必能寶 (PBI) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the Pitney Bowes second quarter 2005 earnings conference call. [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 S. McBride, Vice President, Investor Relations.

Mr. McBride will now begin the call with the Safe Harbor overview. Please go ahead, sir.

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 upon 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 this call such as adjusted earnings per share, earnings before interest and taxes or EBIT, free cash flow, and organic revenue growth, 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. Mike?

Thanks very much, Charlie, and good afternoon. There are three things I'd like to highlight concerning the second quarter performance. First, our solid results for the quarter were driven by the ongoing strength and momentum in our core mailstream business. Global demand for our digital mailing systems of all sizes and the related supplies and services contributed to revenue growth of 13% to 1.36 billion with 6% of the reported revenue growth generated organically. This marks the third consecutive quarter that our organic revenue growth has been within our targeted range of 4 to 6%.

Second, our strategies for enhancing the profitability of our management services business are gaining traction. The ongoing success of these strategies is reflected in double-digit EBIT growth for management services during the quarter. There were several actions which contributed to these results -- contract repositioning, vendor consolidation, reduced administrative overhead, utilization of more flextime labor, good growth and color copy volumes, and improved equipment utilization. We also saw an increase in cross-selling activity within our management services accounts, which is a direct result of our focus on enhancing customer awareness and access to other Pitney Bowes solutions.

Third, we continue to develop new growth platforms. Through targeted acquisitions, we have expanded into growth segments within the mailstream and have established new platforms for increasing customer value. Group 1 Software, acquired during the third quarter of last year, strengthened our mailing efficiency, data quality and customer communications management software offerings. The successful integration of Group 1 resulted in increased revenue and higher margins for document-messaging technologies during the quarter.

Our mailing services operation increased strong growth -- or experienced strong growth during the quarter. We now have two growth platforms within our mail services business -- work sharing and marketing services. We established our work sharing capability with the acquisition of PSI in 2002. We have continued to expand its network through the addition of both presort and internationally bound mail processing sites.

While the strong growth in work sharing revenue during the quarter was led by ongoing expansion of the network, it is also important to note that revenue from existing sites continued to grow at a double-digit pace versus the prior year. Our recent acquisition of Imagitas has established our marketing services growth platform.

Imagitas developed a move update marketing program for the U.S. Postal Service which includes address change instructions, forms, and moving tips. The program also includes move-related offerings from co-marketing partners of Imagitas across a broad range of industries such as retail, automotive, and financial services. Imagitas has a similar program to help several state departments of motor vehicles with the motor vehicle registration process.

Turning to our overall performance, second quarter net income was $139 million, or $0.60 per diluted share versus $0.58 per diluted share in the prior year. During the quarter we recorded after-tax charges of $17 million, or $0.07 per diluted share as part of our previously announced restructuring program. Excluding the impact of these charges, our second quarter adjusted diluted earnings per share was $0.67 versus $0.62 per adjusted diluted share for the prior year. EBIT rose 12% to 287 million, excluding the restructuring. We generated $22 million in cash from operations during the quarter. We posted a $200 million bond with the Internal Revenue Service in order to stop interest from accruing as we dispute potential liabilities.

Adjusted free cash flow, which was $167 million, reflects cash from operations after subtracting capital expenditures and excluding the effects from the restructuring program and the IRS bond. We purchased approximately 2 million of our common shares during the quarter for $85 million, leaving $51 million of future authorization. We anticipate going to our Board of Directors in September to request additional authorization.

For the full year we expect revenue growth in the range of 9 to 11% and diluted earnings per share in the range of two-fifty-two to two-sixty-four. Excluding the impact of net restructuring charges and a charitable contribution made in the first quarter, we expect adjusted diluted earnings per share in the range of $2.66 to $2.72.

We anticipate third quarter revenue growth in the range of 10 to 12% and diluted earnings per share in the range of 0.57 to $0.65. Excluding the impact of restructuring charges, we expect adjusted diluted earnings per share in the range of 0.65 to $0.67.

One final note before opening up the line for questions. Over the last few years we have consistently updated you on both postal reform and postal transformation and the ways that each could complement our growth strategies. I have had numerous discussions with the leadership in the House, Senate, and White House on legislative reform as well as, obviously, the Postal Service.

