必能寶 (PBI) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Pitney Bowes Third Quarter 2004 Earnings Conference Call. Your lines have been placed on 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 like to now 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, Vice President, Investor Relations. Mr. McBride will now begin the call with the Safe Harbor overview. Please go ahead sir.

Thank you. Good afternoon. Let me remind you that you can find today’s earnings press release and the attached schedules on our website at www.pitneybowes.com/InvestorRelations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based on various important factors including changes in international or national political or economic conditions, timely development and acceptance of new products timing of potential acquisitions, mergers or restructurings, gaining product approval, successful entry into new markets, changes in interest rates and changes in post regulations as more fully outlined in the company's Form 10-K annual report filed with the Securities and Exchange Commission. Additionally if there any non-GAAP measures discussed during this call, there will be a reconciliation of those measures to GAAP measures located on our website, and again, that is www.pitneybowes.com/InvestorRelations. Now our Chairman and Chief Executive Officer, Mike Critelli will review with you the quarter with you. Mike?

Thanks very much, Charlie, and good afternoon. Our performance for the quarter was in line with guidance as we continued to leverage our near term opportunities while positioning ourselves for sustained growth.

During the quarter revenue grew 7% to 1.22 billion and net income was 136.5 million or 58 cents per diluted share, representing a 16% year-over-year increase. Excluding a $10 million after tax charge as part of our previously announced restructuring program, net income was 146.5 million or 63 cents per diluted share. Cash from operations was 214 million and free cash flow was 149 million after subtracting $79 million in capital expenditures and excluding $15 million in payments associated with our restructuring initiatives. In addition, we received $16 million in cash from the sale of non-core Capital Services assets, but that sale or those sales did not have any material effect on revenue or earnings. We primarily used our cash during the quarter to pay dividends, repurchase approximately 936,000 shares of our stock for $40 million and paid for the acquisition of Group 1 Software.

Our quarterly results reflect the overall changing mix of our product line and the steady progress of our long-term growth strategies. In the past, our core business performance was led by sales and upgrades of mail finishing systems, particularly to medium and large businesses. Today, and this is the key message I want to leave with you, we provide a broader array of customer offerings and have a more diversified revenue base. We now have more solutions because we enhanced our existing businesses and entered new businesses as part of our plan to grow by meeting our customers’ evolving needs.

We also have rebuilt virtually all of our product lines in mail finishing, mail creation, production mail and distribution solution ,including delivering the industry's most extensive line of digital systems for mailers of all sizes. We leveraged these new products in markets outside the United States, added more software solutions and entered and expanded our participation in the multi-billion dollar mail work-sharing or pre-sort market. Our strategic acquisition activity of over $10 billion in the last four years has expanded our global distribution capability and customer base, added software capability, product and talent, expanded our presence in key vertical markets such as the government sector and added international mail and flats to our growing mail services capability. All in all, as we’ve made progress in our growth strategies we’ve moved from a more singular core business performance driver, mail finishing systems, to a more diversified revenue stream driven by small business solutions, supplies, International, mail services, software and payment solutions.

Our success in both growth and transformation initiatives supports our confidence that similar to 2004, we can continue in 2005 to achieve our target earnings per share growth rate of 8 to 10% excluding the headwinds associated with non-core capital services and retiree benefit obligations. In 2005, our non-core capital services business will have lower earnings of approximately two to four cents per share, which is higher than we anticipated previously as a headwind, due to additional asset sales this year that have brought income forward and have reduced our future income producing asset base.

It is important to note that the 2005 headwind for capital services is less than the seven-cent per share non-core capital services headwind expected this year. Our estimate of the 2005 non-core capital services headwind is based on maintaining our current strategy of allowing the non-core financing portfolio to liquidate over time. But we do continue to explore other options for this business, however, as we seek to maximize shareholder value.

