins and that would be a function of, in the case of US mailing, last year they had the benefit of rate increase and this year, did not have that and that was a high margin source of revenue for last year. They also continue to expand both on new product introductions which we've already alluded to and also, in connection with infrastructure improvements. You saw slight decline in the margin for the mailing segment. I should also comment within the mailing that the international margins did improve and they had a good performance in the margin side. In the case of the enterprise solutions, you saw the decline in margin there. That is solely attributable to DMT, that in the case of management services, they had a improved margin. DMT, however, is substantially off in terms of margins year-over-year.

I just quick comment by the way of other add on -- on Capital services. We did do some postal financings in the first quarter which had very strong positive margin contribution.

Okay, is that a one time type of thing or?

We hope over time, those will be more frequent, but I -- given the nature of that business they tend to be large ticket transactions. They're not one time, but I wouldn't say that you'll see exactly the same transaction levels every quarter.

Okay, great.

critelli But, it's somewhat of a lumpy business.

OK, Thank you.

Your next question comes from Mr. . Pete Asnet your line is open. Please state your company name.

Thank you, Deutsche Bank. Yeah, I just wanted to ask a couple of questions about competition in both meters, and if you break it out in anyway, in terms of other handling equipment and folders and inserters, do you see those two markets and treat them similarly or do you see your share differently in both markets?

Well, they're, you know, they're clearly different markets with different competitors. We have a handful of European based competitors in the traditional metered mailing machines market, and we have in the high end mailing market, different competitors, Bell & Howell and a couple of European based companies there. So, they are different.

Any share trending similarly in both? I mean is it basically solid and or do you see any gains or erosion in any, in either market?

In the meter business, if you just look at total installed base of the population, we, you know, we did pretty well in the first quarter. We actually had an increase in share on the numbers published by the postal service. We don't necessarily look at that as a long term meaningful data point, but to the degree that there is one, we did have an increase I think for the first time in a few years. In the high end, it's a little harder to tell, but we believe, we're holding or gaining share there against competitions worldwide. The issue is not market share, it is that for large capital equipment, our customers are deferring purchases. Although we did have some signs of light in the first quarter with very good written business in some areas. We don't see enough of a trend there to tell you that that thing is coming back. But, in terms of share, that is not our problem.

Okay, with regard to digital meters, I've heard that you have gone offering digital services on the, you know, the two DM series products that you've launched already with sort of flat rate pricing at about $15 a meter a month. Am I correct on that?

There is a model, a pricing model that for certain service packages we would add a premium to the existing rate. Keep in mind, that's for lower volume mailers and smaller offices. We obviously have to look differently as we get to medium and high volume mailers. And we will talk about our approach to those mailers when we launch the product and we maybe using a different kind of pricing scheme that's appropriate for those markets.

would you say that you.

We have done. What we will be doing is selling out the line, the DM 200 and 300 is for the, is the low end of what we call the systems market and we will be filling out the product line with the announcement that we make shortly.

would you, would the way to think about pricing be a fraction of the mailers savings you would seek sort of capture as a fee to enable the services?

To be honest with you, I would prefer to talk about that when we launch the products and when we can explain the pricing in the context of the services. It's a little difficult to give you a fragmented view during this call as to, you know, what we're doing because this is a, as we were pointing out, these are different in a lot of ways from what's gone before them in that day, they are a gateway to postal services and we will price -- we will do more value based and usage based pricing, but I prefer to talk about the details at the time we launch, shortly.

Yeah, quite sure. OK, thanks very much.

Right.

Your next question comes from Ms. Shannon Cross. Shannon Cross, please state your company name.

Merrill Lynch. Hi guys.

Hi.

Just a couple of questions. First of all, in your global mailing comments in the release, it said something about a shift to lower margin products domestically. If you could talk a little bit about what that actually entails and if you think that's permanent or more of a one time issue. And then second, if you could give us a heads up on you know, how your acquisition strategy is going, you know, what your looking at if things or anything you can clarify there? And then, I've got a couple of follow ups.

Bruce can talk about the lower margin product mix and I'll comment on that and then I think we can give you some feed back on the acquisitions.

