必能寶 (PBI) 2002 Q4 法說會逐字稿

Good afternoon, and welcome to the Pitney Bowes fourth quarter year-end 2002 earnings conference call. Your lines have been placed in a listen-only mode during the conference call until the question and answer segment.

Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. This call will be available for replay after 8:30 p.m. Eastern Time today through Tuesday, February 4th at 12:00 midnight. To access the AT&T Executive Playback Service, you may dial 184-75-6701. International participants may use 320-365-3844 with the access code of 669538.

I would now like to introduce your speakers for today's conference call -- Mr. Michael Critelli, Chairman and Chief Executive Officer; Mr. Bruce Nolop, Executive Vice President and Chief Financial Officer; and Mr. Charles McBride, Executive Director of Investor Relations.

Mr. McBride will now begin the call with the Safe Harbor overview. Please go ahead.

Good afternoon. First let me remind you that you can find today's earnings press release and attached schedules on our Web site at www.investorrelations.pitneybowes.com.

Now for the forward-looking statements. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change -- changes in international, political or economic conditions, timely development and acceptance of new products, timing of potential acquisitions, mergers or restructurings, 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 our Chairman and Chief Executive Officer, Mike Critelli, will review with you the results for the quarter and the year -- Mike?

Thank you very much, Charlie. Good afternoon.

2002 was a year in which Pitney Bowes met financial targets while building momentum to produce long-term profitable growth. We're very pleased with the performance of our core business during the fourth quarter and full year, and our results were in line with guidance. Diluted EPS of 64 cents for the quarter and 2.37 for the full year excluding special items. Highlights from the year included the generation of significant free cash flow. $682 million excluding special items, and the completion of a $300 million share repurchase program with authorization to repurchase an additional $300 million of our common stock over the next 12 to 24 months.

Highlights from the quarter included a 339 million pretax cash contribution to our pension plans. We also increased our dividend on common stock with -- for the 21st consecutive year, underscoring our board of directors' confidence in our ability to continue to generate free cash flow.

During the quarter, we also took a number of steps to transition our capital services business and strategically focus our resources for profitable growth. First, we liquidated about 225 million of financing assets. We anticipate liquidating most of the remaining 195 million of similar finance assets by year-end. These are the assets that are in what we call our warehouse. The money from these assets will be used to further enhance the core and grow our business through reinvestment, paying down debt, and stock repurchase.

Second, we have begun a strategic analysis of our existing capital services portfolio to develop the best asset disposition strategy for our long-term financial assets. Next, we decided to stop active pursuit of and growth in long-term financing transactions including postal financing. Originating profitable capital services investments increasingly requires complex transactions of very long duration, which leave little flexibility to restructure or transfer those assets prior to maturity. To help position us for growth and to maintain our financial flexibility, going forward, we will not originate these types of long-term financial commitments.

And finally, in light of our new strategic direction, as well as the accelerating deterioration of the U.S. airline industry, we increased our credit loss reserves by taking a non-cash pretax charge of $115 million for 30 cents per diluted share during the quarter. This charge was in addition to the previously announced non-cash pretax charge of $98 million or 26 cents per diluted share to write down investments in commercial aircraft leases with U.S. Airways and United Airlines.

Our core business is solid, and we leveraged its strength throughout 2002 to pursue new opportunities, invest for the future and grow despite the lingering political and economic uncertainty in the global marketplace.

During the year, we focused on three strategic imperatives. Streamlining our infrastructure, enhancing our core business, and executing our growth strategies. We feel that these three areas are essential for increasing customer and shareholder value, and we will maintain an unwavering focus on them in 2003 as well. By streamlining our infrastructure, we'll be more agile and efficient.

We anticipate taking more actions enterprise wide throughout 2003 and 2004 to streamline our infrastructure and enhance our operating efficiency, including restructuring initiatives over a two-year period, which will be roughly $100 million on an after-tax basis and be recorded as the various initiatives take effect. We expect these initiatives to be related to realigned infrastructure requirements and reduced manufacturing needs for digital equipment. The introduction of the DM series, our investments in Pitney Bowes management services, and the acquisition of PSI are all examples of how we are enhancing our core and executing our growth strategies.

The DM series features advanced IntelliLink technology, digital printing and the network on site delivery of value added services, some of which mailers previously had to access from a postal counter. The continued strong market acceptance of the DM series during the fourth quarter helped fuel both the growth of our global mailing segment and our year-over-year growth in population and market share in the United States.

Throughout the year, we invested in talent development technology and processes at PBMS. PBMS benefited from these investments as our competitive position continued improving, and we made strong gains in new written business, particularly in higher value document management services. PBMS also signed an agreement with the U.S. general services administration that will make a broad array of enhanced mail and document management services available to federal agencies including both on-site and off-site high-level mail security screening, testing and processing.

