必能寶 (PBI) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Pitney Bowes First Quarter 2003 Earnings Teleconference Call.

Your lines have been placed in a listen-only mode during the conference until the question-and-answer segment. If you need assistance while you're on this call, simply press zero, then star and an operator will come onto your line to assist you. Today's call is being recorded. If you have any objections, please disconnect your lines at this time.

Now I'd like to introduce your speakers for today's conference call - Mr. Michael J. Critelli, who is the Chairman and Chief Executive Officer; Mr. Bruce P. Nolop, the Executive Vice President and Chief Financial Officer; and Mr. Charles F. McBride , who is the Executive Director of Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overvie

Thank you and good morning.

Let me remind you that you can find today's earnings press release and the attached schedules on our website at www.investorrelations.pitneybowes.com.

The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based 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, mergers, or restructuring, gaining product approval, successful entry into new markets, changes in interest rates, and changes in postal regulations are 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. Mike?

Thanks very much, Charlie, and good morning. We were pleased with our performance during this quarter as we continued to generate revenue and earnings in line with previous guidance.

Cash from operations was $217 million and free cash flow was $161 million after subtracting 68 million of capital expenditures and excluding 13 million in payments associated with restructuring initiatives.

During the quarter, the strength of our business model gave us the resilience to grow even in challenging conditions. We also undertook several strategic actions to execute our long-term growth strategies, such as the disposition of approximately $80 million of non-core capital services assets including 29 million of assets held for sale, investment for future growth through initiatives such as our new branding campaign, and streamlining our infrastructure.

Revenue for the quarter grew four percent to 1.09 billion and net income was 113.9 million or 48 cents per diluted share. Excluding the 14 million after-tax restructuring charge that equaled six cents per diluted share, diluted earnings per share were 54 cents.

In January, we announced the decision to stop originating long-term complex non-core financing transactions in capital services. So, included in the first year first quarter 2003 earnings was four cents per diluted share of earnings from non-core capital services operations compared to six cents in 2002.

We believe that we should be able to grow our business even in a harsh economic environment, which is why we are increasing our leasing and rental initiatives, diversifying our customer base and expanding our value proposition to a wider variety of customers.

When we provided first-quarter and full-year guidance in January, we factored in the continuation and possible worsening of the global economic softness that we have experienced through 2002. It is important to note that despite the global economy proving to be as difficult as we had feared, our large and growing base of recurring revenue, our free cash flow, and some of our strategic new revenue streams such as our presort or work-sharing services gave us the strength to grow the business. And as I will discuss later, we are also reaffirming our previous full-year guidance.

At the beginning of this year, we talked about several strategic initiatives for delivering long-term customer and shareholder value - enhancing our core businesses, streamlining our infrastructure, and executing our growth strategies. That is why in January, we also announced that we expected to record approximately $21 million in after-tax restructuring charges over the - I'm sorry - $100 million in after-tax restructuring charges over the next two years.

The charge we took this quarter was the first in a restructuring program designed to ultimately improve our operating expense ratio. These actions were primarily related to manufacturing and infrastructure improvements. These moves also helped position us for both near-term and long-term growth.

And as an example, our enhanced operation efficiency is currently helping us grow in this challenging global economic environment. It'll also strengthen our speed and nimbleness in taking advantage of key opportunities during the inevitable upturn of the economy in the future.

Last month we held an analyst day, which many of you attended, where we identified $250 billion in growth opportunities in the mail and document streams worldwide and discussed our strategies to take advantage of these tremendous opportunities.

During the quarter, we continued to make investments in a variety of strategic initiatives to transform and grow the company, including our information technology infrastructure, customer-facing processes, human resources organization, and corporate branding. Keep in mind that while we feel these investments are essential for strengthening our ability to grow the business on a long-term basis, they do impact our near-term results.

Though we do not see any near-term economic improvement ahead, we expect year-over-year revenue growth for the second quarter and the full year 2003 to be in the range of two to four percent. Diluted earnings per share are expected to be in the range of 58 to 60 cents for the second quarter of 2003, and we're reaffirming previous full-year guidance of 238 to 245. This earnings guidance is provided excluding the impact of the previously announced $100 million in restructuring charges because we are still finalizing plans related to these potential charges.

