必能寶 (PBI) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to Pitney Bowes third 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 & Chief Executive Officer, Mr. Bruce Nolop, Executive Vice President and Chief Financial Officer, and Mr. Charles McBride, Vice President,Investors Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you. Good afternoon. Let me remind you that you can find today's earnings press release and the attached schedules on our website at www.pb.com/investorrelations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change, based upon various 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, sus--such as adjusted earnings per share, earnings before interest and taxes, or EBIT, free cash-flow and organic revenue, there will be a reconciliation of those measures to GAAP measures located, again, on our web site 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, Charlie, and good afternoon. Our revenue and earnings per share performance were in line with our guidance. Revenue grew 11% to $1.36 billion, with 6% of the revenue growth generated organically. This marks the fourth consecutive quarter that organic revenue growth has been 5% or better, and within our targeted range of 4 to 6%. Net income grew 6% to $144 million, earnings per diluted share was $0.62 versus $0.58 per diluted share in the prior year. And if we exclude the impact of restructuring, adjusted diluted earnings per share was $0.66 versus $0.63 in the prior year.

We were especially pleased that our EBIT grew approximately 12% during the quarter, and that we were able to grow our earnings per share, despite an increase in interest expense and a higher tax rate compared with prior year. Excluding the impact of restructuring and capital services, our EBIT rose 14% and earnings per share grew 8%. We experienced broad-based growth, highlighted by the contribution of our growth engines, which include mail services, payment solutions, supplies, software, small business and international. We're particularly pleased with the exceptional results from Group 1software. In aggregate, these diversified growth engines increased 9% during the quarter and represented 46% of our total revenue.

We also enjoyed ongoing strength and momentum in our core Mailstream businesses. Our mailing equipment business has generated 5% growth during the quarter as a result of global demand for our network digital mailing systems of all sizes. Our mailing equipment business has generated 5% growth during the quarter, as a result of global demand for our network digital mailing systems of all sizes. We saw strong revenue growth from document messaging technologies in the U.S., as it achieved higher placements of the industry-leading Advanced Productivity Systems, or APS, and newly introduced Flexible Productivity Systems, or FPS.

During--for the quarter we generated $218 million in cash from operations. Our free cash-flow was $165 million, which reflects cash from operations after subtracting capital expenditures and excluding the effects from our restructuring program. We purchased approximately $1 million of our common shares during the quarter for $41 million. The board of directors approved an additional $300 million authorization for the repurchase of shares over the next 12 to 24 months. And as a result, we now have $310 million for future share repurchase.

During the quarter, we recorded after-tax charges of $8 million or $0.04 per diluted share, as part of our previously announced restructuring program. For the fourth quarter we anticipate not after-tax restructuring charges in the change of $5 to $20 million or $0.02 to $0.09 per diluted share. We anticipate fourth quarter revenue growth in the range of 5% to 7% and diluted earnings per share in the range of $0.64 to $0.73. Excluding the impact of restructuring charges, we expect our adjusted diluted earnings per share to be in the range of $0.73 to $0.75. Earlier in the year, we announced that we had entered into a definitive agreement to affect a sponsored spin-off of most of our Capital Services assets. We now expect the spin-off to occur mid-year 2006, because the preparation of the regulator filings with respect to the new company has taken longer than anticipated. In summary, we were very pleased with our performance this quarter, Our performance reflects our successful execution of strategies to enhance our core businesses, develop new growth engines, and expand our presence throughout the mail stream.

And now we'd be happy to answer your questions.

Okay. We're ready for your questions now. Jeremy?

Sorry, my phone was muted. [OPERATOR INSTRUCTIONS] The first question today will come from the line of Jay Vleeschhouwer from Merrill Lynch. Please go ahead.

Hi, this is [Woodren Ho] for Jay Vleeschhauwer. Can you describe the momentum you're seeing in hybrid sales? And related to that, can you give some adv--some examples of customers that implemented your broad vision of the Mailstream for available printing data or direct marketing, for instance?