Yes, what it refers to is that if you look at the composition, some of the higher margin areas such as rentals and sales of products, were not an increasing, but, service revenues did and service revenues tend to have a lower margin than product sales and rentals. So, that was the number one. The other mix issue is between the US and international, where the international was a little stronger and they tend to have lower margins versus the US.

Our hope would be that with the launch of the new products, we would see a shift back to higher margins as the year goes on. But, obviously, not, you know, we don't have any basis and experience yet to say how quickly that transition will take place.

On your second question, the acquisitions are going very well. We have been very pleased with the integration efforts with the performance of those acquisitions compared to the business plans that we had in place and we've been pleased with the contributions of those aquisition of people, technology, customer base and capabilities. So, I think, you know, we've been, I can't say the unqualified. I think we've had an excellent experience. The only comment I will make is that -- I always mention is that in terms of integration, we remind people that in the case of a Secap acquisition, we did enter into an agreement with the works counsel to delay the major part of the integration until late this year. But, even there, we have done a lot of joint product planning and we have been able to construct an integrated strategy for the safe integrating of Secap product line into the Pitney Bowes product line both in France and for export from France to other markets, and we are starting to look for other synergies that we are able to do, that are not going to affect the arrangement we made with the works counsel. Otherwise, we are doing very well on the integration.

What about pending acquisitions, you know, is that heating up again? Anything we should know about?

I think it is a practical matter, you can assume that we are continually on a look out for acquisitions, we have talked about are some of the areas of interest, Niche Technologies, areas that can expand, our participation in mail and document management, opportunities to expand geographically or expand our customer base. But, we don't have any specific acquisitions on which we're prepared to comment.

OK, in terms of inventories you seem to go up slightly in the quarter, was that related to the launch of the digital products?

No, its actually, if you look at our inventory turnover in US mailing, which is where that was, we had actually improved. It's primarily in the DMT area and it relates to their advanced productivity system which they have by the fact that they build the products for the customers, they have some inventory.

This is just for those who are not familiar with what Bruce is referring to, this is a very -- what I would call, revolutionary product for the high end production mailer. It was launched and shown at the Explore show last fall. It's the highest speed, most fully featured product in the market. But, at this stage, it's out and it's out in several beta sites and we are doing a fairly heavy build and would expect to realize revenues in the second half of the year on the systems that we built. But, right now, we are building and yet -- and not at this stage realizing revenues.

OK, great. Thanks.

You're welcome.

the next question comes from Mr. Deane M. Dray. Dean Dray, please state your company name.

Good afternoon. Dean Dray, Goldman Sachs. I'd like to get an update on PBMS and it was interesting you announced a product, if I heard it correctly that three tiered secured mail facility. So, if you'd talk a bit about what the experience has been post the anthrax in the mail issue. You know, how many of those inquiries actually turned into contracts or close to turning into contracts and what this new product might do for that business.

First of all, generally PBMS, the headlines would be as follows. The -- we are getting very strong, new written business. We have excellent share of customer and I would say we feel like we were increasing market share, but we are seeing shrinkage of our existing customer installations. Which is why the revenues, they have, you know, for the first quarter, exclusive of DSI have been flat. We have a number of customers as we talked about in the past in the financial services industry that are simply shutting down facilities and therefore shutting down the outsourcing operations associated with those facilities and we're seeing some flattening of volumes of copies and document printing. Also, as a result of that, so, but, you know, the PBMS is becoming stronger each month in the market place and we are extremely pleased with the synergy between PBMS and DSI.

Now on the secure mail area, as I think I've said in previous calls and what I've predicted to be the case, outside the -- outside of a couple of , business has sort of return to usual in terms of people's interest in acquiring secure mail solutions since the anthrax situation sort of died down. We're the exceptions. Increasing business and interest in business from federal government agencies and that's something that we didn't get a big boom or bang on in the fourth quarter, but each month that passes we are seeing more revenue and more pipeline for federal government. And I think that will continue for the longer term, it gives the federal government a reason to out source where it hasn't before and I think also some of the budget pressures coming from the administration in the congress will drive some outsourcing opportunity and I think we're very well positioned because of the mail solutions.

