必能寶 (PBI) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Pitney Bowes fourth quarter 2004 earnings teleconference.

[Operator Instructions].

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, Vice President, Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview. Please go ahead, sir.

Thank you and good morning. Let me remind you that you can find today's earnings press release in the attached schedules on our website at www.pb.com/investorrelations.

The forward-looking statements contained in this presentation involve risks and uncertainties and are a subject to change based upon various important factors, including changes in international or national, political or economic conditions, timely developments in acceptance of new products, timing of potential acquisitions, mergers or restructuring, gaining product approval, successful entry into new markets, changes in interest rates and changes in 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 are any non-GAAP measures discussed during this call, there will be a reconciliation of those measures to GAAP measures located on our website at www.pb.com/investorrelations.

Now our Chairman and Chief Executive Officer Mike Critelli will review with you the results for the quarter and the year.

Mike?

Thank you very much, Charlie. Good morning. There are three things I want to draw your attention to concerning our fourth quarter and full-year performance.

First, we had an exceptionally strong finish to the year as several factors, including stronger than expected worldwide demand for our mailing systems and services generated a 12% revenue increase to $1.36 billion, substantially above our previous revenue guidance of 5% to 7%. Our adjusted earnings per share during the quarter was also significantly above previous guidance of $0.66 to $0.68.

Second, we continued to see growth in the sixth -- strength in the six growth engines that have propelled our momentum throughout 2004. Our growth engines include small business solutions, mail services, international, supplies, payment solutions, and software, all of which helped to accelerate a revolution to be a bigger, stronger company.

Third, our investments in new information systems are essentially complete. We are pleased with the benefits that we have received thus far from streamlining our infrastructure and improving our systems and processes. Though we will take advantage of some specific opportunities to restructure this year, such as in Europe and in other projects that we delayed while we focused on Sarbanes-Oxley, our total restructuring activities in 2005 will be less than in previous years.

Now let's take a look at our performance. Fourth quarter adjusted diluted earnings per share was $0.71 versus $0.66 on a comparable basis in the prior year. Excluding the impact of a $13 million after-tax charge, resulting from a nationwide settlement of lawsuits related to an equipment replacement program and a $71 million after-tax restructuring charge. Including these charges, net income for the quarter was $0.35 per diluted share versus $0.61 per diluted share in the prior year.

For the full year, cash from operations was $945 million and adjusted free cash flow was $694 million, after subtracting $317 million and capital expenditures and excluding $66 million in payments associated with our restructuring initiatives. The company generated $217 million in cash from operations during the quarter and $147 million in adjusted free cash flow. We used $25 million of our cash during the quarter to repurchase approximately 556,000 shares of our common stock, bringing the totals for the year to $200 million and 4.7 million shares for an average price per share of $42.60.

Our board took two actions this week. First, it approved the sale of our 22-acre main plant site. We had previously announced our intent to sell the property because of our transition from manufacturing to assembling and our real estate optimization strategy.

During 2005, we expect to record an after-tax gain of approximately $18 million, net of expenses in connection with the sale. Keep in mind that this gain will be recorded on the restructuring line of our consolidated income statement.

Next, the board authorized an increased dividend on our common stock to an annualized rate of $1.24 per share and we're proud to note that this is the 23 consecutive year we've increased the dividend on our common stock. Throughout 2004, including the fourth quarter, we focused on strengthening our ability to grow organically, identifying and integrating strategic acquisitions and streamlining our infrastructure. The growth engines that I noted earlier were evident in the quarter's performance.

During the quarter there was also a very strong showing outside of the US, led by the UK, because of an increase in production mail equipment placements with large customers and an increase in meter and mailing equipment placements with small businesses.

In the fourth quarter, our strategic use of acquisitions to deliver long-term customer and shareholder value continued with the acquisition of Groupe Mag in France and the addition of Ancora prestored operations to our national US network.

We also completed a transaction with standard register to acquire the assets of its hardware equipment services business, expanding our ability to provide a broader array of equipment maintenance and service for our customers.

