必能寶 (PBI) 2006 Q4 法說會逐字稿

Good morning and welcome to the Pitney Bowes fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Today's call is being recorded. If you have any objections, please disconnect your lines at this time.

I would now like to introduce your speakers for today's conference call, Mr. Michael J. Critelli, Chairman and Chief Executive Officer; Mr. Murray D. Martin, President and Chief Operating 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 morning. 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, free cash flow, and organic revenue growth there will be a reconciliation of those measures to GAAP measures, again, 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.

Thank you, Charlie, and good morning. There are four things I would like to highlight. First, our financial results for the quarter and the year. Second, our use of cash flow to invest in the business and enhance our return to shareholders. Third, the long-term benefits due to the passage of historic postal reform legislation. And fourth, our outlook for first quarter and full year 2007.

During the quarter our revenue increased 8% of which 5% was organic. For the full year revenue increased 7% of which 5% was organic. This marks the second straight year that our organic revenue growth was within our target range of 4% to 6%. Our earnings per share on a GAAP basis doubled from the prior year. Adjusted earnings per diluted share from continuing operations grew 11% from $0.69 in the prior year to $0.77 this quarter, which was in line with our guidance of $0.76 to $0.78 per diluted share. This is the third straight year of adjusted earnings per share growth at or above our targeted range of 8 to 10%.

During the quarter we also completed our previously announced restructuring program and recorded an after tax charge of $12 million or $0.05 per diluted share. We expect to continue reaping benefits from this program, which enhances our operating efficiency, improves our customer facing processes, and aligns our skill base with the growth markets we have entered in the last several years. Free cash flow of $523 million for the year included $208 million in incremental investment and finance receivables net of reserve account deposits. This reflected the growth of customer financing for equipment purchases as well as customer financing for postage and supplies.

During the year we spent more than $900 million on targeted acquisitions, dividends to shareholders, and share repurchase, while our debt increased by less than $100 million versus the prior year on a comparable basis. We also removed about $500 million of nonrecourse debt from our balance sheet in connection with the Capital Services sale. Our Board of Directors authorized an increase of our quarterly common stock dividend to $0.33 per share, a $0.01 increase from the prior year, which will be paid in the first quarter. This is the 25th consecutive year that our dividend has increased.

The highlight of the quarter was the passage of the historic postal reform legislation in December. This landmark action was more than ten years in the making, and will help keep mail an effective communication channel and enable the postal service to deliver more value to the mailing industry. We believe that its long-term benefits can be summarized as follows.

First, stability. The U.S. Postal Service will be financially strong because of the release of over $100 billion in excess pension payments both to address existing unfunded retiree medical liabilities and to reduce future rate increases. It will also be a more focused institution with a clarified mission to focus on its core business. Second, flexibility. The legislation will help ensure rate predictability and flexibility through an annual price cap which we believe will support mail growth and incent its usage. Third, technology. The additional investments in technology will help make mailstream communications more valuable to the sender and the recipient. And fourth, partnership. The Postal Service will be encouraged to engage in more private sector partnerships for the most cost-effective postal system.

We're proud of the role we played in helping lead the industry's advocacy of this needed reform to enhance the viability and growth of the U.S. postal network. During the next 18 to 24 months, the implementation of the legislation will be fleshed out, and we intend to be as active in helping influence and support the specifics of implementation as we were in the passage of the legislation itself. On the morning of April 30, we will host a meeting in New York to discuss our first quarter results and provide you with additional prospectives about postal reform in the U.S. and postal transformation in global markets. Save the date, and we will provide you with more specifics in the coming months.

As we look to 2007, we see results in line with the guidance we gave you this past September. We expect revenue growth for 2007 in the range of 6 to 9%, both for the first quarter and the full year. Our revenue guidance includes the expected impact from currency translation and the impact of acquisitions announced today but obviously does not include any revenue from any additional acquisitions that we may make during the year. We expect fully diluted earnings per share in first quarter 2007 in the range of $0.66 to $0.68, which is an 8% to 11% increase when compared to adjusted earnings per share in the first quarter 2006. For the full year we expect $2.90 to $2.98 per share, which is also an 8% to 11% increase when compared to 2006 adjusted earnings per share. We have included tables within our press release that provide further detail on our first quarter and full-year 2007 guidance.

