必能寶 (PBI) 2003 Q2 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes' Second Quarter 2003 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. I would now like to introduce your speaker's for today's Conference Call, Mr. Michael J. Critelli, Chairman and CEO, Mr. Bruce P. Nolop, EVP and CFO and Mr. Charles McBride, Executive Director of Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview. Please go ahead, sir.

Thank you and good afternoon. Let me remind you that you can find today's earnings press release in the attached schedules on our website at www.investorrelations.pitneybowes.com. The forward-looking statements contained in the 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 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 of the quarter. Mike.

Good afternoon, everyone. Our performance on track during the quarter as we continue to generate revenue and earnings in line with previous guidance, enhance our core businesses, streamline our infrastructure and execute our growth strategies. We also continued to execute our capital services strategy to exit large ticket financing this quarter with the disposition of approximately $123 million in non-core assets including the $22 million liquidation of a Lufthansa aircraft lease and $71 million of assets held for sale.

Also consistent with diminished activity in this area is the lower contribution to diluted earnings per share year-over-year, four cents compared with six cents in 2002 and an 18% decline in the capital services earnings before interest and taxes. Revenue for the quarter grew 5% to $1.13 billion a net income was $118.9 million or 50 cents per diluted share. Excluding the impact of the $21 million after-tax restructuring charge that equaled nine cents per diluted share, diluted earnings per share for 59 cents. Almost all of this charge relates to severance that will be paid out to employees.

As announced in January, this charge is part of a $100 million after-tax charges that we anticipate over the next two years to execute our long-term growth strategies. We have taken a total of approximately $34 million in after-tax charges for this program thus far in 2003. Cash from operations was $209 million and free cash flow was $150 million after subtracting $70 million in capital expenditures and excluding $11 million in payments associated with the restructuring program. We used $40 million to repurchase 1 million shares during the quarter leaving $210 million of authorization for future share repurchases in 2003 and 2004.

We also used some of the cash to reduce our debt by $159 million. Although the economic conditions have not changed significantly from the first quarter, we did manage to improve our management services in DMT operating profit margins in the second quarter compared to this year's first quarter. As we previously discussed relative to management serves, large accounts in the financial services and related legal sectors are particularly susceptible to weak economic conditions resulting in a negative impact in margins year-over-year. We countered these trends during the quarter through general and administrative expense reductions, the addition of new business and continued diversification of the customer base.

The contract that the company signed to provide mail and document management services to a division of the U.S. Department of Justice during the quarter is a good example of the strategic diversification of the management services customer base. Let me close with just a few thoughts on our growth. Keep in mind that as we continue to execute our growth plan, we're always evaluating potential acquisitions within our strategic framework.

During the last two years, we have developed a competency in identifying, evaluating, negotiating and integrating acquisitions that add shareholder value as evidenced by DSI (ph) House, SACAP and PSI. Also of note is the upcoming report by the presidential commission on the U.S. postal service. The final report is being released in faces that will be completed at the end of this month. However, the recommendations already disclosed at a public hearing on July 16 strongly support our strategic direction through some of our growth initiatives such as work sharing and pre-sort and some of our solutions which support pricing flexibility and greater access to postal and carrier services in places like retail stores. With regard to our expectations for the next quarter and for the full year, we anticipate year-over-year revenue growth for the third quarter and the full year 2003 to be in the range of 2 to 4%. Earnings guidance is provided excluding the impact of previously announced restructuring charges and the impact of any new accounting standards. Diluted earnings per share are expected to be in the range of 61 to 63 cents for the third quarter, 2003 and we are reaffirming our previous full year guidance of $2.38 to $2.45. Thank you and we will now be happy to answer your questions.

Ladies and gentlemen, if you wish to ask a question, please press "*" then 1 on your touch-tone-telephone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by depressing the # key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please depress "*1" at this time. One moment, please, for the first question.

We have a question from the line of Julio Quinteros from Goldman Sachs.