When you say hybrid sales, you mean across mult --

Cross-selling.

Oh, cross-selling?

Cross-selling into--or cross selling multiple products into a single customer base.

Yes, what I'm not sure about--I mean, you know, we announced the Banc of America deal a year ago, but we have had other customers in the interim. I'm not sure what we're authorized--we usually ask customer permission to mention the names on a call. I will say our cross-selling efforts in total, year-to-date, are more than double what they were in 2004, and we're seeing an increasing number of cases where we're selling multiple solutions. I'm looking at my colleagues here, and unless we've gotten specific clearance from a customer, I'm unfortunately not able to identify them by name in this kind of forum.

But based on the commentary, it sounds as if interest and momentum is mounting?

Oh, absolutely. As I said, we're more than double year-to-date what we were all of last year.

Could you describe the organic growth you're seeing from the larger acquisitions of the past year and a half, i.e., Group 1 and other software and service purchases?

Well, Group 1 had a phenomenal quarter. It was a major contributor to the [dot] to DMT getting a 26% growth year-on year. And the Group 1 software licenses were a major contributor to that. It was the best-ever quarter for Group 1 revenue in EBIT. What I particularly liked about the Group 1 offering is that a lot of the growth came in what we call the geo-coding space, which is the use of address management software for purposes other than helping the postal service and alternative carriers find correct addresses for delivery. It is using--in one application for a major telecom provider, being able to lock-in addresses to determine the appropriate tax rates to apply to telecom bills, you know, state and local tax rates. And that kind of application applies--I think there's phenomenal growth opportunity for those kind of applications within Group 1.

Imagitas had phenomenal growth. And not only did they get continued growth from the--the address--the marketing to people that are going through a change of address process at the postal service. And the vehicle registrations in four states added a fifth state during the quarter, and they launched, toward the end of the quarter, catalog request card. And what that does is for people that are moving, catalogs are not forwarded. But they can check a box on a catalog request card that's included in the move update kit, and we are paid a fee for every box that is checked by every mover. So, Imagitas had a very, very good quarter, as well.

We had good growth. We've had good growth year-to-date from Compulit, our legal litigation support firm. We're still in a mode of integration on [Incora], which is our mail services acquisition from last November, but that typically takes 18 to 24 months to get focused on the right kind of pricing and service offering. So we couldn't have expected significant organic growth. On the acquisitions where we did get--you know, have an expectations of organic growth, we had a very good quarter.

Lastly, in terms of geographically, do you have any data suggests you may be getting share in any or all of France, Germany or the UK?

It is hard to get the data on any of those markets mid-year, but we've gotten some large orders, particularly in France. And we feel like we're getting good growth relative to competition, in--certainly in France. A little harder to assess in the UK and Germany.

Thank you very much, gentlemen.

You're welcome.

Next question will come from the line of Matthew Troy from Citigroup. Please go ahead.

Good evening, guys. Question on the cap services spin. Specifically, if I think about it, as I understood it, there were two impediments. One would be the documentation issue surrounding some of the legacy leases and two is the IRS coming back to you with their ruling. I guess if you could give us little bit more of a deeper understanding of both? And then the second part of the question was with respect to the strategic partner, is there an exploding deadline or any reason to believe they might be getting impatient with the process which taking longer than expected?

Let me talk to the first issue and then Bruce, who is closer to the second one, can answer the second question. The IRS process is still within the time frame that we expected. It's under review, and we anticipated it would take four to six months, and we're still within that time frame. We don't have any reason--we don't have any reason to believe there is a problem. We just haven't gotten to the decision point or dialogue point with the IRS, at this stage.

The documentation issue, I think the big--the big unknown going in was not so much on the active transactions on our books today, but the fact that, with a five-year look-back on transactions that were on our books as far back as 2000 and that originated mostly in the '90s and, in some instances, back to the '80s with a lower materiality threshold, we really didn't know. We made estimates how long it would take. It has taken longer than we anticipated, preparing them. And being late in the year now, we ha--we're really looking forward to putting the 2005 financials into the proposed registration statement, which is kicking us into mid-2006.

