必能寶 (PBI) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes third 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 speakers for today's conference call, Mr. Michael J. Critelli, Chairman and Chief Executive Officer, Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer, and Mr. Charles F. McBride, Executive Director of Investor Relations. Mr. McBride will now begin the call with the safe harbor overview.

Thank you. Good afternoon. Let me remind that you you can find today's earnings press release in the attached schedules on our website at www.investorrelations.pitneybowes.com. The forward looking statements in this presentation involve risks and uncertainties and subject to change based on various reporting factors including changes in international and national political and 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.

Thank you. Good afternoon. During it is quarter our business model continued to demonstrate its strength by generating crash from operations and delivering revenues and earnings in align with previous guidance. We also continued to make progress against our strategic imperatives with today's acquisition of Triple D Company that diversifies and strengthens our document management portfolio and customer base and investment and infrastructure improvements in organizational transformation.

Revenue for the quarter grew 2% to $1.14 billion and net income was $118.5 million or 50 cents per diluted share. Organic revenue is flat excluding the $28 million after tax restructuring charge that equaled 12 cents per diluted share. Diluted earnings per share were 62 cents. To date we have recorded total of approximately $62 million in after tax charges for this previously announced restructuring program. Our exit of large ticket financing and capital services continued with the disposition of approximately $103 million in noncore assets including the liquidation of $45 million of assets held for sale and the sale of an additional $58 million in leased assets. Also consistent with diminished activity in this area was a lower contribution to diluted earnings per share year over year, 4 cents compared to 6 cents in 2002 and a 5% decline in the capital services earnings before interest and taxes, or EBIT.

Cash from operations was $250 million and free cash flow was $192 million after subtracting $76 million in capital expenditures and excluding from the calculation, $18 million in payments associated with the restructuring program. We used $50 million to purchase 1.3 million shares during the quarter leaving $160 million of authorization for future share repurchases in 2003 and 2004. We also used the cash to reduce our debt by $240 million. With regard to our expectations for the 4th quarter we anticipate year over year revenue growth for the 4th quarter in the range of 2 to 4% since we are still finalizing plans related to the next phase of our restructuring initiative, earnings guidance is provided excluding the impact of potential restructuring charges or the impact of any new accounting standards. On this basis, we expect diluted earnings per share in the range of 65 to 67 cents for the 4th quarter 2003. We are still finalizing our budget for 2004 and have yet to present them to our board. Therefore, we will provide 2004 revenue and earnings guidance when we report year-end 2003 results in February as we did last year.

But we do want to point out that we believe the challenges of 2004 will be similar to 2003. We will still have the head winds of lower earnings from our capital services business as we reported at analyst day at the beginning of the year. And like many other companies, our benefit costs still remain a challenge. We are currently evaluating these and other factors and we will report our expectations in February. Thank you. And now we will be happy to take your questions.

Ladies and gentlemen, at this time if you wish to ask a question please press star then 1 on your touch tone phone. You will hear a tone indicating you have been placed in queue and may remove yourself from the queue by pressing the pound key. If you are using a speaker phone, please pick up your hand set before pressing the numbers. Once again, if you have a question, please press star 1 at this time. One moment please for the first question. Our first question is from the line of Craig Ellis with Smith Barney. Please go ahead.

Thank you and good evening, Michael.

Hi.

Looking at the operating profitability by business segment we have a nice pick up in capital services -- excuse me, enterprise solutions. Can you help us just work through some of the dynamics there with respect to how much benefit you are getting from cost savings and perhaps the absence of business contraction and how that looks going forward? Thanks.

Yes. In management services, as I committed or suggested we would in the last call, we took out significant SG&A expense, structural expense during the quarter. And we also continued to see the same kind of -- the same level of contraction for the rate of contraction and the rate of lost business that we saw toward the end of the second quarter which meant that it didn't get any worse and it is at the rate it was in the early part of 2002. As opposed to the spike that we saw during the last six months of 2002. So we are encouraged by both what we were able to do in taking costs out and also by the, you know, the continuing lower run rate above contraction in lost business. At the same time, obviously we continue to see the new business run rate be lower than we would like because of the fact that large enterprises are still very cautious about major decisions whether they be capital spending or technology-based out sourcing decisions. And I expect to see the same trend in the fourth quarter as we saw in the third.