At the end of the quarter, we announced board approval of a plan to pursue a sponsored spin-off of our capital services external finance business. Our negotiations continue with a party interested in investing in the new entity, non-core capital services financing contributed $0.02 per diluted share in the fourth quarter, 2004 versus $0.04 per diluted share in the fourth quarter 2003. For the full year 2004, diluted earnings per share included $0.09 per diluted share from non-core capital services compared with $0.16 per diluted share for full year 2003.

In terms of 2005 guidance, the company expects revenue growth in the range of 9% to 11% for the first quarter and 7% to9% for the full year. During the year, we expect to record additional after-tax restructuring charges in the range of $13 million to $26 million or $0.06 to $0.11 per diluted share, net of anticipated gain on the sale of the main plant site. These charges relate to the continued realignment and streamlining of our worldwide infrastructure requirements.

Excluding these charges, adjusted diluted earnings per share is expected to be in the range of $2.62 to $2.70 for the full year and in the range of $0.60 to $0.62 for the first quarter. Including the net restructuring charges, diluted earnings per share is expected to be in the range of $2.51 to $2.64 for the full year 2005. We're not able to get quarterly guidance inclusive of restructuring at this time because the timing of some of the restructuring activities is uncertain and not completely within our control.

Revenue and earnings guidance also do not assume a spin-off of capital services because although we are optimistic we will conclude a spin-off, the timing and the exact financial impact are not determinable at this time. In July 2005, the company expects to adopt statement of financial accounting standards number 123 for share-based payments. The annual impact on diluted earnings per share of this new accounting pronouncement, which is not included in the estimates noted earlier, is expected to be in the range of $0.07 to $0.09, which is comparable to 2004. Thank you and now I'd be happy to answer your questions.

[Operator Instructions].

The first line will open with the line of Matt Troy with Smith Barney. Please go ahead.

Good morning, Mike, Charlie. I had a question on global enterprise solutions, specifically surrounding the EBIT margin. Came in much better than we were looking for. I was wondering if you could help me better understand some of the things you're doing there and the traction you're seeing in your cost reduction initiatives.

Well, certainly we are taking costs and implementing productivity at the site level. We are going slowly through a process of weeding out unprofitable account. I also think that we are getting some greater value-added services into our contracts than we have in the past. And, finally, we've had a program of seeking early renewals, which has reduced the margin compression on renewals.

Okay. If I were to think about pairing those unprofitable accounts, because certainly we've heard about this before, what inning are we in? I mean, are we 80%of the way there? You know, how should we think about this in 2005?

Yes. Let me just make a comment. I may have left the impression that we were going to quickly exit every unprofitable account. We go through a multi stage process, which is to first of all assess what we can do within our contract to improve profitability and secondly we go back to the customer and look for ways to convert the contract from an unprofitable structure to one that is more of a win-win solution and then and only then do we look to exit. I would say we're probably at the first inning out of nine and we're well along on phase one of those three and we're at phases two and three on some others. But I think there's a lot of opportunity. But I do want to emphasize it is not our intention or desire to exit every account that's unprofitable today. It's our desire, first, to make them profitable and then to exit as a last resort.

Okay. Last question, internationally, you cited some strength in Europe, specifically in the UK.

Yes.

I was wondering if you could comment. You know, maybe put some more specifics around where you were seeing that strength and, two, are you seeing that carryover into early 2005?

We have gotten -- we mentioned the UK because it's our largest business in Europe, but with the exception of Germany, we had very good growth everywhere else in Europe. Certainly the high-end production mail business was helpful. We continued to see strength as we do in the United States and small business. We see greater sales productivity where we have direct sales people and we are getting more and more critical mass at distribution.

I would say of the factors I've just mentioned, the only one that there's a little lumpy when you look at quarter by quarter, as you look into 2005, is the -- are the large, you know, production mail orders. Although we've got a good pipeline there with the ability to predict that we're going to get comparable levels of business in the first quarter. It's probably less likely. The other areas, though, you know, we see continuing strength. Obviously the sales productivity that we bill up over the last year, we don't see any reason why that wouldn't continue and similarly, we are growing our small business infrastructure and we are hopeful of getting some new product introductions late this quarter, early next quarter in France and Germany.

