必能寶 (PBI) 2005 Q1 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes First Quarter 2005 Earnings Conference Call. Your lines have been placed in listen-only mode during the conference call until question and answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time.

I would now like to introduce your speakers for today's conference call - Mr. Michael J. Critelli, Chairman and Chief Executive Officer; Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer; and Mr. Charles F. McBride, Vice President, Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you and good afternoon. Let me remind you that you can find today's earnings press release and 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 subject to change based on various important factors, including changes in international or national, political, or economic conditions, timely development and acceptance of new products, timing of potential acquisitions, mergers or restructurings, gaining product approval, successful entry into new markets, changes in interest rates and changes in postal regulations, as more fully outlined in the company's Form 10-K annual report filed with the Securities and Exchange commission.

Additionally, if there are any non-GAAP measures discussed during the call, there will be a reconciliation of those measures to GAAP measures located on our website, again, at www.pb.com/investorrelations.

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

Mike?

Good afternoon. There are five things that I would like to focus on in today's discussion of our first quarter results. First, our strong quarterly results reflect the ongoing progress toward our growth strategies. Our stated plan for reaching our longer-term higher growth rates was to generate one half of our growth organically and up to one-half of our growth from acquisitions.

During the quarter, revenue rose 12% to 1.32 billion, with 5% of the reported revenue growth produced organically and almost 6% from acquisitions, with the remainder due to favorable currency translation. Our first quarter adjusted diluted earnings per share was $0.63 versus $0.58 per diluted share for the prior period. Both revenue and earnings exceeded our previous guidance.

Second, our business is gaining momentum as the benefits from our previous actions continue to build. This quarter's performance was marked by ongoing strong worldwide demand for our mailing systems, which continue to be introduced in markets outside the US and a related need for supplies for our broader base of digital mailing products. Acquisitions, mailing services, and small business solutions all contributed to this quarter's performance as our growth engines continued to set the pace for our business.

Third, we think this quarter's performance was particularly notable given that we were faced with increased interest expense and a higher tax rate. On a go forward basis, we're going to pursue a more conservative tax planning strategy since as previously announced we are in the process of spinning-off most of our capital services business. The proposed spin-off means that we will not have the same investment opportunities to effectively reduce our tax rate that active participation in the capital service markets afforded us. As a result, you should assume a 34% tax rate for the rest of 2005.

Fourth, based on the strength of our last two consecutive quarters and our underlying business, we are raising our full-year 2005 earnings and revenue guidance. We expect 2005 revenue growth in the range of 8 to 10% and adjusted diluted earnings per share in the range of 2.64 to 2.72. Our revenue is up 1% from our previous guidance of 7 to 9%, and our adjusted diluted earnings per share is up $0.02 from our prior guidance of 2.62 to 2.70. Please note that our guidance does not include a change in options accounting.

Finally, as we look forward to the future beyond 2005, we are encouraged by the progress in postal transformation, the prospects of postal reform legislation, and the relatively modest rate increase that has been proposed for 2006 in the United States.

Now let's take a look at our performance. Net income for the quarter was 149.6 million, or $0.64 per diluted share versus $0. per diluted share in the prior year. As I stated earlier, our adjusted diluted earnings per share was $0.63. This excludes the impact of a net after-tax gain from restructuring activity of $9 million and a $6 million extra tax contribution to the Pitney Bowes literacy and education fund and the Pitney Bowes employee involvement fund. The net after-tax gain is composed of an $18 million after-tax gain from the previously announced sale of our twenty-two acre main plant site and a $9 million after-tax charge for ongoing restructuring initiatives to streamline business processes.

We generated $192 million in cash from operations during the quarter. Adjusted free cash flow was 144 million. Adjusted free cash flow reflects cash from operations after subtracting capital expenditures and excluding the impacts from our restructuring program and the contributions to our charitable foundations. We used $64 million to repurchase 1.4 million of our shares during the quarter and we have $136 million of remaining authorization for future share repurchases. All in all, we are pleased with the performance during the quarter and we remain excited about our future growth opportunities within our targeted mail and document management markets.

Now, we would be happy to answer your questions. Hello? Operator?

(Operator Instructions).

