必能寶 (PBI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Pitney Bowes fourth quarter 2003 and year end earnings release. Now at this point all of your phone lines are muted or in a listen-only mode. However, later during the release there will be opportunities for questions and those instructions will be given at that time. Just as a note if you should require any assistance during the call you may reach an AT&T operator by pressing star then zero on your phone keypad. As a reminder today's conference is being recorded for replay purposes and that information will be announced at the conclusion of our release. Well, with that being said let's get right to today's agenda. Here with our opening remarks is Pitney Bowes Executive Director of Investor Relations Mr. Charles McBride. Please, go ahead, sir.

Good afternoon. Let me remind 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 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 in 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 form 10-K annual report filed with the Securities and Exchange Commission. Additionally, if there are any non-GAAP measures discussed during this call, there will be a reconciliation of these measures to GAAP measures located on our website at www.InvestorRelations.PitneyBowes.com. Now, our Chairman and Chief Executive Officer, Mike Critelli, will review with you the results for the quarter and the year. Mike.

Good afternoon, 2003 was a year in which we continued our transformation for sustainable long-term growth and enhanced shareholder and customer value. We are very pleased with the strength of our business model, characterized by significant recurring revenue and strong free cash flow and our ability to deliver results during the fourth quarter and full year that were in line with guidance. Adjusted diluted EPS of 66 cents for the quarter and $2.41 for the full year excluding special items. During the year we generated $851million in cash from operations and repurchased 5.4 million shares for $200 million leaving $100 million of authorization. Our results in 2003 were driven by our focus on three strategic priorities: enhancing the core businesses, streamlining infrastructure, and executing on growth strategies.

With respect to enhancing the core, there were two aspects of our U.S. mailing operations that were especially solid throughout the year: our small business solutions and our new digital mailing systems. Our base of small business solutions customers reached a record of 825,000 last year, as both acquisition and retention rates continued to climb. Through the end of January of this year, we have now seen 31 consecutive months of growth in this segment in the US. Customer acceptance of our new network digital mailing systems remained strong throughout 2003 and by year-end, the new digital systems made up more than two-thirds of our U.S. meter base; and we continue to progress well ahead of the U.S. postal service transition schedule. Both management services and DMT experienced sequential improvements in their operating profit margins, particularly in the second half of the year. DMT had a very strong fourth quarter, indicating a gradual increase in capital spending as companies are preparing for an improving economy.

With respect to streamlining the infrastructure, in January of 2003 we announced a two-year restructuring program to implement our growth plan. That restructuring activity included initiatives, such as investments and transforming our information technology infrastructure and human resources capability, for example, as well as our continued shift from direct manufacturing to the assembly of our products. Thus far, there have been $75 million in after tax charges related to this program. As far as executing the growth strategies, as you'll recall, last March, we focused on strategies for growing our 2% share of the $250 billion global mail and document management opportunities that we identified. We continue to implement our strategy with the acquisition of DDD Company, which expanded our presence in document management in the important government vertical. Our presort services provided even greater value for customers and shareholders this year as we expanded our network from 12 sites at the acquisition of PSI to 23 sites throughout the U.S. currently.

In December, we unveiled a new more customer-centric organization structure designed to enable us to more effectively pursue our growth opportunities and more seamlessly deliver a higher-value customer experience. Throughout the year, we continued to transition our capital services business and strategically focus our resources for profitable growth. Since January, 2003, we have liquidated approximately 337 million in non-core lease assets from the portfolio, including 31 million during the fourth quarter. For the full year 2003, diluted earnings per share included 16 cents per share from non-core capital services compared to 24 cents per share for the year 2002. And I might note that exclusive of non-core capital services our annual earnings per share increased 5.5% in 2003. When we reported results one year ago, I told you that I thought that all of the actions emanating from our strategic imperatives should help us build the momentum to be bigger, stronger, and better today and tomorrow. I believe that more strongly than ever. We have made good progress in 2003 , but we are determined to go even further in 2004.

In closing let's turn to our 2004 outlook. We expect revenue growth in the range of 3-5% for the first quarter and the full year. During the year, we will continue our restructuring initiatives as we did in 2003. However, we're still finalizing our plans for the first quarter and the remainder of the year and therefore, the earnings guidance that we provide will exclude the impact of these charges and any new accounting standards. Adjusted diluted earnings per share are expected to be in the range of 55-57 cents for the first quarter and in the range of $2.44 to $2.51 for the full year 2004. Exclusive of non-core capital services, we expect full-year adjusted earnings per share in the range of $2.36 to $2.43, which would be an increase of between 5-8% EPS versus the prior year on a comparable basis. We will host our analyst day on March 9, in New York, where we look forward to you joining us in person or via the web. Thank you and now we'll be happy to answer your questions.