We also continue to see some targeted interests from some companies, particularly in financial services and media, where there is a heightened interest in security. But I would say as a whole, looking around the country, you look outside in New York and Washington, other than federal government, we've probably seen the, you know, the specific interest in secure mail down. That being said, the fact that we do have secure mail has given us an advantage against competition and it gives us a reason to talk to customers about outsourcing, so I think it has enhanced our competitive position and our ability to get new business.

The three-tier solution is really a package of services starting with a basic package that is our solution relating to, you know, the way we typically train our employees and select our employees moving up to the top package which has state of the art bomb scanning equipment's and also an ability if the customers so desires, to build selected, you know, protected facilities. We have -- we also, I should note have security products in other areas of the business. We launched some solutions in our global mailing business that I think over time will be valuable to people if -- you know, to businesses that don't outsource, but still want secured mail solutions, mentioned something called Image Alert which we launched earlier this month which uses imaging and e-mail to give people an ability to determine whether they are going to receive mail or packages and some other solutions called, excuse me, security secure scan mail, security scanners. So general point, it helps us get business. I think it will be a business getter longer term to the federal government and some media companies but there hasn't been a, you know, there hasn't been an explosion of new business solely because of security issue.

Mike, for PBMS, could you give us a little sense, when you say strong written business, any numbers around that in terms of growth, contracts and then when you talk about share of customer how do you -- can you split that up between either a secure mail processing, document processing, however, you categorize that, what's Pitney Bowes' market share?

Well, I'm not going to give you numbers and we don't have specific market share data that I would feel comfortable sharing but I would say that for situations in which customers make decisions to go with an outsourcing company, whether it's a new contract or renewal, we are winning a greater share of those than we have in the past. I would also say that we are adding services at a more rapid rate than we have in the past looking at our written book -- what we would conclude in our written business. At the same time we are seeing customers that are asking us, existing customer -- we're not losing the entire customer, but they are telling us, you know, just to use a use an order of magnitude as they have seven facilities, they are telling us we are we're -- we're closing down a bunch of facilities, so we're going to close down two of your facilities along with it. Or if we have a customer that we are doing a printing services for, through our document printing group, when they lay off 10,000 people, and we're printing their training material, we're obviously going to be doing less training materials for them. So that's the kind of stuff we're experiencing a very upbeat situation in terms of customer satisfaction, new business, add on business but we're getting that offset by customers just shutting down facilities and businesses wholesale.

And just last question Mike for, when you say strong written business, any sense of the profitability of these incremental new contracts, are they at the segment margin or are they above the margin or have you had to have any pricing concession?

I'll answer that. It really depends. For some of the higher value added services we're definitely seeing higher margins and some of the secure mail that Mike talked about has potential for higher margin, some of the document related. But on the other hand there's part of the business, particularly in the -- almost the commodity type reprographics where you're under a continuos pressure to deliver more savings to the customers, so as a mixture our stand pretty confident in the gross margin.

Yeah, I meant -- we did have operating profit improvement in the first quarter relative to the revenue, but as Bruce said it's a -- we're in a difficult economic environment.

Great, thank you.

The next question comes from Kartik Mehta.. Kartik Mehta, please state your company name.

Midwest Research. I've couple of questions. Last quarter conference call you had indicated that, you know, probably tough comparisons for Germany and France because of the Euro conversion, but Canada and UK. should be able to have make up for because of the migration. Will that still be the correct statement?

In the first quarter we did have a tough comparison in Germany and I think we also have a little bit of a fall-off in France. The UK did show improvement as we expected it would. Canada we are -- we launched our new digital product line this month. So we didn't see improvement in the first quarter -- significant improvement. But we're optimistic as the year goes on for Canada.

The new product, I understand, you don't want to provide a pricing but would it be safe to assume that those will be definitely better margin products because they are digital products?

I think that's a fair comment yes. Although you always have the depreciation issues, you know, to the extent that some of the stuff was fully depreciated and it was -- it's being replaced by new product but yes it would to do that -- if you look at the total life cycle margin on the digitals it would be better than what it replaces.