Okay.

But, Bruce can talk to the second.

In terms of the support of the equity provider, which is [Servrisk] Capital, they have continued to be very involved in the process, and we've been keeping them apprised as we went along. As a result, they're very aware of just what the issues are, and why it is taking so long. And, furthermore, they're aware this is not an economic issue, it's merely a documentation of accounting. And, so, they have been very accommodative in giving us more time to accomplish it, and we continue to expect that they'll be the spin-off transaction in mid-2006.

Great. Second question I had, I guess operationally, your numbers look really good from where I sat, relative to my model. I was a bit surprised on the interest expense. Was wondering if you could give a quick sense of where that might level out in the fourth quarter? And then I have one follow-up.

Why don't you talk about --

Just as a general rule of thumb, for every quarter percent the short-term rates go up, that general would cost about four million analyzed,or about a penny a share. And that's due to the floating rate debt, which is currently about 22% of our total debt. And then we also have some auction-preferred which is supporting a tax-oriented vehicle that was set up some time ago. And we haven't given a forecast on fourth quarter. I think it may be up slightly but--In terms of rate, but we've had a--should have a lower debt balance. So I'm guessing it'll be roughly the same.

Okay, and my last follow-up, and thanks again for the time, was if I look at the unallocated corporate expense, if I strip out the interest and the restructuring, it looks like that number was up, I don't know, 6, 7, 8%. I thought with some of the systems investments in the past that we could actually see on an absolute dollar basis the number could come in a bit. If you could just help me in terms of as a percentage of revs or absolute dollars, do you see that number flat, do you see it up slightly, trending with revenues? Help me conceptually think about where it goes?

Sure. The numbers we have as corporate expense did not go up that much. And, in fact, where we're really seeing the benefit of the lower expense, it isn't so much in just a corporate expense line, but in the overall Company GNA line. And you're seeing--on an organic basis, in other words if we hadn't done any acquisitions, a significant improvement in our GNA expense ratio this quarter. So that's where we're getting. The other place we're definitely seeing the benefit of less transformation spending is in cash-flow., because much of the expenditure on SAP and those other systems was going into capital--capitalized amounts, and so that's been a significant reduction.

All right. Thanks again, guys.

You're welcome.

Next question will come from the line of Shannon Cross from Cross Research. Please go ahead.

Good afternoon. Wanted just to get an idea--I mean, you've obviously made several acquisitions in the last quarters, where you stand in terms of your acquisition pipeline, and any thoughts as we, you know, enter the fourth quarter?

Well, you know, the one that's announced that's still on the pipeline, of course, is Firstlogic, which is going through the regulatory approval process. And we are obviously continuing to look at a variety of both bolt-on and platform acquisition. We don't have any specific acquisitions to announce now. But, you know, we continue to look at opportunities in adjacent spaces to grow through acquisition, as well as organic investment. I can't announce anything right now. Our major focus in the acquisition front is to--is to get Firstlogic completed.

I might have missed it. Did you make any comments about how PSI is going and any update there in terms of revenue growth, et cetera?

No, I didn't. But I will. PSI--well, our mail services group had phenomenal organic growth in the quarter. I think it was 129%. We usually get--

That's total growth.

Total growth, I'm sorry.

Yes.

Our same-store, which is the number we usually use, was 15% this quarter. Our margins continue to improve for original sites. And overall, our mail service EBIT margins improved versus the prior quarter and prior year. We are in 30 sites in 27 cities,but we're going to be closing a site next month in the Delaware area, to improve efficiency and reduce costs. from And we haven't yet fully gotten the benefits [Incora] because typically for an acquisition of that size, it would take about 18 to 24 months for full integration and to get them aligned to original MOP--site processes. So we're looking at, probably, mid-year next year for [Incora] to start to approach PSI margins. But I feel very, very good about pre-[Incora] PSI and how it did this quarter.