As a result, I am confident that while work continues to reach a final agreement, we have a bipartisan consensus that reform is important and should move forward. I am delighted to note that postal reform is scheduled for a vote sometime this week by the entire House of Representatives and it could be as early as tomorrow.

All in all, we were very pleased with our performance this quarter. More importantly, we understand that the mailstream is rich with opportunity and we are confident that we are perfectly positioned to take advantage of those opportunities. Now, we would be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Steven Weiss with (MindFlow) Capital Investments. Go ahead.

Thank you very much. Nice job, guys. You guys always seem to amaze every quarter, so again, congratulations. Michael, a couple of questions.

In the past year or so, a lot of your competitors have recently been implementing some new strategic initiatives to reduce their raw material commodity cost by establishing a better line of communication with their supplier base to help overall reduce their supply chain costs and improve their efficiencies. I'm interested if you can provide some color as to what you plan on doing to reduce your raw material commodity costs by establishing a better line of communication with the suppliers and opening up more collaboration as well.

Well, we've been doing that kind of program for quite a few years. We closed -- in fact, we have moved much more toward -- we closed our components manufacturing operations a year ago, and have really settled on final assembly as our core in our major lines of business, where we used to have a component manufacturing. And we have consolidated facilities.

We just recently not only closed but in the first quarter sold our main manufacturing plant here in Stamford, Connecticut. So we've been on that kind of program for a very long time. We have very aggressive targets with our major suppliers, both for them to -- we start with designing our products to reduce the total amount of material in them to reduce component and parts and subassembly costs as well as to come up with more efficient direct distribution strategies. So this has been a program in place for about five years, and it continues. It will probably never end. We'll continue to find ways to reduce our end-to-end supply chain costs.

I have noticed over the last couple of years by following your company, that quality has always been a big initiative with your organization. That's why you guys are able to achieve great results.

In terms of quality, how are you making sure that all of your suppliers are meeting up to your certain standards? Are you scorecarding them regularly? Are you meeting with them quarterly to discuss certain quality initiatives? How are you making sure that they are meeting up to Pitney Bowes standards?

We have very active supply chain metrics for all of our suppliers on both out-of-the-box quality as well as longer term reliability. And because of the better reliability of our products, we have, in fact, been able, over time, to reduce the customer service headcount, which had been involved in a lot of break and fix operations. And we are able to manage more of our customer service calls over the telephone, but the absolute percentage of out-of-the-box problems has significantly declined over the past several years on every model.

Like, what do your suppliers -- I mean, are you scorecarding them on a regular basis?

Oh, absolutely. I think that's state of the art. Yes, we are doing that.

Okay. And another thing. You're talking about you are closing -- you had closed some plants. How do you plan to make sure those improve your supply chain efficiencies? What are some outlook -- that you guys -- are you trying to get some of your suppliers closer to your DCs? What is really your objective?

Well, one of the other things that I'm glad you mentioned it that we are moving more and more toward direct ship to customers and trying to reduce the number of distribution points and the number of people who handle a product from the end of the assembly line to the end customer. We're also trying to work out ways where we can get more direct ship a returned product back to us without having a lot of hands touch it on the way back. So there's no one single big effort.

As I said, it's been an ongoing effort, which we've been engaged at for a number of years. And the large investments we made in process improvement and transformation, which we concluded last fall -- a good chunk of that was supply chain related investment. We've gotten very, very good returns from the supply chain investments that we've made.

Okay. Final question. What is your supplier feedback? You guys have obviously worked on these great initiatives the last five years. Have they been saying yeah we agree, we’d like to participate in this to remain a big supplier? Have they been kicking back saying that they feel like they're being squeezed? What’s been their feedback from you guys?

We have had very good long-standing partnerships particularly in our core product lines, and we continue to have very good relationships with suppliers. Not had a problem in that way.

Okay. Congratulations. Thank you very much.

You're welcome.

Thank you. We'll now go to Chris Whitmore with Deutsche Banc. Go ahead, please. Okay. He has taken himself out of queue. We'll move on to Julio Quinteros with Goldman Sachs. Please go ahead.