The acquisition of PSI provided us with a good platform to enter the presort mail market, and by doing so, helped us enhance the services we can deliver to our existing customers, our value to posts, and opened up new growth opportunities for us as well. When combined, all of the actions emanating from our strategic imperatives should help us build the momentum to be a bigger, stronger and better Pitney Bowes today and tomorrow. In closing, let's turn to our outlook for 2003.

If you recall in the third quarter when discussing factors with potential impact on our guidance, we estimated incremental pension and retiree medical cost of about 12 cents per share in 2003. We now know that those incremental costs will be about 11 cents per share. We also believe that the incremental earnings from our contribution to the pension plans will roughly offset the loss of income from the non-core short-term assets that we have and will liquidate by year end in our capital services portfolio. However, we believe that the new capital services strategy and related actions that we just announced today will reduce earnings by 6 cents per diluted share, and in addition, the change in strategy will cause us to have a higher tax rate, which could cost us an incremental 2 to 3 cents per diluted share.

Nevertheless, we expect year over year revenue growth for both the first quarter and the full year to be in the range of 2 to 4%. Excluding the charges relating to the anticipated restructuring initiative that I discussed earlier, we expect first quarter 2003 earnings per share will range between 53 and 55 cents, and for the full year two 2003 earnings per share are expected to range between $2.38 and $2.45.

We will host our annual analyst day on March 18th in New York, where we look forward to you joining us in person or via the Web.

Thank you. And now we will be happy to answer your questions. We are ready to take questions.

Thank you. Ladies and gentlemen, if you do wish to ask a question, please depress 1 on your touch-tone phone. You will hear a tone indicating you've been placed in queue, and if you have depressed 1 prior to this announcement, we please ask that you do so again. To remove yourself from queue, you may press the pound key. If you're using a speakerphone, we please ask that you pick up the handset before pressing any numbers. Again, ladies and gentlemen, if you do have a question, please press 1 at this time.

We do have a question from the line of Ben Reitzes with UBS Warburg. Please go ahead.

Good afternoon, guys.

Good afternoon, Ben.

Looked like revenues in the quarter were a little better than expected, and particularly in cap services and mail versus my expectations. Could you just go through what the PSI acquisition impact was as well and where that fell? And then with your recent moves, what that means for cap services going forward. And then I have a follow-up.

I will discuss PSI, in general, and Bruce will give you the specific numbers. PSI did help us a great deal in the quarter. And it will continue to grow. We have expanded from at the time of acquisition, 12 cities, to within the next couple weeks being in 18 cities, and we are getting increased revenue obviously as we add cities to the PSI network. We are adding customers and mail volumes as well within the existing cities. Bruce, if you could give Ben the exact components of PSI revenue.

PSI for the quarter is 23 million.

Okay.

Now the other drivers on the mail side, we had a strong quarter in the United States in the mailing business. I think the DM series performed very well, but we were strong in all of our product lines in the quarter, our distribution solutions and our mail creation. We had very strong performance in Canada, the UK, and (inaudible). We had challenges in the rest of continental Europe, and in the Asia Pacific/Latin America area, but they were not enough to offset the very strong performance we had in the market that is I identified.

How did you see the takeup of the new services and the new meters?

They were above plan, if we consider the 20% figure to be ahead of plan, and we feel comfortable at this stage that the track record would say that in the United States, 20% is a good number for the longer term.

Do you have a growth rate of what your install base of meters did in the U.S. in the year?

We have grown our base of meters during the year. I don't know that we customarily -- we customarily disclosed that, but we did gain about -- but we did gain market share during the year and we gained population during the year, and I think that's the first time that I could be wrong in this, but it's -- in terms of revenue-bearing meters, this is the first time that we've been up in both in about 17 years.

All right. Bruce, just with regard to the cash flow and the earnings, it sounds like you have a higher tax rate due to your exit of businesses. I saw on the balance sheet that some areas kind of moved in conjunction with your exit of this portfolio. Could you discuss what that does to your cash flow in 2003 on a run rate basis, and particularly the deferred tax impact and what we should be looking for there?

Sure. First of all, there was a question you asked, Ben, I want to give an answer, and that was on the capital services revenue for the quarter, and just want to make sure that, you know, there was nothing unexpected on the capital services revenue as we've talked about in the past, they tend to be somewhat volatile on a quarter by quarter basis, but it was exactly on track, and there was no material effect from the liquidation of the warehouse portfolio, that everything was in line with what we expected. Second point is, on the taxes, you're exactly correct in that the change in the capital services strategy will have two effects. One is that it will cause a gradual increase in our effective tax rate, and just give you a feel for that, we think it will be roughly 32% as the tax rate for next year. The second effect it will have -- or 2003. Well, next year's reported earnings, 2003 reported earnings. In terms of deferred taxes, the good news is that it's a relatively gradual decline, and so order of magnitude, the change in strategy will reduce our free cash flow for 2003 by around $35 million. The offset, though, it's not in the free cash flow line but in the use of cash that we won't have the increase in investment, so that in terms of the overall cash for the company, it's actually a positive for the year 2003, and then over time, the deferred tax loss increases and it eventually becomes cash-negative, but that's a couple years out.