And we have a question from the line of Matthew Troy. Please go ahead.

Good afternoon, guys.

Good afternoon.

I had a question on the overall enterprise-spending environment. We're getting mixed data points from the office equipment players. So I was wondering if you could comment on linearity to the quarter, specifically what you saw January, February and March? I know that you had indicated some strength heading into the end of the year. I was wondering if you could give us a sense of follow-through? And then secondly, now that we have got about a month behind us, in the second quarter, a sense of your take on enterprise level demand heading into summer?

The businesses where we've touched large corporations are obviously our DMT Business, the very high-end of our Global Mailstream Solutions business, and PB Management Services. Our written business in document messaging technologies was actually quite strong. We had a significant increase over prior year. We did see more business coming from the competitive takeaways and from what I would call our up and down the street business. But to the degree that there were delays, I couldn't say that there was any pattern of spending slowdown for our particular solutions.

In Management Services we had good written business, we did see some reduction in copy volumes during the quarter compared to fourth quarter rates and we attribute that to a lower level of merger and acquisition and other major end of the year transactional activity. And as we've said over in Global Mailstream Solutions, we continue to see a downshifting from higher-end systems to mid-range and lower volume systems or consolidations in terms of the number of high-end machines that customers acquire. But I didn't see any different pattern in this quarter from any previous quarters. So in terms of our particular solution set, we did not see any radical change in enterprise spending.

As far as this month is concerned, it is very difficult to answer that question. A lot of our business comes in in the last couple of days of the month, so we don't see anything to indicate a dramatic change to our plans from what we have seen in the month of April.

Okay. And second question, I was wondering if you could just potentially give us a roadmap with respect to the Capital Services spin? I know we've finalized the terms of that transaction, but is the paperwork now filed with the IRS and what's your sense based on your dialogue with them in terms of timing?

We will file -- our goal would be to file with the IRS sometime in the month of May, and we would work in parallel to file the appropriate registration statement with the SEC. The IRS process typically takes between four and six months and we are certainly going to work to try to complete the transaction by the end of the year. I would have to say that if it's the -- there are a lot of factors that are not within our control. It would be certainly easier to meet that goal if it were closer to the four months and harder if it got to be six months. But we're preparing our filing - we're taking a little longer to prepare the filing so that our hope would be that we would have fewer issues to address once we did file.

Okay. And last question, with respect to the regulatory front, any update either from Europe or Asia? I'm getting a couple of mixed data points during the quarter, I was wondering if anything incremental had occurred from what you folks did? Thanks.

What you mean by regulatory plan in Europe and Asia?

Just the drive towards privatization in Europe, that obviously a multi-year process, but I was wondering if we've hit any milestones in the first quarter or if you expect to hit any turning points?

Let me talk about Europe first. I was there three times, actually I was in Europe, if you include a day in London this past week, I have been in Europe four times this year so far. Spent probably three weeks there. The major -- on a country-by-country basis, of course, the UK has accelerated the move toward a completely competitive market. It will be January of 2006. And we are assessing the impact of that. We expect that in the long run those kinds of moves do help Pitney Bowes, although we will obviously work very closely with the Royal Mail and we think that the urgency created by this competitive market should help us in the UK.

In Germany, the mail consolidation, which is an opportunity that we would obviously be in favor of, back in the fall, the German cartel authority, ruled that Deutsche Post and the German government had to move toward mail consolidation. Deutsche Post appealed it. There was a decision, I believe, in the last couple of weeks that reaffirmed the cartel authority decision. I expect that Deutsche Post will continue to appeal that kind of decision, but certainly it increases the likelihood of eventual consolidation, which I think I said at Analyst Day.

We have seen no change in the regulatory environment in France other than the fact that the French will -- are actually finally moving toward having an independent regulator, which had been directed as far back as 1997. The EU is considering an updated directive on postal liberalization and they are beginning to study and comment effort. And it's our feeling that that could be issued sometime next year.

But in Asia, I was there last week and there are no changes of which I am aware in the major markets like Japan, China, India, or Australia. We continue to make progress in all of these markets. We had a very good quarter in Japan. China is predominantly a government business, and as we announced earlier, we opened up a direct operation in India and had a good quarter there. And Australia, we had, I think, a prior year comparison in our document messaging technologies business, which was adverse but we had good growth in the mailing side of the business.