And then, Bruce, how much were supplies up year-over-year? Did you--will you provide that?

Sure. It is right in line where it has been, organic supplies growth is 12%.

Okay. And then, Mike, one last question. Can you just give us an update on the postal reform situation?

It's a good question. It--of course the house has passed a bill that was introduced, HR22, and the senate committee has passed the bill. Because of the hurricane and the--and some other intervening events, where we are on that is I think a lot of progress has been made in terms of issue resolution from the major stakeholders.. I'm very confident this bill will pass.

The issue about whether it passes this year is that, as a practical matter, bills get on the floor of the senate in the latter stage of the session only if debate can be shut-off. And that requires unanimous consent and it is between Senator Collins, who's the sponsor of the bill in the senate and a handful of senators who have specific issues as to whether those consent issues can be resolved. If not, I expect it will move forward in the first part of 2006. And at that point, there is less time-sensitivity to having a issu--having a bill go to the floor without--without debate.

Okay. Great. Well, I have to say, it is amazing how fast our congress works, but hopefully at some point, you guys will get that through. Thank you very much.

(inaudible) there. You have White House support, you have, I think, bipartisan support in the senate and house, and many of the stakeholders that have been at odds with one another in the past are supporting this. So we're really down to a handful of niche issues, as I would characterize it, and they are not going to stop the bill from passing. They are really going to question it, do they have the potential to delay it into 2006.

Okay. Thank you.

The next question comes from the line of Julio Quinteros from Goldman Sachs. Please go ahead.

Sure, good afternoon, guys, or good evening, actually. I think was -- I don't know. Can you just walk us through again the--six growth engines, the performance of those growth engines real quickly?

Yes, software, I think, was--I don't know, have we gone down to--I don't think we get down--but, we'll just tell you impressionistically how we do--we're going organically.

That would be great.

We already talked about and we've been public on that,that's 12%. We had strong double-digit growth in global payment and in mail services. More high single-digit growth in software. Our laggers this quarter were international and small business. And international, in our global--you know, what I call our mail-stream products, which would be our table-top mail finishing systems and stand-alone meters, our typical growth rate. We hit some timing issues on large DMP acquisitions in Europe, in particular, and we built backlog, but didn't translate it into revenue in Canada.

But I'm confident that the issues relative to international--I would say as well in small business are temporary. I'm optimistic that both will bounce back, if not in the fourth quarter, then certainly in 2006. I would say that earlier in the year, for example, global payments was a laggard and it came back very strongly in the third quarter. So that's roughly the breakout.

And, Julio, of course the other general comment is that it represented about 46% of our revenue, and the organic growth of the six, in total, was 9%.

Got it. Okay, great. And one of the other things I was kind of wondering as you guys were talking about your numbers, have you guys--or were you able at all to quantify any impact, at all, from Katrina and some of the other hurricanes that we've had so far?

From the Katrina and Rita, it's less than a penny. It was obviously adverse in the short term. But, on the other hand, we obviously are going to look at what kind of business opportunities the fact of those events presents. Like what can we expand in terms of business recovery, offerings to our customers. And we did get a license from FEMA, from Group 1 software. And we're hoping to get more business from government agencies on a go-forward basis. But the--if we get between reserves and actual experienced losses, it was a little bit less than a penny.

Great. Thank you. And just one other question. Related to the Group 1 performance this quarter, obviously a very strong number across Group 1. Here's what I'm wondering. For the fourth quarter, how much was actually left in the pipeline for Group 1, or do you have to rebuild that pipeline going into next quarter?

That's a good question. We expect to have good growth in Group 1 in the fourth quarter. Whether it is phenomenal growth or good growth is hard to predict, because software licenses tend to come in in the last day or two of a quarter. And whether they get done December 31 or January 3 or 4 is very often not known until you get to that--get to the evening of December 31. And that's true of every quarter. So we can say we feel good about the pipeline, but the timing--it's a bit of a lumpy business.

