必能寶 (PBI) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Pitney Bowes second quarter 2002 earnings conference call. Your lines have been placed in a listen-only mode during the conference call until question-and-answer segment. Today's call is also being recorded. If you have any objections please disconnect your line at this time.

I would now like to introduce your speaker's 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 Investor Relations.

Mr. McBride will now begin the conference with the Safe Harbor overview. Please go ahead, sir.

Thank you. Good afternoon.

The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change base on various important factors including changes in international or national political or economic conditions. Timely development and acceptance of new products. Timing of potential acquisitions, 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.

Now Chairman and Chief Executive Officer, Mike Critelli will review with the results for the quarter. Mike.

Thank you very much, Charlie. I'd like to briefly review our results for the second quarter. Most of you should have received the press release which contains more detailed information about the quarter. If not, find the release on our Web site at www.pb.com under the Investor Relation section.

Despite ongoing week economic conditions our business model and underlying strength has enabled us to meet our earnings target for the quarter. Which include diluted earnings per share of 59 cents compared to 58 cents for the prior year from continuing operations to the second quarter 2001, and excluding special items detailed in the press release.

Revenue growth for the quarter was six percent to 1.08 billion. If the impact of recent acquisitions is excluded revenue would have declined two percent for the quarter.

Free cash flow for the quarter was $80 million excluding payments relating to special items from the prior year. Including special items free cash flow was $62 million. This was lower than the previous year. And it's primarily due to the timing of tax payments during the quarter, the build up of receivables and inventory associated with the successful launch of new products. And an increase in receivables primarily related to the U.S. postal rate change which took place on June 30th .

For the year-to-date free cash flow excluding payments related to special items totaled $269 million which is in within $4 million of our net income for that period. And that proportion is consistent with our expectations for the year.

We continue to take actions during the quarter to position the company for continued profitable growth in the future which included the launch in the U.S., the U.K. and Canada of the most comprehensive and technologically advanced product line in our history. Our unique DM line of digital networked mailing systems uses our patented IntelliLink technology and provides our U.S. customers with convenient access to discounted special mailing services.

While it is still to early to predict sales, early indications from our customers to the new product line are quite favorable. And we are very optimistic about the product going forward. We also signed a definitive agreement to acquire 100 percent of the stock of PSI Group, the nation's largest mail pre sort company. Subject to the completion of certain conditions, we expect the transaction to close in the third quarter of 2002.

We also signed a multi year agreement with Aetna to provide our integrated mail and document management services, and expertise which will contribute to reductions in operating cots for their document production. These actions, together with other pending initiatives, will further delivery shareholder and customer value as we strengthen our ability to provide leading edge, global integrated mail document management solutions for organizations of all sizes.

Given the topicality of corporate governance, I'd like to say a few words about that subject as well as proposed regulatory changes. We believe that shareholder value is insured through realistic reporting as well as an independent engaged and knowledgeable Board of Directors.

We have reviewed the recommendations that came out of the New York Stock Exchange governance reform proposal which the President advocated during his recent Wall Street speech and compared them to our current practices. I am pleased to say that Pitney Bowes is all ready compliant with all of the proposed measures to ensure corporate integrity including no loans to corporate officers. Only one non independent director, that's me, all other independent directors. No material relationship between the directors and the company. The leadership and staffing of all committees by independent directors except for the executive committee.

The use of plan link - plain English in our proxy. The fact that we have no consulting relationships with directors. And we have diversified 401 (k) plans with eight investment options that do not include our stock, except for company contribution. And I should also note we do not have a large concentration of employee 401 (k) money in employee stock. We also seek and only seek stockholder approval of stock plans. And the audit committee of our board approves independent auditors. And obviously shareholders ratify that recommendation.

In looking to the future, the continuing environment uncertainty does present near term challenge to our business. However, we expect revenue range for the third quarter to be in the range of five to seven percent. And diluted earnings per share to be in the range of 60 to 62 cents. And for the full year, we anticipate revenue growth between six and seven percent. And diluted earnings per share to remain between $2.37 and $2.40.

Now I would be happy to take your question.