In closing, we are very pleased with our significant progress and consistent results in 2006. Our strategies are working, and we're delivering both growth and increased customer value. As we look out to 2007 and beyond, we are excited about the numerous opportunities throughout the mailstream and our solid positioning to take advantage of those opportunities. Thank you, and we will be happy now to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question will go to the line of Matt Troy with Citigroup. Please go ahead.

Good morning. I had one question on U.S. mailing, specifically meter migration, as we've now moved into 2007. I was wondering if you saw any disproportionate impact or catch-up in the fourth quarter? And then looking past the current meter migration you had in the past talked about implementing something along the lines of an inflationary price increase as the initial digital agreements rolled over. Just wondering if you've begun to do that, if you've any success or push-back in the market, and I've got one follow-up.

We didn't see any disproportionate influence of meter migration in 2006 generally or in the fourth quarter. If you recall, we have specifically focused on making this a more gradual steady-state transition than the last migration. There was a little bit of, obviously, in 2006, some customers waiting until the last minute, particularly people that -- government accounts, and that's why, in the second quarter of 2006 we had a little blip-up in operating leases.

Right.

But it's been a more gradual transition, and there's a little bit of carryover into 2007 from some of the 2006 meter migration, and obviously there's another wave that will be the final wave for 2008. I'm going to let Murray talk about our pricing on our products, particularly to answer the question you've asked.

Hi, Matt. Murray. Regarding price increases, we have not put in an inflationary price increase, but what we are doing is continuing to add new goods and services to the products, so we're adding new services which are incremental in revenue, and, therefore, we're seeing an increase in revenue per transaction year on year, and that's how the revenue growth is continuing. We expect to continue that in 2007 as we look to more incremental services.

Okay. Second question -- thank you for that color. Second question related to the international operations, Bruce, or perhaps Mike perhaps. Just give us an update there. It looked like the EBIT was, I think, relatively flat. I know you're trying to get a little bit of consolidation and scale on the international ops but if you could just give us an update there, and tactically what are the milestones we should be looking for over the next 12 to 18 months to see a little bit more margin fall out of that business? Thanks.

I'll answer the first part of that, then I'll ask Murray to take the second. As we have talked about in the past, we have gone through a -- an outsourcing/offshoring process and consolidation of our back-office functions to make sure that we could continue to manage the ongoing business. We have incurred substantial transitional expense throughout 2006. That ended pretty much in the fourth quarter, and we will start to see operating leverage in 2000 -- we will see operating leverage in 2007. We'll start to see it in the first quarter. And if there was a second factor which is investment in increasing our sales and marketing reach in some of our European markets, and again, there's a little bit of a time lag between the time we invest in that and the time we reap the benefits. But we would expect to see operating leverage in 2007 from what we did in these initiatives in 2006 and before, and I'll let Murray talk about sort of milestones over the next 12 to 18 months.

In particular, we invested in France in expanding our sales organization, and you might recall that is a rental marketplace. So as a result, the revenue trails the investment in selling. So we're seeing good progress there in expanding our sales operation, and we would expect as it has already shown that that will continue to grow. On the G&A side, the transition is well underway, and we will begin seeing benefits late first quarter, and then it will pick up through the balance of the year as we continue to finalize the transition of moving things to an outsourcer, some nearshore, and some offshore throughout Europe.

All right, thank you.

Thank you. We have a question from the line of Jay Vleeschhouwer with Merrill Lynch.

Thanks. I already thought I had a lot of letters in that name. So the first question, then, Mike, concerns looking back at the last one to two years and your focus on the mailstream, the question has to do with is there any way to gauge how much more you are, in fact, partaking of or being part of that flow? Is there any way to gauge in reasonably real-time the percentage of the flow or volume of activity which you, in fact, touch or participate in? Then a couple of follow-ups.

The mailstream by its nature is very diverse and there are thousands, if not tens of thousands of subsegments. In our meter business -- there are different streams. In our meter business, as we've talked about, the single piece mail volume has declined. Our share of it has pretty much remained stable. Our PSI group has increased its volume of mail over the last couple of years. In the e-commerce space with eBay, we have gone from nothing three years ago to handling hundreds of thousands of transactions a day, and we expect to get about $0.03 a share this year, up from $0.02 a share in 2006, and, you know, the -- the difficulty is that many of our customers, when you deal with postage meters or production machines, our newer machines have counters on them, but as a practical matter we do not collect piece count data and aggregate piece count. We collect data by revenue but that depends on mail mix. However, we are finding more and more applications in which we did not participate before, and getting revenue from them.