It sounds like you're racking up the frequent flier miles. Thank you for a very detailed overview.

Sure.

Our next question comes from the line of Jay Vleeschhouwer for Merrill Lynch. Please go ahead.

First, Mike, could you talk about the internal growth rate you saw for the presort business in the quarter, and what you think the sustainable internal or organic growth rate for that business might be?

Well, first, we did the Ancora acquisition in the fourth quarter of last year and we spent a great deal in the quarter in focusing on integration of that business. But if we look at the PSI business on a same-store basis, we grew approximately 20%. We think double-digit growth is certainly sustainable there, and our goal would be to continue to build out the network this year and next year, continue to grow our international mail business, which had good growth in the quarter, and accelerate the integration and the what I would call the standardization of the Ancora sites that we acquired in the fourth quarter.

Okay. Thanks. Second question, in your prior response to Matt's question, where you talked about Europe, in the meantime, or even before the regulatory changes fully take effect, are there any indications that in any of the key markets, UK, Germany, and so on that you are already gaining market share? Do you have any current data to that effect?

Market share data is harder to collect in Europe and it tends to be collected annually and we believe we are gaining a little bit of share in Europe. But let me just comment on the results in Europe. We had a very strong quarter in France. And we were very pleased by it and we are also, obviously, pleased by gaining the Groupe MAG distributor, which is going to give us a leadership position in the DMT business in France that we would have had a harder time getting organically. But we are very pleased by the results in France.

We had a reasonably good quarter in the UK, both in revenue and earnings. Germany, we saw some revenue growth, but because of the mix of DMT business versus mailing, we had lower margins than we have had in other quarters where the mix was more towards mailing. But the issue in Europe is, I think, less Neopost or Francotyp or Frama than obviously the -- there are two things, one is the attitude of the posts, and we were very pleased that the Royal Mail, after many, many years of our efforts, approved the 3.3% meter discount which went into effect on April 7. And we see in other markets a more favorable attitude toward metered mail. Although in the big market in Germany, I think there is still -- in Deutsche Post's offerings, a number of competitive aspects with IT franking and permit. So I would say that on the whole the environment is getting more favorable, but there are spots where we have opportunities for improvements that we haven't yet realized.

In your early remarks, you noted the continuing equipment trend toward the somewhat lower end part of the mix. Offsetting that perhaps, are you seeing that the consumables or volume of use per machine even at the low end is, however, increasing. Is there some increase in average revenues or the current revenues per average user, as result of that even with that mix shift?

Our overall supplies business grew at a double-digit rate. We're not seeing increased volumes per machine at the low-end or the middle range of the market. I think the biggest opportunities in terms of digital metering and supplies, aside from the remainder of the meter migration in the traditional mailing business, is the very, very high-end Infinity, which goes at the end of production inserters. And that's an exception to the rule about the migration down market, because if you look at the letter -- look at the direct mail shops, as I have commented on, on many occasions, Pitney Bowes has not been a leader in inserters, BOWE Bell & Howell has had a dominant share for decades in that marketplace. And over the last 15 years, I would say, all or virtually all, I would say, virtually all, there are a few Pitney Bowes meters at the end of Bell & Howell inserters, but the vast majority of meters are Hasler meters.

And what we expect with the launch of Infinity, and we saw this in the first quarter, is that about that one-third of our Infinity placements were on the competitive inserters and we expect to see very good supplies growth - supplies volume growth, because that's mail we literally hadn't touched before. And over the next couple of years, that has to migrate to a digitally compliant product and we are the only player in the meter market that has digitally compliant product today.

Thank you very much.

Our next comes from the line of Julio Quinteros.

Hi guys. Two quick questions on my side. The enterprise margins, first of all, can you just walk us through the -- some of the mechanics around the lower operating margin there? And then secondly, just wondering how much of the revenue upside in the quarter was purely from the Group 1 Software component and what is the visibility on that going forward?