Ladies and gentlemen, if you would like to ask a question, please depress the one on your touch-tone phone. You will hear a tone indicating you have been placed in queue. And you may remove yourself from the queue by depressing the pound key. If you are using a speakerphone, we please ask that you pick up your handset before depressing the numbers.

Our first question is from the line of Ben from UBS Warburg, please go ahead.

Hi, thank you. Good afternoon.

Good afternoon, .

I wanted to talk about free cash flow for a second, if you could go through how that's going to look sequentially for the year? And how it's tracking versus your $600 million target or maybe a little below?

I'm going to ask Bruce to answer that one, .

Yes, just as a general statement we're pretty comfortable with our estimates of free cash flow will average approximately equal to our net income. And we continue to think that is the best estimate not only overall but for the second half of this year. And we don't have any further breakdown than that then. But I think for the second half you can assume that we will approximate the net income forecast which we just gave you.

OK. And then - but this is all inline with your targets that you said earlier.

That's correct, . There's no change in expectations of free cash flow.

OK. And then with regard to revenues, you know, DMT, albeit, you know, a small part of revenue but getting hit was that inline with your expectations? Or did that even get worse towards the end of the quarter? And what do you, you know, what do you see as far as that one playing out sequentially? Can it at least stabilize? And I'm wondering what the operating profit of that little unit is?

If it's inline with our obviously reduced expectations from the beginning of the year, and we see better comparables in the second half of the year. We do not yet see a dramatic turnaround in the industries that are where we have heavy concentration of DMT. And we would expect and improving operating profit comparison in the second half of the year, again because of weaker comparisons from the prior year. And some improvement in absolute performance.

But again, keeping in mind we had weaker comparables in the second half of last year. We haven't seen any significant change in capital spending patterns in the financial service industry which is the largest segment for DMT.

Another way of asking, and I appreciate that answer, but another way of asking is to the operating profit line I guess in the hit to that segment. What is the contribution of the DMT revenue drop versus, you know, what's going on in the outsourcing?

Yes, just, in terms of the revenues that PBMS is positive on an organic business as well obviously with the acquisition of DSI. So the - and DMT has a negative revenue for the quarter.

No, right, on op profit.

For operating profit, DMT is still profitable but at a lower margin than was the case last year.

What's the normalized run rate of that business? And I'll cede the floor here, but what is the normalized like profit in the hey day of that business?

On average it would tend to have a EBIT revenue margin of around 12 percent. And it's going to be running much lower than that this quarter and the rest of the year.

Thanks a lot, guys.

Our next questions if from Credit Suisse First Boston, please go ahead.

Thank you very much. Just trying to drill down a little bit in terms of your Q3 outlook, five to seven percent. What's the underlying expectations there in terms of contribution from acquisition? What you're expecting from the new line of digital meters? And also, I know you said PSI was expected to close in that quarter, you know, do you have a sense, are you counting on a little bit of that? And you know, does, you know, what's your overall visibility going into the quarter? And I have one follow up question.

I'm going to ask Bruce to give you the breakups .

Sure. I think the best way to give it to you would be we said five to seven as total revenue. If you just look at organic, and that would be excluding any estimates for currency, PSI or the prior year acquisition of , the organic revenue growth would be one to two percent.

And in terms of the impact of new products, that is just part of our overall expectation of global mailing to have a revenue increase in the quarter which is the contrast to where they've been. And it contributes to the overall flow. We do not have a specific breakdown of digital, but obviously that momentum helps us.

And then the other question on PSI we are expecting some revenues from that. It would be roughly in the range of about one percentage point would come this quarter.

OK. And just to drill down a little bit more. On an organic basis for the full quarter, I believe you said it was down two percent for Q2. And so the big delta is assuming that DMT gets a little bit better on easier comps. We're assuming that global mail was back into positive territory. I mean it looks like PBMS, at least it was up sequentially it was up two percent on an organic basis versus one percent in Q1. So I guess they're resuming that spot and maybe you'll see some additional acceleration?

Yes, to put it another way, we expect each of those business lines you mentioned to have a positive trend compared to second quarter in terms of their organic growth rate. The only part of the business that at this point we actually see lower organic would be capital services.