So, for example, we are now a leading provider of solutions for voting by mail, and we're very pleased at some of the recent announcements that people are getting away from electronic voting machines that didn't produce a paper trail. That's very, very good news for us, and we are -- so we are picking off applications piece by piece and finding revenue from them. In terms of a total count, given the tracking tools in place today, with an installed base where that was not a focus for a long time until the last few years. We don't yet have the ability to track the total number of mail pieces in which we participate.

Okay. You mentioned in your review of the benefits, or effects of the postal reform, that the postal service might be inclined to partner more with private companies. By the same token, how do you foresee yourselves otherwise doing more on the partnership side? The question is prompted in part by some of the things we saw at Graph Expo and some of the potential we would think you would have in working with other IT or imaging or systems companies. What are your thoughts around that, Mike?

I'm going to let Murray talk to that one. I think he's out in the marketplace every day. We do have a lot of partnerships already in the space.

We're continuing to expand in our partnerships, both with the public and the private sector. In the public sector, we continue to work with the postal services around the world to assist them in transforming their business into a more cost efficient business and more importantly, one that delivers more measurable value to the user. That's really our focus, is to make the customers' use of the mailstream better, more efficient, and more valuable, and therefore increase its competitiveness with other forms of communication. At the same time, we're continuing to expand partnerships in the private sector, and we have announced some of those and will be continuing to expand in relationships there throughout 2007 and beyond to enhance our capabilities across the board.

Let me just -- a couple of footnotes here. First of all, in the postal space, we have -- because of liberalization already that has taken place in the U.K. and is underway in other markets, we have specifically begun some retail access partnerships. The eBay partnership will expand to Europe this quarter, or actually is expanding to Europe this quarter, and we are looking at trials that are underway with the self-service kiosks in the U.K.

In the imaging area that you reference specifically, our Group One and Emtech software work with a variety of the vendors. One of the reasons it's a little difficult to answer your question about partnerships is we tried to work with all of the major printer companies in some way. We also feel that we have a unique ability, particularly with Emtech software to universally convert output from computers to a wide range of printers. So although we have closer working relationships with some companies, historically Xerox and Fuji Xerox have been major international partners with us, we can feed into Osay printers, H-Ps, Lexmarks. So our goal is not to work with a specific company but to make our tools applicable to a very wide range of imaging companies. Specifically in the international sector we are continuing and strengthening the distribution arrangements that we have had with Xerox and Fuji Xerox overseas.

I would also note that in the personalized postage stamps area we've specifically added to the Zaso.com partnership with a recently announced arrangement with Fuji, which will be offering the personalized postage stamp solution through its retail outlets.

Okay, thanks. And then finally just a clarification on postal reform and what you say are the long-term benefits. Do those benefits, Mike, accrue to you naturally or automatically, let's say, or is there something that you need to do to sort of assure or even magnify their impact on the Company?

They will only happen -- there are some benefits that happen automatically. I think the risk we've always had in any postal environment is Post Offices getting into adjacent spaces and competing with us, very much like we see with organizations life Deutsche Post in Europe. This loss slams the door shut on that kind of activity, and there is protection by a newly formed independent regulator that takes effect immediately. So in terms of long-term insurance to make sure that we do not get the Postal Service regulating us and competing with us, the law automatically has affected that.

In terms of partnerships, the other thing I think is the rate stability, which comes into play automatically with the ten-year statutory price cap. So the broad based benefits, as an industry player and as a specific player that has to worry about competition with the Postal Service, those happen automatically. In terms of work sharing, in terms of pricing innovation, or technology investment, we have to work with the postal service and with the regulator to make sure that the implementing regulations and postal business processes are consistent with the direction contained in the legislation, and that's what unfolds over the next 18 to 24 months.

Thank you.

Thank you. We have a question from the line of Carol Sabbagha with Lehman Brothers.