The other headwind in 2005 will come from rising costs associated with pension, and retiree medical care, that we estimate to be in the range of six to eight cents. This headwind is due to the stock market losses in previous years in our anticipation that given market conditions year-to-date we would expect to earn less than the 8.5% return assumption in the pension account calculation. This headwind has also led to the potential decline in the interest rate used to compute the present value of our pension and retiree medical liabilities. Although short term interest rates are rising, long term rates are actually coming down and it is the 10 year rate that is used to compute our pension and retiree medical obligations. So these factors result in an expectation for higher pension and retiree medical expenses than we previously projected.

We will provide full year 2005 guidance in February when we report our fourth quarter and full year results after we finalize our budget, finish our evaluation of these headwinds and other factors, including our growth opportunities. In terms of the fourth quarter 2004, we anticipate year-over-year revenue growth in the range of 5 to 7% and expect diluted earnings per share to be in the range of 66 to 68 cents, excluding the impact of restructuring initiatives during the quarter that are still being finalized.

Thank you. And now we'll be happy to take your questions.

Ladies and gentlemen, if you have a question to ask or a comment to make, please depress star followed by one. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by depressing the pound key. If you have a question or comment, please depress star followed by one. Your first question is from the line of Shannon Cross. Please go ahead.

Good afternoon.

Good afternoon.

I want to follow up, Bruce, a question on some of the headwinds you were talking about and how to think about '05, I’m trying to figure out if you're trying to take down our expectations for '05 or if this is just new information on headwinds and there may be some tailwinds, as you guys call them, that could offset that. So maybe a little more clarity there.

I think I will let Bruce answer the question, but we, we are sharing the information as we have it. And we feel that given the fact that we are three quarters into this year, we can start to get some visibility into 2005. But I will let Bruce talk to how it relates to expectations.

Sure and Shannon, let me just repeat what Mike said in his opening remarks, because that is really the message, is that we have a target as you know of growing earnings per share of 8 to 10% and we feel comfortable we can do that were it not for these two things that are outside of our control. First is Capital Services and, we are providing you with specifics about that, which is the two to four cents Mike mentioned, and secondly, that the pension and retiree medical are going to be greater and that that is a six to eight cent headwind. Now to be honest, Shannon, I don't know what you and the other analysts had in your models for those two headwinds, but to the extent those were greater than you might have projected then we are trying to signal that you should take those into consideration.

The other thing I would point out, Shannon, is that, in the past, we did have some benefit from interest rates going down or a substantial year-over-year change in foreign exchange and at this point, we don't think those will be the same benefit. In fact in the case of interest rates it might even be a negative, as short term rates go up from where they are now.

But we have reaffirmed that, if you were to exclude the two specific headwinds, we - even though we haven't finalized our budget we are more comfortable with the operating earnings being in the 8 to 10% EPS growth range.

Okay. And maybe following up on that. What are you seeing in terms of the economy? Earlier in the year it was picking up. It slowed down in the summer. You guys have a pretty good handle on what is going on there.

We operate on total, I don't want to say -- we have got our own economic drivers in our business and they really haven't changed from the second quarter. And you know, we continue to see robust performance in the small business and because of our very strong technology capability, our DMT business continues to get strong order flow. What we see for the middle, mail finishing market is that businesses are obviously in a mode where they are doing consolidations and they are taking longer to make decisions and moving to smaller fully featured systems but at the same time we are seeing a greater appetite for our payment solutions. Our mailing services, they continue to mail so we are getting good supplies revenue across the board and our PBMS customers continue to be cautious and very demanding although, our loss business continues to be going down and our shrinkage I think has bottomed out. So, not a lot changed, I would say that’s pretty much the same outlet for us that we would have given you in the last earnings call.

Okay. Just a final question. On postal reform legislation, any ideas, any changes since the last call?

