必能寶 (PBI) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to the Pitney Bowes third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Today's call is also being recorded. 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 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 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, 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. Good afternoon. There are three things that I want to highlight about the quarter. First, our organic revenue and earnings per share growth continues to be within our targeted ranges. Second, we took actions that continued to enhance the strength and resilience of our business model. And third, the successful execution of our strategies increases our confidence in the sustainability of our results. Revenue increased 8% to 1.4 billion, of which 5% was organic. This is in the middle of our target range of 4 to 6%. Earnings per share from continuing operations increased 12% to $0.64, excluding charges from the restructuring program, our adjusted diluted earnings per share from continuing operations was $0.66 this quarter versus $0.61 in the prior year. We will complete any charges associated with the restructuring program during the fourth quarter of this year.

We continued to enhance the strength and resilience of our business model as we invested during the quarter in growth and improved operating efficiency for our business. Our expansion in software, mail services, marketing services, and supplies, as well as other parts of our business, help position us for sustained growth. We also continued to improve our operations, particularly our customer support capabilities in Europe. Our strategies are enabling us to grow our customer base and enter higher growth segments within the mailstream. We also are improving our margins through the successful integration of our acquisitions and our focus on productivity.

As we discussed last quarter, we believe that the sale of capital services and the expanded disclosure for our segments provides enhanced visibility into our business performance and our strategies. When combined, these factors underscore our confidence in the sustainability of our results in 2007 and beyond. That is why we provided 2007 guidance on September 12, and longer range revenue growth and margin expectations for each of our segments during that same recent investor update meeting. This marked the earliest that we have ever provided an outlook for the upcoming year.

Net cash used in operating activities was $68 million for the quarter. The net use of cash was the result of the $238 million payment to the IRS which was a portion of the taxes due from the sale of the capital services settlement -- capital services business and the settlement with the IRS. Our free cash flow for the quarter was 133 million and our year to date, our free cash flow is $390 million. Our strong free cash flow, which is approximately equal to our net income, provides us with the flexibility to repurchase shares, increase dividends, and invest in the growth of our business. We used $19 million to repurchase 440,000 of our shares during the quarter, and have 229 million of remaining authorization for future share repurchases. Year to date, we have repurchased $312 million of our shares, and we plan to buy a total of 350 to 400 million by year end.

As we look to the fourth quarter, we expect revenue growth in the range of 7 to 9%, which would result in full-year revenue growth in the range of 6 to 7%. We expect fourth quarter earnings per share from continuing operations in the range of $0.71 to $0.75 per share, which compares with $0.36 per share on the same basis last year. On an adjusted basis, we anticipate fourth quarter earnings per share from continuing operations in the range of $0.76 to $0.78 per share, versus $0.69 for the fourth quarter of 2005. We expect full-year adjusted earnings per share from continuing operations of $2.68 to $2.70, compared with $2.46 per diluted share last year on the same basis. In closing, we are very pleased with our results and the direction of our business. We expect to continue to leverage the many growth opportunities throughout the mailstream while delivering greater value for customers and shareholders. Thank you. And now we will be happy to answer your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Matthew Troy with Citigroup. Please go ahead.

Good evening, Mike, Bruce. Quick questions. You were just in town. I don't want to waste your time. The postal reform, judging just by the level of noise and advertisements on my television assets, it's election season, all issues seem to be at least dead in the water for the near term. Are you changing the calculus in terms of odds of that passing this year? Our folks generally tell us that it's looking lower. I know you said it's not a material impact and a lot of the benefits have flown through the peripheral legislation. If you could just give us an update on your thoughts there, and I've got two follow-ups.

I think it has a reasonable chance to pass in the lame duck session. We closed out all but one issue before the Congress -- congressional recess, and there are probably some other tweaks that need to be done. I think the unknown -- so if we were judging it purely on how far we've come and how much is left to be done, I'd say there would be an excellent chance that it would pass. But, of course, the -- given the fact that there are chances that there could be a change of control, of one or both houses, and how that impacts the momentum of this, I'd still say it has a reasonable chance, 50/50, maybe a little bit better, but certainly it would have been preferable if we could have done it before the election.