Very good, sir and thank you. Well ladies and gentlemen, as you just heard then if you do have any questions or comments we invite you to queue up at this point. Simply press star then one on your phone keypad. Now, you will hear a tone indicating that you have been placed in queue and just as a note to remove yourself from the queue just by pressing the pound key. So once again to ask a question, please press star one on our touch-tone phone and one moment for our first question. And representing Lehman Brothers, first participant in queue is Carol Sabbagha. Please go ahead.

Thanks very much. Just a couple of questions. First on the guidance for this year, I guess, for '04, what is embedded in that in terms of negative headwinds from capital services and from pension and health care and what would it take for you to get to the top end of the range versus the low-end of the range?

The capital services headwind is about 8 cents, which I might note will be significantly reduced in 2005. Bruce, what is our headwind for pension and other items?

Sure. Yeah and as Mike said, capital services is 8 cents a share; pension and medical combined would be 6 cents a share. We lose another -- we're losing transition payments from Imagistics, which is 2 cents a share; we are increasing our spending on transformation programs, by about 3 cents a share, I should say expanding it and that's what flows through our income statement. The cash expense will be down but the income statement will be about 3 cents and then the insurance and other non-controllables are roughly 2 cents. So overall we're overcoming roughly 21 cents of headwinds next year.

Okay.

I'm sorry.

Sorry, Mike, go ahead

Your second question, obviously, the higher up we are on the revenue guidance, that would help us. We have not made any assumptions in terms of we fixed the currency as of the end of the year and that obviously would--it could help or hurt depending on its direction; and we have a certain amount of transformation benefit built into the year; in terms of restructuring, it's about 40 to $50 million in incremental benefits in 2004. So if those numbers were to be on the high -- would be higher, that would help us move up in that range that we gave you.

Okay. And I don't know if I am reading into the last statement that you made about the guidance that you haven't finalized your plans for restructuring. Does that mean that you could increase the restructuring that you laid out last year? Are you considering that?

Carol, the general principle is that we're going to do whatever makes sense; and as Mike said we have already spent $75 million after tax on the program. So we likely will be above what we originally guided; and we will update you at analyst day; but our goal is to seek anywhere we can to have long-term reductions in our cost structure and if that means increasing the restructuring we will do so.

My last question is on PBMS; it seemed--at least relative to our expectations that business was weaker, with, I think, flat organically excluding acquisitions last quarter; and if I'm guessing, I'm guessing it was probably down 1% this quarter. When should we expect that business to start seeing improvements in the top-line? You're starting to see some improvements in DMT because of better economy and a better enterprise, should we start to see that at PBMS soon? Or are you shrinking part of the portfolio, because you had some contracts there that maybe were not as profitable as you would like them to be.

I think there are a couple of comments about PBMS. One, what I think we are finding is that the -- as we have gotten more into document management and particularly, you know, we have got over time more business in the corporate arena that is copy volume dependent and it's sort of paper volume dependent; that is not increasing. In fact, it is still down from prior year; and we're finding and we've looked at some broader industry data that--those kind of volumes tend to be less dependent on GDP growth than they are on white-collar professional employment and managerial employment; and we have all heard about the jobless recovery and it appears that at this point, we're not seeing the business grow with the recovery and the broader economy. We're seeing because of the, I would say poorer or lagging rehiring that it has not yet come back. But even beyond that, what our goal -- we really are looking at PBMS -- with the organization change that we made, we have really decided that we're going to focus on three things. One, is to accelerate our transition to higher-margin technology-based services; and Karen Garrison talked about that last year. We have to be more selective and focused on what we offer and the kind of business we go after. So it's going to mean that we are looking to get higher margins, but not necessarily higher revenues in the short-term. Secondly, we clearly have a focus on verticals. We did the acquisition of DDD and the government vertical; and Matt Kisner will talk about other verticals in his remarks in March. And third, I guess it goes with the first comment, we will be focused on a more rationalized offering of products and services. So our goal this year is to focus on profitability and to build a business model where we are not as dependent on what happens with white-collar employment or what happens with , you know, the sectors that we have been dependent on in the past. I think directionally, we're moving that way. We took a lot of cost out in 2003. We will get the full year benefit of that in 2004; but we need to do things that make this business model less cyclical than it has been in the last few years; and that is going to be our focus; and Matt is going to go into more detail about that in March.