Thanks, Michael. And switching gears a little bit to DMT, there was a pick up in revenues quarter to quarter. What's underneath that? Are people looking out and seeing a little better environment next year and starting to acquire new equipment?

That's a hard one to answer. On the positive side we have had strong written business since probably the middle of the second quarter, and we have seen that in the third quarter as well, and we have a very good pipeline. What we are also seeing is where we are getting that business is in the more complex -- what we call automated document factory installations with our new advanced productivity system technology that is very well received by customers. Our flow master system which is our second platform and these installations tend to take more time and to have more complex acceptance procedures which means that we do not book revenue as quickly as we do with the -- you know, the lower value systems that we sell to another part of our DMT customer base. So we are encouraged by what we anticipate will be the revenue trends moving forward, but clearly -- you know we didn't realize the receive new growth as much as we expect to get it in the third quarter. We'll get more in the 4th quarter. 4th quarter is always sequentially strong than the third, but we expect to see a fairly sizable gap between the third and fourth quarter.

Okay. Thank you. And lastly, with respect to the 4th quarter guidance on the bottom line, what have you reflected for the Triple D acquisition?

Very little.

Okay. And I know it's early, but how could we look at that on an accretive a potentially diluted bases over the next year.

It should be mildly accretive. We did close today and had due diligence. But we will obviously have a better assessment after we have had a few months of it where we own it.

Thank you, Michael.

Sure.

And our next question from the line of Carol Sabbagha with Lehman Brother. Please go ahead.

Hi, thanks. Just a couple quick questions. What are you seeing broadly speaking in the general economy? You talked earlier a couple quarters ago about maybe some strength among the small customer base. Has that continued? And talk a little about the international markets by region since they were, from our perspective, a bit of a disappointment on the top line.

Sure. Okay. As far as the economy and North America and really most specifically the United States because that's about 90% of our North American business, you know, the small business part of the customer base continued to be strong. We grew both our meter population and market share this quarter and predominantly because of strength and new customer acquisition in the small business arena, our portfolio, which is a broad portfolio in leases and rentals was very strong. We didn't see any up-tick in write offs. So we felt very good about that. And our low end products performed well. When you get to what we call our systems products in global mailing and our DMT products as well as our management services business which is more reflective of enterprise business we see cautiousness on the part of customers. The DMT business and the part of our business where we place some of our complex shipping systems performed well on the written business side in the quarter which tells us that, you know, where you can demonstrate significant value and technology and where there has been something on the table for a long time. Customers are loosening up a little bit. But we are not seeing any kind of up surge in either capital spending, nor are we seeing a speeding up of the rate at which customers make big ticket decisions. I should note, by the way, that in our -- in our shipping systems business we were very pleased in particular about very favorable customer acceptance of the deliverability product. It does president produce a lot of revenue because it is a rentable model but we did get good acceptance. The second question had to do with international. Good performance in local currency in Canada, comparable maybe even a little better than the United States. In Europe, strong performance in France in local currency. Acceptable, but not exceptionally strong in northern Europe and the U.K.. But not -- we are not seeing very good performance in Germany or the other countries adjacent to it. And, you know, we did not see any signs of recovery. We continued to struggle in Germany. And in Japan we struggled as well as other parts of Asia. And Latin America's insignificant. It performed pretty much the way it did previously.

And back to the U.S., with the meter migration going on, have you noticed that customers whose leases are running up are upgrading to the digital meters, or do you find a certain percentage that will just extend the existing leases?

We have had a relative -- I think -- it is sort of interesting. We introduced in the midst of the economic downturn in early 2000 -- actually, we did it even before that. A program called customer privilege, and a certain percentage of our customers immediately went to that. I think that accounted for earnings missed three years ago in this quarter. And we have seen a fairly level acceptance of customer privilege since then. In other words, about the same percentage of customers every quarter go with customer privilege. It will vary by one or 2 percentage points. So after shooting up in the year 2000 and really surprising us as to how rapidly customers went for that versus upgrade, it has not changed materially from our budget or our plans since then.

Thank you.

You're welcome.

Our next question is from the line of Lloyd Boitman. Please go ahead.

Good afternoon, everybody.

Afternoon.

Let's see, could you tell us, Mike, if there is anything -- well, is there anything worth talking about as far as China is concerned? You know, given all the investment activity there on the part of global manufacturers?

You mean in terms of us having the market in China?

Right. In terms of your business. Because we really haven't heard anything about that in awhile.