Sure.

And so I would say our pipeline is good, but being able to predict revenue growth rate, it just doesn't have the same predictability as postage meters.

Okay. In the 5 to 7% growth for the fourth quarter, is that all organic? Or is that an all-end number, including the impact of currency, et cetera?

That's all in. But currency is not a favorable thing, it may be a slight negative fourth quarter.

By how much?

Less than a percent. I'll cut through it, the organic assumption that equates five to seven would be the 3 to 5% range.

3 to 5%?

Correct.

So a little bit of deceleration versus the last couple of quarters. Maybe can you just walk through the factors on that?

Just the primary factor is just year-over-year comparison. We had a very strong fourth quarter last year, so just by the nature of the numbers coming in, that's the primary.

I mean, we could--the kind of quarter we had, the fourth quarter last year, there were a lot of big things that popped. And we could see that again, but we can't predict that. So we are just taking more of--on a regu--on a steady state run-rates, we would--we would not see it decelerating the momentum and the business momentum we're seeing is good, but it has got a much tougher comparison than any of the previous quarters this year.

Understood. Thank you very much.

By the way, I also think 2006, although we don't see any--you know, the momentum, we expect to be good into 2006.

Great. Thanks a lot, guys.

Sure.

Next question will come from the line of Carol Sabbagha from Lehman Brothers. Please go ahead.

Thanks, very much. A questions on the margin and global business services. It improved much more than what we thought. Is the 6.9% or better, hopefully, sustainable going forward or could that trend backwards, get trend back down.

Carol, we fully expect that to be sustainable. If you think about the components, one on management services, our priority is to improve profitability rather than revenue growth, and that is bearing fruit. And then, secondly, on the mail services side, as Mike said, we're still integrating some of the new sites, and as they become more mature within our system, we expect the margins to improve. And we also expect good margins out of the [magdas].

And then you bought back a decent amount of stock this quarter. I guess I would have assumed, maybe, you were going to be more aggressive, given where the stock is. Are there any plans to up that a little bit, if the stocks remain at these levels?

Carol, I would say that we're--we are repurchasing more than we originally planned at the beginning of the year. I think, if you recall, we budgeted $150 million total, and we're above that now. What I would say is we're going to continue to buy in stock as long as the price is where it is, that we think it is very undervalued stock at this time. And our only constraint is just our relationship with the rating agencies.

And on options just looking into next year, should we still assume options expense that goes through's is going to be roughly $0.08, or are there plans to move towards RSU's or accelerate the vesting?

I'd say that is the best assumption at this point, Carol, and the board of directors will be finalizing compensation at the end of the year.

The end of the year or Jan--January, and we'll give you up dated guidance, but for now you can assume the $0.08 a share.

Okay, and then one last quick one, because I missed it, so I apologize in the beginning. What was organic revenue growth for the whole Company?

6%.

6%. And U.S. mailing, did you ever say that?

We did not. We could do that for you.

That would be great if you could.

5%.

Good.

Okay.

Well, yes, just to clarify, Carol, that 5% would be for the whole Global Mailstream solution segment, and the U.S. portion would be about 4%. And the one thing I would say, though, Carol, is that often, when you think about organic revenue, it's confusing because we have such a recurring revenue model. One thing to think about in the U.S. mailing, if you think about just the type of business that would be comparable to [neopost] you might compare it with and just sales of equipment and sales of supplies, That organic revenue growth is roughly 9% for the quarter.

Okay. That's helpful. Thank you much.

Next question will come from the line of Chris Whitmore Deutsche Bank. Please go ahead.

Thanks a lot. Wanted to ask a question on the rental revenue line. Looks like it was down modestly year-on-year. Can you talk a little bit about the outlook for that line going forward and the population of meters out there in the field? Any color on that would be helpful, as well.