Thank you. Good evening, gentlemen. I wanted to just go back through the segments real quickly -- if you wouldn't mind just repeating the organic revenue growth by division, with and without the impact of currency, please?

Bruce, do you want to take that one?

Sure. Of the two segments that would be affected, Global Mailstream Solutions, the organic growth was 5% -- 4.7 to be precise.

Okay.

And Global Business Services was 10%. And that excludes strategic transactions and currency.

Got it. And on the tax bond that you guys set aside, can you just give us a sense, Bruce, on what is, sort of, the nature of this bond, assuming you either win or you lose this one? Can you just kind of talk about what would happen if you were to basically win or lose?

This is Bruce. I would say that there's really nothing extraordinary about this. This is just part of the normal auditing that the IRS does on transactions that took place, in this case in the mid-1990s.

The reason you post the bond is that, otherwise, there's an accrual of interest, and so just from a capital management standpoint, it's more cost-effective for us to finance the bond through our normal operations rather than through the IRS interest.

Okay. So you're eliminating --

It won’t affect anything in terms of the ongoing nature of the company. This is just within the deferred tax calculations.

Just a follow-on to Bruce's answer to your question on organic growth. Our six growth engines that we've identified in a number of calls and in our analyst meeting, which would be, you know, mail services, supplies, international, small business, local payments and software in aggregate grew at close to 10% during the quarter. The rest of the business grew at a little bit over 3%. And the growth engines now accounted in the quarter for about 44% of our total revenue.

Great. Thank you very much. And one last question from my side. Can you talk a little bit about the emerging markets growth, in particular Brazil, China and India, the traction that you're seeing on that business?

It's still very small. You know, we -- China is lumpy, so we still are getting most of our business from postal sales. We also, by the way, include Japan as an emerging market, which did grow at double digit rates in the quarter. Latin America grew at double digit rates. India, we don't really have any meaningful prior year comparison because we just acquired the company in December. But we're very optimistic that that will grow at well into double digits. China is still very lumpy because it depends on when China post chooses to do a buy of mailing equipment. They are opening up the spigot on allowing commercial placements of mail finishing systems very, very slowly.

Great. Thank you very much.

Ladies and gentlemen, due to the large volume of callers, would you please limit yourself to one question and one follow-up. Thank you. We'll now go to Matthew Troy with Smith Barney. Please go ahead.

Good afternoon, guys.

Good afternoon.

Bruce I had a question for you specifically related to the management services segment.

My understanding was that you guys were in negotiations to centralize the procurement of the office equipment with one vendor, or largely around one vendor, earlier this year, with potentially reaching final agreement sometime this summer.

I was wondering if you could give us an update on how those negotiations are going? Have you reached a final contract? And could you give us a sense of what your equipment spend is in a typical year?

Matt, just let me say that we had a number of initiatives in management services that had the net effect of increasing our operating margin in that business, and one of the areas that we are pursuing -- you correctly pointed out is the consolidation of vendors. Not necessarily to one, but just wherever possible we would try to do that.

I would just say that we've made good progress toward that consolidation and we expect to have continued benefits not only this year but going forward.

Yeah. Just as a follow-on to that, Matt. Many times we have contracts that have either rentals or leases with longer term life, so this is going to phase in over time, even as we reduce the number of vendors.

One follow-up would be on the regulatory front. You mentioned Japan. I guess the lower house of parliament approved legislation that would allow split up in privatization of their state-run postal system. I was wondering if that has any implications either in the near or longer term for you, positive or negative, just to refresh there?

As a general matter the leadership of Japan post which is much more commercially oriented, has really significantly improved the focus on efficiency and effectiveness of mail in the mail segment. And we've seen the benefit in improved revenue growth and as I said we had double digit revenue growth in the quarter.

Privatization is a much longer term proposition, and we believe it will be beneficial, but it's too early to predict the form in which -- form it will take.

Thanks, guys.

Thank you. Our next question is from Shannon Cross with Cross Research. Please go ahead.

Hi. Good afternoon. Could you dig a little bit more into your -- the managed services business?