Thank you. Just a couple questions. First, on cash flow, Bruce, can you, adjusting for the tax payment, tell us what operating cash flow and free cash flow was for the quarter and the year? It seemed a bit light, I guess, is the nexus of my question.

Sure. In terms of cash flow from operations, that for the quarter was 192 million, and then the free cash flow was 126 million. And the reason why, Carol, it would seem light was, was, as was mentioned in Mike's remarks, that we had a much higher investment in finance receivables than would be typical. And that reflected the strong sales growth, particularly at the end of the quarter, and what that does is it converts the sales into a financing arrangement with the customer, which has the effect of reducing free cash flow, but you get the benefits from that investment over the period in the case of a lease it would be over a four-year period. And then we also had strong growth in the unsecured financing, the purchased power receivables that we've referred to, and that was both in the U.S. and overseas. So between those two things that really was the difference of what would be a normal free cash flow.

And the higher level of usage in finance receivables, do you expect that to continue into this year, into '07, and sort of does anything you saw on the fourth quarter impact your view of cash flow for '07?

That's a good question, Carol. We have always thought that the most unpredictable part of our cash flow is the finance receivables. And as a result, we have widened the range that we'll give for 2007. So free cash flow, we will say instead of -- we had said 575 to 625. We are now going to say 550 to 625, just to give it additional protection against that growth in the receivables business. But in terms of overall, we think that fourth quarter was exceptionally strong, and it will not be that strong going forward. And so give you a feel for like for the finance receivables incremental investment in '06 was 237 million and we think, our best guess, is roughly 175 for '07.

I just want to add one other comment. We were higher in accounts receivable as well, but most of that was because of very strong software sales at the end of the quarter. It was probably $20 million higher at the end of this quarter than the prior quarter, and we did have a renewal of a large marketing services contract right at the end of the quarter which accounted for another $11 million increase there. So I just wanted to add that color to this whole discussion about cash flow.

Got it. Thank you. And then a question about the U.S. mailing business. The third quarter, you commented that product mix was more towards the lower end, as you saw some delays in customers purchasing the higher end equipment. Did that sort of reverse out in the fourth quarter, and then a longer term question on U.S. mailing and product mix, I think you've been talking for well over a year now about a broader shift to lower end equipment among customers as the equipment is getting better. If you look back and take stock of '06, did that shift downwards accelerate versus '05 levels? Are you noticing anything different in how that trend is occurring?

I'm going to ask Murray to talk to that since he -- particularly since he spoke about this a bit in September.

Hi, Carol.

Hi, Murray.

The mailing business in the U.S. continues very similar to its history. We're continuing to see the mid market being strong in the mailing business, both the small and the mid. The high end is very good, but the number of units there has come down a little bit as we see the shift of customers being able to get all of the functionality in the mid-market products. Now, that's the shift in technology. At the same time, however, we have been able to increase the margins in those products and also increase the price by adding incremental functionality. So in reality, although there is a product shift, the revenue per product is not declining. And we're seeing that trend from '04, '05, '06, and expect it to continue into '07.

To answer your specific question, we didn't see an acceleration in 2006 versus 2005.

Great.

In the rate of downshift. Pretty stable.

And my last quick question, can you provide the outlook for '07? I know at the analyst meeting you gave sort of broad ranges for revenue growth for your different businesses. But more specifically on '07 for mail services what should we look for on the top line organically? And are you seeing incremental competition in that business, or is what we're seeing more that you have fully penetrated most of the markets where you had been expanding to?

Let me answer -- there are two separate questions. Let me talk about mail services specifically, then we'll get back to the broader question about revenue and specifically organic revenue for 2007. We expect mail services to start to have an uptick in organic revenue growth starting in the first quarter. We had about an 8% organic in the fourth quarter. We expect it to go up slightly in the first quarter. It will go up and we expect to be in the double digits after -- certainly in the second half of the year.

The reason I can't give you specific guidance in a narrower range is it's relatively dependent on the outcome of the current rate case. Our best estimate at this time is that the new rate case will be effective in the second quarter and probably in the month of May. The Postal Service's proposed rate spreads would certainly, if they held, or if we did better than what the Postal Service proposed, we would end up actually seeing a clearer direction toward double-digit growth and mail services the second half of the year, but that decision has to be recommended. It's still under the old rules, so it has to be recommended by the rate commission, and then approved by the Board of Governors, and it was an adversarial proceeding with the Postal Workers Union opposing the expansion of this discount spread. That being said, we're confident that the Postal Service will do at least as well as the Postal Service has recommended, but we can't give you specific guidance until that decision is announced, which will be sometime in March or April. So by the next time we're together we'll be able to give you specific guidance on that.