Right. So three yards and a cloud of dust. Also, you mentioned the current restructuring plan should be done or exhausted by the fourth quarter. I was just wondering if you can help me, if we think '07, '08, '09, the changes you've made, the focus now on cleaning up the balance sheet, on streamlining the businesses, orienting the Company towards growth here, for the lack of a better term, businesses, what should we think about in terms of future restructurings or just how you manage the business? Obviously if you're trying to grow on faster services and software one could argue that requires a different incentive structure to attract key talent. Are there any changes being contemplated as we look out beyond the current restructuring that we should be aware of in our modeling, or just thinking about Pitney Bowes in general? Any update there would be really appreciated. Thanks, guys.

I'm going to ask Bruce to comment on restructuring, then I'll talk about, the different business models we have for different businesses.

In terms of restructuring, I'd just want to first of all say you're correct in that the program that we have been embarked on since 2003, we will be done as of the fourth quarter, and we have no plans to do any major restructuring at this point going forward. There will be actions that we're taking but nothing that would require a special restructuring line. And in terms of what we might do in the future, that's obviously something we would consider, but again, at this point, no plans at all.

Just to deal with your other part of your question, certainly we are, as I indicated, in my remarks, we are growing our investments in some of the growth areas, and this quarter, for example, we invested substantially in growing our sales and marketing capability in the software space, and we did the acquisition of print ink, which is going to help us grow our position and supplies. We did do some additional investment in marketing services and mail services, so we are absorbing that investment in the P&L. What it will mean, and this is true, by the way, both on the revenue side and on the comparables on EBIT performance, is that although we believe our EBIT margins over a year are going to be at the -- at or approaching the targets we set out in September, there may be individual quarters where we are going to spend ahead of getting revenues, and that is indeed the case this quarter in software where we will probably reap the benefits of those investments in the first half of next year, as with the sale cycles that we have with some of the software, particularly in the geocoating area, where we think there's huge growth opportunity.

Would that investment in the fourth quarter be one of the reasons you pull down the revenue guidance, if only slightly, to the mid to low end of the range? Argue which is the point, but is there a short list of factors that you would point to that say that on a near-term basis that that revenue target should come in slightly lower?

We definitely did not lower the target. I think that was just the way the math worked out.

Okay.

We did the forecast for fourth quarter, then once having done that it said it would be in the range of 6 to 7. But there was definitely no change in our thinking about fourth quarter or for full the full year.

Okay. As always, appreciate the visibility. Thank you.

Thank you.

We have a question from Carol Sabbagha with Lehman Brothers.

Thanks very much. Just a couple questions. The first one is more just technical nature. Bruce, can you tell us what foreign exchange and acquisitions contributed to revenues for the total company, and as much as you can by segment, if possible?

Sure. In terms of overall, the acquisitions contributed a little over 2%, and the foreign currency was a little over 1%, and so it works out to about 5% organic for the Company. And I'll give you organic for the segments. So U.S. mailing was 4%. International mailing was 10. Production mail was 12. Software was minus 7. Management services, minus 2. Mail services, 9. Marketing services, 12.

Thank you very much. Now it's longer that you give us so many segments. But going to U.S. mailing it had a nice recovery from Q2. Can you talk about what occurred? Did the three factors you talked about in Q2 reverse?

Well, each quarter we have a different part of the mix. We had a strong quarter in our distribution solutions, which is the higher end shipping solutions part of our business. That was very strong. Strong business with our -- what we call our desktop solutions and our low to mid-range meters did well. And, of course, we always have, and continue to have, a strong quarter in supplies and financing.

And on PBMS, did the Sharp contract have any impact this quarter at all? I thought it had anniversaried out.

It was very minor this quarter. So, yes, it was pretty -- it definitely wasn't a major part of the picture this quarter.