Let me talk about DMT first. There were two factors that contributed to the lower operating margins. Two main factors, the lower operating margins even though we had a growth in revenue. One was, as I alluded to in the answer to another question earlier, we had a major focus in the quarter on competitive takeaways versus upgrading our -- upgrading Pitney Bowes product. We have a great pipeline, by the way, on upgrading our own inserters for the rest of the year. But disproportionate amount of competitive takeaway business that tends to be at the point of equipment acquisition, lower margin. So the mix year-on-year was significantly more competitive takeaway than Pitney Bowes product upgrades. And that means that we have increased share and it's -- but that should balance out as the rest of the year goes on.

Management Services, we did have a higher profit margins in the quarter compared to prior year. On a rolling 12-month basis, we have had margin improvement. The fourth quarter tends to be more profitable - or almost more profitable because we basically adjust for variables that we can't know until then, such as favorable medical expense experience, but on the whole we are seeing margin improvement in Pitney Bowes Management Services across the board.

Okay. And then the second part of my question was related to the contribution from software and visibility going forward. Because software tends to be a little bit lumpier so I'm just trying to get a sense for whether the momentum in the first quarter carries through here?

It's very hard to answer the question about Group 1 Software because we don't have a full year's experience and they switched fiscal years. They had a very, very strong fourth quarter, and between fourth quarter and first quarter was pretty good. But a little softer the first quarter than the fourth quarter, but we are optimistic going forward about Group 1. But we're not going to have meaningful year-on-year comparisons for a full quarter until the fourth quarter of this year. But we have a very good pipeline in Group 1. The DMT side of the business, I think, had roughly about a 4% revenue increase in all DMT.

Okay. And let me just go back to the first point that you made about margins in enterprise services, just to make sure I understand. The takeaways from competition, obviously, helps on the market share side. But I'm assuming that that means that the pricing terms that you guys are putting forth there are maybe a little bit onerous on the margins and then eventually you plan to make those up? Is that kind of what...

First of all, we're definitely going to make it up on the supplies because over time they are going to have the Infinity meters on the end of those equipment, so we are going to get very good margins on the supplies. We will get incremental service revenues, but at the point of equipment acquisition, it's nothing different that we did in this quarter. Historically, we tend to in particularly larger competitive takeaways, as you would expect, competition fights a lot harder to keep their own customers so there is a little bit more margin pressure on those then there is when we're upgrading and holding onto our own equipment. There is a switching cost for customers that gets reflected in the pricing.

Understood. Thank you.

You're welcome.

Our next question comes from the line of Carol Sabbagha with Lehman Brothers. Please go ahead.

Just a couple of questions. I'm just trying to get a better understanding for what gave you confidence to raise numbers for the year? It looks like it was mostly topline driven, what businesses would you say are performing better than you initially expected?

It was -- we went into the year, we had probably more hedges and contingencies. And the business actually was -- we did very well in this quarter in spite of the fact that, as I said, mailing services had a very heavy integration focus as opposed to growth from absorption of Ancora. We think we're going to do better as the year goes on in profitability and Management Services and in document messaging technologies as we realize on some of the written business that we got in the first quarter. And we don't see - we got in the US Mailing operation we do have a very -- we have a product launch in our mail creation product line over the next 30 days that we are very excited about, which we showed at Analyst Day. And we've had small business and supplies hold the growth rates that they had last year. So it's the -- I think that the diversification of opportunity and the fact that not as -- we got to this organic growth rate with not everything working up on all cylinders. And the things that weren't working on full cylinders we expect to improve. We think we've got some -- we've got enough depth and breadth of offerings that we feel comfortable raising the guidance.

Okay. And you talked about organic growth for the overall company, can you give us just a few more numbers on the specific businesses? What I was looking for hopefully was US Mailing, international, DMT, and I don't think PB MS had any acquisitions in there but just wanted to ask what the organic growth rate was in case?

Sure. Bruce will answer that one.

Yes, Carol, for Global Mailstream Solutions in the US, 2.7.

Okay.

Outside of the US, 7.4. And for Global Business Services, organic would be 8.2.

Okay. Thanks. And on the rental revenue, it seems like the growth rate there has been decelerating. Is there something going on there? I don't know if there is changes in how you are approaching different businesses that would make that growth significantly lower than your overall revenue growth number.