Okay. Great. Thank you very much.

Next line we'll open is the line of Jay Vleeschhouwer with Merrill Lynch. Please go ahead.

Thank you. Good morning. Mike, I'd like to ask you a larger market or strategic question before turning to a couple of detailed questions. The company has expressed the goal of wanting to become a broader provider of mail stream technology and services, to become more broadly embedded in the whole mail stream process. And I was wondering if you could give us any examples of where you provide much or most of a customer's entire breadth of document and mail stream-related activity. Are there any reference accounts in that respect that you would refer to?

I would say, too, that we've publicly announced in the last year where we have a broad range of solutions. Although we could go even broader with the Bank of America -- well, certainly Bank of America that we announced last year and we have a -- you know, we do operate the mail production mail center and handle a hi-fi a fairly sizable range of Ethenes business. But we have 25 enterprise accounts and the one area that I would say we have yet to exploit for the full range of solutions, opportunity would be group one. But I would say we are exploring with certainly this Banc of America and we announced that contract in August and -- I think in the August-September time frame. That would be an example of a contract that where we really are doing a broad range and expected to even a broader range of solutions going forward. And it's much more of a partnership relationship than just a vendor relationship.

And are there any assumptions in your 2005 guidance with respect to increasing the number of those types of accounts and how much of the business or how much of the growth might those types of large enterprise accounts contribute?

Yeah, we really haven't had made a specific judgment that we're going to get a major, you know, increase in the number of those. And not because we don't think we can't, but because I think the -- for a couple of reasons. One is the timing is very difficult to predict and, second, they tend to -- if we're doing it right, to be stream revenue situations. So, they will -- even if we were to sign a contract, you know, with a number of these big accounts, that's all encompassing as Banc of America, it would -- there would be a lead time in terms of getting up and running and then there would be stream revenue after that.

Okay. I'd like to ask about two of the six growth drivers, you asked about specifically supplies and software.

Yeah.

And when you look at supplies and particularly the growth in placements in small and medium accounts and if I understand it correctly, some changes in your equipment towards more inkjet technology and the like, what are you seeing in terms of consumption of supplies per machine or per customer? Are you seeing greater throughput of that sort of high margin business in the base?

At this point in the United States, at least, largely just going from electronic non-digital to digital, we're not seeing a greater usage in the -- when we replace one machine, a non-digital for a digital -- or digital for non-digital. What we cannot calculate, of course, when we acquire a new small business customer, its all incremental there because they were using stamps before. But I do want to comment on one big opportunity that -- that is going to help us continue our double-digit supplies growth in 2005 and probably in 2006.

We launched a new very high-end mailing system. We're at the end of our production mail systems and this is a high-speed machine that will do 22,000 per hour and it's going to be a significant growth driver for supplies in 2005 and 2006 because the whole population today is non-digital in this space.

Additionally, it will stimulate sales of new production mail systems because, as we go in and talk to customers about the new metering technology, we also expect a survey there -- their equipment and their software needs as well. So, that's why we're optimistic that we can also get double-digit growth in the high-end part of our business as well because this -- this new high-speed meter, high-speed digital inkjet meter, which was launched earlier this year, is going to be a -- I think a significant growth catalyst.

All right.

Jay I just wanted to add one thing.

Sure.

Technically, just supplies for the fourth quarter, world wide, had organic growth of a 11%. So, you're correct in your assumption that this was a really good part of our performance the fourth quarter.

Yeah. Just one other final comment. This new digital inkjet meter, the reason we're so optimistic about it is literally the only product of its kind in that market segment. There is no competitive offering.

All right.

And Bell and Howell and Bowie are competitive. And probably Bell and Howell our major competitor in that space, which uses competitive meters, will either have to go to another form of postage to convince customers to go to another form of postage evidencing or they will have our equipment at the end of their production systems or we will replace those.