Yes, just a quick comment, the stronger DMP comparison is going to up positive would be the fourth quarter. We actually had a reasonable good third quarter in DMT. It was - it suffered less. And in fact, didn't really suffer at all from the impact of 9-11 because of the long lead times. But it took a big drop in the fourth quarter because of the inability - as I mentioned in previous calls, the inability of customers to get to our facilities and check out the equipment and make final decisions.

And so DMT will see some better comparables in the third quarter but based on current market conditions should be stronger comparisons revenue wise in the fourth quarter compared to last year.

And my follow up question just briefly, is the last couple of quarters you've done about $20 million and operating profit from capital services. And then after Q1 you said well that may not be sustainable. So is this sort of same idea this time that maybe it will come down in Q3? Or is maybe that more of an appropriate level to model going forward?

Yes, I think the thing to keep in mind, much of the improvement in operating profit and capital services is due to the interest rate decline. So the interested allocated to it has gone down. So if you continue to think interest rates are going to stay low, which we do, then that will continue to have a positive effect on their operating profits.

Great. Thank you so much.

You're welcome.

Our next question is from the line of for Goldman Sachs, please go ahead.

Hi, good afternoon. Could you give some color around the acquisition of PSI in terms of how the acquisition came about? How long you looked at the asset? And where does the presort mail fit in terms of an adjacent market? And are other acquisitions going to be - is that the biggest asset? And did they get smaller from there? But are they still attractive?

Yes, the per sort market is - if you look at pre sort, the - after the mail comes out of the mail room or a production center with we call in our industry the automated document factory, the next place it goes if the mail order is sophisticated is to a pre sort house. So that whatever pre sort discounts mailer itself was unable to take, it will get additional work sharing discounts from the pre sort house.

This is an area that is increasingly important in the end-to-end mail system, the U.S. postal service in its transformation plan endorsed the idea of more work sharing and partnership. And therefore we would expect the discounts to not only continue but perhaps even improve and be enhanced over time.

We would also expect that the postal service gets more rigorous in its quality standards for acceptance of mail that the high quality pre sort houses will gain at the expense of some of the more marginal pre sort houses. That there will be consolidation. And there will be an opportunity for greater profits because of that consolidation and scale that results from it.

This is something we've strategically talked about for, you know, on and off for several years. But I think the confluence of our own growth strategy looking at the expansion of the mail strain, and the U.S. Postal Services clear endorsement of work sharing and its transformation plan has led us to believe that this is a good industry to enter at this point in time.

Since PSI is the largest - or we believe to be the largest pre sort house in the United States, we think that as we expand the expansion if it is done through acquisition would be through smaller acquisitions on a city-by-city basis. Meet with firms or models that can be made to fit PSI's very high quality business model.

OK. And how do the margins look in that business?

The margins are good. They are better than the margins of Pitney Bowes management services today. But beyond that, at this point I wouldn't want to comment.

OK. And then separately we haven't heard a recent update regarding the patent infringement discussions around the inkjet technology, where does that stand?

We have made some settlements with some very small licensees, nothing material. We have litigations pending against some of the big ones. And the - obviously if you look at opportunities for - that would be more than a very modest amount of money, the big names would be the big players in the printing industry people like Lexmark, Xerox and Apple. In terms of the other players they'd be relatively small. And the litigatons are moving along, but no imminent developments in any of those litigations.

OK. And then last question for Bruce, an update on where you expect to end up at cap ex for the year?

Cap ex should be approximately equal to depreciation. And that's a little bit higher than we might have forecasted before and that's because we're starting to see the marketing of enterprise solutions of a combination of PBMS and DMT and some fleets that they're financing. And this would be, for example, the IBM fleet and the Aetna contract.

But - so - but it should - I'm pretty comfortable it will stay within the depreciation and amortization but it won't probably be as great a gap as we originally thought.

Yes, just - I think that's very good news for us. In the past, DMT would have sold the equipment directly to a company like Aetna. And Aetna would have either run its document factory itself. Or in that case, Aetna actually had a competitor of Pitney Bowes' running the document factory.

So once Pitney Bowes management services won the contract, the structure of the transaction was to have a payment stream from Aetna to Pitney Bowes through Pitney Bowes management services. Which means instead of booking a sale which hits all at once with the equipment, we book sale revenues but it comes through over time to PBMS.