You had mentioned some of the drivers of the double digit EBIT growth, which is great, and I just wanted to see if you could give us an idea of -- was one bigger than the other or was it sort of an overall improvement?

I would say at this point it was an overall improvement. I think -- I do want to mention one piece which has to do with contract repositioning, because it is more noticeable than the others in the income statement.

We did a major agreement with -- to take over all the facilities management for Shell Oil, and five years ago we called -- it was (SIG), the (SIG) transaction or contract. We made a decision that the -- we would exit the noncore facilities management services piece of that contract while keeping the core or mainstream document management services. That exiting took place in May.

It will have an annualized effect on revenue of about $50 million, but it will have virtually no effect on EBIT. This was very low margin, so our margins on the management service business will improve quarter by quarter and it will also improve our cash flow because we had a lot of receivables that we were collecting and on which we took risk. And all that ends as of the end of -- all of that ended as of the end of May in this quarter. So that will have a number of positive effects going forward in terms of margins and also reducing the amount of effort we had to make on that contract.

Okay. So you're exiting -- you said $50 million annualized revenue. And you exited -- was it early May or late May?

End of May, annualized. So this quarter had about a $6 million effect on revenue. You'll see a full quarter impact starting in the third quarter, and it will obviously remain in the comparables until we get to third quarter of next year. But it's a decision that was very consistent with our plan to exit low-margin accounts where we couldn't find other things to do. And the good news is that in most of the other cases, we are finding opportunities for margin improvement.

So, in the other contracts we have gotten some -- where we've really looked at low margin accounts, and the vast majority of them we are seeing opportunities to either do things ourselves or renegotiate with customers and get improved margins. But that one we have made -- that's a big one, and we made the decision to exit it.

Okay. Bruce, maybe you -- Mike mentioned receivables. Was there much of a receivables balance associated with that contract or?

Nothing that would be extraordinary. It will be typical terms for management.

Okay and then one final -- my follow-up question here. In terms of interest expense, obviously, as would be expected, but how should we think about interest going forward? Anything you can do to try to mitigate it or?

Shannon, you probably saw that we did a $500 million debt issue just in the beginning of this quarter. We did it at a coupon rate of four and three-quarters. And as a result we now have three-quarters of our debt, which is fixed-rate. And as you know normally we would only have 50% of our debt being fixed-rate. So we've already taken quite a bit of steps to insulate ourselves against the movement. And as you know, we're essentially having a higher cost as a result because fixed is still higher than floating. So that's the tradeoff we've made to have a higher interest cost in the short term with the expectation that over the long term it will perhaps save money but if nothing else definitely reduce the risk.

Should we assume that 75% is where you're comfortable for the foreseeable future or -- ?

I'm saying that we are above where we would normally like to be, so in a sense that we have the flexibility now to let more of our debt be floating as we go forward.

Oh, okay. Great. Thank you.

Thank you. We'll now go to Jay Vleeschhouwer with Merrill Lynch. Go ahead.

Good afternoon. Mike, with respect to the six growth drivers that you mentioned a few minutes ago. Do you see any trends with respect to let's call it hybrid sales? Where two or more of those items are jointly benefiting the business with common customers or in common markets?

That's a good question. We are seeing more cross-selling and partnership opportunities. For example, where we would bring in a Group 1 Software to an account, you know, and additionally get some mail services in that same account or where we're getting on an enterprise sale, global payments, Group 1 and mail services. So, some more naturally link up than others.

Internationally we are seeing tremendous supplies growth and small business growth, particularly in Europe where we have approved small business products like the personal post office. The growth there has been very, very strong and looks like it will continue to be strong, you know, for at least as far out as we can see.

Okay. Just clarification, when you say something like personal post office. Is that a market phenomenon, a real technology or economic trend or is it perhaps some sort of transient phenomenon in lieu of postal regulation change or market reform?

No, I think just as we've seen here in the United States, we think there's a tremendous appetite for small businesses in developed countries around the world to find more efficiency in their mailstream solutions. And just as we've seen here in growing our small business customer base actively over the last -- really the last nine years, we're seeing a similar trend take hold in Europe.