The basic point is that, as we've mentioned on other calls, customers are right-sizing their meters, and as a result, they're going from larger ones to smaller, and that has an affect on the rental line. And we believe that's the right strategy for the Company, we're preserving our population. And with our recurring revenue model, that we will make more money over time. But it just doesn't come in through the rental line, it comes in through supplies and others. And we expect to grow the population. And that's always the question, is whether the growth in population will be enough to offset the right-sizing of the equipment.

Meter population is a less meaningful number over time for a couple of reasons. One is that we see--what we're seeing for many customers is their mail stream usage doesn't necessarily fit the meter model. For example, the eBay customer-base shows up on the sales line, and that thing--the eBay transaction volumes and revenues are growing every single quarter. And this year we expect it'll be over a penny a share. We are starting to rent a product called Shipstream, which is for somebody that does low letter mail, but more postal packages. We launched the [Snazel] personalized postage partnership for people that are stamp users. And what you're going to see more and more is us leveraging our online postage capabilities for people that are not traditional meter customers, but where we can get revenues from other sources.

And with the--and the other comment I would make, and this follows on Bruce's comment about meter population, not necessarily the benefits showing up on the meter line. With the Infinity meter which is for the production mail customer, it's a single meter, and on the population figures it shows up the same as a standalone meter, but the supplies revenues for that meter are huge, because these are highest volume mailers. And we're getting--that's part of what is fueling our 12% supplies growth. And that will continue to be a agent for supplies growth over the next couple of year. So, we focus less on the meter rental line than we do getting the greatest share of mail stream revenues, whatever the customer may need, and it may not necessarily be a meter.

Just to follow-up on that, any way to size that supplies line? How large is it in terms of percentage of total revenue today?

Supplies about 7% of our revenue in total.

Great. That's helpful. Thanks. And then coming around on the interest expense question, you talked about 22% of your debt floating. Are you comfortable with that number given all the fed-speak we've been hearing, et cetera? Are there any changes or any plans to go out longer on the yield curve? How are you thinking about your interest rate exposure right now?

Sure. We feel real good in the sense that our normal rule of thumb is a 50/50 breakdown between floating and fixed. And we correctly anticipated that rates were going up. So we did a number of fixed rate longer-term financing which will give us flexibility to accommodate our debt. In other words, we don't need to do any more long-term financing. At this point, you still have a relative advantage of floating versus fixed, so no plans to do any more financing at this point.

Great. That's helpful. One last one, on pension, is there any update to expected pension expenses next year? Any color you can give us? I know it is still early in the planning, but any color there would be helpful. Thanks a lot.

Sure. As you pointed out, it's still a little early, because the actualairily assumptions get set in December and probably the one that's the least able to be predicted is the discount rate, which is a function of long-term bond rates in December. But given where rates are now and our current assumptions, we would expect that the net increase in pension expense in 2006 compared to 2005 would be roughly $0.02 to $0.04.

Thanks a lot.

Our next question will come from the line of Lloyd [Zytman] from Bernstein Investment Research. Please go ahead.

Hi, folks. Let's see. PBMS was down 2% year-to-year. Aside from Shell, were there any other contracts worth talking about?

Not individually. That was an order of magnitude. If you strip that out of the equation, we would have grown organically PBMS worldwide by 2.7%. And there was no other single contract that even approached Shell, either positively or negatively.

So then, would it be reasonable to say you are at a point now where you could start growing the revenues again?

I think 2006 is more realistic. We still are going through a profit focus on the business. Our new President, Vince de Pamas, is been on the job June 20, and there's still a lot of profit improvement opportunities with low-margin contracts that he's working through.

Okay.

We are getting very good profit improvement in PBMS in terms of EBIT growth.

Okay. And also, as far as your costs, and let's throw in credit costs in that mix, what are you folks seeing, given the nature of our business in the U.S., globally, in terms of the--both the cost of doing business, overall, and the credit situation?