Yes, it is not going to happen this year because the crowding and I think the only change since the last time we spoke and the reason we are confident it won't happen is that the government operations committees, which really have to sponsor postal reform, are now being tasked as well to get the President's plan for the 9/11 Commission recommendations implemented. But we don't expect in any known scenario that there will be a change in either the leadership or the ranking membership in the key House and Senate committees, so we are cautiously optimistic that postal reform could happen in the next Congress. But it will not happen this calendar year unless there is some miracle.

Okay. Thank you.

Your next question is from the line of Jay Vleeschhouwer of Merrill Lynch. Please go ahead.

Thanks, good evening. I would like to ask first about your pre-sort business. Could you give us a little bit more detail in terms of what you are seeing, in terms of total growth for the pre-sort business, particularly in terms of the pre-existing or same-store locations which we are seeing in terms of the volumes there or perhaps if you have any way of measuring (iindiscernible) your share of pre-sort. Secondly, if you could elaborate as well on your software business, the release notes, acquisition driven growth from Group 1, but I'm wondering if you could also comment on your various other software offerings and how those are doing in terms of demand or attach rate to the rest of the business.

Let me start with the pre-sort, I am not going to quote specific numbers other than that the total business grew I think by about in the 30s, 35% this quarter. Same-store was well into the double digits. I don't want to get into the habit until this business is fully stabilized and we have got the network built out of talking specific numbers but it was a very, very strong quarter. We believe we are getting the benefits of scale which is very important in this business of the superiority of the PB, you know the PSI business model which is based on meeting the highest quality standards of the postal service, and with the announced acquisition of Ancora which we expect to close in the fourth quarter we will be in more cities; we will still have certain cities that we have to expand into in 2005. But that's going very, very well. And we also have an emerging program called the Postage Discount Program for our global mailing customers where they sell discounted postage or pre-sort to our customer base that has never had access to it before and that is now in over 30 of our districts and we expect it to be in 40 districts by the end of the year, that is going very well also. It is not material at this stage to earnings but it really helps cement customer loyalty and we get incremental mail finishing systems sales from it. So we feel very, very good about that business.

The PS -- I'm sorry --as far as software, the Group 1 software did very well in the quarter and the integration process is proceeding according to plan. We are very pleased about how well we have been able to integrate Pitney Bowes software into Group 1. The part of the DMT software business that was, that is now being integrated into Group 1, what we used to call Doc Sense had a very good quarter. Over on the GMS side, it is a little trickier because parts of the software business did well and other parts we had some difficult comparisons with prior year, but we are generally pleased with how we are doing overall in the software business and I would say we are most pleased with the DMT Group 1 part of the business right now.

And on the equipment side of the business, the release also refers to quote strong placements of your APS.

APS?

Could you elaborate on what that means. It also looks as though your gross margin on sales improved a bit sequentially. Is that a new, somewhat higher gross margin assumption you have now for the sales business?

I will talk about the APS and I will let Bruce speak to the gross margins. We are gaining share. We are winning a very high percentage of the competitive deals because of both the Advance Productivity System and the availability of our Flow Master platform in DMT. We had a very, very strong third quarter in written business and we have an excellent backlog for that business going into the fourth quarter and we are penetrating not only the traditional markets where customers do their own mailings, but we are getting good penetration into the service bureaus that have always been competitive strongholds. We've also, although I am not at Liberty to name some accounts, we took some -- at least on the written business side we have taken some major accounts away from competition during the quarter.

In terms of the gross margin on sales, first, you did have somewhat of a mixed issue because Group 1 was brought in and some of their software sales would have a very gross margin compared to the average, but in addition we definitely got some improvement in gross margin in our mailing business, that would be both U.S. and overseas. So we are seeing that as a real positive trend.

Okay. Just one last one. Just a very broad market question pertaining to your longer term growth. You know, in the last couple of weeks, we have had Graph Expo, we've had other major industry shows and there has been talk that I am sure you are well aware of, all kinds of new print and production opportunities having to do with targeted mailing, variable data printing and all of that. And as that takes hold, have you tried to factor what the impact might be on your volumes or addressed market and growth if and when any of those trends in three letter acronyms become reality.