Right. And then plus you get 195 million for monetizing the portfolio.

That's a different thing. 195 that hasn't been taken yet. You're exactly right. Overall, for at least the next couple years, this is beneficial from a cash flow point of view and should help our debt to equity ratio.

Of that 195, can you just plow it all back into share repurchase or is some going to go into severance or what do you see?

Well, if you look, Ben, we vested $339 million in the pension plan, and so a lot of what is being used is for that, and then the rest of it will be used, as we put it, primarily for debt retirement, and it helps us with our share repurchase plan.

Okay. Thanks. I'll get back in the queue.

Sure, Ben.

We do have a question from the line of Caroline Sabbagha with Lehman Brothers.

A quick follow-up on the headwinds that you mentioned for '03. If I heard it correctly, you still think there's going to be a pension headwind of 11 cents to 12 cents. I'm sort of surprised by that given the pension contribution you're making.

I'll let Bruce answer that, but the pension contribution does not address the issue of changes in assumptions. And Bruce can go through the changes in pension plan assumption. They don't have to do it the current performance of the plan or the funding of the plan, but the actuarial assumptions.

Right. Carol, just to make sure it's clear, the change of the assumptions had an 11-cent a share effect, and we are able to offset that by taking the money that was in our capital services warehouse portfolio and investing that in the pension plan. So what you'll see is the pension plan overall comes out without that 11-cent hit. But we lost the income on the capital services warehouse portfolio that was used to fund the pension plan, so the net effect is, it washed out between the two and that's an 11-cent a share impact of what it would have been had we not had any pension fund issues at all.

Okay. So I shouldn't add sort of 11 cents, what we call the pension for now, and then incremental negative 6 from capital services?

You should.

You should?

In other words, Carol, if you're saying what were the headwinds that we had to overcome in giving you the guidance of 2.38 to 2.45.

Right.

They were really two headwinds, and two of them are overlapping. One was the pension fund benefits, and that headwind is offset by the capital services strategy, so you can call it capital services warehouse strategy or you can call it pension fund. Then there is a second headwind related to capital services which is the decision we made just now not to did decision we made last quarter, and that, as we said, is roughly in the range of 6 to 9 cents, depending on what happens to our tax rate.

Okay. And that's sort of incremental exiting on top of the securitization?

Right. So in other words, if you add the two together, the headwind that we had to overcome for next year is roughly ...

To be very precise on the 6 to 9 cents, there is what we are not going to receive in earnings from U.S. airways and United, there is the treatment of other assets, domestic aircraft assets that we assume will be a non-earning status, in other words, we'll receive cash payments but le with not record income, and then there is the fact that we will not do new business such as the postal financing business, which would have produced a few cents a share, so that's where the 6 to 9 cents comes from.

Okay. And then as you exit capital services, everything else other than securitizations, should I assume that happens kind of evenly over a 10-year period or so? And what do you think the P & L impact will be on an ongoing basis sort of every year, the hit you would take in

Well, we haven't worked out the details. These transactions -- I mean, the main reason we decided not to do any more of them is that they are not easy to sell, at each one has a different strategy of disposition, and we at this stage haven't finalized the disposition strategy for the portfolio, but I don't think we will be fully out of them in 10 years given the nature of the transactions, but we can give you -- we can give you better visibility into the income impact and will be doing so on a go-forward basis as we report in future years, we will specifically talk to the capital services business and what it is.

Okay. And was the 115 million charge, incremental charge, mostly around the airline assets?

Yes.

So basically you've pretty much are writing off all your U.S. exposure, right?

I believe we shall see in the 10-K, I think we got a little bit over $60 million left in the domestic airline industry and we feel comfortable that at this stage, we are appropriately reserved.

Okay. And the last quick question, the 682 million in cash flow for this year, does that include anything from the securitizations you roll off?

No.

No? Okay.

No. Anything related to that is below the line.

Got it. Okay. Thank you very much.

We do have a question from the line of Peter Ausnit with Deutsche Bank. Please go ahead.

Yes, thank you. Can you walk us through the change in the strategy here a little bit regarding financing? My understanding was that non-core financing was non-synergistic with the core mailing business, but financing the posts was something that was going to help you build your relationships with international posts.

Yeah, that's a very good comment, Peter, and we thought long and hard on it, and we felt that there is actually a good market out there for people who want to participate. We can build the relationships by facilitating that financing, resident actually -- rather than actually taking an equity position in it, and we have many other levers to build the relationships with the international posts based on what we've already done, and when we weight that against the fact that these transactions will tie the hands of -- whatever we put on the balance sheet will tie the hands of not only this management team but future management teams and take that money and make it not available for acquisitions, R&D, starting of new businesses, share repurchase, dividends, you name it, we felt that the financial flexibility overwhelmed the relationship benefit and the financial benefit.

