必能寶 (PBI) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to Pitney Bowes third quarter 2007 earnings conference call.

Your lines have been place in a listen-only mode during the call until the question-and-answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time.

I would now like to introduce your speakers for today's conference call, Mr. Murray Martin, President and Chief Executive Officer, Mr. Bruce Nolop, Executive Vice President and Chief Financial Officer, and Mr. Charles McBride, Vice President, Investor Relations. Mr. McBride will now begin this 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 Web site at www.pb.com/investorrelations.

The forward-looking statements contained in this presentation involve risks and uncertainties that are subject to change based on various important factors including changes in international or national, political or economic conditions, timely development and acceptance of new products, timing of potential acquisitions, mergers or restructurings, gaining product approval, successful entry into new markets, changes in interest rates and changes in postal regulations as more fully outlined in the Company's Form 10-K annual report filed with the Securities and Exchange Commission.

Additionally, if there are any non-GAAP measures discussed during the call such as adjusted earnings per share, earnings before interest and taxes, EBIT, free cash flow and organic revenue, there will be a reconciliation of those measures to GAAP measures located again at our Web site at www.pb.com/investorrelations.

Now, our President and Chief Executive Officer, Murray Martin, will start with an overview of the quarter. Murray?

Good afternoon. Thank you for joining us for the announcement of our third quarter earnings.

I'll start with a broad overview of what affected our performance and Bruce will follow with some additional perspectives on our quarterly results and on our guidance for the fourth quarter. I will then conclude with a brief discussion of our action steps for the near future and then open the lines for your questions.

During the quarter our revenue grew 5% compared with our previous guidance of 8 to 11%. Our average adjusted earnings per share from continuing operations was $0.63 compared with $0.66 in the third quarter of 2006. This was below our guidance of $0.70 to $0.74.

Our GAAP earnings per share from continuing operations was $0.58 compared with $0.64 for the same period last year. This is the first time in 28 quarters that we have performed below earnings expectations. We are disappointed in this performance and I will talk about the factors which led to these results.

But before I do that, I want to make certain that we do not lose sight of the positive trends we continued to see during the quarter. Our enhanced management focus on free cash flow has delivered one of our strongest quarters ever as we generated $239 million during the quarter.

Also, as we saw last quarter the software segment continues to be one of our growth leaders. The ongoing demand for our array of solutions highlights software's growing importance in helping customers optimize their mailstream investments.

During the quarter we combined Group 1 and MapInfo into one organization, bringing together our expertise in locations and addresses and laying the foundation for us to become the most comprehensive provider of customer information for marketing and business transactions.

Earlier this year, we named Mark Cattini, former CEO of MapInfo, as head of our marketing services group. Since that time we have begun leveraging the synergies and increasing linkages between our software and our marketing services group. This powerful combination enables to us add value to customer operations earlier in the mailstream life cycle.

Our mail services segment also had a very strong performance as we experienced growth in both presort and across border mail services. The recent increase in work sharing discounts available to large mailers is an example of the benefits made possible by U.S. postal reform. We are continuing to build out our network of services in the U.S. and are looking at opportunities to expand internationally.

During the quarter we also achieved good growth in payment solutions and Asia Pacific continued its strong momentum with excellent growth across all product lines. However, these positive results were offset by more challenging conditions than we anticipated in four areas.

First, we experienced an unfavorable impact due to weakness in certain sectors of the economy, in particular financial services. We are seeing lower sales of equipment and software, lower supplies orders, and slowdowns in transaction volumes handled by management services.

Second, we had lower than expected revenue in our U.S. mailing segment. After the exceptionally strong second quarter performance we planned to return to more normalized levels of growth in September. We now believe that the lower sales were related not only to the spillover effect due to the rate case but also the wind down of meter migration.

Third, in our international mailing segment delays in market liberalization in some countries and the issues related to changing requirements from deregulation and others has contributed to market confusion and lower product placements. In the U.K. as an example, strike conditions at Royal Mail created uncertainty affecting postal services and reducing sales.