And - but incrementally we're going to get, you know, incrementally over time, we will get a great deal more revenue than we would have gotten. And we would not have had a capital expenditure. We would have just had a sale from inventory.

Got it. Thank you.

Our next question is from the line of from Merrill Lynch, please go ahead.

Good afternoon.

Good afternoon.

A couple of questions for you, first of all, Bruce, during the analyst meeting you had indicated that you felt far more comfortable at the lower half of the 237 to 240 range. I'm wondering if anything has changed since then to make you a little more positive? Or if structurally that's still the case?

That would directionally still be the case, that we have seen some of the trends which we have seen in the second quarter results. And we continue to think that third and fourth quarter will be challenging. But again, we're committed to coming out at - within the range of the earnings.

OK. And then looking at your inventory and AR which, of course, you're up, will it take a couple of quarters to get those to trend down? Or do you anticipate seeing at least with AR pretty much a return to the normal state over the next couple of months?

I think there may be a couple of quarters for us to work through the new product launch or the inventories just because it's a process of bringing work in process and components. So that is probably going to be continuing but not in increase.

On the case of receivables this was an exceptional IM primarily driven by the rate increase which was that very end of the quarter, so that should cause an improvement in next quarter.

OK. That makes sense. And then, finally in terms of, you know, and I know, I realize you're, you know, just starting the launch of the new meters. But any changes or more information you can give us in terms of take rates of the new features and functionality? Or the increment to monthly lease fees that you're seeing from customer taking the new products?

The take rate on the features was very good. It was a little better than we anticipated. But it - the numbers are so low that I would say that what we told you previously at the Analyst Day is still a good number in terms of percentage take rate.

I should note by the way that the - we probably - what we've experienced was - in the quarter, was probably a little bit the momentum in terms of getting the products really getting some revenue was probably a couple of weeks later than we anticipated in the quarter, but very strong margins on the products and we're very pleased by that.

So when have you anticipated getting some contributions from the products in the quarter? Was it like early in March and then it drug out?

Yes, I think what happened was we did a lot of - we did an unusual amount of training and had our usual - we had our usual sales conference. We took a lot of people out on the field to do the training. And we did more pre launch training this - for this launch than we've ever done before. We wanted to hit the ground with, not just hit the ground running, but hit the ground with very knowledgeable sales people because this is a different kind of sell.

And we, you know, when we gave the revenue guidance, I think we - you know, when you look at a revolutionary new product, we felt pretty good in retrospect that we were probably two weeks off the market from where we might have been. But we did see the momentum that we expected. It just came about two weeks later.

OK. Great. Thanks, guys.

Our next question is from from Salomon Smith Barney. Please go ahead.

Hi, guys.

Hi, .

A couple of quick questions. First of all, just going back to the free cash flow you're - for the first half of the year, you're roughly in sync with where you would have expected to be roughly in line with net income.

Right.

But yet, you would expect a reversal at least by the fourth quarter I would think of some of the inventory and certainly the receivable build up we would expect a reversal sooner than that. So I would think that in the second half, we would see free cash flow that is looking somewhat better than net income.

, the area where there would be some uncertainty is in the finance receivables. And to the extent that your revenues go up which we are forecasting for the second half of the year, that produces a corresponding increase in finance receivables which is a good thing, but it does have the effect of producing free cash flow.

OK.

, the other uncertainty is if we get a repeat of an transactions like Aetna where we are running an automated document back to that would also have an impact on free cash flow. I want to emphasize that these are better deals longer term for the company than had we just sold equipment to a company like Aetna but they do obviously change the timing of receipt of cash.

OK. Also, in terms of your top line during the quarter, was there towards the end of the quarter, did things seem to get hit a little harder than you had anticipated? It seems the organic of down two percent, you know, even at the Analyst Day, I would have thought would have been a little bit worse than you might have expected. Is it inline with what you thought at the Analyst Day? Or did things get worse toward the very end of the quarter?

It was actually inline with what we thought at the end of Analyst Day. The fact is the last part of May and the first half of June were slower. We didn't, obviously, have visibility into the second half of June, but the second half of June came back very strongly. So it didn't get worse right at the end of the quarter. But we obviously couldn't make up fully for what happened for the slow start that we had with the new products in the first couple of weeks after we got them out from the sales force.