China is a market where as I may have mentioned on past calls, through a lot of work we did in the 1990s we became the preferred provider for China post. This past year after a several year effort we got the approval from China post to test out commercial customers in Shanghai because we have never been allowed, nor has anybody for that matter, been allowed to sell postage meters and mailing equipment outside the post office. We began the commercial test earlier this year, delayed a couple months by the SARS virus, but we got it under way late spring and early summer. We've gotten good favorable feedback from the customer and we would hope that China post would allow us to enlarge the test in more cities and to more customers, but it isn't material in terms of its revenue impact at this point in time.

And is it meaningful anymore on the cost side?

No. You know, it's a profitable business, but it is a very small business for us today.

Okay. And, let's see, your inventory levels have held up roughly about the same number, around 230 million over the last three quarters, and is everything okay on that side?

Yes. Yeah, keep in mind of course they are a little bit higher because of currency. Of course, the currency impact was not as great this quarter as it was the second quarter. We continue to see some good progress in inventory reductions and management on our mailing side on a same inventory basis. In our document messaging technologies group, that order backlog that I talked about that is very strong is also increasing our work in process inventory which is on the one hand, it is not a good thing because we would like to get the orders booked and get the revenue and get the equipment out of inventory. But on the other hand, it is a good sign because it indicates we have a strong backlog. So, the decline on the mailing side has been almost completely offset by the increase in the DMT side.

And last one, could you tell us the impact of foreign exchange on profits in the quarter?

Bruce, would you like to --

yeah, Lloyd, it is roughly 1 cent a share would be the impact. It was about a 1% impact on our operating profit and about 1 cent per share.

Thanks very much.

And our next question will be from the line of Shannon Krause with Cross Research. Please go ahead.

Hi, Good afternoon, guys.

Good afternoon.

Can you give us an update as far as your acquisition strategy, and what the contributions were from psi in the quarter and how you are seeing that business grow and expand and also if you could just give us an idea of any changes in the way we should -- you talked a little about this I think with Carol. Any changes in the way we should think about how the value added services are being taken up with your digital meter sales, anything that might drive that bundled packaging, anything we should think about going forward?

Let me answer the second question first. The acceptance rate of value added services has been about where we projected it, in the neighborhood of 20%. And we are in that neighborhood this quarter as well. So no change from earlier quarters in terms of acceptance rate on value added services. As far as the PSI acquisition, of course, this is the first calendar quarter, the one just passed, where a part of the revenues are inorganic because it closed the way we look at it it closed on August 1st of 2002 so it was 2/3 of PSI was in the prior year comparison which is, by the way, why the revenue growth--- one of the factors why revenue growth was not as good in the third quarter as it was in the second quarter. PSI had only a small impact in terms of the nonorganic part of its growth. This quarter compared to the second quarter and previous quarters. If continues to grow. We expect to be in a 20th city from 12, at the time we started, we expect to start in city number 20 within the next 45 days. We continue to see strong performance in terms of overall EBIT profit. You know, our operating profit from PSI. And we are piloting some expansion into standard mail because psi who has historically done first class mail. We are looking at expansion opportunities through PBMS and global mailing. And we obviously are continuing to look at other cities into which we can expand either through a buyer or build strategy. We are very please wed PSI We are also, as I said, you know, this is my first earnings call since the presidential commission report. We were particularly pleased that the presidential commission strongly endorsed work sharing and that it strongly endorsed more pricing flexibility for the postal service such as the negotiated service agreement it did with Capital One. That has to help us with this mailing services network. We are very pleased by that performance.

How long do you think it will take for these meaningful -- I don't know how to say, but the meaningful changes the post office fall on the presidential commission? Is this a long process over the next 5 to 10 years? Is this something you think they are embracing sort of immediately and there will be a kick in maybe next year? How should we think about it because it did seem like directionally, the decisions made were beneficial to you.