We don't think there's a lot of risk, and we think it's very, very good business, but we're going to be presenting our detailed growth plan on March 18th, and it includes obviously as we've talked about in past analyst days, acquisitions. We want to free up more of our balance sheet to do things that we want to do in the future. We obviously this decision is going to give us more financial flexibility, but not, in our opinion, cost us a lot in terms of relationships with the international post. We can always make a decision on a one-off basis to do that, but we're not going to actively seek it outgoing forward.

Okay. Thank you. Can you also go through a little bit about some of the encouraging, I think, operating metrics you presented regarding PBMS, how they have not lost accounts, they had actually gained market share? Do you have an update there? Has that continued or ...

Yeah, it's continuing. PBMS had its best year ever in terms of not having a lot of lost business. It had it's best year ever in written business. It reduced its dependency or its concentration of financial services in legal, increased the government segment and got good margins on the written business. It was hurt by two things in 2002, and one is, as we've described previously, the downsizing of many of its profitable financial services accounts in particular and secondarily, legal and technology sector accounts, and secondly, there were some volume hits in terms of, you know, the copies in those same sectors.

We saw a little bit of improvement in the fourth quarter in terms of reduced downsizing and volume problems, and continued strong writ written business, and, you know, low loss rates, but it would be too early to say that we're out of the woods for PBMS, and of course all of these have a delayed impact. So we're assuming even a sluggish economic environment. We believe Pitney Bowes management services is going to pick up nicely in the second half of this year.

Okay. Thanks. One last one before I get back in the queue as well. Can you update us on your cross-selling efforts between, say, PSI and PBMS?

They are improving. It's a little bit early because PSI just became part of the Pitney Bowes family on August 1st, and our biggest focus in the past five months or six months has been both an expansion of PSI to six additional cities, and a focus on the development of strategies and pilot programs not just for PBMS but we did move the presort for our Aetna facility into PSI during the quarter, but we are looking at other major PBMS sites.

We're also looking at plans to pilot some of the mailing operations this year as well. But the main focus the last six months has been city expansion, and we significantly increased our efforts, and we will focus the first six months of this year on the PBMS and the mailing opportunities.

Okay. Thank you.

You're welcome.

We do have a question from the line of Lloyd Siegman (ph) with Bernstein Investments.

Hi, folks. I'll take a cue from everybody else who preceded me and ask a whole bunch of questions. Let's see. First of all, on the tax situation, the tax rate, I believe, Bruce, you said a 32% rate for this year, is that right?

Correct.

Okay. Would you anticipate that that rate would increase further in 04 in

Yeah, I think it would increase over time to about 34%. If you looked at the contribution in our tax rate, it's been about 2.5%, so that's where we get that from.

So say 2.5% to 3%. Roughly in that vicinity.

31.3 this year, so 34 should be a good estimate.

So let's say 34% about the time that you complete the liquidation?

Not complete the liquidation. That we have the reduction in the deferred taxes. We will not complete the liquidation of this portfolio in the next three years.

Yes, I think just for an assumption, it will go up roughly half a percentage point a year. So the next year after this would be 32.5, 33, 33.5, et cetera. And 34 would be where it capped out. That's just a rough estimate.

Okay. That's what I was looking for. Okay. As far as this additional $115 million charge, again, I believe you said this relates to your aircraft exposure?

Yeah, domestic.

Okay. So that's 115 million plus the 98 million.

Yes.

And let's see. Your total domestic exposure was about 225 million all together; is that correct?

That's -- in terms of direct exposure, yes. We did have a component of our investment in the PBG partnership that had airline -- that related to the airlines as well. So you've got to put those things together.

Okay.

But at the end of the day, at the end of this, we end up with a little over 60 million that is not covered by credit loss in the domestic aircraft portfolio.

And the $100 million charge that you mentioned for '03 and '04, could you give us a little color on that?

It's a little early to do that, Lloyd. We are just signaling -- the one thing that we have -- we don't have specific numbers on it, but clearly, we will be downsizing in manufacturing to specifically reflect the fact that we do not need the number of labor hours for our digital products, and that is moving faster than planned because of the better than expected performance of our digital mailing systems. Additionally, we have an ERP implementation in our customer facing processes. We're also looking at G&A expense, and we have a number of streamlining initiatives, and this is our best estimate right now, but we do not have it broken down by initiative, by quarter, or by location, so we expect as we get that data to share it with you.

Okay. Jumping back to capital services, how do things look in terms of your other assets, as far as credit quality?

Frankly, there is no other part of the portfolio that had the combination of risk factors that we had in the domestic airlines industry. The transactions are structured to provide a great deal more confidence that we would not have to deal with the kinds of issues we've had to deal with in domestic aircraft, but I think in this very volatile and uncertain economic political environment, I wouldn't say that there's no risk, but I would say that we feel very comfortable with it that with this action, we are appropriately reserved.

Okay, and one last thing. I believe, Mike, you said that regarding PBMS, that you see a good pickup in the second half of this year?

Yes.

Is that both in revenue growth and margin improvement?

Yes.

Thanks much.

We do have a question from Deane Dray with Goldman Sachs. Please go ahead.