Additionally I'd like to point out that we have reclassified our income statement because of improved reporting systems that we have that can now provide more meaningful information to investors. We're now reporting separate lines of revenue for sales; rentals; core financing, which is core financing in the capital services segment including financing that we intend to continue such as the financing of Imagistics products; non-core financing that we do not intend over time to continue; business services; and support services.

We are also reporting separately the costs related to each of these revenue lines and now have a sales, general, and administrative - SG&A - expense line. We provided quarterly information on the same basis for 2002 on our Web site, www.pitneybowes.com, in the investor relations section.

Thank you, and now we will be happy to take your questions.

Ladies and gentlemen, if you wish to ask a question, please press one on your touch-tone phone. You'll hear a tone then indicating you've been placed in queue. If you are using a speakerphone, we do ask that you pick up your handset before you ask your question.

Our first questioner is Caroline Sabbagha from Lehman Brothers. Please go ahead.

Thanks. Hi. Just a couple of questions - one broadly speaking what you're seeing in your end markets. You said you don't expect an improvement, but when you read the text of the release, it sounds like you might have seen a little bit of deterioration broadly speaking in the economy maybe in Europe especially.

Yes, I would say that the way I would put it is we at the beginning of the year set our guidance with a seven cent per share range with somewhere in the middle of that being a continuation of 2002 conditions, the low end assuming somewhat worse, the high end assuming an improvement. And economic conditions for a good part of the quarter came in probably on the low end of the economic conditions that we have anticipated.

It impacted the business differently in different places. Our small business area obviously had little or no impact from economic conditions - did well. The high end where we deal with the high end of our mailing business as well as enterprise solutions, we did not see an improvement during the quarter. And Europe we saw continuing to be soft, and similarly in Japan we saw continuing softness.

So, I would say it was a little bit worse in Europe and Japan than we had anticipated and a little bit worse on the high end of the mailing and the enterprise solutions business than we had anticipated. And we will - you know, we'll - we - it's a little too early to tell how the second quarter's going to be in terms of first quarter trends, but we're reaffirming the guidance.

Right. And then if you'd - if we move on just to outsourcing quickly, or PBMS, the margins there were much worse than what we were looking for. We were expecting them to be down, but not this much. And you cited a lot of the same reasons that you've been citing for the last several quarters, but there seemed to be something incremental that occurred this quarter because if you look at dollar profits, the last time you were close to, you know, that $11 million for enterprise solutions as a whole was maybe back in 1999 even before you acquired Danka.

What was - you know, assuming my conclusion is correct, there may have been something unique in the quarter. Can you give us a little bit more detail about that?

(inaudible) in fact our lost business was lower in the quarter than it has been in other quarters. Our downsized - and I think this I a critical point - one of the things you have to realize in management services is that there is a delayed impact. So our downsized business in terms of when it hit probably hit its peak in the lets say the June to November timeframe of last year.

But it has, it is the first quarter where you see the full impact compared to prior year. It actually, in terms of event during the quarter itself, the written business was probably as good as if the spread between Britain business and the negative factor is probably greater, but the full year comparison we finally have the full quarter impact of some of the loss and downside business from last year. So, I think that's why it looks worst. And we would expect that although it will continue to be an issue, that it should get progressively better as the year goes on. Although, I don't think we will see a return to improvement over prior year until latter in the year.

Are customers or are some of your big customers not refusing to pay but trying to push more of the cost, aside from shrinking, but trying to push more of the cost on to you and not paying for some of the incremental services you maybe be offering?

No. We are not seeing that, what we are seeing and I'm glad you brought it up because it raises a balance-sheet question. A side from currency which affected a lot of items on the balance sheet like receivables, payables, and inventory. In the account receivables areas we are seeing high-end customers all parts of our business announce that their going to take longer to pay us.

But we're not seeing refusal to pay and we're not seeing less acceptance of our value added overings, in fact, we are seeing greater acceptance of them. The only thing that I would say about management services is as we migrate to more technology based offerings when we do get this higher margin written business that's technology based the ramp-up times are longer, and the startup costs are a little bit higher than when we used to just run mail rooms.

At the end of the process, the margins are higher, but there is a period -- the startup time probably is double, and may be -- maybe triple sometimes what it used to be when we were just doing the more predominantly conventional mailroom and repo-graphics business, because all we were doing in those cases was hiring people. That could be done in 60 days.

But the big one I would say it's a combination of the three factors that made the first quarter worse. I think the fact that the full impact of what we observed last fall hit for the first time in this calendar quarter.