All right. And then lastly, could you elaborate on the presort business in terms of the kind of organic or same store growth you saw there and what the capacity expansion plans are for '05, in terms of moving into new territories where you're not yet represented?

Well, it on a same store basis, it was well into the double-digits and we -- and I would say our EBIT margins were considerably better than the margins for the business as a whole. We are today in 27 cities and we plan to continue to expand to build out our network. Our goal is to get to roughly -- we're about 90% to 95% of total high-volume mail that's produced and it would be our objective to try to get there in the next 12 to 18 months and we have a number of targets of opportunity, which I'm not going to pre-disclose until we get there. But we would expect to substantially build out our network this year. Right now our major focus is on the integration of the Ancora sites that we acquired in the fourth quarter.

Thank you very much.

Thank you. The next line we'll open is the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Good morning. Real quickly, can you provide us a little bit of perspective, on as we look at calendar year '05, how much is the growth in calendar year '05 is expected to come from organic growth or of the group one acquisition?

Julio, maybe just that answer generally. We expect for 2005 to have organic growth of 3% to 5%. And just to clarify, we define organic growth to exclude strategic transactions and foreign currency. So organic 3% to 5%.

So, group one would be included in organic after July 20 of this year.

Got it. Understood. Great. And then maybe if you -- just if you can give us a couple of looks at the quarter results for the -- I'm sorry; this quarter's results excluding the FX impact on the revenue side.

Chris do you want to take that?

Sure. If you look at the total organic growth, I'll give you both, excluding strategic transactions and excluding currency, then that was around 6%.

Okay. Great. And then can you -- you talked a little bit about the supplies business. Can you talk a little bit about maybe the payments and the payments segment in particular? I'm just wondering the -- how the ebay relationship is coming along.

Well, ebay is not usually -- it's part of our small business division, but it's coming along very nicely. We cannot give you specific numbers of transactions, but it grew -- It grew significantly every month in 2004 and we're well ahead of plans.

Yeah. And in terms of overall Internet transactions, we've had 22 million transactions during 2004. So, that's a significant number overall.

And --

Including ebay.

Yeah. We did about $84 million of postage during the year. But the program went up literally every month during the year in terms of total numbers of transactions.

Great. And then just as we look at calendar '05 and maybe even out to calendar'06, is there anything on the horizon in terms of new product introductions in your global mailing business that we should be thinking about or on the enterprise solutions side?

Well, certainly in global mailing, we launched in the fourth quarter a new midrange paper handling system and we will, you know, refresh our paper handling product line over the next 12 to 18 months. That's probably the biggest change. In terms of the traditional mail finishing products, you know, the digital metering, our biggest focus in the next 12 to 24 months will be increasing the overseas penetration of those products and obviously the one area that we are going to look at refreshing our product line is the very low end. The personal post office.

Great. Thank you.

Thank you. The next line we'll open is the line of Caroline Sabbagha with Lehman. Please go ahead.

Thanks. Just a couple of questions around the expectations for '05. You seem like you're looking for, you know, decent organic growth, but a deceleration from the fourth quarter. What business do you think will, you know, will weaken from the fourth quarter levels?

Well, it's a little early to tell whether what we experienced in the fourth quarter was an end of the year spike or a continuee. We're optimistic that the fundamentals that lead to the fourth quarter performance are still there. The -- in terms of the, you know, the parts of the business that are a little lumpier certainly as I mentioned earlier the European production mail business is probably a little bit lumpy. We do have very good pipeline in the US DMT business and didn't have a big spike in the fourth quarter there. But we are going to have better visibility in terms of what carries through into this year where we had an unusual high fourth quarter, probably later in this quarter. So, we've chosen not to go too far out on a limb on that.

And Carol, this is Bruce, just for the year, 2004, organic growth was 3%.

Okay.

So, by putting 3% to 5%, that's actually the more optimistic year-over-year growth rate.

Got it. Bruce, did you have a lot of leases that came up in the fourth quarter, kind of a bunching of leases, which you've had sometimes in the past?