We certainly are going to see a benefit from that both in our DMT and our Group 1 businesses. And we expect to see some benefit in our addressing product lines and our software product lines in mailing. In the Global Mail Stream Solutions business. Those trends are going to take hold in our automation mail stream which you will see the benefits of in supplies, payment solutions, DMT and what we call the mail creation part of our Global Mail Stream business. The traditional -- what we call single piece mail -- continues to decline and that means that we will continue to fight to get flat or low growth in our traditional mail finishing business, but we are going to see growth in the automated parts of the mail stream which will benefit from these new tools for print on demand, for you know targeted mailings and for the need for print stream software and document composition software which the Group1/Pitney Bowes combination excels in.

Thank you.

Your next question is from the line of Julio Quinteros of Goldman Sachs.

Thanks guys. Quick question just in terms of, just going through the math, maybe Bruce, what I was looking at right now, was the calendar year '04 estimate that I had originally -- that I currently have projected, which is around 249, if I build off of that, 8 to 10% and then subtract out the pieces you are talking about is that more or less what we should be thinking about in terms of the '05 guidance?

I think you heard Mike's comments very well.

I'm sorry.

You listened to Mike very well by what you are proposing to do.

Thank you. Then other question, maybe in terms of the diversified solutions that that you are talking about in small business, International mail services, software, and payment solutions, can you maybe just remind us or kind of go through what the expectations are for relative sort of growth trajectories in '05 if it is all possible?

We haven't finalized the budgets for each of those businesses or 2005 or each of those segments of those businesses but mail services, you have already heard, grew and this year's growing in the around, I think year-to-date it is growing a little bit over 30%. The supplies business, I think we talked about that as growing low double digits. Global payments is a double-digit business. International grew this quarter. Did we?

We can give it to him. Organically for International Mailing, 8%. And then for the International overall organically was 5%. The difference is capital services in the PBMS area.

And the DMT/Group 1 combination, we talked about Group 1 in the call where we introduced Group 1 after the announcement, I think we talked about that as having the hope of high single, low double-digit growth going forward and DMT we think is a strong grower as well. So, what did I say? Did I leave anything out? Small business centers, good mid single digit to high single digit growth rate over the last couple of years.

And software should be a good grower next year as well.

Yes.

Just to elaborate. That's what Mike was saying about the message we want to convey is we now have a pretty good diversification of products and customers and so the growth in one area can offset if there is weakness in another. And overall we feel good about the growth prospects.

On the comment that you made about the kind of being at the bottom in terms of the shrinkage in some of your core vertical markets, can you talk a little bit about whether you're seeing increased timing in some of the core verticals or are we still, even though we are at the bottom we are still not seeing incremental upticks there maybe.

There are some areas where we are seeing growth in PBMS in terms of expansion of the verticals but it is still a cautious market and I don't see a major change from the second quarter. But we are seeing some hopeful signs.

I know this isn't really material today but can you talk a little bit about the relationship with Ebay and where you are at with that?

Ebay is part of the internet postage business and it has continued to grow well, month by month. And we can't, we are not at liberty to talk about how many tactics, how many transactions or the amount of postage for Ebay specifically but our total for the internet postage market is I think 15 million transactions year-to-date. Over 15 million and over 50 million of postage. I think around 55 million. But it is literally growing month by month, and we are not only talking to Ebay but others about opportunities to expand in this space. But we are well ahead of where we planned to be at this point in time when we put, we started (indiscernible) the service or product February 12.

Thank you very much.

You are welcome.

Your next question is Lloyd Zeidman (ph) of Bernstein Investment Research.

Good afternoon, folks.

Good afternoon, Lloyd.

Let's see. We've been hearing now, I guess for a few quarters, that the smaller systems business is moving along better than the larger systems, lot of caution among larger customers. And does this give you any doubts as we approach 2005 in terms of what overall demand levels and what your revenue growth could be as a result of that?

