必能寶 (PBI) 2008 Q1 法說會逐字稿

Good evening. Welcome to the Pitney-Bowes 2008 first quarter earnings conference call. Your lines have been placed in a listen-only mode during the conference 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. Michael Monahan, Executive Vice President and Chief Financial Officer, and Mr. Charles McBride, Vice President Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you. Good afternoon. Let me remind you that you can find today's earnings press release and the attached schedules on our website at www.PB.com/InvestorRelations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based on various important factors, including changes in international or national political economic conditions, timely development and acceptance of new products, timing of potential acquisitions, getting product approval, successful entry to new markets, changes in interest rates, and changes in postal regulations as more 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 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 President and Chief Executive Officer Murray Martin will start with an overview of the quarter. Murray?

Thank you, Charlie. Good afternoon, and thank you for joining us for today's quarterly results announcement. I will share a few thoughts on the quarter and Mike will follow with the financial overview of the first quarter as well as an update on our transition initiatives. I will conclude with our ongoing focus for 2008, and then we will open the line for questions.

Despite the economic uncertainty, we are encouraged by our ability to deliver a solid performance during the quarter, which included 11% revenue growth and adjusted earnings per share of $0.66. Free cash flow for the quarter was strong at $197 million, which was about 27% better than the $155 million that we generated last year. This reflects our ongoing focus on cash flow management, and gives us the confidence to raise our free cash flow guidance for the full year by $25 million to $625 million to $700 million range. The quarter's results were characterized by continued momentum in the areas of our business that led our growth throughout 2007, by improving trends in our international business and performance in line with expectations in our core U.S. mailing operations. The value of our solutions in enhancing the efficiency and the effectiveness of mail stream processes becomes more evident at a time when businesses are looking to reduce costs and optimize the impact of their communications with customers. This is particularly true of our portfolio of mail services and software solutions, which continued to pace our growth during the first quarter.

Our mail services solutions enable customers to take advantage of postal discounts, speed the travel of their mail through the postal network and to enhance the quality of mail delivered. In the first quarter we continued to expand our U.S. mail services network. The operating leverage that our network provides allows us to maximize discounts, to insert mail into the network closer to its destination and to enhance our operating efficiency. The growth in this operation continues to be driven by both presort and cross border mail services. Our software solutions enable customers to leverage contact with their customers through the mail using address management, data quality, location intelligence and customer communications applications. There is a good demand across the portfolio inside and outside of the U.S.

Our payment solutions also contributed to this quarter's performance. Innovative financial solutions have long been a way to help the customers manage cash flow and get access to postage products and services they need to grow their businesses. We first started offering payment solutions in the mid '70s and over time, they have enabled us to establish longer term relationships, and provide a wide variety of convenient financial options for our customers. International mailing improved in line with our expectations, as we continue to focus on growth and on enhanced operating efficiencies. Our EBITDA margin was down on year-over-year basis, although it improved on a sequential basis. The quarter's performance also benefited from a rate change in France.

We continued to make progress in completing the outsourcing of the financial and customer processes in Europe. The performance of our U.S. mailing business was in line with our expectations. We had anticipated the difficult comparisons in this business throughout the first half of the year because of last year's rate case activity, lower meter migration, continued economic weakness, especially in the financial sector, and additionally, market uncertainty has deferred some customer decision making. We are nearing the conclusion of our evaluation of the strategic options for U.S. management services and we expect to make a statement by the end of the second quarter.

Overall, we are encouraged by our performance and we are on track to strengthen our positioning for long-term growth in value. Before I discuss our outlook for 2008, Mike will provide an overview of our financial results.

Thanks, Murray, and good afternoon. Our revenue was $1.6 billion for the quarter, which was an 11% increase from the prior year. On an organic basis, revenue grew about 3%. Foreign currency contributed more than 3%, and acquisitions about 5% to the revenue growth. For the quarter, our revenue in the U.S. grew by 3%, while our revenue outside the U.S. grew by 34%. International operations now represent about 32% of the total revenue. The earnings before interest and taxes for the quarter, excluding charges related to restructuring and accounting for MapInfo was $280 million.