Thank you very much.

And next we go to the line of Merrill Lynch's, Jay Vleeschhouwer. Please go ahead.

Thanks. Good afternoon. A few questions about the basics of your revenue mix. First what was the percentage of your revenue that was recurring in 2003 and how did that compare to '02? Secondly, perhaps if you can measure this at all, how would you gauge the value of the mail that slowed through your entire installed base, as perhaps some indicator of overall economic activity, did you see a significant pickup in the value or the mix of the mail by various types that flowed through your base?

I'm going to let Bruce handle the first question and I will talk about the second, and that had to do with the percentage of recurring revenue.

Recurring revenue. 77% and that is a slight increase and in generally, we're finding that the weakest area this year was product sales. So that is why the revenue is more recurring.

I am a little confused by your question, Jay, about the value of mail. I can talk to you about the mail that we processed through PSI, which now is on an annualized basis between 6-7 billion pieces; and we don't have the exact count because January, which is running very, very well, would be over 7. But January typically is a strong month in terms of mail volumes. But that mail is predominantly first class mail and we're seeing some segments grow and other segments that haven't yet come back. But we're getting the good overall growth in the amount of mail that we're processing through PSI. As far as our volume of mail that goes through our postage meters, we don't count pieces through a lot of our machines but the amount of postage is roughly flat at this point. And as far as the mix and the broader mail stream that we work through, let's say, our document messaging technologies equipment, first class mail is declining slightly and marketing mail is increasing. And we're selling more to service bureaus; and we're finding that the broader trend is -- and the economy or in the industry is consistent with our experience -- just continued, slight decline on first-class transactional activity and a bounce-back in standard or marketing mail. Does that answer your question?

Yes, thank you. Moving on then -- could you be more precise, perhaps about the contributions to revenue last year from your 2001-2002 acquisitions or what you expect for 2004 in terms of real growth from the acquisitions over '03.

I don't know that we total up. We have done a lot of acquisitions, large and small; but of the ones that are, sort of, non-organic, we don't keep a running total.

I could give you a little bit feel, Jay. On PSI, which would have been the most recent large acquisition,when we acquired the company it had revenue of $80 million; and as of this last quarter, the run rate is $120 million; so they have already experienced significant growth; and we expect that to continue to be a growth engine for us. DDD, which we just acquired, we do not have any projections for it. It's being merged into our overall governmental business. But, I think, as Mike said in the opening remarks this is one of the verticals that we'll be focusing on. So, I think, you can expect that that will also be a growth area for us. Otherwise, acquisitions have helped us; but again, more they have stimulated organic growth; and we are at this point having them fully merged into the overall Pitney Bowes array of services and products.

The only acquisition or business that we could -- even though it got integrated last year fully, last summer -- I think it's fair to say that our Secap acquisition has produced significant profit growth and some good organic revenue growth. The DSI and Bell & Howell acquisitions of 2001 have been so fully merged and co-mingled with the businesses of which they are a part, that it's very difficult to really assess how they're doing. Although we believe that both have contributed well to our organic growth

Okay. I think perhaps lastly, can you talk about the utilization of your various financial services, Postal Privilege, Purchase Power and so forth in terms of how wide spread those services are adopted within the customer base? And if there are any particular trends to comment upon in terms of average assets or income per customer that you are seeing in the offering of those services?

We do have, a sort of, an internal P&L which we don't break out; but we had just double digit growth in all the key financial metrics for what we call our global payment solutions line of business. And both in terms of revenue, activations and EBIT and in terms of the amount of monies in the reserve account. So we had a very, very good year across the board in that business. And we are optimistic about this year that we'll again achieve double-digit growth because of the expansion of that business into permit mail and into some other payment areas.

Thank you.

And did you have any follow-ups, Mr. Vleeschhouwer?

Not at the moment; thank you.

You are very welcome, sir. Thank you. Next in queue is Craig Ellis, with Smith Barney. Please go ahead.

Thanks and good afternoon, Michael, good afternoon, Bruce.

Hi.

Just starting off, I would like to get a little more insight on some of the headwinds that you are facing in 2005 that Carol started to dig down on. Looking out to the end of, excuse me, for fiscal '04. As I look to the end of '04, are we going to have the transformation expenses largely behind us by that point? And are those going to be down to where they are a much smaller headwind for you? And as I look at the incremental headwind as you exit capital services, it seems that at the margin that should be a lot less in 2005. Can you just recap how we should look at the business as it exits '04?