As far as DMT is concerned, when do you see yourself getting back to a year-to-year growth position. Is it the fourth quarter? Or is it in 2003?

I think the fourth quarter, unless there's another catastrophic event in between like 9-11 was, yes, I would expect the fourth quarter to be positive year on year?

Not Q3?

Q3 was actually very strong in DMT because...

Right.

Because unlike mailing and our credit services businesses, DMT had strong business throughout the quarter. And we installed what had been committed to previously keeping in mind that there are, you know, 60 to 90 day lead times. So the written business in DMT which had been strong all year last year through - right up to September 11th got installed in the last month of the quarter it just was the fourth quarter, things literally dropped off a cliff.

Yes, and when I mentioned before about improvement it's that the degree of negative comparison will be less in the third quarter, but it still will not be positive.

OK. And just one final question, the cap service margin outlook, I know you addressed this a little bit with, I think it was but, you know, you're at 44 percent margin I think this quarter. Normally you're at about 35 percent.

Right.

And I recognize you indicated that the lower interest rates are contributing. Should we be modeling going forward something closer to the 40 percent number? Or closer to the 44 percent? I mean how should we think about this? Even though it's a small revenue figure, it can make a somewhat meaningful difference given that magnitude differential on the margin on profits?

, I would say that yes, probably the best answer would be to model pretty much as we're going. But keep in mind as I mentioned that third quarter we are expecting a decline in revenues so that the profit contribution will be less than the capital services.

But, you know...

So should margin - we should use margins that are more in sync with the historical?

No. No. I think where they are now...

Where they are now?

Is probably as good as it's going to get. But the other thing to keep in mind too on capital service, what makes it hard is that a lot of their contribution comes to the tax line. And so they don't really manage it to the operating profit line. They manage it to the net income line. And so that creates some distortion also.

But for your modeling, I can't come up with anything better than extrapolating where we are now.

OK. Great. Thanks, guys.

Sure.

And, ladies and gentlemen, as a reminder, if you do have a question, please depress the one on your touch-tone phone. Our next question is from from Morgan Stanley. Please go ahead.

Hi, can you hear me?

Yes, .

Hi. Just a few questions. Could you just give us a little bit more update on how your international businesses are tracking? You'd referred to some improvement in the U.K. portion of the business, if you could talk about that a little bit more. And also, how your Canadian operations is doing.

The U.K. is improving both because of - the new products didn't have a lot to do with the U.K. I think we're, you know, we have new sales. We have, I say, a new general management there. We've seen some improvement for that reason.

We expect to see some improvement the second half of the year because of the ending of the space of meter migration. And we would also expect to see some uplift from the launch of the new products. So the U.K. we feel pretty optimistic about. Continental Europe both because of weaker economic conditions and the fact that we're seeing a little bit of a drop off after the end of the euro migration we're not - we don't expect to see a lot of growth there the second half of the year.

Canada, we would expect to see modest improvement in the second half of the year. And again, they're also in a weak economic environment. Excellent results in mailing with the acceptance of new products. But they also have a DMT operation that's struggling. And they do not have a sizeable management services operation to provide - to offset some of the weakness in DMT. So DMT is a bigger hit in Canada in an integrated business well compared with than what it would have in the United States.

OK. Have you built in - are you assuming a pick up in that portion of the world? Or just overseas in the second half to help drive that five to percent organic growth? Or are you just looking for sort of stable trends that are consistent with what you saw in the first quarter?

A little bit of the pick up. A little bit. We've mentioned the U.K.

Yes, and I just want to clarify five to seven was not organic growth, that was total growth.

Yes. Sorry.

And so - and currency is helping us going forward.

How much is currency helping?

That would be, I'm guessing about one percent.

One percent of the revenue, .

In the second quarter?

No.

No. No. This quarter there's absolutely no effect. It just turned out that any positives were offset by a negative. But third and we hope fourth quarter should be positive.

OK. And then in terms of the growth margin performance in the second quarter. Just, the cost of goods sold line on the consolidated income statement, just on a sequential basis we saw some improvement there. Can you talk about what drove that? And also, if that's sort of a reasonable assumption or level of a rate to assume for the second half of the year?