In France, a regulatory change in the method of meter rentals is causing both delayed purchasing decisions and increased selling and marketing costs. Additionally, our profit margins in Europe continue to be adversely impacted by ongoing investments in sales and marketing channels, and the transformation of our back office operation has continued to produce higher than anticipated expenses this year.

Fourth, while our management services revenue was helped by strong written business from prior quarters, the third quarter results were affected by continued weak performance in the legal solutions vertical. We also experienced unanticipated delays in new business in the government solutions vertical as the postal service postponed any additional outsourcing activity while it works through the review of the new regulations that resulted from postal reform.

Bruce will now provide some additional information concerning our financial results.

Our revenue for the quarter was $1.5 billion, which was a 5% increase from a year earlier. Foreign currency contributed about 2% and acquisitions contributed about 4%, therefore, excluding the impact of acquisitions and currency, our revenue declined by 1%.

Our revenue overall in the U.S. grew by 2% while our revenue outside the U.S. grew by 13%, although this was primarily due to currency translation.

Our earnings before interest and taxes, or EBIT, declined by 2% during the quarter to $278 million. Our EBIT margin for the quarter was 18.4% which was lower than the prior year's margin of 19.8%, but on an organic basis our EBIT margin was 19.2%.

The decline in our EBIT margin was due primarily to mix as we had a lower average gross margin and a higher selling and marketing expense ratio, however, on an organic basis our general and administrative expense ratio actually declined by 20 basis points. If we add back depreciation and amortization our EBITDA for the quarter was $374 million, which was very close to the $377 million of EBITDA in last year's third quarter.

Our adjusted earnings per share for the quarter was $0.63 per diluted share which compares with $0.66 for the same period last year. Much of the year-over-year decline in our adjusted earnings per share was due to higher interest expense.

The higher interest expense reflects higher levels of debt outstanding, but also last year we had interest income on a large cash balance that resulted from the capital services divestiture. This cash balance contributed about $5 million of interest income to last year's third quarter results.

Our GAAP earnings per share for the quarter was $0.58. This included a $0.02 charge for aligning the MapInfo accounting with our procedures for software.

In addition, we had two non-cash adjustments, a $4 million net decrease in our deferred taxes, primarily due to recent changes in German tax laws, and a $4 million pretax expense for the impairment of certain intangible assets in legal solutions.

Our effective tax rate on adjusted earnings for the year is now expected to be 34.10%. This is a slight decline from the 34.25% that we estimated last quarter.

Our shares outstanding this quarter were approximately 1% below what they were in last year's third quarter.

Our cash flow from operations for the quarter was $290 million. Our free cash flow was $239 million. And there are three things to note about our strong free cash flow. First, we are seeing the benefits of increased management attention on working capital and generated about $57 million from working capital during the quarter.

Second, our capital expenditures were $22 million below the level of depreciation and amortization. And finally, we had lower additions to finance receivables which is a function of lower sales of equipment.

We now have generated $550 million of free cash flow year-to-date and given this strong performance we are increasing our annual guidance from 625 to $675 million from our previous estimate of 550 to $625 million.

During the quarter we used $72 million of our cash to pay dividends to shareholders and we also repurchased $105 million of stock. We acquired 2.3 million shares during the quarter. Year-to-date we have returned $497 million to our shareholders through dividends and share repurchases.

Our total debt as of September 30th was $4.9 billion. About 79% of this debt is fixed rate and 21% is floating rate.

As we look to the fourth quarter we are expecting a continuation of the trends that we saw this quarter. We are forecasting revenue growth in a range of 6 to 9% and for the full-year we expect revenue growth in a range of 6 to 8%. For the fourth quarter we are forecasting adjusted earnings per share of $0.67 to $0.71 which compares with $0.77 for last year.