Good afternoon, guys. Real quickly on the segment operating margins, can you discuss little more granularity here on enterprise solutions as we look up forward going through the rest of calendar year '03 going into calendar year '04. I guess what I'm looking at here is the ramp-up of some new clients potentially here in the sort of the in the out-quarters. What kind of impact will the ramp-up of those clients have on the margins? I know that in the first quarter, for example, there were obviously some client ramping up and you saw a margin decline. There is a sequentially from December to the March quarter so I want to get a sense for what your feelings are in the terms of the way that enterprise solutions clients will ramp up and the impact that would have to the segment operating margins.

Ramp-up tends to be a bigger issue at PBMS because of the nature of the timing of the spend and the fact that it hits the P&L as operating expense. And we expect that the fact that some of the previous ramp-ups are turning to go profitability that we will see improving operating margins in the third and fourth quarter. DMT for very different reasons, we also expect to see improving operating margins in the third and fourth quarter. We don't have the same ramp-up issues there because we are typically, you know, seeing in -- when we do a particular customer, we're providing standard products and it would show up in the cost to sales margins whereas a lot of the activities that we're doing with PBMS have shown up as significant expenses.

Okay, great. Thanks you.

You're welcome.

And our next question comes from the line of Ben Reitzes with UBS. Please go ahead.

Yeah, hi, thanks. Good afternoon. Guys, just with regard to PBMS, so it seems like this is kind of turning around here at least a little bit. Could you just elaborate a little more on what we should expect? It seems like you just said we should we should Siebert margins and to what degree and what gives you this confidence now?

Well, first of all, in terms of overall operating margins, we have taken out general and administrative expenses and Will continue to do so. So we will we start to realize the benefits from some of the actions that we took previously in November, February and April where we took out some infrastructure costs in that business. Secondly, the customer shrinkage which last year hit us very hard between May and November went down in the first quarter and went down again as a percentage of revenues in the second quarter. So that makes us feel more confident that we will see operating margin improvement. And given the prior -- we expect to see in the third and fourth quarter improving comparisons to prior year.

Well, what type of customers are getting better there? Obviously financial and legal but who are you seeing success with?

Well, it's as I indicated in my opening remarks, we're getting good business from government.

Okay.

And in other sectors, we're starting to see some good margin business being written so we're getting more diversification; although, even in the financial and legal segments, we're seeing a little bit of bottoming out and only in the sense that although we're not getting a lot of -- a big surge of written business, the shrinkage factor for whatever reason has been has not been as much of an issue. It is really more like it was in the first part of 2002 as opposed to the way it was in the second half of 2002.

Okay. Okay, good. Thanks.

Sure.

Just a clarification here, what was the currency impact in the quarter? Did you mention that? I didn't catch it.

I didn't mention it and Bruce

Bruce Nolop It was about three percentage points of revenue that came from currency.

Okay. And what was the impact of acquisitions in the quarter? Was it really just PSI the big one or what were they again?

On the year-over-year the only one that would be in effect would be PSI.

Okay. So what was it without PSI, the growth without currency in PSI?

Well, the way we would do it, Ben, is we would take into account currency, PSI and then the capital services strategy change. And if you lump out all of those three factors, the organic growth rate was about 1% point.

Okay. Okay, that is a little better than I had though. All right. And then the -- just with regard to Europe, you had some success there, right, with postage rate changes in France and C-cap. It sounds like Europe is getting pretty weak among other companies?

Yeah, we think C-cap has a strong recurrent revenue base because it has rentals both for meters and mailing machines. It's the only market in the world that has that. So the growth in C-cap with the exception of the small increment for the rate change is we believe sustainable. We -- our weakness in Europe and we had uneven performance in Europe was in Central Europe, particularly Germany and the germ antenna germ antenna speaking countries, Switzerland but Germany was our weakest area. We had flat to slight increases across northern Europe and in other parts, southern Europe but we took a big hit in Germany and frankly at this point in time we don't see an immediate turn around in Central Europe. We're obviously taking corrective actions to function even better and what we'll -- what will probably be a continuing weak environment there so we do not intend to sit still and make that an excuse to, you know, that as far as staying where we are. We are going to do things to improve our performance in Germany. But Germany and Central Europe, the German speaking countries are clearly a problem area in Europe.