Sure. Just to go down the headwinds. Capital services, as Mike said, you will definitely see that headwind decrease substantially, to be just a fraction on a year-over-year basis, what it is. The Imagistics headwind essentially goes away. Pension and medical, we believe should be lower, presuming that we can get good earnings on the pension fund next year.

Yes, and just by the way on the pension, I think the one area that we did take a bit of a hit on this year versus last year is the discount rate. And if interest rates flatten out, we can assume that that will not be a headwind in 2005.

Yeah, just to explain what Mike was saying there that the discount rate had been 6 3/4 and we changed it to 6. And then transformation expense, which you alluded to, the peak spending was 2003, but in terms of the income statement, the peak year will be 2004. So we'll have an increase from '03 to '04 on the income statement. '05 should be back actually a lower expense running through our income statement, closer to what was in '03. So just to put it in dollar terms, it's expense item more like 55 million to 65 back down to 55, pretax.

Okay. So when I look at the relationship between revenue growth and earnings growth, in '03 and '04, it looks like revenues are going to grow faster than earnings, based on the guidance that you have given. It would seem like in '05, given that a number of these factors are going to diminish significantly, that you should be back to growing earnings at a more rapid clip than revenues. Is that unreasonable?

That is a reasonable assumption.

Okay. Thanks, Michael. And then let me just check on one last item. Looking at broader enterprise spending patterns, as you are out there meeting with customers, are you seeing that the unfolding economic recovery is starting to get people more willing to spend on mail equipment or what are you actually seeing in terms of customer spending as you look out over the full year?

I think that clearly as evidenced by the performance of DMT in the fourth quarter and really the second half of 2003, some capital spending projects that had been put on hold for almost two years are clearly starting to be unblocked. Whether people spend on mailing equipment, the small businesses never really slacked up. The larger businesses, you know, are--they're spending a little bit more, but I will say that we're not seeing the level of loosening up of the purse strings in the mail room that we would see in the production mail center, where there was, I think, a pent up demand; because we never really saw the big dip in the what we call our global mailing products that we saw -- we saw a severe dip in our DMT business after 9-11 and that clearly people are more confident and willing to look at upgrading their systems. Now some of that is because we have launched technologies that enable them to--like with our advanced productivity system where they can take one of our APS's and replace anywhere from 2-4 of their existing systems and they can take labor out. So we are seeing more willingness to consider that.

Okay Michael, so if I understand you, you're saying that DMT is kind of the early cycle play for you and that the rest of the business follows; and historically, what typically is the lag for the rest of the mail equipment coming out of the cycle?

No, I wouldn't say it's a lag. I would say we never really went into the trough with--except with some areas, such as distribution solutions of the shipping systems and that did have a good fourth quarter. The high-end, what we call the mail creation products had a very good fourth quarter, or I'm sorry second half of the year. So whether those things progress is less economic cycle dependent at this stage than our launching of new products and technologies. The DMT equipment is very much more heavily influenced by, you know, people's economic confidence and that did come back in the second half of last year and we're optimistic that we'll see better performance compared to prior year in the first half of this year as well.

Okay that is very helpful. And then lastly, looking at revenue growth in the two segments versus the overall target, should we expect both to be close to that or do you expect better enterprise solutions revenue growth versus global mail or the other way around?

Enterprise solutions will have the benefit of the DDD acquisition, but if you just went to organic, you would probably see better organic growth in the mailing segment than the enterprise solutions segment next year. That mailing would be at the upper end of the organic range. And to give you an organic range, it would probably be 1-2%, would be our best estimate; so they'd be near the top of the range; and enterprise solutions is more likely to be at the bottom end of the range.

Okay. Thanks, guys.

Thank you Mr. Ellis and here now representing Cross Research a question from Shannon Cross. Please, go ahead.

Hi. Good afternoon guys.

Good afternoon.

Can we get a little bit more into the potential benefits from a more aggressive restructuring program and what you guys--from the standpoint of your earnings expectations within the range, is it--is the potential there to get more of an upside than we're seeing?