On a GAAP basis we are forecasting fourth quarter earnings per share of $0.66 to $0.70 which compares with $0.73 last year. Our guidance for full-year adjusted earnings per share is $2.67 to $2.71. Our GAAP earnings forecast is $2.59 to $2.63.

So that concludes my remarks and now Murray will provide more insight about our plans going forward.

We do not believe that this year's results are indicative of the growth and the value inherent in our mailstream portfolio. As a result, we plan to accelerate some of our action plans to ensure better performance going forward. First, we are looking at ways to accelerate our infrastructure improvements to lower our costs and deliver a better customer experience.

Second, we are planning to accelerate the transition strategies for our mailing products in the U.S., Canada and Europe, in light of the dynamic market conditions resulting from the end of meter migration in North America, postal reform in the U.S. and market liberalization in Europe.

Our mailing business is central to our equation for delivering shareholder value. Our goal is to ensure that this business delivers consistent earnings and cash flow even in the midst of increasing complexity within our markets.

Third, we must improve our operating performance in Europe. As a first step, at the end of the quarter we appointed Neil Metviner as President of our mailing segment in Europe.

Neil joined the Company in 2000 and has successfully transformed our global small business operations by creatively expanding our market reach to over 1 million small business customers while lowering our cost structure. I have a great deal of confidence in his ability to make an immediate and positive impact.

Earlier in the quarter we also appointed Ian Davidson as head of production mail in Europe. I believe that Ian's experience and market knowledge will enhance our focus on production mail opportunities and lead to improved profitability.

Overall, we're examining all aspects of our operations and our investment strategies to ensure that we will deliver enhanced value to our shareholders. I want to assure you that we will move swiftly to take appropriate actions for the current market conditions. We plan to hold a special investor call on Thursday, November 15th to discuss our action plans with you.

Now we'll take your questions.

Operator, can you open up the lines for questions, please?

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Jay Vleeschhouwer with Merrill Lynch. Please go ahead.

Thanks. Good afternoon.

Murray, you mentioned that the benefits from postal reform in the U.S. earlier in the year turned out to be temporary concentrated in the second quarter. That was notwithstanding years of anticipation of these reforms and how it would benefit the business.

So the question is, why do you think it was so brief or concentrated and the next time such reforms occur in Europe or elsewhere, is it reasonable to assume that the benefit would again prove to be relatively temporary?

Second question concerns the strength you're seeing in mail services. Is there any reason to believe that in presort or any other part of that business that the current growth, which I assume is volume driven, could prove to be temporary?

Thanks, Jay.

First of all, on postal reform there are long-term benefits to postal reform. It really starts with market stabilization and the benefits that the entire market will receive from having a solid postal environment.

Now as we look at the benefits of postal reform the first is, we are seeing and expect to continue to see positive benefits in our mail services segment. We don't see these as temporary benefits.

The discount offered to mailers is very good and the commingling of mail enables them to receive those discounts. So we would expect more and more customers to look at how they can comingle their mail to receive those discounts and we see that as a positive going forward.

As to your question on the second quarter, the second quarter actually created a slight anomaly which was the introduction of shape-based rating. That was not really something that was part of postal reform or anticipated in postal reform. It was something the postal service put in and it brought forward business but we don't see it as having a long-term negative effect, it changed the timing of when revenue will be recognized.

We do believe that the other elements in postal reform and market liberalization around the world will have long-term positive effects, although we will see occasional anomalies.

In the software business, you mentioned that you've combined MapInfo and Group 1. Do you foresee the benefit or do you anticipate similar structural changes across any of the other business units or is this unique to the software business?

And a couple things you mentioned at the analyst meeting earlier in the year were first that the composition of the business now would likely lead to more, quote variability, your word at the time. I assume this, what you're seeing now goes beyond some of the revenue mix variability that you anticipated earlier in the year and you also talked about accelerated products development, if there's something you could say on that.

First of all, let me just touch back and I'll try to remember the question. And if I don't get it all, pop back.