Okay. Thanks. One last quick question. On the cash from operations that you gave, did that include anything from exiting the securitizations business or I'll just -- I didn't see the full cash flow, or is that all below in finance.

Carol, this is Bruce. That is all below. So, the $80 million of asset sales and capital services that we had this quarter would be in addition to the free cash flow from operations.

Thank you very much.

Next question comes from the line of Craig Ellis at Smith Barney. Please go ahead.

Thank you, good morning, guys.

Thank you.

Just a couple of questions on PBMS and a few others, clarifying the earlier comment, can you help us understand the magnitude of each of the respective factors that are hitting PBMS margins right now with the high startup costs, the late implementations of new accounts.

Right now, in order -- I don't know if we have gone to that level of granularity before and I don't think for competitive reasons it would be a good idea. In order of priority, downsized is probably the largest factor that we had today, lost business would be second, and startup costs would be third.

Okay. Then with respect to the trajectories on each of those, Michael, are we at a point where we are stable, are conditions getting better, how much conviction do you have that things are going to improve sufficiently, or that new business that's coming on is going to give us a favorable year over year operating margin comps by, say, the third or fourth quarter of this year.

I think let me take each of the factors separately. The downsized business on a quarterly basis, the first quarter, is less than it was in the fourth quarter. But a lot depends on the overall economic environment, and the cyclical industries that we're doing business with, but we're cautiously optimistic that is sequentially in terms of new downsizing, less than it was in the fourth quarter.

The lost business continues to be relatively low, and we don't sow any reason why that would get higher. The written business we see a little bit of pickup, the startup expenses, I would say will diminish in terms of impact -- in the second and third quarter, unless we get some other large contracts that require additional startup expenses. That are technology based which I obviously cannot forecast at this point in time.

But you would say, you know, the lost business component, if it does not go back up again should be less of a factor by the time you get to later in the year, I wouldn't go so far as to say it would turn positive in the third quarter it might, but you know, a lot depends on economic conditions in the second quarter that are unknown to us at this point.

But the fourth quarter I would feel more comfortable. I should also note that PBMS took operating expense out in the first quarter, and will take more out in the second quarter and that's another reason why we feel things are going to improve. They're taking out a fair amount of incorrect management overhead that will start -- that will start to see the benefit of in the third quarter.

Speaking of operating expense you did have a good performance on the income statement. Are we at a dollar level or a percentage of sales level that we could look at as a run rate level, should we look at that trending down over time.

Our goal, obviously is to have it trend down over time. And that's why we are going to continue to do restructuring. Each of the next several quarters.

Okay. Then lastly, you mentioned currency a couple of times. Netting it all out, was it a factor in the quarter one way or the other, and is it significant enough that it's incorporate at all in the second quarter outlook?

Currency, was important both in the balance sheet and in the income statement. Let me start with the balance sheet. It clearly had an impact in accounts receivable in making that go up. It was A major factor there. It was a major factor in the inventory, increase, although, not the only one. It was a major factor in the goodwill, it was also a major factor in the accounts payable line, in fact, if you look just as an example in accounts payable at the $32 million increase of which 20 was currency, and the remainder was combination of the restructuring reserve and higher reserve account deposit, on the income statement, it added what, about $2.5 ---2.5%.

On the income statement, in revenue, it's 2.7, the income effect would be half that. 2.7%, not - 2.7% of revenue and income statement effect is half of that.

Okay. Thanks, gentlemen.

The next question comes from the line of.Ben Ricis from UBS Warburg.

Good morning, thanks. Hey, Mike, not to belabor this, but with regard to the outsourcing, I mean, if you had just had the operating profit that you had last year, you might have beaten the quarter by a few pennies, is your patience running thin with this? You sound like this business is kind of sputtered along a few quarters now, it seems, and is your patience running thin with this business, it sounds like you're patiently letting it --letting it, waiting for a turn-around, but it just seems that we have been talking about this business disproportionately for a few quarters.

Then I have a few follow-ups.

Thank you. I'm glad you asked the question. A couple of comments. First of all, one of the things I think we need to analyze and quantify and talk about is the fact that the outsourcing does provide profitability for some of our other businesses, and, up, it -- that's something we are looking at in terms of providing income and opportunity over time for mailing business and DMT business, whether our direct sales to the customer. Obviously, if they are placements directly with PBMS, that doesn't have an impact. There is a pull-through effect for the Pitney Bowes brand.