When I--I probably shouldn't have used the word, restructuring, as much as transformation, which is a little bit broader than restructuring. We will take out--we do have planned restructuring in the United States. We're just beginning to look at opportunities in Europe and we--and that is where we don't have it completely sized up and we might get some incremental benefit. But it's very difficult at this point to predict how big that could be. When we talk about transformation though, it goes beyond restructuring; we talk about things we might do in the procurement arena for example and other areas where we could realize cost-savings; and we have some stretch targets there which if we get them, will give us a little bit more opportunity.

And Shannon just to clarify one thing that when Mike said that we would have incremental benefits next year of 40-$50 million, that assumes that we will have restructuring above our initial estimate; and right now, we're assuming for that benefit level that we're going at the same pace as this quarter, which is roughly 20 million pretax a quarter; but the question is how much we go above that, if any.

Okay. So the full year 2004 expectations you gave us included a $50 million restructuring expectation.

After tax.

After tax, okay. And I just want to clarify.

Just – Shannon, just to make sure that on the call we have everybody with the same numbers. What I said was that pretax we have assumed the charge would be roughly 80 million; and we'll update you at analyst day with a better estimate. But that's the assumption that correlates with the level of benefits that Mike talked about, but that's, as I say, is just a rough estimate.

Okay. And then going back to some of Carol's discussion, I think, on PBMS, can you -- it sounds like maybe you'll be pairing some of the business there. I assume that is what you are talking about when you talk about Europe,;but are there parts of that business that have been disappointing to you, you know, in some of the acquisitions? Should we expect to see more significant cleanup than you have already been doing in some of the cost cutting?

First of all, it's not it's not a situation where we're going to do more cost cutting. We took out a lot of G&A expense last year. It's really the kind of business that we look to get going forward and the way that business is structured; we want to get away from focusing as heavily on labor--contracts with a heavy labor content just to get to revenue targets; and we're going to be more selective in those and really focus more on the higher margin contracts that have more technology content to them. So it's not that -- the acquisitions that we have done whether it be DSI or DDD have been very successful or at least -- I'm sorry DSI has been very successful; DDD, we're optimistic that it will be. But there is a lot of what we call traditional PBMS business that has a heavy labor component to it. Cost plus type labor agreements that we're trying to be more selective on the ones we take going forward.

Okay. And then I guess just one follow-up question in terms of use of cash and this gets to like some of your comments on acquisitions and that. You haven't made a major acquisition, and I mean it's not like we expect it all the time, but it's been a little while since we have seen an acquisition. Should we think that if we don't see more substantial acquisitions in the next few months, you may kick in a higher share repurchase program? Because I know it's always been a give and take between cash use for acquisition and cash use for share purchase?

Well, I think, Shannon, the way I would answer is that we have substantially reduced our debt this year. It's down around $400 million. And we made $200 million of share repurchase this year as well. So we have been generating cash and what this does is give us the capability of doing acquisitions. And we'll always make the right tradeoff between the two and we'll always compare the value of acquisitions versus the alternative use of cash, which is buying in shares or reducing debt. And just would tell you we already have plans to continue a share repurchase this year; and we will continuously monitor it based on what we see in the acquisition front.

Okay. Thank you guys.

And thank you, Ms. Cross. Ladies and gentlemen, once again if there are any additional questions or comments simply press star and then one on your touch-tone phone. And we do have Lloyd Ziteman with Bernstein Investments in queue. Please, go ahead.

Good evening, folks.

Good evening.

Let's see I have a few questions here. First of all, Bruce you did a very good job running through all of the headwinds, itemizing all of those for '04, could you do the same thing for us for '03 on a cents per share basis?

I can estimate them. Capital services was the same ,8 cents. Imagistics was zero, essentially from a headwind. Pension and medical, yeah. That is difficult, Lloyd because we made this large contribution to the pension plan. Before we made the contribution, when we did the estimate, then it was as much as 11 cents a share. So that is why -- but that is not really a direct comparison with what we have here. Transformation was a similar 3 cents a share headwind increase year-over-year. And other stuff was probably pretty similar to 1-2 cents.

Okay.

And, in fact, if you recall when we first began the year, we used a headwind of 19 cents. So it's roughly comparable with some different components.

Okay. Now, with PBMS, if you folks are moving to either these more technology-intensive areas and moving away from the high-labor content, does that essentially mean also that you are up against different competitors for these projects?