Our EBIT margin was 17.8%, which was lower than the prior year on a comparable basis. The anticipated decline in our EBIT margin was primarily due to a lower gross margin which reflects a shift in revenue mix. Similarly, our SG&A expense was up this quarter when compared with the prior year. This was largely due to slow organic revenue growth, a shift in the mix of our businesses and higher credit loss expense in the U.S. When we add back depreciation and amortization, our adjusted EBITDA for the quarter was $377 million, which was similar to prior years' EBITDA. Net interest expense increased by $2.1 million compared to the prior year. The impact of higher average loan balances was mostly offset by a lower average interest rate, which declined from about 5.2% last year to 4.9% this year. Our effective tax rate for the quarter was 37.2%. This was higher than our expected rate because of a $6.5 million tax adjustment we made during the quarter, related to a U.K.leasing program that ended in 2002. Excluding this adjustment, our effective tax rate on adjusted earnings was at 34.4% for the quarter, which was about equal to our estimated tax rate for the full year of 34.5% on adjusted earnings. During the course of the year, however, the tax rate could vary between 34 and 35%.

Our adjusted earnings per share for the quarter was $0.66, which is equal to the earnings per share for the same period last year. Our shares outstanding this quarter were about 5% below what they were in last year's first quarter. Our GAAP earnings per share for the quarter included $0.05 of charges for our previously disclose initiatives and $0.03 for the tax adjustment. Our GAAP earnings per share also included a charge $0.02 per share from discontinued operations, which related to interest on possible future tax payments related to our former capital services business. Our free cash flow was $197 million for the quarter, as compared with $155 million in the first quarter of last year. As Murray noted, our focus on cash management resulted in strong free cash flow during the quarter, therefore, we have increased our cash flow guidance for the year. During the quarter, we returned $254 million to our shareholders through dividends and share repurchases. We used $74 million of our cash during the quarter to pay dividends to shareholders and we repurchased $180 million worth of stock. We acquired 5 million shares during the quarter. We returned a greater amount of cash to our shareholders in the form of dividends and share repurchases than we generated in cash flow during the quarter. We continued to repurchase our shares in the second quarter.

Given overall market conditions, going forward, we will balance future share repurchases with other demands for cash. We have $227 million of share repurchase authorization remaining as of the end of the first quarter. Our debt increased during the quarter to a total of about $4.9 billion, as we continued to repurchase our share as part of the previously announced plan. About 77% of our debt is fixed rate and 23% is floating rate. During the quarter, we recorded about $17 million in cash charges in connection with the initiatives that we announced on November 15 of last year related to anticipated severance associated with the elimination of positions. On an after tax basis, the charges amounted in total to about $11 million in the quarter, which is equal to $0.05 per share. As previously disclosed, we expect to realize $70 million in benefits from the transition initiatives in 2008. We intend to reinvest the majority of these 2008 benefits in programs to enhance customer value and gain operational efficiencies. We now have in place programs to achieve our target of $150 million of benefits in 2009. We still anticipate reinvesting 50% of these benefits into the business.

So that concludes my remarks. Now Murray will provide insights about our plans going forward.

We continue to remain confident in our ability to deliver innovation, growth and value in 2008 and beyond. We will continue to execute our strategies and focus on operational efficiency, free cash flow and expense management. Our solid performance in the first quarter, despite the environment and our ongoing actions to enhance long-term value give us the confidence to expect a stronger second half of the year. As we discussed last quarter, we anticipate that we will realize approximately 46% of our adjusted earnings per share in the first half of the 2008, and approximately 54% during the balance of the year. We are reaffirming our 2008 revenue guidance of 6 to 9%. The range for our adjusted earnings per share from continuing operations of $2.80 to to $2.90, and we are increasing the range of expected free cash flow to 625 to $700 million.

We were able to meet expectations this quarter, despite tough comparisons, and a difficult economic environment that we expect will continue at least throughout the first half of this year. We look forward to the opportunities that lie ahead. Thank you and let's open the line for questions.

(OPERATOR INSTRUCTIONS). Our first question will be from Matt Troy with Citigroup. Please go ahead.

Murray, couple of questions, revisiting one I asked last quarter. Could you just give us a sense now that you are a few months past the end of meter migration and the comps should begin to generally ease into the fourth quarter of this year what your expectations are for organic growth in the business? Are you hearing or seeing or experiencing anything different with your customers to lead you to believe that you may need to readjust that organic growth expectation in core U.S. mail metering into 2009 and 2010?