Good afternoon. A couple questions for Bruce, if I could. Bruce, can you comment on the payout ratio today and it looks as though you hadn't adjusted it following the separation from Immagistics. Talk us through as the expectation on dividend growth in light of potential changes in tax treatment?

Sure. First of all, to clarify the payout ratio, it's roughly 50% right now, and you're exactly right that the reason it got up to that high level is when we spun off Immagistics, we did not adjust our dividends so we essentially paid the same dividend on a lower earnings base. Our goal over time is to return the payout ratio to its historical norm, which is roughly 40%, and we intend to get there by growing our dividend slower than our earnings grow, and so we establish a pattern of 2 cents a year.

In terms of what we would do if the legislation passes, we do not see that changing our dividend policy. We think the main effect will be that the stock market will give us more credit for the very high payout ratio and the very attractive dividend yield that we already have. Our yield is roughly double that of the market as a whole, and obviously the new tax legislation would be good news for Pitney Bowes shareholders.

Sure. And just a quick question on the balance sheet. It looked like your investment in leveraged leases actually went up from the third quarter and just given your change in appetite for these kinds of assets, I would have thought that would have gone down. So what was the investment there?

The vast majority of that was the postal financing. We did a couple large ones in the quarter. One very large one in the quarter.

And that will be the last time we see those?

I would expect so, except as I said, if we happen to do one on an opportunistic basis that we absolutely have to do, yes, but that's not our plan. We will not actively seek to do those from this point forward.

Okay. And then you said that you can comment on that there's been all kinds of patent infringe went suits going back and forth with a number of parties. Can you give us an update where those stand today?

During the quarter, we filed and settled with Neopost. We are not at liberty to disclose the financial terms but it was not material for us, but we believe it was good result for -- it was a win-win situation. We did not settle any of the remaining suits in relating to the Hewlett Packard -- the patent that led to the Hewlett Packard settlement. We have a couple fairly sizable but not anywhere near Hewlett Packard ones remaining there. The Rico litigation was largely a technique by Rico to gain more leverage because we are working with them or negotiating with them on the laser printer patents. The stamps.com thing is just another step in the litigation process for them. We do not believe that either of the Rico or the stamps.com claim have any merit and are confident that we will prevail on all of those.

Okay. And then last question. An update on the acquisition outlook, the pipeline, pricing, and so forth.

I'm going to let Bruce take that one. He has the corporate development function reporting to him.

I would say that there's a lot of interest in Pitney Bowes as a potential acquirer. We are clearly on the radar screen of anyone in the mail and document management industry. There's a good deal flow, so to speak, and a lot of opportunities for us to expand, and if you're wondering why we haven't done more of that, it's more a matter of making sure that anything we do passes all of our screens and just to reiterate what those are, we want to make sure first strategically, it's the right priority for our growth strategies.

Secondly is, we want to make sure particularly on some of the smaller companies, that there's not integration issues because they don't have some of the systems and so forth that we would require. And then third, of course, is the financial returns. So again, we use acquisitions as a buy versus build, and I have no essential need to do it other than to the extent it forwards our growth strategies. But there's no major acquisition that's imminent at this point.

Okay, thank you.

You're welcome.

We do have a question from the line of Curt Moore with Dresdner RCM. Please go ahead.

Good afternoon. Thanks for allowing so much time for questions so I can get in some questions here. On the financing of postal equipment, roughly what in terms of the dollar volume would you have financed in 2002?

I'll give you the answer not so much for 2002, but for planning purposes, we assume that it would increase our financial commitment of roughly 75 million a year, so that's the cash that would be freed up that we wouldn't be reinvesting.

so I'm just still a little puzzled here. Is it only $75 million worth of transactions a year that you guys no longer are going to be financing?

That 75 million is what we would retain on our balance sheet. What makes it harder to answer your question is the strategy and capital services was to do larger transactions, and there are leveraged leases to a considerable degree, and much of the transaction is off balance sheet debt which is non-recourse, and so that's one factor .

Second factor is that we don't necessarily keep all of the investment that we can (inaudible) Kate the financing to other participants in that market. But I'd use 75 million for your calculating what the effect is. So if you think about what I said earlier for this year, we're losing 35 million of free cash flow, but overruled, we're not reinvesting 75 million. So if we have a net positive of 40.

What kind of impact do you expect that to have on your ability to sell your products to customers, and if you guys wouldn't be financing it, who might they get to finance this product and services?

We don't sell to the posts, and this is more to be very much involved in understanding their strategy. This equipment is equipment that is used inside the large postal processing centers. It's heavy mail sorting equipment when with the scanners and the related technology that's used not only to move the mail, but to track and trace the mail through the postal system. The beauty of this marketplace is that we don't do it. We can guide the post to other people who can.