I got a last question. Are you seeing any more interest from companies to want to offer E-bills?

There's a lot more talk about it. We're getting a bigger pipeline but no, I'm not saying that -- and interestingly, even if you looked at some of the leading players in the industry like CheckFree, they announced the downsizing during the quarter. So I would say that our experience would probably be typical in the industry. I do, you know, we expect over time that E-bill payment will go faster than E-bill presentment. I am an example of somebody who pays my bills electronically, but receives them in physical mail form. But -- and that does hurt the postal service, but as I pointed out, really is immaterial to us. We're not seeing a big rush to E-bill presentment.

Thank you very much.

You are welcome.

Next question comes from Solin Cho. Solin Cho, your line is open and please state your company name.

Hi, Morgan Stanley. Just had a few questions about DMT. First of all what are the lead times typically for that business?

Depending on the system if it's a standard product it could be out there in from 30-60 days. If it is a more complex system like our advanced products activity system it could be four to six months. And the reason being that it doesn't take us that long to build it, but we go through an elaborate in-plant testing process where customers come in, they submit material and we actually run it in our own facility for an extended period of time because it's a lot easier to fix any issues or correct any misunderstandings between us and our customer when we still have it in our plant versus sending it to the customers place of business. So it can be any where from three to six months from the time we get a written order to the time we actually ship it out and install it and then -- and actually to recognize revenue on it.

OK. So, just going back to your comment about the inventory build in the quarter, I thought I heard you say that you expected some pickup in those revenues in the second half based on the work in process that's in the inventory line today?

Yes on those systems absolutely, the APS systems.

Are we talking about meaningful in the second half versus the first half.

You know, it should help, but you know, would it ultimately turn that back into a double digit growth business in the second half, I would say not by itself. But it will certainly help our business in the second half. And when, you know, when we give you our aggregate revenue forecast for the corporation, we do assume that we will pickup that revenue.

OK. and then what are you seeing in terms of bookings today in that business, you know, any sense that the business is moving in one direction or the other?

It's to early to tell. I mean we, you know, just if you get back -- I think I might have -- I think I may have mentioned this at previous calls. One of the things that happens when you look at the big ticket orders is that customers come to visit our facility and they -- we go through an elaborate process before we sign an order with an onsite customer. In the fourth quarter we had -- we normally in a quarter let's say have 20 of those business, we had four in the fourth quarter, I think as people just didn't travel, we had probably, you know, 25 to 30 in the first quarter but we don't know at this point whether some of the business that we got in the first quarter is a make up for the fourth quarter or whether it's a signal that business is picking up. It's too early to tell and if you averaged the fourth and first quarters, it's still below our historical run rate, but the first quarter is definitely better than the fourth. But I would say that we got to really go another quarter to know for sure what our, whether the business is picking up.

Mike I can just add one other point that's happening in our DMT business is increasingly DMT is providing machines along with our management services business and what that does is it from the economic standpoint, instead of having revenues immediately from those contracts, those will come in over time as rentals to management services. So that's another reason why we may had seen pickups in the business DMT, but it wont necessarily be, immediately translated to the revenue line and this is something we're having increasing interest in our customers. We're viewing Pitney Bowes as a one stop solution providing ample services and equipment in the expertise to do in the right way.

Yeah we're going to talk about that and that's a positive for us longer term because we get more total revenue from the customer but clearly in the short term it goes from a sale model to a rental model.

OK. Great and then I understand that you, at least a good portion of the charts that you took in the fourth quarter was to address your DMT maybe some other lagging businesses. It looks like DMT was through the negative swing factor in enterprise margins in this quarter. Did you take additional charges in the first quarter as well in that business.

No we did not.

OK.

And I I mean DMT was part of the restructuring last year, but I would not say was just a portion.

OK, what are you doing on a cost site, sort of you know right size that business given the environment and you know what is the expectation for profitability, you know over the next step of quarters.