We have a little bit of migration left. I believe it is about 33,000 units left between now and the end of the year. As you mentioned, the comparisons to the first half and second half are different. As we look at the organic growth rates we do not see anything that would significantly change what we have laid out.

Second question on that point. A lot of focus or concern in the market seems to be that organic growth rate of the core U.S. mail meter base, focusing on basis point changes there, almost at the expense of ignoring some of the progress you have shown on the software and services side. Is there a better way to talk about or present the changing value proposition of your installed base, be it a revenue per unit metric or some kind of bundled sell-in success rate so that the street can get a better idea how the package is coming together, how you are pitching the ROE proposition to your customers, beyond this "wow, it's a metering business, it's growing at a low single digit. Let's just focus on that."

I think you make an interesting point, Matt. Mike will take a look at that and see what other metrics we could give you to give you a broader description of the business. As you recall, we spoke last quarter about 2007 and 2008 having a little anomaly in them from prior migration adjustments. That is, it is sort of a wave that goes through the lease-based on significant changes that happened three to five years ago, and those then improved and will run at more a normalized rate for about three years, and then the wave will come back because it is a stream business. What we will do is try to look at how there is a way of giving you a better look on different unit measures so that you can see the value that we are generating in that business a little clearer.

Also, it is important to realize that the mail stream in totality is an important item.When you look at mail services and the mailing business together, we see them as very related because we are, as the mail stream has moved towards more and more standard mail, we are getting benefits out of that on one side even though we might see a change on the other. There is really a combination effect there if you are looking at the U.S. stand-alone business that you need to take into account. As we go forward, we will look at how we could better describe that for you.

That would be helpful. People tend to focus too much on one without appreciating that the two are actually interrelated. Look forward to any update there. Third question is maybe a nonstarter. I know you said you'd give us an update on the strategic alternatives for the managed services after second quarter. Not looking for what you may be leaning towards, but can you just delineate at a very high level what the options are? I think the market may tend to focus when they hear "strategic alternatives" as just, "that means outright sale". My sense was this is not the case of where your focus may lay. Can you give us here are are the top three or the big three options or alternatives that have emerged without giving us a directional cue as to where it might be leaning?

Sure. And just back on timing, I did say we look to make a statement before the end of the second quarter rather than after the end of the second quarter. So we want to be more definitive before this quarter is out. As we look at strategic alternatives, and I believe this is an important thing to do on every portion of the business on a regular basis. We look at what the value is inside of Pitney-Bowes versus the value outside of Pitney-Bowes. What is the value that can be generated complimentary to our existing business, or how could it be more complimentary to another business. We see all of our businesses as valuable assets with great potential. It is a matter of where they have the most potential and how we ring that out. The first would be compare inside Pitney-Bowes to with someone else. Another portion of comparison is to say we have structured the business in this manner for this time period, what are the future structures of this business that can enhance the value on a long term basis in relationship to Pitney-Bowes? You do the first one, you do the second one, and say how can you tie that together and take it forward? Then start measuring those comparisons and what that value could be.

I got it. Appreciate the detail, Murray, thank you.

Next question is from the line of Jay Vleeschhouwer with Merrill Lynch, please go ahead.

Murray, I would like to ask you about your components growth. What do you think are the most valid leading indicators in thinking about the business and specifically you highlighted the continuing growth in your international markets. The question is what kinds of investments do you feel you need to make this year to keep that momentum going either in terms of distribution or products and services? In earlier comment before today you alluded to the possibility of having to have certain unique products or services for certain non-U.S. markets. Is that something you are factoring into your outlook for this year and next? And then I have a couple follow ups.

On the international side, last year we had a similar anomaly in international where we had shaped base rating which slowed down the ten year history we had of significant growth. That is washing out this year. We see that now returning positively. We've also made some of the structural changes which will also give us a positive change as we move forward on the EBIT side. We see Europe coming back stronger and then Asia Pacific is growing in the 20%-plus range for the last years. We see that as a continued growth area for us. When we talk about component as we look at the international markets they are in varying states of development. You have markets that are developed similar to the U.S. or western Europe but you also have markets in different stages, whether it is Brazil, India or China which I see as making significant changes in growth. As we do that, we see them tending to move from a cash society, you're asking about indicators, from a cash society to a credit society. As that occurs, there is a significant change in the demand profile for our types of products, so that is one we are very keyed on that in the international and developing market spaces.