The broader question of revenues for 2007. On the organic revenue side for the year we expect to be in the 4 to 6% range. I do want to point out that in the first quarter we expect to be lower by a couple percentage points because of difficult prior year comparisons. We had -- if you will all recall, we had a couple large management services off-site print orders in the first quarter last year, which were not repeated in this year's -- or won't be repeated this year's first quarter, and we had a little bit of a blip-up from the postal rate case, which was the first one in three-and-a-half years. Those two elements combined were $21 million in the first quarter a year ago that we will not see this year. So the first quarter we are very confident of the earnings guidance in the 8 to 11 range, but we might very well see the revenue at or below the low end of the range, in the 2% to 4% versus 4 to 6. For the remainder of the year and starting in the second quarter we'd be back in the 4 to 6 for organic revenue. And we have given you the overall revenue of 6 to 9 for both first quarter and the rest of the year.

Thank you very much.

You're welcome.

Next we go to the line of Shannon Cross with Cross Research. Please go ahead.

Good morning.

Good morning.

Just a follow-up on the revenue question. It plays, I think, into your acquisition pipeline. In that if you're looking at sort of range of 6 to 9 I would assume the upside there predominantly comes from acquisitions relative to your organic growth rate expectations. Is there anything else we should think about playing into potential drivers of upside to revenue? Seems like the Street is kind of at the lower end of your guidance range. I'm just trying to figure out if it's only acquisitions that aren't factored in.

We always factor in currency. Bruce maybe can talk to the currency impact that's in our 6 to 9 calculation.

Shannon, in terms of the 6 to 9 it's roughly 1 percentage point for the year would come from currency, and roughly similar, a little bit more for acquisitions, but again, as Mike said in his remarks, we do not include the forecast of any additional acquisitions we make during the year. So when you look at upside of where there may be stronger revenue growth, it would come from additional acquisitions that we would make during the year.

Okay. Then if you could just talk a little bit about what you're seeing in terms of -- on the supply side, just our thoughts from the standpoint of if we start to lap some of the growth or if we can just continue to assume supplies will continue to grow as strongly as they have been given demand, and I guess probably to some extent the continued meter migration.

As we continue to migrate -- it's Murray -- as we continue to migrate around the world, we will continue to see supplies in the range it has been through 2007. We aren't expecting to see any change in that. It will be strong growth.

Okay. Then just finally on the acquisition side, full product pipeline, I assume, any thoughts on what you're seeing out there? Have prices gone up at all? Is there any change sort of in the market?

The main change is that we now have private equity, which is a force that is much stronger than it had been in the past. So it affects acquisitions where otherwise we might have been the only potential buyer. We now find ourselves in the case where, that a private equity alternative is there. So it creates a little bit of a floor as to what kind of price has to be considered. But as Mike mentioned before, we're viewing the mailstream as really a full panoply of niches. As a result, we avoid getting into a real price competitive situation. So for the kinds of deals that we're looking at, it's always a full price for a good acquisition, but not -- nothing that we would say would preclude us from continuing to grow with smart expansive acquisitions.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Speakers, at this time there are no questions in queue. Please continue.

Well, as I've said, we've all said, we were very pleased with the results of the fourth quarter. We expect 2007 to be a very good year, like 2006. Our value proposition to investors, just to remind everybody, is to make sure that we can deliver consistent earnings growth and appropriately get share price appreciation along with it, and continue to have a strong dividend yield so that we can get to an 11 to 13% total shareholder return on a relatively low-risk basis. We will give you a lot more background on the implications of the changing postal and mailstream environment at the update that we will be doing face to face on April 30, and we look forward to having a good dialogue with you at that time.

Ladies and gentlemen, this conference will be available for replay after 11:30 a.m. today running through February 15, until midnight. You my access the AT&T replay system at any time by dialing 1-320-365-3844, and enter the access code of 859840. Those numbers again, 1-320-365-3844, access code 859840. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.