Can you talk about what you're seeing in that business? I thought after your analyst meeting that maybe your outlook for organic growth in that business had improved somewhat, that we were moving away from a phase of shrinking to a phase of growth.

I think that's true. Just the way business falls out and the ramp-up, our written business has been strong throughout the year, and our -- we have improved as the year has gone on, and retention and some of our segments, reduced losses, particularly in the -- I would say the legal segment, but just the way the timing of revenues comes in, it will probably bottom out in the -- this quarter and the fourth quarter, be a little bit better in the first quarter, and you'll start to see strong performance in the second quarter overall. Keep in mind that this includes Europe, where we're a little bit further behind in our transition. So although the U.S. was -- didn't lift up Europe as much as it might have, we're further behind in Europe, and that's why we look at management services, the segment, being stronger, probably in the second quarter of next year. I think what you were referring to, Carol, is our assessment of the U.S. situation.

Okay. All right. That's helpful. And my last quick question is on gross margins. They were a little weaker than I thought. It seemed like a lot of it came from gross margin on supplies. Was that the print ink business or is something else happening there?

That is the print ink business predominantly.

So we should expect this as sort of a new level for that business?

As we grow on the -- as the mix changes, if we were to grow proportionately more in the other space, the ink and toner, you would see some margin shrinkage. We still had very strong and sustaining margins in the meter ink area. It is clearly proprietary and originates with us.

Thank you very much.

Sure.

We have a question from Shannon Cross with Cross Research. Please go ahead.

Yes, good afternoon.

Good afternoon.

Just a question on sort of country-specific or at least region-specific performance. Can you give us an idea of Germany and Canada and some of the other regions, how they're performing?

Canada improved substantially from the first half of the year. It grew, and we were very pleased at its growth. It was in the mid single digits area. The strongest performer outside of the United States was, of the big countries, it was U.K., and that -- we're reaping the benefits of actions that the royal mail has taken in a fully competitive market. As you know, we've always had the view that where markets are fully open to competition, there's tremendous growth, and that growth was well into the double digits. Good growth in the Nordic countries. If we are looking at geographies as opposed to lines of business, strong growth in Asia Pacific, although predominantly from production mail we did get growth in international mailing in Asia Pacific, but it was pulled up to double-digit rates by production mail. Very strong growth in Latin America. A little slower growth on the continent in our businesses than in some of the past quarters, and I think that's just the way things played out in the quarter. I expect we'll see some good growth in, 2007 and some of the continental European countries.

Then one other question just on the share repurchase side. I think 19 million this quarter, it was done on share repurchase, and you've got, I think, up to, I didn't do the math, I should have, I apologize, but up to 400 million for this year is the high end of the range. How should we think about share repurchase -- is it still that offset between acquisition and how else you use the cash or how should we think about it as you move into 2007?

Yes, Shannon, first of all, for this year, we front-loaded so much of our share repurchase that that was the reason why we had a lower amount this quarter, and as we said in our press release, we fully intend to be in the range of 350 to 400 for the year in terms of the repurchase. Part of the reason why we're repurchasing more, in addition to the fact that we thought our stock price was a compelling investment, especially in the first half, is that we expect that the acquisitions will be at the lower end of our normal range of 200 to 400 million. For next year, we've said that we will definitely do at least 150 million of share repurchase. The amounts above that will be a function of the share price, but even more importantly, to what extent we find attractive acquisitions that compete with share repurchase. And again, we don't budget for acquisitions, but we assume that we will likely do them in a range of 200 to 400 million for the year.

Thank you.

Next we go to Jay Vleeschhouwer with Merrill Lynch.

Thanks. Good afternoon. Mike, at the Graph Expo show last week, Pitney had on display, as you'd expect at a show like that some pretty high-end sophisticated sorting and processing products, and so the question first is, how are you doing with those big-ticket items, generally speaking, and in terms of market development for technology like that what kind of work are you doing, if any to develop relationships with some of the transactional printing kinds of companies that, in effect, provide the input to your kind of handling equipment? In other words, what are you doing with the Orsay's and VersaMarks of the world that predominate in that transactional print market?