At the same time regarding investments, we look at, and as we did in Europe, we expanded our direct footprint. What that does is it places us in a position to grow the market and to grow in multiple places. Not only around our traditional products that we have in that market, but to bring in new goods and services that we have not offered in those markets that we have proven elsewhere. At the same time, in some of those markets, there are other opportunities to leverage our technologies. If you look at Asia, tax metering is a very significant item, and other things that need to be evidenced as being secure proof that what is on the document is true. So we see those types of things, and then branches into other areas of related software space as expansion. We will be continuing to invest as we did in the fourth quarter, and this quarter to create a regional center in Singapore and building that with capability and talent, enhancing our country management in the region and growing that expansion. At the same time on the leading indicators, when you get back to those specifics, you really have to look at how the different Financial Dynamics are in our more developed spaces where we have a higher market share because they will have a more direct effect. We don't see huge swings, but as we said, we have 25% of our business is in financial services. If there is a shift there, we look and watch what the volumes are. We look at the transaction volume through that space, and those things generally give us a leading indicator of what is to come.

If the transaction volume in financial services starts to decline, we can expect that the sector will see a slowdown in the sort of 60 to 180 days out if it continues. So those are the types of things that we really watch. And then we look at consumer spending, definitely has an effect as to how our business will go on the long-term. Short term anomalies on anything have a very low effect because of our recurring revenue stream.

Thanks. Looking at your restructuring, how much of that has been completed and has begun to flow through the income statement of the Company? Are you certain that the amount you decided upon a quarter or so ago with the initial plan is just the right amount or do you think that perhaps you need a little more or might you end up doing a little less than you thought?

I will have Mike take you through the details. But just a general comment, when you select a number, you of course always know it is the right number. But there is always opportunities to enhance that number. That is what we are looking at now. Mike, if you could fill in the exact details of it, and then what we are looking at.

Jay, just to give you a little background on it. What we originally said was we expected to take a total charge of somewhere between 3 and $400 million and we were targeting to take 1500 heads out. Part of that charge was also asset write offs. In terms of asset writeoffs, we are right in line with what we announced at the end of the fourth quarter roughly $200 million related to those write offs. From a head count perspective, against the 1500 we have now actually exceeded that 1500 in terms of head count identified and are closer to 1600, and with that, we have achieved the definition of programs that would get us the $150 million of annualized benefit for 2009 that we had targeted. We are going to look at opportunities around the program to see if we can enhance that further, but we are pleased with our progress to date. In terms of realizing that benefit, we have realized some benefit in the first quarter although it is a relatively small amount. As we said in 2008, we expect to reinvest most of that benefit back into the business. In terms of head count out, we are now at 580 people actually separated from the business. Against that total of about 1600. That is right in line with our plans in terms of implementing the head count reductions over the course of the year.

Lastly, given your outlook for the year, is it fair to infer that within financial services specifically, there is no change or deteriorations from the changes you had seen in the third and fourth quarter?

Yes, when we looked at the third and fourth, we looked at our indicators and the market conditions we were seeing. We had expected a slight deterioration from where they were and we aren't seeing anything significantly different than what our plan was at that time.

And our next question from the line of Shannon Cross with Cross Research.

A question of follow up on the cost cutting side. Can you talk a little bit about timing? 580 people separated, I would have though maybe you would have a bit lower of cost structure, so I would assume it was more back-end of the quarter weighted. If you could provide any sort of metrics on how we should think about how the rest of it will run through over the next few quarters and anything we should look for, I am not sure what I am asking but the specifics of the cost-cutting. At least I am honest, right? What we can look at to gauge your continued success in the restructuring .

I look at it as efficiency gain and margin improvement is what we are focused on. When we looked at it, Shannon, the first item that we mentioned was the manufacturing. The outsourcing of manufacturing. That will take us right through Q4 to do that successfully. We are running that through and that definitely changes what you might have thought we would have done. That has been in the way we had planned it, that Q3 and Q4 will have more of the manufacturing than the front end of the year. We want to be sure that we don't miss anything, that we don't lose anything. At the same time, doing that type of a transition creates incremental costs to ensure that you have the smooth transition. When you look at the savings and Mike mentioned that we will be spending the savings generated this year during the year. A lot of that is bridging over some of those things and those activities where we are transitioning services. We see it as moving right on target. The expenses of overlap that we had anticipated by quarter are right in the ballpark of what we had anticipated, and the head count shift is going right on where we had expected.