Yes. That's mostly the result of this downshifting from high-end to medium and low range meters. And what we are finding is that even in the meters that we do place, we are getting more of our growth from supplies, services, and payment solutions which show up on other lines of the income statement.

Okay. And my quick last question is, on the PSI or mail services business.

Yes.

I know you are in the growth phase right now; it looks like you're going to have a couple more years of expansion. At what time should we expect more stability in the margins of that business and improvement in the margins as the growth starts to slow down?

Well, we would -- I think Ancora in the letter mail space for domestic presort. First of all, we have to be mindful of what happens to postal rates and we feel that the proposed announcement, if it holds, will be either neutral to slightly positive on both revenue and profits. But it's too early to tell whether -- because the Postal Service has to go through a rate case and it only announced the rate increase within the last month. There is a 60-day period for people who want to challenge it to come in. We haven't seen the reaction of people who might be interested in either supporting or attacking the proposed rates.

But so any question -- anyway I answer this question, I'm going to assume no change in postal rate spreads or sells or anything, even though I think the rate announcement probably is slightly favorable to us. We have a good chunk of the network built out. Our goal would be probably to complete building up the letter mail network for first-class presort certainly within the next 18 months. The growth opportunities continue to be for standard mail, where we would not build or buy a lot of additional sites, but expand our penetration. It's a very low penetration today. And international which I think there's still a lot of opportunity and we are, I think, at the beginning stages of exploiting that business opportunity.

We are going to look at other parts of the Mailstream, but I think that the business can have a significant growth rate the next couple of years in double-digits. After that, there are a lot of factors including postal rate structures and our degree of penetration in standard mail that are going to affect, hopefully positively, continue into that, but it will be too early for us to predict out that far until we see the other end of the rate case here.

Thank you very much.

Sure.

Our next question comes from the line of Lloyd Zeitman (ph) from Bernstein Investment. Please go ahead.

Good afternoon.

Good afternoon.

Let's see, could you talk about the margins in the international side? How did they compare in the quarter?

They were - Bruce, you want to talk about that?

Yes. They were quite strong, Lloyd. In terms of EBIT margin, they went up, just to give you a feel, from 16 to 18% even on revenue, that's for the Global Mailstream in mail. And for the geographic, for the overall, if you just -- in order words, when you include the Business Services and Capital Services, the the margin went from 16 to 17.

Thanks. And also, in PBMS, are you still seeing some -- any meaningful contract runoff in that area?

I am sorry, what you mean by contract runoff?

Well, essentially business running off because of, let's say, mergers or...

Downsizing.

Downsizing?

Yes.

No, it has not picked up. The downsizings have not picked up. I think they bottomed out in the middle of last year. We are doing a better job on renewal margins, but there is still pricing pressure on the large deals. But I think we're seeing improvement in the discipline of the business.

Okay. Great. Thank you very much.

You are welcome.

Our next question comes from the line of Lamont Richardson (ph) from Peg Capital Management (ph). Please go ahead.

Good afternoon, gentleman. I read in the Financial Times, April 22 -- this goes back to revisit Europe, that under European Union regulations, the legal monopoly on letters, and I assume that applies to all members of the EU, will drop to 50 grams in the year '06. Now, that's a pretty small piece of mail. Does that mean it will be open to any competitive carrier? And if so, what does that mean for you folks, selling meters and other mailing equipment?

The EU's directive, and it is only a directive, has to be implemented country by country. And as I indicated earlier, in the UK, that day will come January 1, 2006. And in anticipation of that, we have seen a much closer working relationship and a greater sense of urgency on the part of the Royal Mail and we have been very pleased about that. In Germany, the addressed mail market, there the regulator has been very slow to regulate or to license mail consolidators, it hasn't licensed yet. And as I indicated earlier, until mail consolidation is allowed there, I think end-to-end competitors are going to have a very difficult time. It's very difficult to replicate the postal network with a start-up competitor. And as a result, the national postal operator in Germany, Deutsche Post, still has about a 95% share of addressed mail. And in France, there, as I have been saying, in answer to an earlier question, they don't even have an independent regulator in place yet. So there is nobody to license competitors till the post. If past history holds true to form, I believe that date will slip in terms of implementation.