No, not really. If we look at the breakout of our performance, the international mailing was, by far, of the -- not of the organic factors. Our currency was about of the 7 percentage points higher than we had anticipated or -- let's say the $68, $70 million. Currency was about $15 to $16 million of it. But the biggest single factor even bigger than currency was international mail and there were a lot of things that went on there, certainly the stronger DMT business. But we had stronger than expected growth you know in a lot of places and the UK I would attribute to just much better sales productivity than we've experienced in the last many years.

Okay. And then moving down to P&L for a second. Mike, you mentioned that your investment on the new IT systems is now complete. Just wanted a clarification on that. Was that kind of the ERP system and if so, how much was running through your P&L in '04 and what kind of goes away there for in '05, the cost.

Well let me well, first of all, let me talk about the program and then Bruce can speak to what was or was not on the balance sheet because some of this was pre-implement efforts that was not on the income statement because some of this was of course pre-implementation that was on the balance sheet. But we're moving to a different phase. The big bang ERP program that covered a comprehensive look at all of our -- comprehensive overhauling of our systems and areas like you know service, call center, HR, supply chain, financial reporting, that's over. As we go forward, we'll be doing more reengineering and small systems implementation on a sort of bite-size pieces and it will be more ordinary course of business. In terms of what comes off the income statement from 2004, Bruce can talk to that one.

Sure. And just a little background that as we mentioned, if the major systems are done, but we're going to continue to invest in reengineering and a number of programs and there will still be smaller type implementation. But the next income statement effect is going to be roughly a $10 to $15 million improvement year-over-year and that was from a level that was running around $65 million. And then you're also going to get a benefit in cash flow. Then the cash flow is going to be also improved because we aren't going to be putting anymore capitalization on the balance sheet and so what the magnitude there is - you know that's a $30 to $40 million improvement.

Yeah, just to clarify. The -- there were two different pieces to the restructuring. One was a write-off of the pre-implementation cost and I believe a lot of that wasn't flowing through the income statement. The other part is the restructuring to eliminate the -- or to eliminate the jobs of the people that were doing the work with the systems and that will fall through the income statement as Bruce described.

Okay. And one last question. On the capital services exit, how are the discussions going around that? What right now do you think is the timing? And can we take the $0.02 in the fourth quarter that you reported from non-core capital services and annualize that to judge the contribution in '05 or are we missing the imagistics pieces in that $0.02 number?

Let me talk about the first piece of that and then Bruce can speak to the financial. -- How you do the comparison? The negotiations are going on very well. There are two separate phases to this. One is the negotiation, the due diligence process that we're going through with the private equity investor and I -- I'm reluctant to predict when that will happen. That's obviously more within our influence and control. The hardest thing to predict is how long it will take to get the letter ruling from the internal revenue service that this is a tax-free transaction, which would be a condition of the spin-off.

And we believe that will take, you know, four to six months, you know let's say three to six months. But it can be shorter or longer than that. So, we're reluctant. And that's why we didn't include any implications of the spin-off in the guidance because we obviously don't have control over the speeds at which the IRS moves on this issue. But if Bruce could -- Bruce could talk to you about what is or is not sure in comparison.

Sure. Sure. And, Carol, we understand it's a little bit confusing because right now when we give our guidance and we talk about what the effect of capital services is, we're talking about the non-core capital services portfolio that we've given the information on all along. When we do the spin-off, you're correct, there will be actually a different set of numbers and we've been reluctant to give a lot at this stage because we're still, you know, negotiating with a third party and want to make sure we don't mislead you. But just to give you our best estimate as of today, as to what would be the net effect of a spin-off, and this is the annualized effect, so if you look at the total assets are about $2 billion that would go off our balance sheet, in terms of revenue, those assets contributed a $127 million in 2004 and 2005 it would be a 97.

So, in other words, a $30 million change. For earnings per share, it was $0.14 in 2004, going down to $0.10 in 2005 and then finally in terms of free cash flow, a 150 million contribution in 2004 and in 2005, it would be $75 million less or $75 million. So, it goes from 150 to 75. So, that's our best estimate and once we finalize the negotiations, we'll certainly give you any changes to those. But in terms of what's we would model and what the - my final comment is, if we are successful with the spin-off, you would restate your prior years. So, you would have the full effects flow through on an annualized basis.