Secondly, we are not waiting for a turn-around, we are actively looking at both taking operating expense out, which some was done in the first quarter, a great deal more will be done in the second quarter. Diversifying the customer base because I think as we have talked about the previously, we found ourselves going into this economic cycle too dependent on transaction-based financial services and legal. So, if you look at some of the business that we have announced in the last year, such as Aetna or some of the -- like the GSA contract, these are areas where we think interest is much less -- much less (inaudible) and economic cycle variability. We're looking at some other vertical markets to expand our position and -- which would achieve the same effect.

The other comment I'd make is that DSI was a very successful acquisition, and giving us higher margin imaging capability in the corporate marketplace, and we feel that based on the business we have gotten through -- as a result of the DSI footprint, that has been a positive and mitigating some of the impact of our traditional business.

Finally, when we look at a contract like Aetna, that is something that has not initially produced operating profit because the startup expenses --as we would have liked it, but over the long run, we believe we'll be very profitable, and we'll be less likely to be subject to loss or downsizing than some of the traditional mail room and repo-graphic contracts.

So, we are taking specific steps to recast the business model here, but let's keep in mind that even the traditional PBMS business model gives us a defensive position in terms of Pitney Bowes mailing and DMT product and a great cultural opportunity for them as well.

I understand that with the mailing room part, but the going head to head against Xerox and Icon and others and copying services, is that worth it? And is that where the margins are getting hit, or is it the mailing room area?

It's getting hit probably --when you talk about copier, there are two different components to that. There's running somebody's repo-graphics and the issue there has to do with volumes. We are not seeing a lot of margin pressure except at renewal points there, but those are obviously dependent on the volumes that people do.

On the other hand, when we talk about imaging kinds of --imaging and desktop publishing which we pioneered at one of the investment banking houses and we're starting to get law firm business, that business is much higher margin and we think we have got a competitive advantage over Xerox and Icon in terms of some of the way we execute in that area. We also think that in many customers' cases, not being able to offer both, and really doesn't give us the entree to add other value-added services. I don't see them as

I do see that the pressure we're getting is less on customers' squeezing our prices down, although we certainly see strong price competition as opposed to the -- the greater factor today is reduction in volumes of copies, and staffing reductions from customers, shutting down buildings, or saying that they'll go from two mail deliveries a day to one mail delivery a day or saying that they just, you know, will not --you know, because of reduced activity on their corporation they're just going to pay for a poorer level of service.

All right. Well, just with regard to outsourcing, I think that this call we have done a lot of defending why you're in the business, and it's -- as far as mail goes, you know, there was a very good performance there with upside. Could you talk about how much of that was PSI.

PSI was a significant part of the upside in the quarter because of the -- but I would note that we distinguished between the revenue at --annualized when we acquired it, which obviously just gets -- is additive. As opposed to how we improved it. We had significant growth, even from the PSI -- on a sequential basis, even beyond PSI as we acquired it, we see great potential for that business in terms of city expansion, customer expansion, and ultimately, driving it through the PBMS, the DMT and the global mailing channels.

All right. So, with regard to the cash flow items also, you said there was $20 million in currency and payables.

Yeah.

How much of a spike in AR was -- and inventory was due to currency?

Bruce, do you have that one?

I would say that in terms of AR, it's roughly half, would be currency and the rest would be the factor that Mike mentioned, which is large customers delaying. Inventory, that was a factor over all, but the other thing was just an increase in working process. It's not finished goods. Related to our DMT business where we have new products being launched to go the to the APS system, and secondly in the mailing business where we have the new mega products which are the DMT lines.

I do want to comment by the way, on the portfolio, in terms of the broad portfolio, it's performing very strongly in terms of not -- no write-off issues. This is purely very large customers that can pay easily, that are choosing to make their balance sheets look a little better. And in some instances, we have been able to negotiate, you know this -- there's been a tradeoff between price and term. And duration of payment.

One last thing. Bruce, with it -- with the working capital, are you seeing anything that alters your $550 million free cash flow goal for the year?

No, we are not, Ben. We still feel good about that as a goal.

Thank you.

The next question comes from the line of Shannon Cross at Cross Research. Go ahead.

Hi, guys.

Hi.

Just one last question on PBMS and hopefully we'll be all finished, but, when you talk about some of your customers moving away from the higher margin businesses, is this something that you think that, you know, along the lines of the financials are moving away from and then hopefully if the market gets better, they'll come back, to or is it a fundamental shift in how they're looking at running their businesses?