On Group 1 and MapInfo, the consolidation of that has brought together our software capabilities around addressing and location intelligence and we see that as enhancing the segment substantially. And having that synergy, we believe, will be a long-term benefit to our customers and to the entire mailstream.

The ability to be more precise in determining an address also will enhance marketing and transpromo as it begins to expand and people look to take transactions to promotional mail. So we see that as to having a continuing effect.

At the same time, we are looking at and examining all portions of our business to see which items fit best together to provide us the most synergistic benefits and the best results not only for our customers but return as well. One of those is in U.S. mailing where we have brought together small business and our mid-size business and put them together so that we have one end to end view of the customer.

And we have a way of seeing the customer from small to large that has allowed to us bring the infrastructure together in one place so that we can deal with the customer experience while we, at the same time, look at reducing the cost of delivering an enhanced experience. So we are continuing to look at all pieces of the business to see what synergies are available, not just from a cost side but from a customer experience as well.

As to products, we are continuing to focus on certain areas of products that we believe will give us good return. We are doing that in our software segment which you're seeing some of the results of today.

We've been doing that in our DMT space as we've become the clear market leader in technology and advanced productivity systems around the world. And we have done it historically in our mailing business where we have a fleet now of units that can upgrade their rates capability as the postal service makes change.

And this is one of the major things in postal reform, the post is going to want more flexibility on rates and we have a large fleet that is easily adaptable, and this is significantly different than others in the market. We will look at how we can enhance this to take advantage of many of the new functionality that the postal service will be rolling out over the next 12 to 24 months to enhance the value for our customers.

Our next question comes from the line of Matt Troy with Citigroup. Please go ahead.

A question. Given a quarter that was very un-Pitney like, I know it's difficult for you on that end, certainly for everyone on this end. I was just curious, when did you first get a sense that the quarter was structurally beneath your expectations and why weren't you able to update investors sooner given the magnitude of the miss?

And I realize this could just be a perfect storm of several items coming together but I wanted to get a directional sense of the items you listed. What were the major drivers of the shortfall? Were some more impactful than others and when did you get a sense that this quarter and your outlook for 4Q would be structurally beneath that which you previously articulated?

Well, Matt, as I mentioned and as we've discussed, the results for a quarter tend to come in in the last week and the last days and that's particularly true of our software business and of our lease trade up business. And this is when we had expected to see a positive swing going forward.

Now we saw at that point that there were some challenges. We still expected to be towards the bottom end of the range but we did not expect to be where we have come out. And I think you were exactly correct in the, all of these items coming together at one time.

To give you an idea as to your question about are some more than others, basically the first three represented about 90% and they're about evenly split at about 30% each. That, just to reiterate, that was about 30% that was defined around the weakness that we saw in the economy and we did not expect those results to show up as they did, particularly in the finance sector where we had some shutdowns of procurement that occurred at the end of the quarter.

Secondly, the U.S. mailing segment, that was about 30%, and as I mentioned, we expected that to arrive at the end of the month of September and international was about 30% and then the PBMS was about 10%.

Okay.

If I could maybe ask, and I'm sure you'll share in great details your plans at the November call, but some of the actions you spoke of in reaction to what you're seeing now in this business were internal facing. I was just curious from a longer-term perspective that the concern would be that you've built these better technologies and these better services and this better hardware to accommodate for a much more dynamic requirement in a post-postal reform era.

How do we get comfortable that you're going to be able to be compensated from your customers for that investment in light of the current quarter results and some of the weakness that ultimately you will get an adequate return, you will be able to seek price. What are some of the external facing strategies you're pursuing to make sure that you can recoup this investment to make your technology and product more valuable and viable?

I think there are a number of things there. Number one, as I was discussing in software, we have combined assets to ensure that we can enhance the customer experience which delivers significantly more value.