Yeah, the postal service issued a transformation plan in April of 2002. The mailing industry task force which I co-chair contributed heavily to that plan and postal service divided up the transition process or the transformation process into three parts. Things that it could do without legislative or regulatory approval, things that would require it to work with the postal rate commission, and things that will require legislative reform. The postal service on the things that it can do by itself is moving, I think, at a very rapid speed for an organization of its size. It has also made good progress with the rate commission. I think the last couple rate cases have been expedited and instead of being 10 month cases have been three to four months such as the most recent one involving the negotiated service agreement with Capital One that required rate commission approval. I think legislative reform is clearly going to take longer and there are two schools of thought. One is that it will not happen at all until 2005 at the earliest because of the intervention of election year politics. And there is another school of thought that would say the stars are aligned given the fact that the postal service also moving for reform on another area of overpayment of its payment into the civil service retirement pension system that it might happen sooner as part of a reform of the pension payment. I personally think that it's more likely than not that 2005 would be the year that the next serious effort would be made. But we're going to obviously work with the rest of the industry toward trying to get postal reform sooner.

Okay. Great. Thanks.

You're welcome.

Our next question is from the line of Ben Reitzes with UBS Warburg. Please go ahead.

Good afternoon.

Good afternoon.

One clarification. DDD, so should we assume in your 2 to 4% revenue guidance for the fouth quarter, about $15 million in revenue?

Bruce can answer that one.

Yeah, Ben, the DDD was not in the revenue guidance. So you should view that as really above and beyond that.

Okay.

Yeah, I meant on the EBIT and not revenue. It will contribute 13 to 15 million on the revenue side.

Okay. We add that to the 2% to 4%. All right. And then last year on this call we kind of talked about head winds going into '03 and there was pension and there was medical and it resulted in some earnings revisions. I'm kind of hearing -- correct me if I'm wrong but I am kind of hearing some of the same things. It sounds like pension and medical -- obviously we all know about the head winds. But we got the restructuring. I mean, can Bruce -- can you -- know you don't want to go through your plan, but this is kind of like what happened last year. We know it is going to be a head wind. The numbers came in and I just want to see what we can get now so cause we need to make the estimates now. It sounds to me like these are still head winds. I guess are they incrementally a little more or less than you thought going from the earlier year looking into next? And can you just recap what you itemized at the analyst day, you know, the how many cents reduction we will have in earnings from cap services? Is it still looking the same and then are we going to have the same head winds from pension and medical that you itemized, or are they a little more? And is the cost savings enough to offset this? Thanks.

Ben, let me -- first, on the triple-d, I want to add one more thing. We do not need to be -- have the revenue to be in the 2-4% range. But you should assume it is roughly 12 million. It is where you come out in the range may be affected by the 12 million we assumed for Triple-D.

Thanks.

Secondly, on the earnings, just want to remind you at analyst day we said capital services head wind would be roughly 8 cents per share next year compared to this year. And at this point we have no reason to change.

So that's 8 cents less in EPS contribution year over year?

That's correct. In the area of benefits and other yon recurring cost changes, we are not ready to answer that question yet. We go through a process of reviewing those assumptions and as Mike said in the call, we will be reviewing those with the board of directors and doing more analysis and providing guidance at the earnings call in February of next year.

Okay, but did I detect right that these costs are, you know, a head wind that could impact the earnings growth next year? Maybe beyond current expectations or is that not the right way to hear it?

To be honest I don't know what the current expectations might be. We just want to alert people that on analyst day we said benefit costs were a head wind. Certainly there is nothing to change that guidance we gave analyst day. So we are simply reminding people that there continues to be an environment where cost increases are continuing, and because we have a recurring revenue base, even if the economy approves, it takes awhile for us to get the full benefit of the improved economy. So it is hard to pass through the cost increases in the form of operating profit.

I want to react to another comment you made. We have had some good success this year in taking costs out from the restructuring. On the other hand we also have indicated and I think we covered this on analyst day, that we are continuing to invest in transformation and enterprise programs. And the cross over point when the -- we will start to see significantly greater benefit from restructuring, versus the cost of enterprise programs, many of which are transformation related will be the year after next. You know, I just want to make that clear that we are still doing heavy investment in the enterprise software area for our systems and processes next year as well as we have done this year.

I mean, so is there anything in the cost savings that is better than expected to offset that higher cost for next year?

You know, if we had anything that would be better, we have to balance that against whether we accelerate some of the transformations. It is a little too early for us to answer that question. We will give you a full assessment of that in February.

Any chance of another cost savings plan really revving it up? We have seen other players doing that because environment is tough. So, in order to allow you to keep street numbers or something for next year while -- you know, while, you know, that's something you might not want to announce here, is that something that is being considered?

I wouldn't -- I wouldn't comment on something like that at this point.

Okay. Thanks, guys.