We would like to believe, although we haven't finalized our budget and we obviously have two more months of the year to go. We would like to believe that we have factored in the secular trend relative to the medium and large businesses for mail finishing solutions. And by the way, don't get me wrong, this is not a dying business. We are just, let me give you -- we are 73% of our systems are digital, so we still have the digital conversions to go. There is a good and continuing uptick for the value added services; we still have over 20% that are adopting the value added services as part of the deals. We continue to find new applications for those value added services. We also are doing better than we have ever done in probably the last eight or nine years in customer loyalty and retention so we are not seeing the normal attrition that we saw in the late '90s and the early part of this decade. We are doing okay with the large customers. We are just not seeing the traditional upgrade behavior that we have seen you know, as a matter of course. To the same degree. I mean people are upgrading. It is just not as many as used to. But, we think we factored that all in and we believe we have got, with the other growth drivers that we have, we believe we will present a budget that will be makable and that our board will be comfortable with and that we can talk about it when we give our guidance the next time we meet.

Okay. Just regarding the 2005 expectations, the pension and retiree medical expense. Had you folks said anything previously about what you expected the headwind to be in 2005?

Not specifically because you know certain of these -- let's say at the last call, we wouldn't have had as much visibility on either stock market performance for this year or the reaction to the Fed rate increases. I think many people predicted that the long term rates would move in lockstep and in fact they have not. The discount rate, which goes up, the 10 year rate has moved in the opposite direction to what some people would have predicted. We would not have had visibility to that in the last call. Those are really the two major drivers that enable us to talk about the headwinds now.

Last but not least, the R&D number came in a bit stronger than I had expected. I would imagine it was Group 1?

Yes.

Was there anything else in there? And maybe could you give us a little guidance as to what we might expect to see from here in on R&D?

If you would look at it organically, you know, this is without Group 1, R&D was up $2 million year-over-year and I think that is within the range of variability that you might see and in general we see a relatively stable R&D number and the mix is shifting but the overall total stays relatively constant.

Bruce, are you saying relatively stable in terms of percentage of revenues?

No, in terms of dollar amount.

Thanks very much.

You have a question from the line of Caroline Sabbagha from Lehman Brothers.

Just a quick question, a follow up on guidance and then a question on DMT. The pension headwinds this year in '04, can you remind me how much they were?

They were if I remember, about two to four cents.

Okay.

I am sorry, three to four cents.

So the combination of the pension plus the Capital Services, the headwind in '05 combined is almost the same as '04.

Carol, that's exactly right.

They revert themselves in terms of the waiting.

Therefore, it seems like if you do the -- back into what numbers you are implying that the growth rate X these is very similar, so you are not assuming any improvement, kind of in demand, in one way or the other?

Well, why don't we wait on that. We could be a little better but the reason we don't want to project that right now is we obviously have to see the results in the last two months of the year and we haven't finalized our budgets. But we are doing things that are improving the health of the business and are seeing results from that, but we really aren't in a position to give guidance for 2005 until we have seen the last two months of the year’s results and reviewed the budgets with the Board.

Then my question on DMT is that the EBIT from that business was lower than I thought it was and I'm guessing it's the Group 1 and the integration costs in there. Can you talk about what DMT EBIT did in the quarter ex-Group 1 and give us bit more detail around the integration costs coming out of Group 1 in the quarter and are you still, what are you still looking for in terms of accretion or dilution from that year, all from Group 1 over the next year.

Sure, in the integration of Group 1, some of the cost is actually in our existing DMT operation and they had an overall EBIT on a year-over-year, excluding Group 1 of flat and that would account for or that would be accounted for partly by the integration expense.

Okay. And your forecast for accretion or dilution – (multiple speakers)?

We are still expecting it to be slightly dilutive, if you count the integration expense, and then be positive excluding that, and positive on a cash basis.

Next year.

No, this next quarter.

Oh, next quarter.