Yeah. In some instances we are. Clearly when we got, for example, under the government vertical, there are some players there that we have not seen before. No major players, companies that frankly, I have not heard of before; but I think we're seeing a broader and different mix of competitors than we have seen before. And you know, we do obviously see the traditional competitors, Ikon, Archer, Xerox, in many of these deals; but we're also striking into new space, where either we have a unique position or there may be a different competitive dynamic. Sometimes it's the customer deciding to do it themselves. Sometimes it's another competitor that has a particular work-flow specialty; but yes, we do see different competitive players. And what Matt will talk about in March is where we think we have advantage over other competitors, because we're not going to try to go in areas where we don't think we have got a competitive advantage. Now in the mail area we--the secure mail area, I think there is no one that has what we have inside the customer base that we're going at. And that is a high technology component as an example; and I think that is an area we need to focus on more, as an area where in 2004, secure mail and government and in other areas like government, where there is a high focus on security, heavy technology component, good margins and we have a very significant competitive advantage. But we have to refocus ourselves to look at that versus maybe some of the other things that our people have been doing instead of that. But we would like to pick out a handful of areas where we really do have a – where we either have a competitive edge or think we could get one.

I don't want to steal any of Matt's thunder for the meeting in March, but I was wondering if you could then tell us what this means for PBMS in the current year and what kind of performance you expect to see; and are we looking at some let's say restructuring or transformation-type charges in PBMS as a result of this?

Let me just answer the first of your questions, which is the -- we would expect to protect the bottom line, but not be as focused on top line growth. I think that in terms of taking out SG&A, we might do some more, but we pretty well did a fair amount of that in 2003. What we do in terms of improving margin on preexisting contracts, we have to be careful that we can keep up service levels with customers. So what we're really talking about is as we -- as contracts come up for renewal in this calendar year, how can we change the offering to improve the margins even if we are not replacing the revenues dollar for dollar? So it's less an issue of downsizing existing contracts, although we'll take opportunities to improve productivity wherever we and the customer can agree on them than it is the kind of business that we'll propose to the customer on renewal, because a certain amount of our contracts come up for renewal every year; and that is where we have to focus more on value-added services. We are in there already or we're competing for business we don't have, we want to compete on a different plane than maybe what we have done in the past.

Okay. And is this a process that has already begun? And could you tell us how this has worked out thus far?

As I said earlier, we're really, I think, it started, I think, this is consistent with the direction Karen articulated. I think what Matt, what we've decided, or what Matt is clearly pointing toward is accelerating it. I think one of the benefits of having the organization change that we made is to, you know, get a sort of a fresh look at the enterprise solutions area and realizing that we're willing to sacrifice a bit of top-line growth to move more in the direction of higher margin services as we move forward.

And one last thing. I believe, Mike, you mentioned something about permit mail

Yes.

Is it this year?

Well, we already -- we have pilots in place already. And the issue for us is how do we reach the permit mail customer, either directly or through service bureaus to get them to work with our purchase power type solutions. The concept was proofed out in pilots we did in 2003 and now it's just a matter of coming up with the right go to market strategies. But clearly it's a very good opportunity for us. I don't think -- it's not going to take off like a rocket in 2004; but we think it's going to be a nice growth adder for global payments.

All right. So if I were to say that this could have an impact on the bottom line in '05, would that be correct as opposed to '04?

It will have more of an impact in '05 than '04. It's a little bit--I think what it gives us is the confidence that we can continue to get double digit growth and maybe higher double digit growth in '05 than we did do in '04 from the global payments business. But we clearly are at too early a time to project 2005 revenues from the permit segment

Okay. Thanks.

Thank you very much, Mr. Ziteman. Well, we do have five others in queue and next we go to ChrisWhitmore, with Deutsche Banc. Please go ahead.

Thank you. Good afternoon. Couple quick questions on gross margin. Looking at the performance of gross margins in the sales segment, looks like it was down quite a bit sequentially and year-over-year despite stronger sales. Is that a result of a mix shift in the impact from the new acquisition or other things? Could you help us understand that? And then secondly, can you talk a little bit more about why you decided to increase the restructuring -- has something changed; have you noticed something different in your business? Or are you not getting the types of cost saves you had hoped? Can you give us a little more clarity there. Thanks a lot.

You correctly assessed the--there are two factors on cost of sales. One is the greater contribution of DMT, which is of lower margin than our mailing business in sales growth. And secondly, our international contribution currency aided; but nevertheless, that is somewhat lower margin than our U.S. sales were a year-ago. So there had been a contribution made by U.S. sales. So those would be the two factors. On your other question, restructuring. We are getting, we believe, very good benefits from the restructuring; but because of the work we did in the United States, we have seen opportunities, particularly in Europe. We took the work we did in the United States, which we think we’ve validated the restructuring opportunities and we think there are opportunities in Europe that we probably had not fully accounted for when we gave the original number.