And we are launching personal post office or have launched it in Australia and are looking to come up with a -- when I say personal post office, I take that back. We are launching our new Case 700, which is the new digital version or new generation personal post office. We're starting to launch that in additional countries around the world. And we expect to see tremendous small business penetration, and obviously, that's going to grow supplies as well. And it's called -- Case 700 is our brand name. It's also -- you might see it under the name Mail Station.

So we're going to see that get tremendous penetration. That will help our international revenues. It will help our small business growth, and it will help our supplies growth everywhere that we launch it and replace older systems.

Okay. With respect to the presort, could you be a bit more specific as to the double-digit rate of organic growth you refer to? Has the growth been stable or decelerating, and if the latter is there any case for it to perhaps, re-accelerate organically?

I think the number this quarter was around 17%. I think we were at maybe 20% the previous quarter, but keep in mind it's off a larger base. So, you know, the postal transformation could have a positive impact, a slight impact on revenue and EBIT. The new rate case, if it were to go into place January 1, would be accretive next year. It's a little hard to predict until the rate case is finalized, but it should be a few million dollars of improvement next year over what the growth would have been because the spreads and all the discount categories, if the rate case stays unchanged, would widen.

As an example, the spread from full rate to best discount rate at first class, if the current rate case were to go into effect January 1st unchanged, it would move from 9.2 to 9.7 cents. We would share in that half-cent discount with the customers. And so there would be some accretion there. Again, it's really too early to predict how much of a benefit we are going to get from that.

Thanks, Mike.

Your next question is from Carol Sabbagha with Lehman Brothers. Go ahead, please. Thanks.

Just a couple follow-ups on revenue growth -- on organic revenue growth. If we look at global mailing and just separate it out into components, can you talk about what U.S. mailing did organically, international mailing, DMT, and supplies, please?

U.S. mailing was around 5%. International was a little bit more than 6%. Supplies was I think around 12% and DMT was only a little bit less, between 1 and 2%. I should point out that -- I'm sorry. It was pretty close to flat if you look at all the factors. Although, our written business at DMT was probably at a double-digit increase over both prior year and prior quarters. So we're optimistic that DMT is going to bounce back in the second half of the year. But it was probably the lowest performing of the different groups in the second quarter.

And U.S. mailing, the 5% is pretty good growth rate. Do you think that was being impacted by the tail end of meter migration?

I'm sure there was some impact from meter integration, but, you know, there are some elements like, you know, I think the value-added services and all of that, and higher realized price that certainly helped here on a model by model basis. But meter migration -- of course, new product launches.

We did launch during the quarter our new high-end mail creation -- mail folding inserting system, the DI 950. We launched on the low end the Mail Station, and we got very good play in the medium and low-volume products. So, I think it's a little hard in those situations to isolate the migration factor versus the new product launch factor. But I think both contributed in the U.S.

Mike, you talked about higher realized prices. Where did that come from? Is it that the hardware prices were higher?

No. Well, you know the revenues per machine, the total amount we take in from the customer when we go, let's say, low volume to low volume; middle volume to middle volume; high volume to high volume. We have more ways of giving customers value and thereby getting more revenue per customer. And even though we talk about the downshifting from high to medium, medium to low, that is largely offset by the combination of supplies revenue, value-added services, the higher value customers place on equipment sales, the postage discount program where that's applicable.

So we have more ways of capturing revenue from customers today than we did a year ago, and we're continually looking for new ways to get more revenue sources from more customers. Global payments, obviously, we're getting additional revenue sources as well.

And a broad question on cash flow and balance sheet. Where do you stand now with your view towards acquisitions relative to dividends and stock buybacks? And how do you view your current debt situation and debt levels and where you want them to be?

Right. Carol, this is Bruce. We're really tracking almost exactly the pattern that we talked about at analyst day that our first priority is the dividend.