The fact that we already have over -- we're going to have probably over $300 million in the balance sheet as of the end of this year, I mean at the end of 2002, we already have the established relationships with the posts that our existing positions give us, and if anything, the fact that we are going to continue to help them but not do the financing should give us -- should enhance our strategic relationships. We don't see a circumstance where they wouldn't be able to find another financing source. In fact, I don't think even if we were continuing to do this, if a post couldn't find somebody else that wanted to finance it, that's not the kind of post we want to finance.

Right.

The kind of -- the one we did in the fourth quarter, for example, is with the German post office, which is financially very strong. One of the dominant post offices in the world. And one of the most important post offices for us to build a stronger relationship with as we move forward.

Right. Switching gears a little bit, just for housekeeping, what kind of impact would you expect -- did foreign exchange have in fourth quarter revenues and what are you modeling for 2003?

I'll let Bruce answer that.

We had about a 1.5 percentage point impact from currency in the fourth quarter, obviously positive. For modeling, the best answer I can give is that 2 to 4%, and we're assuming that organic growth should be roughly around 2%. So the rest is currency range.

Okay. And also you mentioned the GSA contract, kind of diversifying you away from financial and legal customers.

Yeah.

How would the breakdown be if I were to think about 2001 versus 2002, your revenues in that segment, financial and legal 01 versus 02 as a share?

That's a little hard to calculate because we did a major acquisition in mid 2001, DSI, and DSI was much less concentrated in the financial services and legal sector, but I don't have the exact breakout. However, I can tell you that through the acquisition and also through the redistribution of the organic growth to government and reduced exposure and financial and legal, it's significantly lower. I can tell you that, let's say for our top 80% of our accounts, it was a significant reduction. I don't have a calculation of all the small legal customers that come and go within the portfolio.

But very definitely, we took a major step to diversify both because of the acquisition and because of strong wins in government, and the only financial -- the only big gain in the financial services sector in 2002, and it skewed the numbers, was the document factory that we -- business that we wanted won at Aetna, and although that's financial services, that's a site that, over time, we will be able to put over customers in. So even there, we improved our ability to have a more diversified portfolio, and this is a long-term contract that, if anything, is going to give us a platform for growth.

Okay. And I apologize if I missed this already, but as of December 31st, what were your pension assets, liabilities and return on assets assumption and discount rate?

Bruce will handle that.

In terms of the assumptions, we went from a return on investment of 9.55, and we are now assuming 8.50. Our discount rate was 7.25. It is now 6.75. Our salary compensation continues to be 4.75, and the other change is that we went to a new mortality table, which has the effect of lengthening the lives and, therefore, increasing our liability. In terms of the exposure, the best way I can put it is the contribution that we made at year-end will make us fully funded from an accumulated benefit obligation in terms of projected benefit obligation, we're roughly $100 million underfunded.

Thank you very much.

We do have a question from the line of Solin Cho with Morgan Stanley. Please go ahead.

Hi. Thank you. Most of my questions have been answered, but you touched on it here and there, but can you speak qualitatively about the business conditions that you saw in the fourth quarter and into the first quarter so far relative to what you've seen in prior quarters in global mailing and also in enterprise solutions?

I think it's a tough business environment. It hasn't really changed. As I said, I think in global mailing, because we have a large diversified customer base that includes both small, medium and large businesses, it's a much tougher environment. Our salespeople have to work harder. We've invested heavily in 2002 in what we call sales revitalization to improve their selling skills, and we felt very good about the way that took, and it enabled us to achieve good results in what I think is a more difficult environment than we've had in any previous year, including the fourth quarter.

As we looked at our management services business, as I said, late in the year, the downsizing slowed up, which is a good sign, but it's too early to tell whether that's just a lull in a continuing trend or whether it's an indication that things have bottomed out. We won't know that for probably another two to three months. The document messaging technologies group had a better fourth quarter than it did third quarter, and it's a strong operating profit growth. Its revenue was down because it's shifting more to a model where it supports management services as opposed to selling directly or leasing directly with the end user, so we're shifting more to a rental model, but the total business volume if you present valued those rentals would actually have been up, so that's -- and the backlog is higher going into 2003 for that business than 2002.

But again, I would caution that I don't know at this stage whether this stuff is a lull or -- you know, and we're going to get back into an even more difficult environment, or whether it's a sign that things are bottoming out for the better.

Okay. So just to clarify, the trend that you saw or that was posted by DMP, the underlying demand continues to suggest at least some stabilization, which is the way you characterize that business in third quarter as opposed to any sort of deterioration?

Yes, and part of the reason for that, I don't think the business conditions have gotten any better, but we now have new technologies with the advanced productivity system and new software that we've launched and professional services, so our revenue there is -- we have more ability to win business in a difficult environment. I would not say that the environment has gotten any better, but our ability to perform has improved during the quarter. But it's still a very, very tough environment with delayed capital spending, particularly in the sectors that we've historically been strong in, financial services being the leading of those sectors.

Okay. And then just to drill down on the enterprise solutions margin, we actually saw a pretty nice increase year over year in those margins despite the difficult environment. Could you just provide a little bit more specifics in terms of what drove the improvement and what we might expect over the next couple quarters?