No. I think it's something they'll come back to. It would be things like imaging for -- when I say transaction work, I'm talking about like example investment banking, some of the desktop publishing work we did. As you know, being in the industry, M & A work is drastically down, and we recognize -- we believe that it will come back, maybe not to --ever where it was in the late 1990's, but we are taking some of those capabilities that we developed in the financial services industry and we were offering them in the adjacent spaces and starting to get play there. But at this point, it isn't enough to make up for what we lost in financial services.

Okay. A follow-up to Ben's questions on AR. You know, the push-back from some of your larger companies or customer, is this something that we can see -- I mean, ongoing, increasing, are we going to see that number continue to trend upward?

That's a hard one to answer. You know, there's always a tradeoff between, you know, somebody that says I'm going to go from 45 to 60 day, and when we negotiate a large deal, we --I mean, at some point, they realize that it gets factored into the pricing. And you know, we -- over time, we will probably settle at an appropriate balance between --given our -- given our very low cost of funds as a double A credit, if somebody said I'm going to pay you 15 days later and we get another 1% on revenue I would take the 1%. But we are negotiating case by case, in terms of that tradeoff, and I don't feel it's a big deal right now.

Okay. Bruce, just one other thing, are we going to be able to get historicals with the breakdown that you gave us on the income statement.

We are for the quarters of the last year. We are giving anything that we can do. It's just a matter of what numbers are available, but it's going to be posted on the web, and it's available I think right now, Charlie.

It will be late they're morning.

Later this morning. So, yes, you will be able to have that.

Okay. Great. Thanks.

The next question comes from the line of Parthy Matha at Midwest Research. Good morning.

Good morning.

I wanted to ask you the question in the press release you had indicated that your sales seen good demand for the digital mailing systems and value added services. Is there a way to quantify at all in terms of revenue or percentage of -- I know in the past that you have quantified the percentage of machines that are not digital. Is there a way to quantify how many people are using the value added services or what the run rate is for the businesses?

Martin talked about the analyst day a target of 20% for the value added services and it continues to be slightly above that. Digital, we have gone over for the entire base gone over 60% at the end of the quarter, and for what we call the systems meter population, the higher end, we have crossed the 25% mark in digital, although, I should note in both of those, they're not --not all digital, in fact a good chunk of the install base is not to make a product today. We continue to get good acceptance of it through the customers that do want new meters and very high customer satisfaction, once they have the product in place.

Is there any thought about maybe changing pricing or anything to get that percentage above 20%, or is it just a matter of the customers being better informed and that percentages will go up?

We clearly want to -- I think that's something that we can look at once we have added more value-added services, which we continue to do. I should note that in addition to product launches around the world, we also have a series of tests and pilots around the world. To add value-added services to the mix wherever we have launched to make a product. Those obviously take time because we have to persuade the postal services in different countries to allow us to offer those services, and to alter some of their business processes but certainly, if we feel that we have got a critical mass of value that wasn't in place at the time we launched these value added services, we would certainly -- we wouldn't certainly take into account whether we could realize a higher price.

The good news is although the value-added services revenue is relatively low, the pricing and margins generally in our lease coupons are holding in a very difficult economic environment. I would attribute that to the value-added services, even though the value-added services revenues themselves are not that high today. I would also note that our meter population increased in the first quarter again for the seventh straight quarter.

Mike, you have talked a lot about PSI and that seems to be an acquisition that's going really well. At this point, is it -- have you grown that acquisition just because you have leveraged your current customers to utilize the service, or has it been that you gained additional non-Pitney Bowes customers, and utilizing these services?

I think it's been a bit of both and it's also been, you know, because the major effort we have had in the past nine months has been to expand the footprint of PSI, faster than it could have on its own. I mean, we have expanded into seven additional cities, and we have gotten both existing PB customers and non-customers for PSI. So, I think it's been both, and -- but the primary reason for the revenue growth has been that we have been able to invest money for city expansion that PSI on its own couldn't have.

So, will the remaining growth in that business, will it be just you expanding that business or will it be the opportunity to acquire some other presort houses?