Just to conclude, what would you say the main driver is of the U.S. and domestic performance?

You're talking about mailing?

Yeah, mailing.

Well, very continued receptivity to our value-added services and our DM series. We continue to get unplanned as far as the growth rates there. And we had good performance in our mail creation and distribution solutions on the written business side so I would say that although it is a very, very tough economy, we did well in U.S. mailing.

So -

Pretty much across the board.

But if you were to say versus -- you did beat - I had some pretty conservative numbers granted, but you beat my numbers by a little bit in revenue. Is there anything that stands out mail creation is what I should takeaway?

No, I wouldn't say there was any one factor. I just mentioned that we had good months of June across the board and our small business portfolio, you know, is personal post office, it continues to be strong. So I would say it's a combination of the DM series and personal post office and improving performance in the other areas of the business, not great performance but probably improving performance.

Okay. And PSI was still going strong or not?

Yeah, PSI was good. First quarter tends to be stronger in pre-sort than second because of just the seasonal mail volumes, but it was fully second - I'll keep in mind we didn't own it second quarter a year ago, but based on what we knew of the financials of PSI, it was strong in the second quarter.

Still on $100 million run-rate.

Yes.

Thanks. Great quarter.

Mike Critelli Okay.

And our next question comes from the line of Craig Ellis. Please go ahead.

Thank you, good afternoon, gentlemen.

Good afternoon.

Just some clarifications. First on Pitney Bow's management services, Michael, can you clarify the magnitude of the operating expense reductions that occurred in the November, February and April time frames and relative to those, what is left to go in PBMS?

I don't think we normally get to that level of granularity and I would prefer not to for competitive reasons talk about other things that we might have in mind for infrastructure changes going forward. But let's say that we are continuing to look at a variety of ways to reduce operating expenses and PBMS.

Okay. Maybe a different way to go about it would be, if you're looking at expanding operating margin performance going forward, can you give us any sense of what role operating expense reduction would have in that?

It would be one of the major factors in that. And the other thing I mentioned earlier is that we had more large technology intensive businesses or orders from the past such as Aetna, improved their performance and get to the others and get to the point of at least break-even and to profitability on the ramp-up in the second quarter versus new technology and intensive business. In other words, our distribution on the ramp-up was - it started to turn us positive in the second quarter and we would expect that to continue to be the case. But the major factor, the first major factor is the continuing work we're doing in taking out operating expenses.

Craig, just to add one thing, too, it's not solely on the operating expense line. In addition, they did have an improvement in gross margin compared to first quarter as well.

Okay, great.

And I think, Craig, just to keep in mind, what we were experiencing earlier was that the new business we were putting on was almost completely wiped out by the hype -- the shrinkage of high margin business. So the reduced shrinkage helps us going forward in terms of operating frost.

Certainly. Great. Thank you. A couple of other clarification. On the global mail, which had real good revenue performance, can we step back and just look at some of the tail winds that might be in place there. There is obviously the meter migration. Are you seeing as well as a result of some of the anthrax scares we saw coming out of 9/11 that has had a sustained impact in the suspended enterprise given the disparity of the low end or high-end or are you just seeing better low end equipment sales because those are certainly more easier to get to purchasing than some of the higher end deals?

The anthrax issue has really only benefited us in terms of government services on the PBMS side and occasional placement here where on the mailing side but really has had no material impact on global mail business. What I do think is a tail wind what is I mentioned is if the postal service and the congress strongly move forward and encouraging more work sharing and pre-sort, that has to help us, help the PSI business.

Additionally to the degree that the postal service is encouraged to be more -- give more complexible pricing, that makes a meter more valuable than some of the other forms of postage payment that are -- that don't give mailers the ability to adjust. In other words, digital meters allow for downloading of new prices and rates very rapidly compared to electronic meters. So to take advantage of more flexible pricing, people may upgrade to the new DM series more quickly than they otherwise would have. So that is why flexible pricing is important at the postal - if the postal service can truly do that. It may be encouraged to do more promotional pricing than it has been able to under its current regulations and practices.