And ladies and gentlemen, if you do have additional questions or comments, you may press star 1 at this time. Our next question from the line of Julio Quinnteras from Goldman Sachs. Go ahead.

Following up on the previous question, maybe I can ask it differently. Can you share with us your current rate of return and discount rate assumptions and just some thoughts about where those are and how you see those trendings going forward?

Are you talking about the pension?

Yes.

Okay. Bruce, do you want to take this?

Yeah, rate of return is 8 1/2% and the good news is that because the markets have been strong this year, the year to date, we are above that. We feel no pressure to lower that return assumption. The discount rate that is used is currently 6.75. That's a function of interest rates. We are monitoring that. There is a possibility that we will have to lower that discount rate, but that's the kind of thing that you don't -- again set to the end of the year. And the salary assumption is 4.75 and we have not had a review of that as of yet and it is just something we will do during again the last couple months of the year.

Okay. Great. And then in terms of, you know, some of the cost saving initiatives, I wanted to get a sense from you especially on the SG&A cost structure side, is there any possibility that you guys could leverage some of the offshore capabilities that are out there, both from a manufacturing perspective and also from your own internal systems and processes, are you looking at any of that and could that begin to be a part of your current enterprise initiatives?

We have already communicated -- there are several areas -- the answer to your question is yes. The -- as far as our, you know, in areas such as I.T. and business process out sourcing, we are clearly looking at what I would call a blended model where we do some work offshore and some work on shore. We have certainly looked at opportunities in the call center area and they are doing experimentation there. And we are doing an overview of our manufacturing strategy. We have been on a long-term plan to do a product sourcing strategy that would involve using much more partnerships as opposed to doing the work ourselves. We will effectively be out of component manufacturing here in Stanford, Connecticut over the next several months. And we have for several years used specific offshore suppliers for components and will continue to review where there are other opportunities for components and sub assemblies, both on shore and offshore. But we have not made any specific decisions as to locating, you know, plants in one country or another at this point in time.

And then in terms of your manufacturing facilities, you are talking about China, correct, for most of the partnerships you guys are using.

Actually for the ink jet printing the market leader for that in terms of technology we would say the -- you know, the domestic producer would be an HP which would be a supplier to us for our French company, Sacap. But we worked with both Cannon and Brother.

Okay.

And there are components that we source from offshore, but obviously weary viewing. Since we are phasing out of component manufacturing here and phasing down in terms of sub-assemblies we produce in house we are looking at on shore and offshore alternatives.

Finally, on the enterprise services sidereal quickly on the operating margin progression, the up-tick was nice in the quarter. What should we expect going forward? Is this something that the up-tick will continue or the momentum or will it flatten out at current levels?

Let me give you two different answers for document messaging technologies, they generally have a strong 4th quarter. So sequentially, the 4th quarter would tend to have higher operating margins than the previous three. We believe that given the actions they are taking, although, the first quarter might not be as high as the 4th quarter from a comparison to prior year. We feel pretty good about that at this point. Management services should see a little improvement, but not as big of a spike as we would expect to see for management services. But it would tend to be steadier over time than DMT which, as I said, tends to have the strongest margin performance in the 4th quarter.

I'm sorry. If I can just get in one last question, can you update us again on the share buy back, the current outstanding you have to go on the current buy back?

Bruce can tell you about that.

$160 million. We bought in 50 million during the quarter.

Okay. Great.

And our next question we will take a follow-up question from the line of Lloyd Boitman. Please go ahead.

Hi, folks. In PBMS, was there any change in the attrition in terms of the specific industries affected?

Not really, and it, as I said, it stabilized at a much lower number than it had been in the third and 4th quarter of last year and we were pleased by that. Whether it is going to go down further or go up we don't know, but we are pleased that it seems to have stabilized over the last couple quarters.

Okay. Thank you.

Mr. Boitman, does that conclude your questions?

Yes, I am finished.

Thanks. Gentlemen we have no further questions at this time. I will turn it back to you.

I want to thank you all for participating and we will be back to you in early February with the 4th quarter results and our best estimates as to outlook for 2004. Thank you all very much.

And ladies and gentlemen, this conference call will be made available for replay starting at 8:30 p.m. eastern time today. The replay will run until the date of October 31st 2003 at midnight eastern time. You may access the AT&T teleconference replay system by dialing 320-365-3844. The access code is 700432. That number once again is 320-365-3844, and the access code is 700432. Well, that does conclude our conference for today. I would like to thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.