We not only are saying that the dividend level is safe, but we intend to have annual increases, although as we've mentioned to you before, we're trying to lower the payout because it's higher than it has been traditionally because of the spin-off of office systems. Secondly, as you can see from this quarter, we continue to be committed to a stock repurchase program, and we will continue to assure investors that we will not have an increase in the number of shares outstanding. So, we will continue to offset any dilution due to options or to employee stock purchase plans. Then thirdly is acquisitions, and the difference with acquisitions is that we are acquiring cash flow and earnings, and so we can leverage those. And that's why you're seeing debt going up.

But overall, we would expect that the total of acquisitions this year in 2005 is right in line with what we talked about at analysts day, which is -- we said then that typically it would be somewhere in the $200 to $500 million with an average probably close to about 400. And that's best guess probably where we'll end up for the year.

And on restructuring, can you remind us what your plans are for this restructuring program? It seems like you're taking it a little bit faster than maybe we would have thought. Just remind us what your view is on it and what the cash out was this quarter for it, if you don't mind.

Yes. Sure. First, the cash outflow was 13 million. And when we started the year we said that pretax before the main plant sale would be 50 to 70 million. And we also said that it's very hard to predict quarter by quarter how it will go. And this quarter is a good example of that -- where we had a relatively high amount. So we're -- we've done 40 million to date, so that the implication is we're more likely to be at the high end of the range. But again, that really is a function of how plans materialize and when it is that we have enough certainty that we can take the charges.

Thank you very much.

Thank you. Our next committee is from Del Warmington(ph) with DellWare Capital Management. Please go ahead.

Thank you. My question has been answered about the Japanese business. Thank you.

Then we'll go to Lloyd Zeitman(ph) with Bernstein Investment Research. Go ahead, please.

Good afternoon, folks. Let's see. The foreign currency impact, could you tell us what that was on earnings per share?

About a penny.

Okay and what do you anticipate for the second half in terms of the impact on revenues and EPS? And if you could, maybe align that with your expectation for revenue growth in the third quarter.

Yeah. Lloyd, the expectation for the year is that it will be neutral from here on out in total for revenue growth and for earnings. So in effect we'll have less of a contribution from foreign exchange, compared to where we started the year with. When we started the year, we thought we'd get $0.04 a share, and it looks like that's going to be $0.02, assuming currency stays where it is now.

We'll have a slight uptick in revenue in the third quarter, and we now forecast a slight downtick in revenue in the fourth quarter. Say, call it a half a percent. Not a material effect on the forecast we gave you.

Okay, and also on R&D, R&D was up about 4% year-to-year. And I know it's kind of lumpy. And when you have products that are released into the marketplace, essentially the cost shifts to other areas in the income statement. I was wondering if you could give us some idea as to where you see R&D going for the remainder of the year?

Keep in mind that we did the Group 1 acquisition third quarter of last year and that adds a significant R&D component that wasn't there second quarter a year ago. But I don't see any major trends in R&D the rest of the year. You know, and that should normalize in comparison as Group 1 gets complete. You know, full quarter-to-quarter comparison, which would be in the fourth quarter.

Okay all right. I think that's it for now. Thanks.

Sure.

Your next question is from Chris Whitmore with Deutsche Banc. Go ahead.

Good afternoon. Am I coming through this time?

Yes.

Great. Couple follow-up questions. First, what's the reasonable gross margin expectation for the business services segment going forward?

Well, obviously, we'd like to get up to and over 20% and we're moving more toward value-added services to be able to do that. But the reason we don't target astronomical numbers is that, you know, we are doing more sales of equipment into PBMS accounts.

So sometimes we might recognize the -- we might recognize the revenue and margin over in mailstream. But we are going to -- and, obviously, we're going to continue to reduce, as well, our administrative overheads and SG&A applicable to PBMS. But we did go up this quarter, and we'd like to continue to increase the gross margin at least to the 20% level. I think we were in the 19% area this particular quarter.

Where do you think -- a reasonable time frame -- is that a six-quarter type of timeline?

I think we could do it sooner than that. I -- we -- you know, that obviously depends, in part, on the business mix, but yes, we should be able to do it considerably sooner than that. I -- we're trying to improve the amount of -- looking end to end, when we look at mailing equipment that we've placed in PBMS accounts and PBMS, we are trying to increase the end to end margins.