What we have found in the smaller markets that have adopted the policy of open competition and full licensing is that because of the desire of customers to have somebody that can deliver to every zip code in the country, and the difficulty of building that kind of network, either organically or through acquisition, there has been a very low penetration of competitors, even when there has been a fully liberalized market. So I don't think in the short-term it's going to move all that quickly. If past indicators hold to form, the Postal Services, for the most part, should want to work more closely with us. There are postal services that react differently to impending competition. But I think on the whole it should, if it is fully implemented, work out. Our problem right now, I think, it's dysfunctiona, it's sort of partly competitive and partly monopolistic. And I think it either should move back to the way we have it in the United States, or toward full competition. Either way, I think that benefits us.

That's about the most encouraging constructive statement I have heard about Pitney Bowes future prospects. I have no more questions.

Thank you.

Our next question comes from the line of Shannon Cross from Cross Research. Please go ahead.

Hi. Good afternoon. Just wanted to talk a little bit about the restructuring and the cost cutting. How you feel about the programs that you are implementing? Where you stand and any opportunity to speed it up or slow it down? Just an overview.

We continue, under Murray Martin's leadership, to have a, I think, a very good focus on what I would call a steady state restructuring here in the United States. The big enterprise programs ended last October. We're doing more targeted re-engineering and restructuring here, and we look at opportunities where we can get good return on investment.

I think there is a big opportunity this year and next year in Europe, where we are at a much earlier stage in the restructuring. We don't have a shared Services Model there yet. We have yet to implement the -- although we do have one, it will be easier in Europe than in the United States because we have already done the hard work in SAP implementation in Europe. So we are dealing more with the restructuring and the kinds of things you have to do with Work Council consultation and identifying shared services vendors. So we think that Europe is our big opportunity for this year and next year in terms of bigger restructuring, which is why we said that there would be one more year of higher level of sort of higher level restructuring before we settle to steady state worldwide. Butmore of our focus this year will be in Europe in terms of bigger programs than in the United States.

Okay. And then I would assume if you are doing Europe and you are structuring, it takes longer, right, because you have to do more notification and...

Yes. It's just more complicated. You're dealing -- when you want to setup shared services, you have to deal with multiple languages. You have probably a less well-developed infrastructure for shared services in Europe than we have here. But we are proceeding -- but the main advantage of what we're doing in Europe is, we do not have to implement, do a big SAP implementation. We actually implemented SAP in Europe over many, many years and we went through the pain there at an earlier time. So this is more traditional re-engineering in Europe compared to what we had to do in the United States.

Okay. That's a good segue to my next question was basically, how is SAP going and where you stand? Any issues you're seeing?

Not really. We made the decision to sort of lock down what we had in place in the fourth -- at the beginning of the fourth quarter last year. The projects we are doing now are more what I would call bite-size pieces and some are Seybold, (ph) which has been more of our customer facing processes, and we will, obviously, look at opportunities for re-engineering that might involve SAP or Seybold. But we are just not doing anything but a big scale in terms of systems implementation. We have no plans to ramp up to the kind of levels we did before last October.

Okay. And then just one final question in terms of acquisition and use of cash. You've made several acquisitions recently, well, over last, I don't know, year or so. What do you see in terms of pipeline? Would you continue to be more on the software and services side? And I would assume that if you're not making the acquisitions that you will funnel the cash toward share repurchase.

Shannon, there is really no change since we talked at Analyst Day. And we continue to be focused on what we call bolt-on, which is to flush out existing businesses where we see opportunity. But we're also looking for another platform similar to Group 1, where it can be an avenue to expand into adjacent space. We are definitely looking at possibilities there. And I do think you are right that we are more likely to do a platform in the software and services area than in hardware.

Okay. Thank you.

And we have a follow-up question from Lloyd Zeitman from Bernstein Investment. Please go ahead.

No, all my questions have been answered. Thank you.

Okay. Great.

If there are any additional questions, please press "star" "one" at this time. And we have no further questions. Please continue.

I guess we can bring the call to a close. As I said, we had a very good quarter. We have reflected our confidence in our business with the change in the guidance and we look forward to updating you at the next earnings call. So thank you all very much for coming on to the call.

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