Okay, Thanks, my cam. Michael. Lastly, Bruce, on the SG&A line the 10 million increase was a little higher than what I was expecting. Was there a little bit of currency in there?

There would be currency and in addition it just is a continuation of the expenditures we have talked about for our transformation or infrastructure improvements.

Okay, great. Thank you, gentlemen.

PSI, by the way, would also contributed to higher SG&A.

Okay.

And our next question comes from the line of Lloyd Boytman (ph) from Bernstein Investment Research. Please Go ahead.

Hi, folks. I have a few questions here. First of all, was there any impact from foreign exchange on EPS?

Yes yeah N terms of the impact, it was a little bit over a penny a share.

Okay, thank you. And let's see, in global mailing, if we take out the impact of the increase R&D and the costs in PSI, would we have seen global mail margins be up on a year-to-year basis?

Yeah. I think -- this is Bruce. What I would mention on the margin is that the primary factor on global mailing is the fix between international and U.S. That international has a lower margin and because it grew so much faster primarily due to currency, that that's affecting the margin. If you look at global mailing by the U.S. and by international it was relatively a constant margin between the two.

Okay, fine. And also I'm glad that you folks mentioned earlier the seasonality in PSI because it looks like PSI revenues were down a couple of million on a quarter-to-quarter basis and also does that match what you expected PSI to do in the quarter?

Yes. We were not surprised or disappointed by that.

And one last item here. I saw something on yahoo bankon July 11th

What are you referring to?

I'm referring to a statement that was made that the company did not fear a takeover offer including one by rival Pitney Bowes.

This is something that came out of Neo post in Paris.

I mean, if they're saying that they don't expect us to -- to make an offer of -- a tender offer, they're correct. I think given the --given the antitrust environment in the United States, I don't think that would be a good use of our resources to attempt to do something we could probably not get clearance to do.

Something that you would explore?

No. I have never -- no, we have not explored it and it wouldn't be a -- as I said, it wouldn't be a good use of our resources to pursue it because it wouldn't be any good -- we don't believe we would get permission from the U.S.Justice Department accept if Neo post were in dire financial straights which obviously they're not.

Okay, thanks very much.

And our next question comes from the line of Shannon Cross with Cross Research. Your line is open.

Hi, guys, good afternoon.

Good afternoon.

Okay, can you give us an idea in terms of the PBMS revenue mix the new business -- I use sort of the new verticals versus the older financial and legal?

It's clearly quarter by quarter for the last, oh, I'm going to say six to eight quarters. We have goten more diversification away from our financial serves and transaction legal and that trend continued in the second quarter. But I don't have specific numbers and we probably wouldn't break them out if we did have them.

Okay.

But we are not diversifying. There is no question about that.

And, no. Having been impacted by the downsizing of the financial firms, I'm glad you're diversifying. In terms of what is in front of the postal commission right now, can you give us some idea on what timing we might expect in terms of, you know, congress actually improving flexibility and rates? I understand it may be a relatively long process.

Yeah, but I think the -- you're absolutely correct on that. I think that let's take each of the three areas. Work sharing, the postal service probably has -- with the rate commission a little more flexibility than is used to date and it has gotten very strong encouragement to use maximum flexibility. I think in terms of pricing flexibility, the only thing that I could say is that the postal service is not likely to increase its rates as we indicated first class rates right now are expected to be stable through 2006 (audiogap).

Ladies and gentlemen, please continue to hold. We will re-establish the line. Please continue to hold. Ladies and gentlemen, we ask that you please continue to hold for the conference to be re-established. I appreciate your patience. Ladies and gentlemen, please continue to hold. We are trying to re-establish the hold site. Please continue to hold. Ladies and gentlemen, please continue to hold. Your host will be joining us momentarily. We have established the hold site once more. Please go ahead, gentlemen.

Are we on again?

Yes, please go ahead.