Well, this is reflected in the production mail results. And as you can see, those results were very strong. We are doing very well not only in the transactional market but in introducing technology that helps us continue to gain share in the service bureaus that concentrate on direct marketing mailings. We have had close working relationships with all of the major print technology providers, not only the two you've mentioned, but clearly Xerox, which, by the way, Fuji-Xerox and Xerox are distribution partners for us overseas. And I should note that not only do we work with them on the output from their printers, but we provide through M-Tech's the software that helps manage the input to the printers from the -- from the computer systems of their customers. So we actually have working relationships with them both ways, both in terms of taking their output on the one side and helping manage the input into their printers on the other side.

We also are a -- an acquirer of their technology where Pitney Bowes management services is doing -- running automated document factories as we do in our Windsor facility, or Aetna and other accounts. So we have very good relationships with all of those accounts. At different points in time, some are stronger than others, and that depends on the people, what's at the account level and at the sales management level. But we have had long-term and very good relationships with all of the companies in this space. Just is a follow-up.

Would you be able to -- or expect to continue the kind of disproportionate growth you've just seen in that production mailing business, Mike?

Well, our longer term forecast for that if you go back to our analyst day, I think we quoted inorganic revenue of 3 to 8%, if I recall what we said at the time, and the reason it doesn't stay at double digit over the long term is simply because at some point we replace -- we're doing a lot of two for one and three for one replacements, where our advanced productivity system is getting upgrades from both our populations and competitive populations. At some point that runs out, and we're also getting a lift right now from the meter migration of the infinity meters which will go through 2008. And after that, it's a little harder to calculate growth. We could do better than the 3 to 8 range in given quarters, but I'd say playing -- we felt that what was sustainable over the next four to five years is in the 3 to 8% range.

In terms of your software business, how would you rank how well you've done in terms of integrating the multiple companies or technologies you've bought? It's small, but it should be a -- I would think, disproportionately growing part of the Company, and had a tough compare in Q3 at least, but how closely organized, how tightly knit are these different pieces as a single software entity?

In the United States, they're not only integrated well with one another, but also with our production mail business because we basically control all of the distribution channels. One of the -- as we look in Europe and Asia, I think Group 1 and M-Tech's have a common challenge, which is that both companies, before we acquired them, entered into a number of partnerships and long-term distribution arrangements, so the ability to integrate those with our production mail business is going to be longer term. It's a lot of upside opportunity, because we're not getting anywhere near the revenue we should be getting from those companies outside the United States, but it will take time, and quarter by quarter, we will work with the different distribution partners to improve the integration, because right now we -- I don't feel it's -- I think we're at the ground floor of where it could be. But I think the answer is in the U.S. it's proceeding exceptionally well. I think outside the United States, probably a little slower than we'd like.

And then lastly, is any part of the software business viewable as a leading indicator for other business, or is it always necessarily a follow-on to something else that you do?

That's a little hard to answer because there are a lot of different components to software. Some, like the -- certainly anything to do with print stream management is going to be very closely correlated with spending in the production mail space. So I'd say M-Tech's and production mail are going to be very closely aligned. When you get to things like postal address management, that is going to be significantly enhanced by the rate case, but it's a separate aspect of the rate case from mail services, because it deals with the postal service really trying to get down to household level address precision, and we've got great solutions there. The rate case is going to help us. That's one that's going to go into place during -- at this stage it's scheduled for the late spring or summer of 2007.

And I think over time, how that part of the software business does -- and that's probably about 35 to 40% of the revenue stream, is going to be very dependent on what happens with is going to be very dependent on what happens with the postal service and what it does with incentives and penalties. Geocoating is a new business for us. That's just going to grow explosively, and that's just putting feet on the street, which we started to do in the third quarter. And document composition software is, I'd say the the biggest challenge there is getting the international growth and working with distribution partners. And it's going to work independently of any of our other businesses in terms of growth potential.

Thank you, Mike.

You're welcome.

Next in queue is Chris Whitmore with Deutsche Bank.