We may acquire presort houses on a buyer-build strategy in a city. But there are no very big players left until the first-class presort area. We are looking at whether over time we can expand to other products, including the large direct mail market that's out there that's -- mostly standard mail. I think everybody in the industry is looking at technology to be able to auto mate the processing of what we call in the industry flat, which would be like your annual report is an example going at an 8-and-a-half by 11 envelope would be a flat, and that's still -- that whole area is relatively unautomated today. So, we think there's some growth potential in both areas.

Thank you, Mike.

You're welcome.

Our next question comes from the line of Julio Quinterro at Goldman Sachs.

Bruce, could you give us the percentage breakouts possible of the domestic versus the international and also if you could talk to the traction that you are seeing in some of the --the emerging markets that you highlighted at your analyst day. Thank you.

Let me answer the second question, and then I'll ask Bruce to answer the first ones in terms of revenue breakout.

China, we continue to see progress, although it's slow, but we have -- we have gotten progress in terms of testing the commercial market, and we are moving forward with that, and I'm very pleased with that. Japan went down in the quarter because of bad economic conditions, and also I think, you know, the post office went from being a government department to a government corporation April 1. So, we will be meeting with the new leadership Japan post, which we expect to be far more stable, and begin a dialogue on how we can get regulatory change there to grow the market, but I think that's a very important first step, one of the things that I have observed in the last seven to eight years that I have been visiting Japan is that because it's a government department, and it's a subset of ministry, people get moved around. It's very hard to get any continuity on long term initiatives. This movement to being a separate government corporation is as important as the postal reorganization act of 1970 was in the United States.

We have seen marginal improvement in India and Brazil, we had a large order last year, so we had an adverse comparison this year, but we continue to make progress in terms of regulatory change in Brazil, and India, we have -- again, there's a change of leadership that took place within the last 30 days.

In terms of the breakdown between the U.S. and outside the U.S., for revenue during the quarter, the U.S. revenue was 844 million, which was a growth of 1.5%. Outside the U.S. was 247 million which was a growth of 13.4% in terms operating profit, in the U.S., it was 213, which is a growth of 3.3% and then outside the U.S. was $36 million, which was a growth of 10.1%.

Great. Thank you. Then just for my own clarity right now, the infrastructure initiatives in the investments that you guys are currently talking about, the H.R., some of the other systems on the infrastructure side, I apologize I'm looking through my notes here, can you talk about the timing when that translates to savings on the income statement side.

Clearly, the restructuring is a major part of that. We -- we got a little bit, but not material in the first quarter. We are obviously going to accelerate more of the -- you know, as we're going to probably take more of the restructuring charge in the -- in 2003 than we do in 2004 in the hopes that we can accelerate the benefits.

I think you could assume that the benefits will ramp up quarter by quarter over the next two years and that -- by 2005, we will see a fairly sizable P & L benefit, but we'll see a fairly sizable one next year, which will probably be pretty close to the amount of the P & L charge.

However, I would say that the benefits we got this year were -- we expect to get this year were anticipated in the guidance. Next year, obviously, we expect to see a great deal more benefit than we do this year, probably more than double the benefit that we get this year.

Thank you very much.

Our next question comes from the line of Lloyd Ditman at Bernstein Investments. Please go ahead.

Good morning, folks.

Good morning.

I'm going to have to bring this up again. PBMS.

Okay.

A little bit of guidance here. Mike, earlier you said that the first quarter impact essentially was just a culmination of all of the lost business. That you have had in prior periods. Since you have said that some of the biggest losses came in the July to November period of '02, I would imagine that -- then that, we should see another big hit in the second quarter this year since that was five-month period. Am I correct in that assumption?

Michael Critelli Well, it will -- operating profit will probably be lower than prior year, but there are two factors that will help us start to mitigate the impact. One is that we have done some restructuring in the first quarter. We will do more in the second quarter, and some of the startup expense issues will -- on previous business will be less of a negative impact in the second quarter.

So, we would say that we should -- depending on business conditions, we obviously cannot predict downsizing over the next 75 days because that is very dependent on volumes and on customer condition, but assuming no worsening, we should say a bit of -- it will still be down, but we should see an improvement from the actions we're -- that we took in the first quarter, and we will be taking in the second quarter.

And we should see further improvement in the third quarter.

All right, so you are saying that the year to year comparison should be somewhat improved in the second quarter versus the first quarter?

That's -- as I said, that's if -- on constant economic condition, yes. But I would not want to predict constant economic conditions right now, because it's so dependent on behavior -- -- it's a real wildcard what's happening in the industries that we have our concentration in right now, so I would not -- perhaps as, you know, as we get further along in the quarter, we'll have better visibility, but it's too early to tell right now.