I was just with a customer this week and we were going over the results of the analysis of their mail with the new tools that are coming available and there were millions of dollars of benefit for that particular customer. And that customer was saying, can you look at the rest of my facilities to see how much more benefit we can get? So I believe that as these new technologies roll out they are measurable and clearly definable benefits for the customer that will justify the expense.

As we move into the more traditional mailing products, the postal service is expanding through the balance of this year and 2008 full-face scanning and they will be putting in the ability to read the bar codes off the meters, and this will then enable to us really take advantage of special services that have had limited capability up until now and that will provide an expanding benefit from our customers.

So I really believe that these two areas will make a significant difference for us and we have built these products so that they have got some upgradability in the field to handle variances that the postal service has. So I think those are the items that will really generate the maximum potential benefit and we are quite confident that our customers will realize measurable benefit.

And will they pay for it?

Yes, we believe they'll pay for it. The customer I was with the other day, I said to him, I said, so there's a lot of money here on the table, I said, what about the price? And he said the ROI is more than sufficient. So as an example from that customer, he saw no issues on the ROI that was presented.

Last question in terms of the share repurchase program. Could you just give us an update in terms of, Bruce, where you are with that and in light of what the stock is going to do in the morning might you be opportunistic in seeking expanded authorization from the board? What kind of capacity do you have there?

Sure. We've, as of the end of the quarter bought in $280 million worth of stock. And we are going to be looking at whether to increase the authorization but that's something that we will look at between now and November 15th and we will update you about what our plans are in that regard.

Did you have a number in terms of remaining capacity yet unused?

Authorization is $160 million.

Of which you've used how much?

That's how much is remaining.

Okay. All right. Thank you.

We have current authority and the question is whether to increase that.

Okay. Thank you.

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

Thank you.

I just wanted to get, delve a little bit deeper into what happened with U.S. mailing. There's still a bit of a disconnect for me.

And starting off with just the three reasons you gave for the miss in the quarter and one was economic and what you saw in the financial services sector. My understanding was where you were most exposed to that was in management services but it didn't seem like the top line in that business was that impacted.

So where would you attribute that 30% impact to? Was it management services or elsewhere in the organization?

Carol, this is Bruce.

It would be largely outside of management services and it would show up in areas like supplies orders. We also think in the mailing side that it affects equipment and in particular production mail, which is the large equipment, and then software. So it's roughly, if we had to characterize it, Carol, we'd say maybe half was equipment, 25% supplies, and 25% software.

Okay. And half in equipment you would say mostly in production equipment or also in mailing equipment?

Both.

And the other thing I'd mentioned, too, Carol is, it didn't affect revenue but we did have some incremental costs related to the financial services sector, and particularly the mortgage area, we had a couple of million dollars of write-offs related to that sector.

And those would have showed up in PBMS.

No, no, no, that showed up in U.S. mailing.

In U.S. mailing. Okay.

So that's what I'm saying that mailing is more diversified than management services but it still has a very large presence in that sector.

And if you looked at U.S. mailing and you looked at the revenues, 3% down, what part, what did equipment sales do within U.S. mailing and what did sort of the other components if you can just give us a general feel? Because I would have thought that 75 to 80% would been recurring so it shouldn't see wild swings like this.

In the U.S. mailing segment it's the swing numbers it would show up as the equipment sales and they were clearly off. And in contrast second quarter they were significantly so just on a quarter-by-quarter swing and then you also see it in the rental line as well. And then you see it in international mailing as well.

Oh yes, and the other point is that supplies is something that you do see effects from the economy and just the amount of postage volume that's going through, but even more importantly, just people sometime postpone the replenishment of supplies.

But your supplies number looked pretty good, maybe not as strong as the first half (inaudible).

I would say if you broke it down between international and U.S. you would have seen that international was very strong in supplies but the U.S. was down considerably quarter-over-quarter.

And then I think, Murray, you mentioned when you were talking about U.S. mailing that you thought the end of meter migration had an impact. Is that right?

Yes.