Yes. And partly Carol, we had some of the integration expense that was not done this quarter will be done next quarter. So it's a timing issue.

Thank you very much.

Ladies and gentlemen, if you have a question to ask or comment to make, please depress star followed by one at this time. You have a question from the line of Dan Nichols of Deutsche Banc.

I am calling on behalf of Chris Whitmore. Bruce, I was wondering if you could just walk through your restructuring benefits a little bit. You spent about 47 million on restructuring this year thus far, and over 100 million last year. Yet if you look at SG&A as a percentage of sales, it's remains relatively static. I know that has a lot to do with Group 1, etc. Can you walk through SG&A and what's happening there, what cost savings you are seeing and also what sort of benefits you expect looking out to '05 and then can you just give us an update on the status of the restructuring and how much more you expect to come out of it – (multiple speakers)?

First of all, let me say in terms of the restructuring benefits, we are right on track with the benefits that we gave you at Analyst Day and in relative proportion, that for a total of 2004, the benefits are roughly $45 million so that was on track for what we originally expected and then we will have some more in 2005 and we will provide that as part of the guidance that we give for '05. And what you are seeing in the SG&A line is a combination. You're getting some benefits flowing through that line, but also you're getting some of the benefits flowing through the gross margin line as well. You heard the comment made earlier about the fact that we are having an improvement in our gross margin in our traditional businesses. Well part of that is the benefits of the restructuring and in particular the manufacturing portion and supply chain portions of the restructuring. Then in addition, you are having investments in the improvements of processes. The transformation expense which has the effect of increasing SG&A. And then finally, we have been investing in marketing programs that will help generate and drive the business. So if you just look at a SG&A number, you're seeing a composite of a lot of things, but the benefits are there.

In terms of those benefits, can you allocate roughly how much is coming through your gross margin how much is through SG&A – (multiple speakers)?

I don't have a breakdown that way. But I'd just say it is a mix.

And then one other question, can you talk through your aircraft lease portfolio, specifically address how much of it is now U.S. aircraft leases and how much is exposed to bankrupt airlines.

We are in very good shape there, the U.S. portfolio is down to around 25 million, of which only I think less than 3 million is anything other than I think that we have one at lease to FedEx and that which is exposed to the other airlines that are troubled is about less than $3 million. We have as well, by the way, I should mention that people have been paying us. You know, and so, we are not in situations where specific airlines are in default at this point in time. In terms of our non-U.S., it's around $250 million of which I think about 124 million is, has either, is some sort of (indiscernible) fees (inaudible) credit enhancement. So we are in pretty good shape on the aircraft portfolio and we believe that we are adequately and appropriately reserved.

Okay. Thank you.

You have a follow up question from Caroline Sabbagha from Lehman Brothers, please go ahead.

Just a quick follow-up. Can you tell us what FX and acquisitions had an impact on overall revenues and also by segment if possible, just to see what organic growth was?

Carol, let me -- probably the easiest way to give it to you for organic and for the company as a whole, it was 2% or to be precise 1.8, and then for, I will give it by segments, in the global mail stream, it would be 1.7, Global Enterprise Solutions would be 1.2 and cal Capital Services the way we define it, it would just be almost by definition, no change in organic but it's a slight .2 decline.

Thank you very much.

You have no further questions at this time. Please continue.

All right. Does this mean there are no further questions from anyone listening in on the call? Okay. Well, I just want to say thank you all for participating in the call and we will be back together again for the fourth quarter and full year at the beginning of February. End of January, beginning of February. Thank you very much.

Ladies and gentlemen, this conference will be available for replay from 8:30 p.m. Eastern Time today until midnight November 1st. You may reach this call by dialing 1-800-475-6701. Using the access code of 475-6701. I am sorry the access code is 750129. Dialing internationally the number is 1 for country code, 320-365-3844 with the access code of 750129. That does conclude your conference for this afternoon. Thank you for using AT&T Executive. You may now disconnect.