Okay. I was answering the question about the Presidential Commission. One of the things the postal service has done recently and concluded during the second quarter was exercise its authority to recommend and get approved by the postal rate commission a negotiated service agreement for special rates for capital one and they got this through the postal rate commission in only a few months. So my general answer is that although fundamental postal reform may take a while, it may not get done next year even, I believe that one of the positive impacts of the Presidential Commission report is that the postal service will be able to and willing to use the power that it does have to the maximum and that it has gotten encouragement from the political arena to do that. And we might see more postal negotiated service agreements; we might see the postal service do some product redesign for some of its niche products for business customers; and all of that will help us. We expect that all to be very helpful to us because the meter, the digital meter is a very flexible device in terms of downloading of new rates and enabling new services to be offered. They will start to go through the rate setting process, but instead of it taking ten months, the last three have taken, you know, in the range of three to four months. So we think that is very positive. But the other major changes recommended by the rate -- by the Presidential Commission, we have no doubt that it is going to take a while for those things to get implemented.

Okay. And then just one final question. In terms of the value-added services that are available on your digital meters, you know, especially within the small business products, can you give us an idea of if you have seen any change in take-rates or where -- if that is still coming in at the level of the prior quarters?

Yeah, it's still coming in around 20%, a little bit more and the take-rates in terms of - the take-rates are pretty comparable.

Okay, well, we have ordered our small business postal meter so I'll let you know how it works.

Good.

Thanks, guys. Don't wait for the next call. If there is a easier way, if it's doing a great job, let us know.

Our next question comes from the line of Barry Mendel (ph) with Mendel Money Management. Your line is open.

A couple of questions. In line with the service question digital meter, what percent of the base now is digital versus the old meters and also you feel you have picked up some market share against Neopost recently?

The percent that is digital is 62% which is up from 60% at the end of the first quarter. We believe that there is a little bit of confusion in the reporting of meters because Neopost discontinued its Internet postage product at the end of last year called simply postage. It swapped people into digital or into postage meters and in many instances I believe it made very low-value or no value swaps to get people to use Neopost product. I don't know how to sort that out from the rest of the Neopost base, but we're either stable or increasing as of the end of the second quarter but it's very hard to get an exact calculation because of the swap-out.

Also, given your comments on June it seems June was a better month for you than April and May?

That is generally the case.

So it is more of a seasonal thing than a thought that maybe the economy is getting a little better?

I think in the document messaging technologies area we got a number we got a number of large orders from some customers that had held off for a long time and -- in the month of June, so whether that is just an aberration or whether that is a sign that things are generally picking up is a little early to tell, but certainly we did see it pick up in the last 45 days of the quarter in terms of large orders coming from customers that had previously been slow to order.

Okay. Thanks.

If there are any additional questions, please press "*1" at this time. And we do have a question from the line of Carol Sabbagha from Lehman Brothers. Your line is open.

This is actually Megan Talbott on behalf of Carol. Just a question to clear your guidance. What are your economic expectations for the third quarter built in there?

Yeah, in terms of the effects, we are looking for relatively constant currency from what it is now and so in terms of contribution it's two to three percentage point impact on revenue. And what was the other part of it?

Just a general economy, any -- I assume you're just assuming the same -

No change in our economic assumptions.

Okay.

We refer to it as a sluggish economy and expect it to remain sluggish. As a general matter, you know, a small business to medium sized business has not been affected much by the economy. Our enterprise solutions area clearly has been and we don't see any reason that the trends that we described to you in terms of improving operating margins, we don't see any reason to believe that those won't happen. We're cautiously optimistic.

Okay. And are you still looking for organic growth in the mailing segment for the year flat up 1%?

Yes.

Yes.

Okay, great. Thank you.

Again, ladies and gentlemen, if you wish to ask a question, please depress the "*1" at this time. And there are no further questions, gentlemen. Please continue.

If there are no further questions, I will close the call and thank you all for participating and tell you that we look forward to speaking with you in October. Thank you all very much for your questions.

Ladies and gentlemen, this conference will be available for replay after 10:15 p.m. today until Thursday, July 31st, at midnight. You may access the AT&T executive playback service at any time by dialing 1(320)365-3844 and entering the access code 690525. Again that number is 1(320)365-3844 with access code 690525. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.