Go ahead.

If I could just touch on meter migration. We've about 49,000 meters left in migration between 2007 and 2008 and what we have seen, which was really a surprise to us, is the migration rate on meters has dropped by about 50%.

So customers that we would expect to migrate are migrating at about half the speed that we expected them to, which says they are pushing out towards the end of migration and what we are now expecting is that customers that would normally have upgraded earlier are saying, I've got until the end of 2008, beginning of 2009, I have no urgency to move forward. And that would be both in the owned and in the leased fleet.

The owned in particular is definitely in delay from where they were. So we expect we will only see about half of the volume between now and the end of '08 that we had expected.

In the last migration cycle I think what happened after migration was over was that revenues came under pressure because a lot of new equipment orders were pulled in during migration. Is that something that happened here, this one was stretched out a lot longer and it seemed like people migrated during their natural lease terms?

I think there are two things there. One is the second quarter, if we talk about the second quarter and what happened, is people were in one of two positions. They either had equipment nearing the end of lease which they traded up prematurely to get the new equipment. That created a pull forward and it therefore lowered the trade up potential over the following periods.

The second item is people that added components to their existing piece of equipment and this allowed them to take advantage of the pricing in proportion. But they then, as they are nearing the end of their lease where they would normally trade up pre the end of their lease, are now staying longer in the lease because they did have an equipment upgrade.

And this was something we had not considered as we had looked at the upgrade cycle, is that those people would also shift their repurchase to a later point in time. So this was also a major piece.

So the migration effect that I was talking about, which is at a slower rate, but then you have the second quarter effect which pulled forward rate which pulled forward and shifted some of the timing. As those pieces of equipment come to end of lease they will still be in a renewal cycle.

The other thing that we've analyzed over the last week is, as we've gotten deeper into the lease cycles, we can see what the potential opportunity is for upgrade and we can now more clearly see what has been pulled forward and what is available in the coming years. And we will talk to you in more detail about that as we confirm it on our November 15th call.

And how quickly do you think given all the information that you have, how quickly do you think the U.S. mailing can get back on track to, call it, low single-digit, flattish, low single-digit growth?

Well, we are forecasting through the fourth quarter that the current conditions will still be there and then on our November 15th call we will give you the 2008 looking forward as to exactly where we see not just U.S. mailing, but all of the different components of the business.

And then one last quick question.

Your revenue guidance for fourth quarter is within sort of what we had been forecasting but, obviously, the EPS is much below. Is it that maybe we were off in the components of what was growing, maybe we had U.S. mailing, is it just a product mix that is causing that, I guess is the question?

I think, Carol, it's almost all mix, I'm guessing in what the difference is, and also, too, that you have more of the revenue growth probably from currency and acquisitions than you originally thought. And so that's made a difference.

For example, we bought a company called [Asterian] which you may have seen which is going to add to our revenue. So overall, I mean, we're looking fourth quarter organically to be roughly flat, so that's probably a difference in your forecast.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) And next we'll go to the line of Shannon Cross with Cross Research. Please go ahead.

Hi. Good afternoon. A couple of questions.

The first one, looking at the issues that are hitting you from a revenue standpoint, I don't know, Bruce, can you talk a little bit, I mean, the first concern everybody's going to have in looking at this, obviously, is the economy. And I'm just curious as to how much when you look at it is truly the economy weakness in SMB, pull back of lease renewals, all of that, and how much you think is, I don't know, one-time or more related to the mail meter migration?

Just any more clarity you can give on that I think would be helpful because I know I got several comments and questions from clients right after they saw the numbers as to.

Sure. I'd say this, as we've always noted two things. One is that we are generally resistant to the economy but we're not immune. And just to reiterate what Murray said is that we estimate that perhaps 30% of the shortfall was attributable to the economy. So it's still, it's a significant item but it's not the majority.