Okay. Great coming back around to currency, how much did that help you in the top line and was there any earnings impact, or was that mostly hedged out?

In the top line, I’d say it is roughly 3 percentage points that we got from currency. And we are going to get some benefit from that next year as well; that's included in the 3-5%. In terms of the earnings that you of course get the translation of the earnings, and that was roughly 1.5 cents this quarter. And that was a benefit to us. In terms of the transaction exposure, any fine selling of product, you are right, we generally hedge that out over the short-term. But over the long-term, the weaker dollar is beneficial to us, that we generally have a tradition whereby we get helped by a weaker dollar. And of course many of our competitors are foreign-based.

Great thanks a lot.

Thank you very much, Mr. Whitmore. We go to the line of Julio Quinteros, with Goldman Sachs.

Good evening guys. Just real quickly, in looking at the segment operating margins, the global mailing and enterprise solution sector, could you just give us a little bit of better feel for how specifically margins will trend? I guess more importantly for me is the enterprise solutions business. Are you guys factoring in any uptick in major clients or anything along those lines that could disrupt, sort of, the normal progression of the operating margins at the enterprise solutions level?

I am not sure I understand the direction of your question in terms of uptick and how it would disrupt us?

Yes. Usually when you guys are ramping up new contracts, it tends to disrupt your operating margins.

Those are specific kinds of contracts, which, frankly, we have not-- probably not going -- you were talking about something like the Aetna contract, where we did a major, major automated document factory investment; and it took a while for to us get that. We had one other like that last year and the year before. We do not have any plans to do that kind of contract with that kind of capital intensity. When we talk about technology, we're talking about lower levels of capital intensity, that don't have the big upfront expense of the kind that we did with Aetna and with one of our other customer sites. And by the way, even were we to do those things today because of the experience behind us, the ramp-up period and the amount of time to get to profitability would be a great deal shorter. But that's not what--I am glad you gave me the opportunity to clarify. We are not intending to do that type of technology-based service as we go forward.

Okay. Great. Thank you. And then just in terms of the share authorization, I think it’s currently $100 million – are currently left, if I'm not mistaken; when will the board take another reconsideration of looking at the further share repurchases?

When we get to the point where we are almost in the process of using -- we virtually would have used that up.

Okay. Great thank you.

And thank you very much, sir. Next we go to the line of Harry Mortner with Neuberger Berman. Please go ahead.

Good evening, everybody. I just had a few questions, if you don't mind. First of all, I think you made reference at the start of your commentary about small business growth and having grown 31 consecutive months; and I was wondering if you could just quantify what you are seeing there; and is it accelerating in growth or decelerating or holding steady?

We have a very efficient engine for acquiring and retaining small business customers with our personal post office as the lead offering; and we have added a few hundred thousand customers in the last couple of years there and it's clearly -- we had a very good year in 2003. We keep expanding the number of distribution channels, the efficiency, the cost efficiency, which gives us an ability to access more call lists and mailing lists, and our hope is that we can increase the rate of growth of customer acquisitions. But I don't want to leave you with the impression that this is a big instant revenue pop, because typically the way we do these is we have a pretrial period and we get a rental revenue stream with a very good supplies and payments recurring revenue stream to follow-on. But from the time we acquire a customer, we start to see revenue at about the fourth month. But it's an area where we've gotten better and better at new customer acquisition. And each year we have taken cancellation rates down. I am certain that we'll bottom out at some point in cancellations. But as of yet, we have not yet hit bottom and seen a flattening out of our cancellation rates. They keep going down and are substantially below where they were three years ago.

All right. A couple of other quick ones if you don't mind. I don't know that you mentioned this, but could you segregate for us what quarter domestic growth would have been?

Domestic versus international?

Yeah.

Sure. In terms of revenue, it was up 1% in the U.S. and 16% outside the United States.

Is that for the consolidated corporation?

That is for the consolidated corporation.

Can you break it down by segment as well?

I can give you a mailing.

Okay that would be great.

In mailing, the US was roughly flat, up slightly, 0.3. And outside the U.S. was up 16.

Thank you. And then also because that was all organic; there was no -- (inaudible) apples to apples at this point in time, aren't we?

No, no, no. The international would have a considerable currency; organic was roughly--

--I'm sorry I am just thinking in terms of acquisitions.