Some of the time that will be recognized in management services and some of the time it will be recognized in the mailstream segment, but the end of the day, we believe there is room for margin improvement and reduction of administrative overhead and operating expense -- expenses relative to that business, as well.

Okay. Secondly, if we look at the SG&A as a percentage of sales, that number has trended up a little bit year on year the past couple of quarters despite ongoing restructured programs. What should we expect from SG&A to sales going forward?

This is Bruce, and what I would point out is that, first is that, to some extent it reflects the selling and marketing expense. But even more importantly, if you do it on an organic basis, SG&A would have been down this year compared to last year, if you stripped out acquisitions and currency effects. And the gains were very much in the G&A area. So the structuring is having the effects, but unfortunately it is being hidden by the other things going on in our overall business mix.

So I think you could plan on -- absent the effects of acquisitions and currency, you can plan on continued improvement on our SG&A as a percent of revenue, which is consistent with what we have said is part of our earnings model.

Okay. And lastly on meter migration, could you provide just a general update as to where we are in the over all migration process? How many meters are on you out there yet to be migrated, et cetera?

There are roughly -- we are 79% of the unit volume of meters that have been converted to digital and compliant product. I think we have probably what 21% left. It's roughly 270,000. But in terms of postage volume that will be converted to digital where we can get supplies revenue, that's at a considerably earlier stage because the Infinity meter, which is our highest volume meter for the conversion is -- we just have a few hundred units out. We've got several thousand units to place there. We still have a disproportionate percentage of the meters that have converted to digital are the lower volumes. What remains is predominantly higher volume.

Is there a time line when you expect to finish the conversion?

Well, the regulated -- the required timeline -- there are two deadlines about, I would say, 75% of the -- or about 70% of the migration is required to be completed by the end of 2006 if the U.S. Postal Service follows past practice. There is usually a little bit of slippage that might take place into 2007 in the United States.

The final migration deadline right now is scheduled until the end of 2008. And I would, again, point out that there are migrations of varying sizes going on continually all around the world. So when the U.S. migration ends, it would not surprise me to see other smaller technology transmissions being mandated in other countries.

Do you expect any margin transitions to occur as the migrations increasingly focus on the higher end, higher volume machines? Does that have margin indications for that business going forward?

I don't think so. The higher volume machines also -- there is more value placed on value-added services. And again, if there is more customer focus on the high-volume machines, they also churn out a higher volume of supplies where we can get supplies revenues. We continue to find ways of adding value so that what we don't capture in equipment sale revenues, we can capture in services, global payments, or supplies.

So our goal is always to find more and more ways of adding value. That's also the population that's going to be a candidate for the postage discount program where we get very high margins -- where people are paying full rate today and can't really readily take advantage of presort services that we might make available.

Thanks a lot.

Thank you. Our next question is from Shannon Cross with Cross Research. Go ahead, please.

Hi. Sorry. Yes. The follow-up I had was basically on the restructuring. Have you given us a headcount number? I was just curious. I can't remember.

We didn't. For this quarter it really only affected 88 employees who terminated during the quarter, but the charges will go toward a lot larger number by the end of the year. That's roughly call it 500 that could be affected.

That is worldwide.

Worldwide, yes. I should say too that the restructuring this quarter was much more than normally concentrated in international locations. So this was much more on that basis than the typical quarter.

Okay, great. If you assume 500 and put 75,000 or something on it, that's a good proxy for how the costs should run out?

Oh, I think, Shannon that it's actually -- it's more complicated than that, because in many cases the restructuring relates to outsourcing. So you're going through a calculation of what the alternative cost is versus what it was in the United States. You also have transition costs and so forth.

So some of those rules of thumb are not quite that easy to use, and I just would caution you not to do too much. As we said at analyst day, we expected to have benefits in 2005 from restructuring incrementally somewhere around the $40 million range. That's still probably the best number you should use.

Great. Thank you.

We have no further questions. Please go ahead with your closing remarks.

Well, I just want to say again that we were very pleased with the quarter; that we have tremendous opportunity within the Mailstream that we are going to continue to look for those opportunities and we are very optimistic about the opportunities we and our ability to take advantage to them. We'll be back reporting to you in late October.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.