Thank you very much.

Next line we'll open is the line of Shannon Cross at Cross Research. Please go ahead.

Hi. Good morning, guys. Question for you with regards to the legislation, you know, and the potential for reform this year. Any updates that you're seeing?

No. Let me talk more broadly about the situation with the postal service. First of all, you'll understand in a moment why I'm covering the postal financials first. One is that the postal service had a far better 2004 than anyone could have anticipated and had an even stronger fourth quarter of 2004 than anyone anticipated. Mail volumes went up 1.7% through fiscal 2004 in total and first-class mail went up in fourth quarter 2004 for the first time in several years and there is one estimate, although we haven't seen final figures, that it may have gone up as much as 4%.

There is -- as a result of this, the -- we're still -- we're cautiously optimistic that there will be postal reform, but in terms of the relief and the shape of the relief on the pension overpayment, that's obviously the concern about a double-digit postal rate increase in early 2006 has abated a bit so there's more flexibility to deal with that very contentious issue. But we are (indiscernible) as I said, we're cautiously optimistic that we will see postal reform legislation this year, but in terms of the, you know, the specific formula for adjusting on the pension and retiring medical issues for the postal service, that's sort of being re-though at this point, given the better position -- financial position of the postal service.

Okay. What steps should we look for in Congress? What are the next steps that we can track in terms of seeing how this is moving through?

Okay. Well, the house bill has been introduced already and it's HR-22. The Senate bill, as of yesterday, had not been introduced. The key -- last year, the first key step was that the bill passing the house and Senate government operations committees and we don't see any reason why that wouldn't happen again. The challenge last year was getting these bills to the floor and the house and Senate with the other distractions, the Presidential Elections, the9/11 commission recommendations, which had to go through the same process and so I'd say the next key step you should be looking at is, did these bills passthrough the committees? And then after that, do they get to the floor? And how soon do they get to the floor? I think it will be easier for them to get to the floor this year since it's a non-congressional, non-presidential election year than it was last year.

Okay. Great. And then I just want to clarify, Bruce here, the 262 to 270,does not include any impact from the spin-off and then the numbers that you just gave Carol are for full-year contributions, so if it happened in mid year, we'd have to consider half of it, is that correct?

No, that's not correct.

Okay.

As I was saying, the way it would be done is you would restate all the year. So, if I were doing the calculations, I would take the guidance that we've given you, and if you want to say what the earnings would be, if a spin-off occur, I would take those earnings per share, the 14 and 10 and I would subtract them from the guidance, each of those two years and then you can do a year-over-year comparison. But --

So, you would be 252 to 260 essentially for '05? But then you'd see you take down the final '04 numbers as well?

That's correct. And that's the way it would work, Shannon. Once you do it, it's just -- everything gets restated and so you don't have to worry about the timing. And at this point, as Mike said, we don't have a good feel. But the annualized is probably the best way to look at the growth rate that you'd have if a spin-off occurs.

Okay. And then just one final question. You guys have been a reasonable barometer for what's going on in terms of the economy, curious as to -- and you talked about various pieces that are picking up and obviously you guys had very strong results relative to expectations. How do you sort of feel overall in general that the economy will -- you know, the enterprises or the small business going into '05?

Bruce, why don't you start and then I'll share a complementary comment.

Yeah. Hi, Shannon, I think in general, we tend to be a coincidence indicator. So, we tend to go with the overall economy, particularly in our mailing and small business and, frankly, we just don't know whether the strength in fourth quarter was due to any economic forces versus the product successes we've had, and as Mike said, the sales productivity. One thing that is interesting, though, as Mike mentioned in his remarks, first-class mail, fourth quarter, was stronger than it had been.

So, that's a sign. The other thing to note is in PBMS, which tends to be the one area where we do get some early indications, a couple of vertical sectors that were stronger than they had been, were the financial services and legal. So, perhaps the pickup in M&A and other activity is starting to flow through those important vertical markets for us.