And secondly is, we tend to be not a leading indicator but a coincident indicator and we really saw the impact toward the end of the quarter and we didn't see it through the first two months. And at that time we were seeing a few things but nothing that would indicate the kind of economic decline and we're just, again, being a coincident company and in some ways a barometer of what the economy is doing, we see it continuing and we are forecasting the fourth quarter to have that slower results.

And as I mentioned, we're seeing it in a lot of ways, but some of the places that we look, particularly such as large equipment orders, we're seeing the companies are clearly watching their procurement and in many cases shutting down new proposals. So, again, we can't be a long-term forecaster but we will tell you right now we are definitely seeing the effects in the economy, in our business and it has, at least having, the 30% of our shortfall effect through the fourth quarter.

And probably greater on a percentage basis, fourth quarter than third and that's why you may see even some widening compared to what we did year-over-year.

And then can you talk a bit about your international EBIT margin, pressures you've seen there, ways that maybe you can address them going forward? I'm sure a lot of this will come out in November but just any more clarity you can give us on the weakness in international EBIT?

Shannon, there are two things in international and I break the international numbers as basically 50/50. About half of the miss in international has to do with the uncertainty and the delays in the postal liberalization and the effect of the strike by Royal Mail in the U.K. which is our largest volume area and the highest margin in Europe. So that's sort of one half.

On the other side, I think half of it is clearly operational. It is up to us to get it fixed and take that cost out. It's cost that we did not anticipate it and we expect it to be gone by now and it is not.

And that had to do with our outsourcing of back offices across Europe and that included our order to cash component and we have not seen those benefits realized as expected in totality. We're seeing the benefit but we're carrying increased expense to ensure that the benefits get there. So to me it nets out as we are aren't seeing the benefit.

We have put actions in place that will get us there but I'm very disappointed in the, our lack of being able to deliver that on time. So I think that will change the margin that you're referring to significantly as that clears itself out.

Okay.

And then just not to beat this to death, but I'm just curious, Bruce, if you could talk a little bit about supplies? You talked about it being under pressure in the U.S. Just from a, maybe if you looked back over the last several quarters trend-wise, because again, I think it does have to go back to the number of transactions and how much people are using their mail meter which ultimately gets back to the economy.

Can you talk a little bit about trends you're seeing in terms of supplies growth and then if there's been any change since the end of the quarter? Looking for a silver lining here.

Sure, right. In terms of supplies, they have been growing organically at double-digit. And now in the U.S. that would be low single-digit. And that's something that was just a change that occurred relatively quickly.

So, in other words, it was not a gradual change, it was really a step function between second and third quarter and we don't see any change to that. And it's related primarily in our mailing line not the new supply area. So it is some effect due to postage but we believe that the economy, clearly, is affecting that as well.

Okay. Great. Well, thank you very much.

Next we'll go to the line of Josh Golden with JPMorgan. Please go ahead.

Hi. Good evening.

A question for you regarding the balance sheet. Given what the share price may do and future outlook that you're forecasting can you talk to me about the integrity of the balance sheet? Are you willing to leverage it up?

What type of share repurchases are you willing to do? Are you willing to take on additional debt to defend share price?

This is Bruce.

I would say that we do anticipate that we will have an opportunity to buy in shares at what we believe will be an attractive price and we will be looking at what kind of strategies make sense. And, again, we have authorization now and we'll be looking at it.

But one thing I would say is our cash flow remains very strong and so the fact that we've increased our guidance for free cash flow indicates that we can buy in more shares without having an impact on the credit ratios and balance sheet.

Are there any type of credit ratios that you're looking to target within a range?

The ratio that we look at that tends to have the most legitimacy to the rating agencies is EBITDA to debt -- our debt to EBITDA, to reverse it. And we look at it at roughly three times. And that, what equates to the rating agencies look at a more complex formula that separates out our finance receivables but that tends to be our rule of thumb, three times.

And the other thing is, we tend to look at returning cash to shareholders to the extent we get free cash flow. And if you look at what we've done over the last five years, we've returned all of our cash to shareholders, either as dividends or share repurchase.