Yes, Bruce can...

Yes, I would say there are two factors. One is that, as Mike alluded, that we've had good responsiveness to our marketing. And I definitely see no decline in any margins. So gross margin's good. And secondly, there's a nuance in the sense that, you know, our service revenues don't have any growth or any cost against them. And that this essentially helps the gross profit margin.

In other words that the cost of sports services are showing SSA. And because support services grew this quarter while sales in the rest of the business did not go up as much, the mix change has the effect of increasing the most profit margin.

So we would expect that to continue. PBMS also had improving gross margins as well.

OK. And so the PBMS portion of the business that gets reflected in cost of sales as well?

Yes.

Yes.

OK. And then just on the inventories, just to clarify, Bruce, you had said that the increase in inventories was primarily a work in process or in finished goods?

In both.

OK. And you - and is it primarily due to new products, or - on the global mailing side? Or is it DMT?

It would be in both global mailing and DMT. And in global mailing it would be the Omega launch. In DMT there's still build up related to the advanced productivity system.

Yes.

And there are some large orders that they'll be filling. And that had the effect of increasing inventories.

Yes, DMT just - what happens with the newer products is that they're much more software intensive and they, you know, they sit on the floor a little bit longer to be tested before they get shipped out. So if the - the advanced productivity system is a higher margin but it's also a higher cost system. And it will -it has a longer lead time in terms of both build and testing than some of the other DMT roducts.

And so you would expect some of that backlog to get released in the fourth quarter? Or as early as the third quarter?

I think certainly by the fourth quarter, possibly on the DMT area by the third quarter. It should improve in both parts of the business in the third quarter. But it will return to more normalized levels in the fourth quarter.

OK. Thank you.

Our next question is from from Bernstein Investment Research, please go ahead.

Good afternoon, folks. Maybe at this late hour, I'm missing something here. But in looking at the operating profit for enterprise solutions up 15 percent in the second quarter and only four percent in the first half? Could you go through that and give us some idea as to what was going on to bring about those percentage changes?

Sure. I would just tell you, you know, I mean in a nut shell, that enterprise solutions is two businesses. And PBMS is showing improved operating profit margins. The decline is in the DMT business. And that's because their sales of product which are relatively high margin have gone down. And so that just has a compression. The operating leverage of the business is the cost.

Now was there a noticeably larger increase in PBMS let's say relative to the first quarter comparison? Or was it the difference in DMT that brought this better result about in the second quarter?

It was a combination of those two, both factors.

Oh OK. Thanks very much.

You're welcome.

You're welcome.

Our next question is from from Boston Partners. Please go ahead.

Hi. Where was the bonus or the balance of aircraft leases at the end of the quarter?

It hasn't really changed. We haven't had any. They - the balance would have gone down if at all very, very slightly. It - we have done no aircraft leases in five years.

OK. And what percentage of the portfolio was to airlines in either Chapter 11 or technical default?

The - none of the airlines that we do business with are in Chapter 11 today. I mean the three that we have highlighted as being in the portfolio, the one that obviously is - that we pay most attention to is U.S. Airways. And they at this stage made the most recent payment to us. There are obviously issues with their payments on a couple of the leases to, you know, they've announced - they've made decisions to the time being they will not pay on Boeing Aircraft. And so that's the situation we're watching.

But at this point, we do not anticipate any issues that would cause us to have a problem in terms of, you know, we're - we feel confident in terms of position.

Yes, although, we do have U.S. Air on a non earning status.

Yes.

So that we have treated as non earning.

And what's that balance right now?

The total - it's 62 million is our net investment in U.S. Air related aircraft.

Yes, just one comment though. We have two kinds of leases with U.S. Airways. We have a couple of planes that are - where we are direct lessors. And we have another lease where we have an equity position where there are leveraged leases. They've made the payments to us on the leveraged leases they - along with all other Boeing airplanes they did not make a payment. But that's a very small amount of money. And the - as I said the that's what put them at a non earning status. But, again, at this stage we don't anticipate a problem.

OK. Thank you.

You're welcome.

Our next question is from from Deutsche Bank. Please go ahead.