Yeah. I would just say the postal service is not only improving its revenue and its mail volumes, but it has improved its profitability, which is an important indicator for us and we're -- and that's sort of a micro factor in our business that really isn't present in any other. But continue to see strong growth in the small business space. No portfolio related issues that would indicate an economic downturn. The thing that we're watching for this year is obviously a couple of factors.

One is the impact of the Fed's interest rate increases, how quickly they happen, what kind of impact they have, and secondly, which is not easy to predict, the movement of foreign currencies and, you know, at the end of last year, the dollar was considered -- there was a -- the dollar was weaker against the euro and the pounds, Canadian dollar than it is today. So, that one is a little bit of a wild cards and it's something we're going to be watching carefully in terms of the impact it might have on our guidance.

And just one more thing I'd add is when we did our budget, which becomes the more informative factor for the guidance, we assume that GDP growth would be moderate. So, we're looking at you know 4% real GDP in US as a benchmark.

Okay. Great. Thank you.

[Operator Instructions]

The next line we'll open is the line of Lloyd Diteman (ph) with Bernstein Investment Research. Please go ahead.

Good morning, folks. This is Lloyd Diteman. Okay, a couple of things. First of all, could you tell us the impact of foreign exchange on the bottom line in terms of cents per share and also could you give us some ideas to what's happening, if anything, internationally in terms of a postal reform or something like that?

Bruce can answer the first question. I'll take the second.

Sure, Lloyd. In the quarter, foreign exchange contributes $0.01 a share and for the year it was $0.05.

Thank you.

On the European environment, I think over the next 12 to 24 months is a critical time. There are a number of markets that the European union have directed the opened to more competition and to more liberalization. There are more countries in Europe that are starting to comply with the E.U. directive in terms of establishing independent regulators.

We feel that our relationships generally are getting better with the major parts in Europe in terms of having stronger partnerships and -- But it's something I'm personally going to be spending a lot of time over in Europe this year trying to influence the outcomes and, in fact, I was in Europe twice in the month of January and will be going back at the end of this month for another week.

So, I would use the same expression that I used relative to U.S. postal reform, which is that I'm cautiously optimistic you'll see a somewhat more favorable environment in Europe and as we go forward.

But it is far more complex because in spite of the E.U.'s Efforts to try to get it to be a European-wide and synchronized liberalization, it's ending up being very fragmented and taking a different shape in each market. So, we're approaching Europe on a country-by-country basis. We're seeing a little bit of an indication in Japan as well of market liberalization and I should note that we are optimistic of some change in India and Brazil, which is why we have, in the last six to eight weeks, entered both of those markets, although in very, very small operations.

Okay. Mike, when I saw you at the analyst meeting last year, you had also mentioned that you were spending a lot of time out of the U.S. Would you say that the overall tone of business outside this country is better today than what you saw last year?

Yes. I just -- I would say that - I think my biggest frustration in Europe is that postal operators -- We all actually talk about the dismal future of mail. But do so for reasons unrelated to its actual future. They tend to believe that if they don't say there is a crisis, they aren't able to take the restructuring programs that we can do without a crisis. So, when you talk to these people privately, there is a very different message, which is that they see growth in advertising mail. They see segments of the first-class mail stream that have opportunity and they do want to partner with companies like Pitney Bowes. There are multiple audiences that they're speaking to when they speak publicly about how mail is, you know, getting eroded by electronic substitution.

And a lot of this is to create a sense of urgency to do what they need to do. So, I would say the environment has gotten better. I commend my European team in particular for its out standing work in leveraging the opportunities they've had available and as well as the team in Asia-pacific which had a very, very good year as well.

Okay. And just one more thing. In PBMS, it seems that whatever you read about the, any type of out sourcing business these days, I guess there is a lot of flux going on in that space overall. And it looks like PBMS had a good fourth quarter and I was just wondering, could you comment on the overall environment in terms of what they -- The trend toward out sourcing. Are people becoming more a min tonight-- Amenable to this and what a competitive situation looks like. I think icon, for example, showed some problems in its out sourcing business in the latest quarter.