Thanks. I wanted to come around to the software business once more. Can you provide color as to why that business was down 7% year on year organically? What product line or product lines were specifically weak, and can you provide any color as to the outlook for the software business, for the software business going forward?

Yes, we had a good run rate, by comparison to other quarters, but last year we had one very large telecom deal that if you took that deal out of the mix, we would have gone from a minus 7 to plus 7 and we we think that the business, as a steady state business still should grow. Over a year, I think we've -- software should be, I think we said, 9 to 14 -- or 8 to 15%. Because -- one of the -- that's interesting. One of the reasons our group presidents were nervous about us going to seven segments, is when you have a small segment like that until it gets bigger and has a high percentage of recurring revenues you get a little bit more lumpiness if you get one big deal one year and you don't get another big deal the next year. That's really all that happened here. Over the year we expect to be within the 8 to 15% range, and we expect to be in that same range in 2007. So whether we get it in an individual quarter is very much dependent on how deals fall. One thing we have found in software business is that our customers are used to stringing deals out for the last day of the quarter, so it's a little hard to forecast ahead what's going to happen in a given quarter. But over a longer period, particularly over a year we feel very comfortable with what we've said in September, this quarter notwithstanding.

Okay. Thanks for that. Second question relates to equipment gross margins looked like they were down about 180 basis points year on year. What's driving that? Is that a mix shift, or are you seeing a change in the pricing environment?

Bruce?

Yes, that's definitely a mix shift. The two things that would cause it were, first, you had very strong production mail, and that's a lower margin than mailing, and then also international was stronger than U.S., and they have lower margins than U.S.

Even within the U.S., these shifting solutions tend to have a little bit lower margins than mail finishing. I will, as a general comment, say that if you look purely at equipment sales during the migration and particularly the end of migration, we do see more discounting on equipment sales. On the other hand, when you look at the total lifecycle payments from the customer which include supplies, financing revenues, professional services, break and fix services, the total payment expectation has been pretty much what we expect, and in aggregate we're not seeing any slippage in total. But it's a little bit of a shift from equipment sales margins to some of these other payment streams where the margins are pretty good.

You haven't seen any change in the overall competitive environment; is that fair?

I think it's a little hard to separate that from the fact that we are at the end of a migration cycle, and what we've seen in past migration cycles is there is -- these are the hardcore customers that you have to attract with more discounts. I will say a couple of things. Again, one is, in terms of the competitive environment, Neopost now has many of the same components that we do and they -- but the good new is that the total payments picture has not changed despite Neopost's entry into the leasing space and then the global payments financing space. So we are holding our own in terms of market share, as far as we can tell. And we've had some wins that haven't yet been reflected in some of the postal data. So we feel very good about where we are and our cancellations, which are an indicator of how things are going, are well below what they were in the past migration cycle. So all in all we're pretty pleased with where we are at this stage.

Great. And finally, on restructuring and benefits, as we move forward into next year, what kind of payback and what's factored into expectations or into guidance regarding a pay back from restructuring?

Bruce, do you want to take that?

At the September 12, meeting we talked about that. If I remember, 25 million was the number we gave, and that's still the same.

Great. Thanks a lot.

Thank you.

We have a question from Julio Quinteros with Goldman Sachs.

Just wanted to follow-up real quickly on the international segment, so maybe focusing more on the emerging segments, Brazil, Russia, India, et cetera, China. Can you just give us a sense on how those are ramping up today, what we've seen over the last couple of quarters here. Then secondly, on the acquisition drags, I think your comment suggested that there was still some margin improvements related to acquisition integration, so I'm just trying to get a sense for how much of a drag have those been this year and what we expect to be the benefit going into next year?

I'll ask Bruce to comment on acquisition drag. Let me just talk about your first question. The simple answer is, off of very small bases we're getting good growth in Brazil and India. China is very lumpy, and Russia is a nonfactor because they just don't and contrary to any of you that went to the analyst day in March, there was one guy that was convinced that there was all sorts of money available for capital equipment in Russia. We have not found that to be the case. So the Latin-American area and the Asia Pacific area were strong, but predominantly in the production mail space in this quarter in Asia Pacific and Latin America off a very small base was good growth across the board this quarter.