And we have done that without jeopardizing the basic credit statistics. In other words, even though we've added debt to finance acquisitions that ratio of debt to EBITDA has been very solid during that period.

Sure. That's fair enough. So is it reasonable to assume that there won't be in the future much of a deviation outside of that three times debt EBITDA?

Well, all I can say is that that's the current targets, and as Murray said, we're going to be looking at strategies that make sense to deliver shareholder value. So I don't want to rule anything out but as of today that is our intent.

Okay. Thank you.

Our next question comes from the line of Chris Whitmore with Deutsche Bank. Please go ahead.

Thanks very much.

Wanted to get a little more clarity on the weakness you're seeing in the U.S. capital spending environment. How much of that was isolated within the financial vertical versus other end markets? Could you provide any color beyond what you're seeing in financials?

I would say that in our case that we're seeing it mostly in the financial services vertical and there are a few others that had impact, for example, retail, people that are exposed to the home market, that would be another area. But it just wasn't enough of a factor to quantify it for you.

But I'd say that in general Pitney Bowes is very diversified across the economy and that's one of our strengths. But on the other hand, again, we're not immune and so as you see weakness in different sectors of the economy, that will affect our sales line and our incremental revenue as opposed to our base revenue.

How much is the large financials or the U.S. financials as a percentage of total revenue currently?

We estimate that overall for our revenue it's roughly 25% of our revenue would come from the financial services industry.

And secondly, your business model has been shifting a bit from rental related revenue to supplies related revenue and this quarter suggests the supplies line is a bit more sensitive to the economy than perhaps the rental line. So has the Company's cyclicality changed at all as the business has shifted more to a supplies based recurring revenue stream as opposed to a rental based model?

Yes, I mean there's a slight change in the model towards supplies but keep in mind that much of the supplies is really related to the basic postage meter so it's in many ways it will be relatively constant although you do have these quarter-over-quarter issues.

And I'd say that the business model, if you're looking for how it's changing it's probably more toward software as a percent of revenue has come in. And even there, though, that we're really emphasizing a maintenance stream as well as the sales stream.

Last question. It looks like receivables were up over 20% year-on-year. You mentioned the organic business.

Right. On an organic basis they were a source of cash. They were actually, we generated cash from receivables. So what you're seeing is really two things primarily, currency and then the addition of acquisition.

Have you seen any changes in bad debt, bad debt expense or delinquencies?

Well, we, as I mentioned, we definitely saw it related to the mortgage industry. And we are generally, though, looking at bad debt the trend has been favorable and we've not seeing anything that would contradict what has been a very favorable trend.

Okay. Thanks a lot.

And next we'll go to the line of Vincent Lynn with Goldman Sachs. Please go ahead.

Hi. This is Vince on behalf of Julio.

I think most of my questions have been answered, just one really quick follow-up question regarding the financial services vertical. Since you brought up mortgage was one area of weakness that you saw, is there any other pockets within the financial services vertical whether it's commercial banks, broker dealers, capital markets, that you can point us to?

I'd say no. When we talk about it it's just more general across it and I think it's hard to pinpoint. But we have exposure to all of the large financial institutions and so just think about people that do large amounts of mailings.

Got it. Thanks.

Our final question in queue comes from the line of Matt Troy with Citigroup. Please go ahead.

I think I'm done. Thanks.

(OPERATOR INSTRUCTIONS) And there are no additional questions at this time.

Thank you all for your questions and spending the time with us this evening.

As I said earlier, we are looking to and will always continue to be focused on enhancing return to our shareholders. Over the last 50 years we've delivered over 12.5% total return to our shareholders and we intend to continue that trend into the long-term.

So we look forwards to discussing with you on November 15th more specific actions that we'll be taking to enhance our value. Thank you and have a good evening.

Ladies and gentlemen, that does conclude your conference for today.

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