Yes, thank you. I was wondering, I'm calling in for , if you can talk a little bit about the cost structure into the second half, how much more leverage you think you have to the bottom line?

And then secondly, if you can talk about the share buy back and the average price that the 2.2 million shares is bought back at?

Do you want to take that Bruce?

Sure. The - on the buy back during the second quarter, we spent $89 million on it and that's roughly around $41 with the price. And in terms of the cost structure, I think you're seeing that we anticipate a pretty good increase in earnings per share for the second half of the year to make our earnings guidance. And that will be a combination not only of the improved revenues we've talked about but also the cost controls that we've implemented throughout the company.

OK. Thank you.

And, ladies and gentlemen, our final question is a follow up from from UBS Warburg. Please go ahead.

Thanks. I get to end the call. I wanted to ask just a little clarity on the revenue outlook, now. I think we started the year at seven to nine percent, or seven to eight percent. And obliviously factoring this quarter for the year, that comes down. But the second half, if you can just talk about the outlook because I believe there's the acquisition of PSI. And with that, we're still at five to seven percent for the rest of the year. If you could just clarify what is the organic rate? Or, you know, the second half and make an apples to apples for me including the new acquisition, that would be great. Thanks.

Sure. Me - I'll take that Mike. But in terms of organic, we had said when we did the forecast we thought the organic for the year would be one to two percent. And we're coming out for the year, zero to one. And that's the real fundamental change. And that reflected that we made at Analyst Day. Specifically for third quarter, that's 1.2 percent organic. And for fourth quarter 2.4 percent.

Wow, that's pretty good exact numbers there. I appreciate it. Then as far as what's PSI contribution, roughly?

PSI will be roughly about one percent this quarter? And about one-and-a-half percent in the fourth quarter.

That's assuming there's no delay in closing which at this point we don't anticipate. But based on current assumptions on timing of clothing.

And then I just had a follow up with regard to the - what's the status of all of the new meters in the international space right now? Are they in all of the key markets?

They are getting launched in a phase basis. As we mentioned, the meters have been accepted and for launch in Canada and the U.K. And we are close to getting launched in several other markets. And we would expect to be launched in many new markets in the remainder of this year. And in the first part of next year.

What I think is exciting about the way this product has been architected and the way we've gone about it is that the timetable from first launch in the United States to launch on major markets will be the shortest ever because it generally takes several years. And in some instances we've never been able to get certain meters approved in certain markets. We believe we have a globally compliant product. And we will believe that over the next 18 months we will have launches in all major markets. And it could be considerably sooner than that.

So just to clarify it's all ready in the U.K.? Or it's been accepted all ready in the...

It's - no. It launched in the U.K. in the month of June. It launched in Canada a little bit before the United States.

Right.

And we are, you know, the continental Europe, Australia, those would be - we'd expect it over the next 12 months. We've hit all of those markets. I don't - I can't tell you about a place like Japan, how long it's going to take.

How about Germany? Isn't Germany a meaningful market?

Yes, Germany we would expect a launch in the fall. We probably could be ready sooner but it's not a great time of the year to launch in August in Germany. So we're looking at - in fact, even now wouldn't be a good time to launch given holidays in Europe. So we're really looking to a fall launch in the northern European countries including Germany where, you know, there's some market opportunity.

Hey, Bruce, just really quick on these new meters, you mentioned currency helps you at one percent on the top line in the back half of the year, does it do anything to manufacturing costs? Obviously that was more relevant when you used to be in copiers.

It has a benefit in the sense that we export more product from the U.S. to Europe and Canada. So over time, to the extent those currencies strengthen it's a benefit. And as you know, many of our competitors are based in Europe. So from that standpoint it's a net positive.

So manufacturing it's positive as well.

Correct.

OK. Thanks.

Yes, just a point of clarification. I got a note here, the U.S. Airways lease we - as I had mentioned, there are two kinds of leases. They have - we are current on the direct finance leases. We are - our debt holders are at this stage dealing with the issue with us on the leverage leases. That's a little different situation because of the recent U.S. Airways announcement.

But again, I mention that we're comfortable that this will not have an adverse effect on our financial statement, material adverse effect.

And Mr. Critelli, any closing comments, sir?

No.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

Thank you.