I'll talk about 2002. I'll let Bruce talk to the budget for 2003. Clearly, we have gained efficiencies in the way we deliver services, and in our business processes in manufacturing, and we have taken a certain amount of G&A out of that operation. So we have improved our operating efficiency and effectiveness. The products are better, the advanced productivity system, which we launched this year, is performing ahead of plan and it has higher price points and higher margins than what it replaced, but I'll let Bruce talk to the shorter term outlook for that business.

I would say on DMT, the outlook is to continue with the kind of margins they had in the fourth quarter. If you looked, they're pretty much back to where they had been historically, and again, as Mike said, it really got there more by reducing costs and that's something that can continue. And the other thing I should note about DMT is that a lot of their growth is coming in the services area, and they've been able to get good margins in that area. In terms of management services, which is the other part of enterprise solutions, as Mike mentioned, they've been investing in a number of programs and new business development, and that's the real issue for them, is to what extent they're going to make the tradeoffs, but -- and also to what extent there's going to be further contraction in some of the higher margin accounts and financial services and law firms. But -- so overall, I guess I would say it's relatively uncertain.

Our budgeting process shows them improving for the year, but that's one area that has less certainty than some of our others.

PBMS, just as an example, has invested in what we call the service excellence tool, which I think helps with both customer retention and margin maintenance. They have invested in technology to reduce the transactional costs for a lot of their human resources transactions. Part of a larger corporate program in that regard. They are putting infrastructure investments into Europe.

We've got a very nice pipeline, but where the business has been slow to come, and if the business does come, that then we will see improving margins. If it doesn't, we will have infrastructure with -- we'll have to make a judgment about whether the revenue will come there to support it. But that's part of what contributed to their decline in operating profits. PBMS has invested for the future as opposed to an issue of, you know, the deterioration of business fundamentals. They are investing for the future.

And then in terms of the restructuring actions you're going to take, is the lion's share going to hit global mailing or should we assume that it's in proportion to the size of each of the key businesses, or what's the mix going to be in terms of areas targeted?

We're not that far along, but we expect to look everywhere in the company. The manufacturing is predominant. The component that relates to manufacturing, I think, will be almost all global mailing.

Okay. And then finally, just in terms of restructuring cash outlays, how much did you spend on restructuring in 2002, and how much of the $100 million after-tax charge is going to be cash-related, if you know that at this point?

I'm sorry, I couldn't hear the last part.

How much of the 2003 and 0'4 restructuring is going to be cash versus --

Right. On the question on 2003 and '04, it's roughly 85% would be an estimate of how much is cash, and the rest is non-cash, and the non-cash would be in the manufacturing area primarily. And just to explain, most of the ca cash is severance. And 2002, we spent in total cash out outlay would be 45 million.

Okay. Great. Thank you.

We do have a question from the line of Danielle Tagsi (ph) with Newcastle Partners. Please go ahead.

Who pushed my button? I didn't have a question.

Thank you. We do have a question from the line of Keith Gay with Thomas Weisel.

As you mentioned the difficult environment especially relative to PBMS, can you discuss -- that's also a very fragmented market, and can you discuss the commitment of some of perhaps the other competitors and are there any other situations where you think you might be taking share there?

We're taking share from all of our competitors in that business right now, both large and small. But it is -- you know, it's a business where, as I said, the written business was very strong, but the biggest single factor was a combination of downsizing and both in terms of shutting down facilities and volume reductions inside those facilities.

Okay. And then can you also talk about the long-term outlook for operating margins as you exit capital services, which is a small but high margin business, and as PBMS continues to grow at lower margins? How should we think of the operating margin trend over the next couple of years?

I'll let Bruce handle that one.

Well, I think the best way would be, we should be able to maintain the overall margin, and that would be a combination of a negative mix which you correctly pointed out offset by the actions Mike alluded to of streamlining our infrastructure, which will lower our cost. So that's probably the best estimate we can give, is relatively constant margins, and our goal obviously is to raise them through the cost measures.

Okay. Most of my questions have been answered. Thank you.

We do have a follow-up question from Ben Reitzes with UBS Warburg. Please go ahead.

Thanks. Just some clarification here with regard to the growth for 2003. By my calculations, it looks like you're getting about a 100 to 150 basis point benefit from PSI. Is that included or excluded in the outlook?

It would be included.

Okay.

I'm sorry, go ahead.

I'm not sure your 100 -- that seems like too much.

Okay. Too much ...

For only half a year.

In other words, I guess that if you think about it, we view that once you had an investment in PSI for a year, that it starts becoming organic at that point.

Right, but in the first half, right, it's additive, correct?

It is additive.

And is that in the 50 million neighborhood?

And Ben, just to explain on that, what we've thought about is that there's roughly an offset between PSI and the capital structure -- or capital services issues that we talked about, so on an apples to apples basis of what's organic, that you get the benefit of PSI, but you have the negatives of no longer have the warehouse assets and the wind down that we talked about.

Okay. Great. That was my next follow-up. Then we wind down the cap services revenue in a comparable fashion?