Yeah, DMT certainly has looked -- it's looked at specific projects that looked promising and better economic times and its cut or cut back some of those projects, some of those are engineering projects, some are new business initiatives, and so it's been more selective in spending, recognizing that some of these things are going to take a little bit longer and the market isn't quite ready for them and we clearly have, you know, lower cost associated with lower buyings of business. We do not have to over time that we had in boom times. We did not, you know as a company we worked -- we set up to two percent salary increases in aggregate for this year and DMT came in much closer to zero then two percent and it's worked on a number of small items to bring it's cost down and it's also cut out most performing sales people and replace them with other people that in aggregate over time should produce better profitability for us.

OK. But we have only seen the benefit here in the first quarter, is it most of it to come or not.

Yeah, that's correct but you know the nature of that business is that it is highly the factory has a lot of fixed expense and we see equipment you know, the hike we offer were obviously going to look to increase margins probably our biggest initiative in terms of cost reductions does need a lot of mailing business to look at ways of using, you know, its application software, you know, like the enterprise research planning software got one project last year on DMT, we are doing another big one this year in DMT and its service management area and we will be -- definitely help us take as we re-engineer some of their very labour intensive processes.

. OK, great thank you.

Welcome

Your next question comes from Jonathan Rosenzweig. Jonathan Rosenzweig your line is open please state your company name.

Hi guys, I am trying to ask the question for about an hour. (Inaudible), first of all can you talk about the last time we had a product roll out that was of the order of magnitude that we are seeing now. I think you are -- you are going to have six new products associated with this family that's rolling out shortly. Where would you say would be the last comparable period we had a roll out of that magnitude. Can you talk about what happened in that time when you had that kind of roll out with the top line performing.

Well, the thing to keep in mind is that unlike any previous time, we never had this many specific products, but what's unique about launch is that all of these products have a common architecture to them. So some of the risks of putting multiple products out at the same time which is, you know, service training and the sales training are not, even though there are multiple products, there is a greater amount of a commonality among those products in terms of product architecture that we never had before.

We are also -- I cannot remember any single time when we had this many products launched at one time, but the last time that we had a fairly big product launch was in 1992 when we launched our mail center 2000 products line which was the Paragon, the Spectrum and variations on those products, but even then each of those products had different architectures. Every one of them was independent to the other in terms of technology and so the learning for sales and service were much higher and this one we think is in a lot of way it's a more manageable launch than we had before.

And where was pattern like for the revenue improvement as those products launched, did you see a pickup right away, did it take a quarter or two and how significant was it?

It was a fairly significant pickup, but frankly our goal would be to have more steady build up of revenues this time than to have a big pop where people go out, they dropped everything, they are doing sales of these products. So we are trying to manage this and we did something we did not do the last time which is, we brought all of our district directors into a National Training Center and we talked through the launch strategy with them. We want to get this into the flow of our products in a way that maximizes its potential, but doesn't cannibalize other things that we are doing and does not cause us to, you know, get a very big pop in the beginning and a drop after the next year, we don't see that happening here.

OK. What you think that these products will roll out you graphically, whether they are all launched at one time or will it be in certain geographies in a few quarters before it's nationwide.

That's a good question and we will be making our decisions shortly.

OK.

It could go either way, we are prepared to go either way.

OK. In terms of the electronic products, that they are all be essentially replacing, are you going to stopping the competitive electronic products in terms of the sales or you be selling both simultaneously.

We -- it depends on the specific product. There are products which we will be able to sell for a longer period of time such as the Paragon where it has features that will be highly valued by customers, the others that because of postal regulation we will need to see if the sale sooner, so we will obviously look at market acceptance, but we will ultimately be governed by the postal regulations which will have dates after which we are not allowed to sell.

Mike, whether those dates really go out to 2004 before you have to stop selling.

But there is some much earlier. I think there is some that you know the end of this year and there is a phase stoppage of new placements.

OK and then earlier you were talking about what happens when postal rate hikes occur, have you ever seen any kind of correlations statistics with regard metered mail volumes and postal rate hikes. I mean is there any correlation there historically or has there been none.