I think that there is still a very strong impetus to do out sourcing. I think as an industry, we're probably past that in our mail and document management spaces. I think the real issue here is can we create a value proposition and deliver it that enables us not to be commoditiesed. It clearly -- What I would call concierge-level service that had been our business model for really 15 or16 years, an increasing number of customers are putting them through a strategic sourcing process and we're seeing market margin compression.

But the focus on mailing technology, partnerships to really provide consultive value-added services for mail and document management processes that are differentors and leverage Pitney Bowes skills. And when we do that, we're able to overcome the margin compression that we have experienced and continue to experience. But we need to be able to do that consistently and with a scaleable set of products and processes. And that's something we're rapidly working to build up. But I guess my answer is I think today there is good potential for high margins in this business with the appropriate offerings and with the discipline of not taking on commodity business and getting into a bidding war with people that can offer cheaper labor with lower wage, lower benefit employees than we have.

So I guess this is something that's still going to be a work in process in'05, then?

Yeah. I think there is huge opportunity. One of the advantages in having Murray Martin, as the Chief Operating Officer in charge of all these businesses is he has a lot of experience in the document management space as well as mail. He understands where there are synergies on the equipment side, the service side for come management equipment and service and I think -- and I think we will see much more rapid pull-through in finding the mail. That's Murray's mantra. Find the mail. One of the interesting things that, as an example, you know incoming mail in big corporate mail centers and what we call single-piece letter mail, first-class letter mail, is declining, but there are other kinds of mail that are created upstream of the mail room and of the administrative offices, welcome kits that go to customers that are multimedia that have a print-on demand element as an example.

We are just beginning to find -- Look for and take advantage of those opportunities and those are very high-margin opportunities when you combine the printing, the mailing and the project Management and we have got a huge knowledge of the end-to-end mail stream that I think we've incompletely and unevenly taken advantage of at PBMS. So, I'm very optimistic on the bottom line for 2005 and PBMS.

Thanks very much.

Next line we'll open is the line of Caroline Sabbagha with Lehman Brothers. Please go ahead.

Thanks again. Just a quick follow-up. On the reason you didn't include on the stock options in the formal guidance is, I guess that's the question. Are you planning on changing maybe your incentive comp in any way or do you think that the rules might change?

We have not made any -- We've made some changes in our incentive comp, but not driven by the stock option accounting change. We will look into doing something to see if whether we should be doing something in 2006. I think although it's looking more and more probable that it's going to happen, there have been other accounting print outs that have been delayed or ultimately shelved. So, we want to wait until we know it's going to happen before we make it in closer to our guidance.

Thank you very much.

We have no additional questions in queue at this time. Please continue with your presentation.

Just in terms of making sure everybody understands our guidance, there are just a few other points I want to mention and for the whole group. First of all, as mike said before, interest expense we are anticipating that the rates will be going up and even though we've insulated ourselves by having more fixed rate than normal, that would still be a negative factor.

Secondly is pension and retiree obligations. We talked about in the last call that that would be a negative and our estimate now is it will be a $0.07 year-over-year impact and that includes the change in our discount rate to 5 in three quarters. So that was something we had to overcome to get our guidance.

Finally our tax rate, we are not bringing any cash in as part of this new tax law, but we are seeing pressure on our overall tax rate and we are assuming, for our guidance, that 33% is the effective tax rate for the full year 2005. So, for those of you who are doing modeling, if you can put those three things into your model that would be consistent with the way we're approaching it.

Are there any other questions?

No additional questions at this time, sir.

Okay. Thank you all and we look forward to seeing you at our analyst day, which will be March 8 and we will go into obviously a lot more depth on our strategy and to the degree that we know more at that point, we will share it with you regarding the quarter and the year.

Otherwise, for the rest of you, and we hope all of you can attend in person or by telephone to that meeting, and otherwise we look forward to seeing you at the end of the first quarter. Thank you very much.

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