Yeah. So we're trying as best we can to give you an apples to apples comparison.

Okay.

And that's why I was saying that organic for next year should be roughly two percentage points, if you subtract PSI and subtract capital services, and then the difference becomes currency.

Okay. Thanks. And then, let's see. At the -- with the restructuring charge of 100 million, when do you expect savings to kick in? Obviously with the outlook, we have a lot of sequential improvement baked in throughout the year, so, I mean, obviously -- should we see it hitting in the second quarter? And then do you have any preliminary estimates as to what kind of booked savings we could have in the year?

It's premature, Ben, to give you that kind of granularity. Certainly by the next earnings call, we will be much clearer on that, and, you know, at least for this year, we're clearly not going to be able to give you 2004, but right now it would be premature to give you savings for this year versus next year.

All right. But we assume some hit and you'll tell us more?

Yes.

And -- okay. And then just one last clarification. Bruce, what is the free cash flow turn out to be for the year if we exclude -- just from core operations in 03? Is it looking like the 550 kind of run rate for '03?

Yes. We don't see a material change. As I say, roughly 35 million, so let's use 550 as a good estimate.

Thank you very much.

We do have a follow-up question from Peter Ausnit from Deutsche Bank. Please go ahead.

Thanks. Just to touch on some long-term issues, is the up take rate on the DM series continuing on plan in that you're likely to convert most of the base well before the meter migration schedule would mandate that?

Well, I would not go so far as to say we're going to convert well ahead of schedule because our experience over a number of countries and over a number of years has been that you get early adopters, you bring forward some other people with the kind of value add that we have, but there always are a certain number of stragglers, and whether we convert them earlier is going to depend on working with the Postal Service here as well as if we do similar migrations in other countries' Postal Services to, you know, create incentive and penalties that move people forward.

So we certainly think that what we've done in the value-added services will bring more forward into the middle period of period from the end, it will probably smooth it out. We do not see it bringing the stragglers into the middle time and shutting it off by 2006, if that's the kind of thing you're talking about.

Okay. And also, can we touch back on the long-term goal of the company laid out for growth and the constituent parts? Has any of that changed based on some of the portfolio changes that are now underway?

I would say no, but I'll let Bruce talk to that one.

I think the basic assumptions remain intact. I think you raised a good point that by losing the capital services revenues, that obviously makes it harder, so what I think we're probably going to be doing in the future is expressing our revenue growth more in terms of the core, and try to give that as a way to explain it. But in terms of the business fundamentals, that's the same. I'd say the biggest uncertainty as was alluded previously was to what extent we would have any growth through acquisitions, and again, we're going to be disciplined, but that's the most unpredictable.

But the basic core businesses, which are going to be continued, are our long term target is 4 to 6% and we continue to feel that's the right target range.

Okay. We spoke before and I think you mentioned that it takes a while to sort of ramp the business toward your target growth rate. Can you walk us through again how long that takes and how much time it would take in terms of good economic conditions for you to get up towards those targets?

Yeah, I think, you know, 2005 is a good estimate for under current economic conditions. If things get a great deal better, we could see on an annualized basis it being in the latter part of 2004, but I'm assuming that, you know, I know that there are some experts that think the second half of the year is going to be great this year. I don't. I think that we'll be living with these kind of economic conditions indefinitely, so I think we would assume 2005.

Okay. Thank you very much.

You're welcome.

We do have a follow-up question from Lloyd Siegman with Bernstein Investments. Please go ahead.

Could you give us (inaudible) and how you're progressing there?

You cut off -- part of your question got cut off. Could you restate the question, Lloyd?

Oh, sure. Could you tell us what's happening with CCAP?

CCAP had a very good fourth quarter. The integration has begun. We would expect it to be completed this summer, and it will -- we are very optimistic about the ability of CCAP not only to contribute to a strong company for us in France, but one of the positives that -- I wasn't going to put it in the press release but that we did get in the fourth quarter, CCAP, we got that improved in some other markets like Australia and it's turning out to help us in other places as we planned. But the integration in France, which is our key focus right now, should be completed by the end of the summer.

And have you found it easier to operate within France because you have had your problems there, but now do you find it easier in terms of trying to get some additional share?

I will -- I would say that CCAP standalone is helping us. The absence of integration to this point has not enabled us to really take a serious effort to gain share in France. One of the quirks of the French approval system is they approve company by company. So if we get a CCAP approval, it doesn't count for Pitney Bowes France and vice versa. So when the sales forces are integrated and we can sell the full product line later this year, then I think we have a good chance of improving our market position. But we've been operating outside of France, we've been able to do more product line integration and leverage the benefits of CCAP than we've been able to do inside France, and that problem will correct itself in the second half of this year.

Great. Thank you.

There are no further questions. Please continue.

I guess if there are no further questions, we just want to say thank you. Your questions have been very provocative, informative, and we look forward to seeing all of you and we hope more people than were on this call at analyst day on March 18th. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.