It is very difficult to make that kind of correlation because let us take an example of one where there was a reduced mail volume after a substantial rate hike which was -- or a reduced rate of growth and that was in 1995, but the reason, you can't make a judgment based on that. It's got a dead time, there was also a 60 percent increase in the price of paper and envelopes. So we never had a fewer case where we could judge postal rate increases against mail volumes, but as a general matter we have not seen metered mail volumes go down as a result of postal rate hikes, but there is no -- this is not scientific.

Right. And then just a two quick questions and let you go, the margins in mail and enterprise solutions as Ben was talking about earlier, Capital services is a kind of we were all looking for, where the margins that you saw on mail enterprise solutions, therefore, may be a little bit below what you have been expecting.

No.

No. But that was in line that you had been in the 40 percent kind of range on the margins and CAP services.

Yeah. I would tell you that overall over all if you look at what we had in our budget and a little bit, where right back on line.

OK and then, I do not make you repeat, but there is one thing I catch, Mike you were talking about market shares earlier, nothing quite catch all that, can you just talk about you are referring to that -- that your market share went up, I just want to make sure I understood what it went up in.

The published date from the US postal service for the meters and service, which say that our population went up but -.

2001 share.

Pardon

That's 2001.

No, it's first quarter of 2002.

Okay.

But I would say that that's not a meaningful number for us to . We don't look at our business to, you know makes that an important variable, our goal is to grab the greater share of profitable business, not get the largest number of postage meters. Although we certainly welcome getting a largest share of postage meters that not our current goal. Our current goal is to get the largest share of the customers wallet for its entire spent for mail and document management.

Great, thanks a lot guys.

Welcome.

The next question comes from . your line is open please state your company name.

Thank you, this is couple of question, first of all, it looks like to me from a linearity prospectives is for your receivables and that may be been a little bit more of back-end quarter. If that is the case, then I guess pace of activities felt through out the quarter, I know is weak, but was there any pickup at all as you got towards the March.

No, I would say Gibney that if anything this quarter was no where working relatively constant it was January-February. We were actually a little above of what we typically see in March came in roughly about where you'd expect but not back in .

Do you think to some extent they made in some deferrals in terms -- in anticipation of new products and people, to see what they have coming out.

We do not see evidence of that we obviously instructed our sales people what they have and when they have that and we have not seen customers sold off and the reasons for deferral are predominantly people not having spending authority or you know shrinking the business. Not having to do with things related to our future product line.

And I suggest talking a little bit back on to the PBMS and your industry and certain industry you are having facilities shut down and overall contraction of business, but there also seems that -- I mean those deals were done based on saving your customers money and since everybody is in cost cutting mood, at least the level of activity in terms of the number of companies looking to outsource would improve and I guess may could you just provide color on that and is that mean may be, you know, companies are still focus on taking cost out but that may be that business start to pickup earlier than overall level of business.

You know, that is the terms on whether we make the case for outsourcing effectively certainly we would hope that to be the case, that if the economy picks up that we would see an uptake in business, but we in the financial services sector and a legal sector which are the two that we still have predominant part of our customer base and in the technology sector where it's sizable part of our business we do not see any evidence of an object at this point.

Give you, one other point I add is that there is normally a pretty long lead -- or a lag time I should say between when you start talking about outsourcing and then when you get the contract and then when you started implementing so the discussions we are having about outsourcing now wont see any revenues probably to the second half of the year.

Yeah and that's particularly a case when I mentioned federal government those are particularly long lead times because of the fact that you know it is a little more complicated politically for federal government agencies to outsource for commercial customers.

When do you see that in your pipeline of business?

Its (-) , I mean, it's going up. I would say its a very strong pipeline and management services. But again, as I also said, the incidents of facility closures and, you know, that's also been higher than we've experienced it before.

And this one's a question for Bruce. What sort of free cash flow generation in the quarter and, you know, what is your target, you know, relative to free cash flows for the full year pre-acquisition and, you know, how much of that do you expect in terms of acquisitions just roughly?