Okay. I understand. That's fine. Okay. Also, the $80 million of receivables that were sold in the non-core capital services. Were there any gains or losses on those transactions, and could you talk about how the marketplace looks for the transactions that you're planning over the next few months.

Well, let me -- there was a very, very small gain in the first quarter on the one large transaction that we saw -- sold. The warehouse -- you know, there were gains. There was one large real estate transaction that we sold in the first quarter with a modest gain. The warehouse had the normal kind of gains that we would associate with it. The -- we would expect -- we're on plan to move out of the warehouse assets by the end ever the year. Virtually move out of them by the end of the year. We are looking at other opportunistic sale, but we don't have anything that we could put into a forecast right now for the rest of the year.

Okay. And that one big gain, was that essentially in material?

Yeah, I would say so.

Okay.

Yeah. We had anticipated that in our budgeting and in the guidance. It got a couple of million dollars of gain there, which went into the income statement and we anticipated that in the guidance.

Okay. Let's see, in global mail, the fact that the revenues were up 5%, I think any kind of revenue growth under these circumstances is good. But could you give us some idea as to how that looks, and I know that you can't really give us exact numbers, but just some idea in terms of units, mix, between let's say high-end, and small business, price and foreign exchange, how that kind of came together to get that 5% increase in global mail.

Clearly, a foreign exchange was a big factor. The other factors, PSI and as I said, the part of PSI where we expanded it was important in the mix. Small business was a strong performer in the quarter, and we expect that to continue. PSI, we expect to continue growth there. Currency, I -- I couldn't tell you. I mean, assuming that it's not going to change that radically in the next -- for the second quarter, but, you know, obviously beyond anybody's knowledge. The high end we had a challenge in the first quarter in the United States, although we did -- we saw some improvement toward the end of the quarter.

The Europe -- Europe other than where we are seeing some nice performance in local currency, we did not see strong performance in the rest of Europe, because of economic conditions and we have seen no change in our outlook for Europe in the second quarter. Canada, we -- Canada and Australia had good growth and we expect that to continue.

Okay. And the postal service situation. It looks like there's going to be no need for another set of rate increases until I believe it's '06.

Yeah.

Could you just kind of give us some idea as to how you view that, and what you see as the impact?

Well, first of all, I think that -- let's keep in mind when they say no rate increases, they -- what they mean is no first class rate increases. There are several -- and probably no standard A rate increases,, but there are several things that the U.S. postal service is looking at in terms of whether it should look at other categories of mail and change its pricing. Niche classifications. It's doing a lot of research into new pricing methodologies that won't necessarily affect the consumer or the first class business mailer, but that might result in rate restructuring. So, we think there's still a compelling case for mailers to take our soft guard product.

On the whole, we are very pleased with the fact that there is not a dramatic rate increase right now because we think that in this economic environment, it will -- it will stabilize and perhaps over time increase the volume of mail, and given the fact that PSI is out there, and can expand its footprint to process more and more mail, we're in a different position from the way we used to be. We're -- when we -- we're predominantly selling rate changes, one off and we got a big pop in recurring revenues. We are less adversely affected by no rate changes, and more positively effected in terms of stabilized or perhaps increased mail volumes. So, we look at that as a positive for the industry, and a net positive for Pitney Bowes.

Although, in the short term, it obviously we do get some small pop in equipment sales a quarter that there's a rate increase. The locus of the business, particularly with PSI and some of the other offers has changed so that, Matt, it's probably a slight positive that there's no rate increase.

Okay. Thanks very much, and have a great holiday, folks.

Thank you.

If there are any further questions, now is the time to press one. The final -- next question is coming from Peter Healey at The Newspaper. Go ahead.

Yes, good morning. This is probably a minor operating expense considering Pitney Bowes' global scope. Last summer, Pitney Bowes said it was exploring several real estate options for it Stanford headquarters.

Yes.

What progress has the company made since that time to a decision on the Stanford headquarters building?

We have not reached any definitive decisions on that at this point in time.

Thank you.

We're still exploring options.

Thank you.

And there are no further questions right now. Please continue.

If there are no further questions, I will close the call. I want to thank you all for coming. I was glad we were able to reschedule this and allow you to get up earlier for the holiday. Thank you.

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