Oh, that is correct. No acquisitions relevant to mailing. Acquisition was DDD, which was enterprise.

But just to clarify, when we use the term organic, we try to pull out the currency; so when I said that we would be growing 1-2%, that is excluding the benefits of currency.

Okay. And you made some reference in the release and I think in your comments about accounting standard changes. And I don't know if you are expecting any or not; but maybe you could just elaborate on that, please.

We are not expecting any. But we just want to be clear about what is or is not included. I think anybody today who assumes that there won't be any changes is not -- there is so much activity today that we have to put that qualifier in just to make sure people have an apples to apples comparison.

Okay. And I don't mean to beat a dead horse here but I am a little confused about just the transformational on (INAUDIBLE) commentary. I guess it will be a 3 cent a share headwind, according to Bruce's comments in '04 relative to '03; but Michael, I think you made some comments that maybe there might be some benefit in '04. And I was wondering if you could just sort of help me out with that? I understand there would be benefits. But net-net -- am I thinking right that it is still a 3 cent drag?

There are two different buckets here. There is the spending on enterprise programs, such as what we spend for our Human Resources transformation or our SAP, order to cash implementation program or what we might spend on our service management technology, which we are deploying this year. And those are all what we call enterprise programs. And on a spend rate, we'll have a 3 cent headwind this year, which we should not have next year. The benefits have to do with the other side of the equation, which is the cost that we take out.

Right.

And at least this year, I think that it's still more spend than cost reduction. Next year, the cost reduction should equal to or exceed the spend, unless we do more spending that I am not anticipating at this point.

Can you sort of frame it -- the cost taken out in '04 relative to the cost taken out in '03? If we looked at it from that side of the equation, what is the marginal benefit.

That is the 40-50 million of benefits from the restructuring program. Much of the restructuring is being driven by the transformation spending. There is not 100% overlap but there is considerable overlap; so you have to look at the two things in tandem.

But I think the question is how does that compare to '03?

Right.

It was 40-50 million above. So it goes from 25 million of benefits this year in 2003 to an incremental 40-50. So by definition that makes it 65-75 next year.

Okay. In '04?

Yes.

Great. Thanks a lot.

And thank you very much, Mr. Mortner. We do have two follow-up questions first is Carol Sabbagha, with Lehman. Please go ahead.

Hi. just a quick question on cash flow. What are you forecasting for full year 2004; is it for free cash flow of about 550 to 600 million range?

Yes; we would be comfortable, Carol at the top end of that range, 600.

Okay. And do you have to make any pension contributions this year, or the big contribution you made last year is enough?

We made 50 million contribution in December of 2003. So that is included in our numbers that we did that. And in our projection of the headwind from pension and medical, it assumes we get earnings from that $50 million. For 2004 at this point, we're hopeful that we do not need to make any more contributions. We are more than fully funded on an ABO basis and are only slightly underfunded on a PBO basis.

Thank you very much.

We do have a follow-up from Craig Ellis. Please go ahead, sir.

Michael, I think in the past, the company has talked about organic revenue growth, targeted organic revenue growth in the 4-6% range, and targeted organic earnings per share growth of 8-10%. Is that still a fair way to look at the business on a longer term basis?

I think, Craig, definitely on the earnings, 8-10 would be there. In terms of revenue, the issue is, as Mike alluded, that as we look at, for example, on PBMS, there is maybe some tradeoff between revenue growth and earnings. And I think you heard him say we're going to focus more on earnings.

But the longer term question is clearly as we bring on acquisitions and incorporate them into our organic business, we would expect to get back to that. But what Bruce is saying is it's not a 2004 event and it will depend on the strategies that we outline, whether we get back into that range for organic in 2005. It's a little early to talk about that. But longer term, obviously, that is attainable.

Okay. Thanks guys.

And thank you very much Mr. Ellis. With that, Mr. Critelli, and Mr. Nolop, I'll turn the call back to you. There are no further questions.

No. We look forward to giving greater depth and clarity to our strategy and direction at the analyst day on March 9, and look forward to seeing as many of you as can come and others that can participate via the web; so look forward to talking with you again on March 9. Thank you very much.

And ladies and gentlemen, your host is making today's conference available for digitized replay for one week. It starts at 8:30 p.m. eastern standard time February the 2nd, all the way through 11:59 p.m. February the 9th. Please access AT&T's Executive Replay service by dialing 320-365-3844. At the voice prompt, enter today conference ID of 717148. And that does conclude our earnings release for this quarter. Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service. You may now disconnect.