Sure. Free cash flow for the quarter as we announced was 189 on an applet-to-applet basis by the same way we have been reporting in the past. So that was actually quite a bit higher than net income. And we expected over time on average, it will be relatively in line with net income. I mean the variable that really swings is the investment in finance receivables and so, in effect, our free cash flow was higher than normal, because the revenue growth outside of acquisitions was not a strong as it typically would be. So on a normalized basis it would be like net income and that's what we expect for this year.

OK. Thanks.

Your next question comes from Lloyd Ziemann. Lloyd Ziemann, your line is open. Please state your company name.

Good evening folks. It is Lloyd Ziemann at Bernstein. I will try and be brief since I just shut off my air-conditioning.

Can you attend a shortened call?

Yeah

Let's see. Again on PBS, PBMS, excuse me. Mike you mentioned earlier strong new written business. Now I know that the lead time from the time that you initiate discussion to the time that the business begins, can take, I would say, let's say, six months or so, give or take. But since you said it's strong new written business, does that mean that we should see some of this come through in the second quarter?

Some of it will some through in the second quarter and some in the third. But again I give in a caution here, I am trying to be very precise as to what is going on with PBMS and it is that we are strong. Written business is getting offset almost dollar for dollar by customers, existing customers shutting down parts of their own activity. That is where we lose revenue. So it tends to balance each other out at this point. But the written business is enabling us to stay flat or perhaps hope over time for increases in revenue. But not what they would have been, if we were not experiencing customer facility shrinkage. So there are two variables working against each other. But we will see obviously, some of that written business is going to start to take hold in the second quarter, more of it in the third quarter. And we have a very-very good pipeline.

OK. Also this reduction in customer installations, do you see this continuing in the current quarter and is this also happening in the Danka business as well.

Well, the Pitney Bowes business was marked -- PBMS business historically has been stronger in financial services and legal. And you -- we can all make our own assessments of what's happening but, you know, there are some companies that historically have not experienced big downturns and are announcing in financial services and legal follows financial services. Now in the Danka area, the business has held up pretty well. The one exception is they had a couple of leading telecommunications companies among our top customers. And these have shrunk considerably in the first quarter and I dont see anything that would say that they would turn around or wouldn't continue to shrink in the second. But more in the, I think old PBMS, than Danka at this -- as we look ahead because of the emphasis in old PBMS in financial services and legal. But, I mean it's very much depends on what we think and what you would think would happen with the financial services industry. But the indicators we follow would say that " we dont see a turnaround in financial services in the second quarter."

OK. And in R&D, I know typically when you bring new products into production, you have dollars that come out of R&D and go into the production cost side. Could you give me some idea as to what the R&D numbers might look like for the rest of '02? And did this process begin in the first quarter or will it become noticeable in the second?

I'll ask -- I'll have Bruce answer that. It did -- the move to sustaining engineering did not happen in the first quarter. You know we did have a bigger R&D spend as you point out. Bruce can give you a little more sense of where we will be as the year goes on.

Yeah. I would just say Lloyd that your question is a good one and that, just to make sure everyone understands, that as products come on, our spendings stayed the same, but it will tend to shift from one part of the income statement to the other from R&D as an offset again it will be in sole. And we expect that to be a gradual process throughout the rest of the year. And I can't quantify it any more than that except to say that your point is a valid one and we will try to give you inside each quarter as to what effect that has had on the results.

Well would you -- well if I would to say that R&D will increase in '02 over '01, would you say that is correct?

Slightly.

In dollar terms.

In dollar terms, correct.

OK. And last -

In fact it would be what you saw in our first quarter, it is probably, I mean it is on, but it is not a major increase in our percentage itself.

Fine. And last, you mentioned earlier that postal financings I believe were up in the first quarter.

nolop Yes

And that is in capital services is that correct?

Yes that is correct.

OK. Thanks very much.

You are really welcome.

At this time we would like to thank everyone for your questions. I would like to turn the call back over to Mr. Michael J. Critelli.

We want to thank you all and we should -- just remind you all that we will be having an analysts conference on June 18th and we look forward to seeing as many of you there can attend. And we will -- we will obviously continue to remind people on the web site that would be taking place. And thank you all and we will see you, those who don't attend in June, we will see you at the end of the second quarter. Thank you.