Then with both Brazil and India you guys had some investments that you made there in the last 12 months, are those investments getting traction, or is it still kind of too early to measure how much traction those are getting?

They're small investments and excellent returns, and excellent growth. But not enough to move the needle for Pitney Bowes taken as a whole.

Understood. Then what about the acquisition drag?

In terms of acquisitions, what really goes on is that we now have a portfolio, and so the new acquisitions, there's a drag in the sense that for the first year to two years, you're investing in integration and so forth, and so generally they tend to be break-even for first year or two. But at the time same -- the acquisitions that we've done previously, they continue to see improved margins year-over-year. For the portfolio as a whole, acquisitions are actually a positive to margins, but that's a combination of older ones becoming very positive, and an example of that, just look at the mail services segment, there's something that before was a drag on margins but now is extraordinarily helpful to the margins. And that at the same time though was being offset by the new ones. If for any reason we ever stop doing by the new ones. If for any reason we ever stop doing acquisitions, it would be only positive. But as we intend to continue, we think it will be roughly a net increase, but not as high as it would be otherwise.

I just wanted to double back to your first question, Julio, and relate my answer to an answer I gave to an earlier question. The ability to grow in these emerging markets in our mailing and production mail business to some degree -- our mailing business is to some degree -- well, to a significant degree constrained by how quickly postal authorities, regulators, and politicians move. Where we have longer term opportunity that is more within our control is in the software space. But the limiting factor there today is the fact that in the big markets -- and China would be an example of this, India would be an example, we gave away, or I'd say not we, but Group 1 and M-Tech's gave away distribution rights before we acquired them, and as we work through those -- work those opportunities with distribution partners, and I can't tell you how long it will take. I don't have committed to memory the arrangements in these individual countries. But as we work through getting opportunities to free ourselves up from some of those distribution constraints, that's a lot easier to deal with once we get past that, than trying to predict when a postal authority will decide to do something.

Understood. Maybe just one -- I want to just double back on one comment about plans for restructurings after 2006. I think you suggested that you would consider them. What exactly does that mean, and how do I walk away from that? Is that something that, you know, if it comes up in your business planning and you have to take more restructurings, or are the restructurings truly done at this point? I'm just trying to get a handle on the consider comment that you made earlier, Bruce.

Sure. Just to repeat, we definitely have no plans for a restructuring program at this point. My only caveat was that obviously as good business people, we're always reviewing whatever structure, organizationally makes the most sense, and so we don't want to say never, but all I can say is that at this point we have no plans and do not have any particular area that is requiring restructuring, and so that's all I don't know what else I can say except that.

That's good. Thank you. Great.

Thank you.

[OPERATOR INSTRUCTIONS] We have a question from Josh Golden with JP Morgan Asset Management. Please go ahead.

Hi. Good evening. Just want to ask a couple of questions. On the balance sheet you had a roughly pickup of about 300 million out of debt. Is that related to the IRS taxes payable, or is that working capital, or can you explain?

Yes, that's the tax payment, and so if you think about it, we had a cash inflow from before, and now we're paying it back town. The point we would make is that we have cash in the bank now to pay the final payment in December, so we're not going to have a significant impact on our balance sheet to complete that tax payment.

We should note that some of the cash flow numbers are going to look a little skewed in the fourth quarter because we will be making the remainder of the payment due to the capital services sale in the fourth quarter. In December.

Okay. Along that line, let me ask this question. We're talking about acquisitions and shareholder -- share repurchases. That, along with potential restructurings that you may or may not do beyond 2006, what are your goals for the credit rating? Are you willing to do more acquisitions and share repurchases where you would be willing to take the ratings lower, or are you comfortable and would you like to stay at the current rating that you're at?