Our portfolios are in excellent shape, and they keep getting better, as a matter of fact, as we develop better tools for late-stage recovery, and do better up front analysis in terms of approaching--you know, how we approach customers. I think we're getting better at collecting from our enterprise accounts where we've been. I think. not as well focussed in the past. In terms of costs of doing business, I'd defer to Bruce on this one, but I don't see any elements that are giving us a particular hard--particularly hard time, in terms of specific costs of doing business.

Yes, the good thing is that one is, we aren't that sensitive to energy costs, and so some of the pressures other companies are feeling, it just isn't a very big factor to us. Secondly, even though we aren't spending money on systems improvements that we did in the past, we are continuing to focus on productivity improvements and just reengineering processes. And those savings are outweighing any incremental cost pressures that we might be having. And, as I mentioned, we're really seeing that in the general administrative line. So very good progress being made in that, as well.

Okay. And on Global Mailstream Solutions, margin was about flat year-to-year. Anything worth talking about there?

No. I think it is always a function of a lot of different things that add up to the number. But if you look at the underlying trends of each of the components, there is nothing that is noteworthy change in the margin. The only thing that's new. probably. is that as we've mentioned in the past, many of our meters were fully depreciated. And as we go through the migration, we are adding more meters. And so, there's not a cash expense, but we're having depreciation expense we may not have had as much of before. We're overcoming that through greater productivity and value-added to the customer.

And of course, as we move toward the digital migration, which now we're at about 81%, the benefit will be felt downstream in terms of supplies revenues and other ancillary revenue streams.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS] We have a question from the line of Lamont Richardson from PEG Capital Management. Please go ahead.

Good afternoon. I have a question about the debt ratio of Pitney Bowes, which is now roundly 71% of total capital. Total capital representing the sum of long-term debt and common equity. Now are you gentlemen, in effect, going to the banks to borrow money to continue your share buyback programs? And what have the--I'm going to call them the hapless rating services said to you about the debt ratio that they would deem proper and prudent whose operations are like yours? You know, highly stable stream of revenues.

Sure. In our opinion, the debt ratio, debt-to-book capital is really not a very important ratio. And the reason is that, because our stock trades at such a high multiple, compared to book value when we buy in stock, it just has the effect of creating that ratio that you're doing.

Secondly, most of the assets, if not all of the assets that are being supported by the debt, are very leveragable. In other words, they're financial receivables, and banks and others typically leverage those up in the kind of ratios we have on your balance sheet. If you look at the type of assets that we have, our leverage is actually quite common. In fact, we'd would be low compared to many of the financial services companies.

Thirdly, we have very good coverage ratios looking at both earnings in cash-flow in comparison to the interest expense, and EBIT to interest remains at about six times and EBITDA at about eight times. So that's a very strong ratio. And I'm happy to say the rating agencies concur with this analysis, and that's why they are very much not only aware of what we're doing, but understanding of why it makes sense for our shareholders to pursue this strategy.

In other words, they are not urging you to go deeper into debt.

They are not urging us to go deeper into debt. On the other hand, they are watching us to make sure that we continue to do things the right way, and so you can rest assured that they are doing their job.

Last question related to this. With 22% of your debt referred to earlier floating, wouldn't it be prudent to start paying that down? Instead of buying back shares?

Well, it may be prudent, but it wouldn't be as beneficial to our shareholders when we can buy in our stock at this kind of price. The only thing I should point out is that our dividend yield is 3%. And as a result, the interest expense on an after-tax basis is actually the same or lower than the dividend yield. So even on a cash basis, we can buy stock and actually not increase the burden to the Company.

Well, thank you.

At this time, there are no further questions in queue.

I guess those who have asked questions have no more questions. There's no one else. I want to thank all of you for participating in the call. And we look forward to having a further dialogue with you with our end of the year results. Thanks very much for your interest in Pitney Bowes.

Ladies and gentlemen, this conference will be available for replay beginning this evening at 8:30 p.m. and going into Monday, October 31 at midnight. You may access the AT&T replay service by dialing area code 320-365-3844. And entering the access code of 798799. Again that, number is 320-365-3844 and the access code of 798799. That does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.