I think the issue on the ratings is never do you aspire -- we obviously want to -- there are -- we've got to stay at investment grade, and we are at the right level of investment grade, is something we'd have to think about, not only in terms of the investor, but the -- and I referred to this at the September 12, meeting. We have an obligation as a licensed meter manufacturer to maintain what's called financial responsibility, which has never really been defined by the U.S. postal service, but in their regulations. What we do has to be -- relative to the credit rating has to be evaluated against the opportunities. We were willing to accept going from AA, to A plus to do the Group 1 acquisition, because we knew that in the long run it maximized shareholder value. We also thought it would produce great cash flow for debt holders. So although we took a temporary hit to our credit rating, we thought that was the right thing to do. We wouldn't make a judgment as to what we would or wouldn't do on the credit rating, other than staying investment grade, until we were confronted with an acquisition opportunity, and we'd have to evaluate the long term opportunity for the shareholders and the debt holders relative to the short-term situation with the credit rating.

The other comment I would make is that we want to maintain the financial flexibility to do not just today's and tomorrow's acquisitions, but acquisitions over an extended period of time. So we don't want to -- we are not in favor of doing an acquisition so big that it would basically wipe out our chances to do any other acquisitions for several years. So we've had a philosophy of doing small to medium sized acquisitions. We like acquisitions in the 100 to $400 million range, and we consider that to be in the sweet spot, and we will look at what maximizes shareholder value both short and long term. But it's very difficult to say hypothetically what we would do. We haven't been confronted with that, and until we are, we are not going to force it.

When you say maximize shareholder value is would you not change the capital structure of the Company, though, is that correct?

We have a capital structure today that we're very comfortable with.

Okay. One just last follow-up question. Given the accounting legislation that is pending for moving pension obligations potentially on to the books, is there any type of credit obligations or credit agreements that investors need to be aware of that that accounting legislation may impact?

I'm very pleased to tell you that the new accounting rules will cause an equity write-down, but it will have no effect whatsoever in terms of any obligations we have.

Okay. Thank you.

We have a question from [Lamont Richardson] with PEG Capital Management. Please go ahead.

Thanks. Within the last ten days there was an article in the Financial Times of London suggesting that the European Union was going to push the member countries to open up their postal services, and I think pretty much along the lines of what's happening in Britain. Does that mean there could be greater opportunities for you folks at Pitney Bowes, or will private carriers like Federal Express, DHL, and UPS be the greater beneficiaries of more competitive, more efficiently run postal service in Europe?

If there were full opening to competition, we think that would open up a lot of opportunities for us. We really don't compete with the UPS and Fed Ex in those markets, and--.

I know, but you supply them some services, don't you?

We don't -- they're carriers. They don't provide--.

Oh, that's right. That's right.

-- print services or mailroom management services the way we do. They also do not provide equipment, software, financing, of the kind that we do. I know UPS has a financing arm, but it really doesn't -- we really have almost no competitive overlap with the companies you identified. We would like full liberalization. I should caution you that although this directive has been talked about a lot, we're still talking about markets like France, Italy, Spain, not being fully open to competition until 2009 at the earliest. Germany and the Netherlands have signaled 2008 at the earliest and even they have said that they may -- if they don't get France to go along, this could be postponed. So although in a fully liberalized market, we would expect to see the kind of growth we're seeing in the U.K., we are not doing any financial projections, such as what we presented you in September, based on that happening, before 2009.

Okay. Thank you.

You're welcome.

There are no further questions at this time. Please continue.

Well, if there are no further questions, then we will conclude the call and look forward to visiting with you with our end of the year wrap-up and, as I said, we were pleased with the results this quarter. We have reaffirmed our guidance for 2007, and we have given you an outlook for 2006 fourth quarter that is consistent with where we have been tracking for the last eight quarters. Thank you all very much.

Ladies and gentlemen, this conference is available for replay after 8:30 p.m. Eastern tonight until October 30, at midnight. You may access the AT&T executive playback service at any time by dialing 1-320-365-3844, and entering the access code 844373. Again, that number is 1-320-365-3844, followed by access code 844373. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.