The other thing I would add on the head count is that there is a reasonable chunk of the head count associated with international operations. There is a process with work councils that we have to work through. Those are reflected in the timing in terms of it being later in the year.

If you can discuss a little bit on, you have the numbers up on working capital. How we should think about that moving through the last three quarters of the year and where you are pushing and the timing on anything we might expect.

As we look at working capital, Shannon, we have been talking for the last, I guess two quarters, almost three quarters of our focus on really managing the cash more effectively, dealing with our assets and ensuring that we have the right assets and then managing our capital expenditures on a more refined basis to ensure that we can generate the returns that we should be able to generate on invested capital. This is an ongoing process. We see it continuing through the year, and we are fairly optimistic on our ability to continue to deliver in the area of free cash flow.

Okay. One last question. Can you talk about market share, what you think is going on in terms of your market share in the various segments. I guess most of the weakness is not share shift, but just market related. Anything you can give there.

Our market share remains basically the same. It is hard to tell whether it moves 0.1 of a point or 0.2 of a point up or down on the reports of whether there is any shift. We don't really see any significance. We believe that we are doing better in share. It is hard to tell when it is 0.1 of a point. We see the share in the 80% range remaining constant. We see ourselves improving in Europe and in international where we continue to see our shares grow.

Thank you.

(OPERATOR INSTRUCTIONS). Our next question is with [Annan Dabarua] with Banc of America. Please go ahead.

Going back to the restructuring and the costing potential. Mike, could you talk about the areas now that you have been in for a few months that you see opportunities for maybe savings incremental to what was originally identified? And then as you look into 2009, should we begin to see those benefits you are going to see at the bottom line. Should we expect to see some of those in the first half or second half? How should we expect to see those come through?

In terms of areas of opportunity, where we began in this initiative was to look at the management levels and our stands of control. We were able to get some substantial improvement in our management ranks. About a 10% reduction across the organization. We have also looked at a number of operational areas. Murray mentioned the supply chain and that is both in the U.S. and outside the U.S. that we focused on supply chain activities. We have looked at a number of other functional areas and have had opportunities for reduction. What we are looking at in addition to that is consolidation of some of our businesses where they naturally go together or more aggressive integration of acquisitions that we have brought in over the last few years. We continue to look across the organization for opportunities and we believe that we can continue to improve on the operating basis of the business. Your second question, with respect to when in the year would we expect that to come in? The benefits in 2009 should map somewhat to how we reduced the head count over the course of 2008 in terms of the annualization of those benefits. As 2008 unrolls you will get a reasonably good view of that.

Going to the balance sheet, if you look at your inventory turns, they are up significantly year over year. Q over Q as well. Could you talk specifically about what was driving that?

Sure. Really within the inventory turns there are two things benefiting that. One is the actions we took relative to the transition initiatives and exiting older product lines and reducing inventory associated with that. The other is what Murray talked about around working capital management, was really putting a global focus on inventory management and believe we will start to see the benefits of that as we go out through the year.

Then just I guess lastly, you have spoken or Pitney Bowes has spoken in the past of looking for areas to gain share. Sort of in mail volumes. I was wondering I think standard mail is what you are pointing to. Can you give us any sense for some of the things you may be doing or how those things are going? What if any timeline we could expect to see, any material impact to the business from any of those gains you may be able to drive?

As we look at those, I think it is important to look at PSI, which is really you could call a gain share of business. It is really we calling it work share, but it is based on the cost that we actually take out for the postal service, that we are paid a servicing fee or a share of them and the customer get a reduction. That is the biggest area. That will continue to expand both in the U.S. presort market, and in the cross border mail business we are in. We see that as a continuing expansion. I would look there as number one. It is the big piece of it. At the same time, in many of the international markets, as liberalization has occurred, the posts have been realizing that meters generate a lot of loyalty and also reduce their costs. As a result, we are seeing numbers of those markets putting incentives in place for metered mail versus nonmetered mail. That is a second continuing component. Those are the two areas that I would suggest you look at. As you have seen the work share component of our business has grown dramatically.

Thank you.

One other comment I would like to follow with your question. I would like to make sure we are also focused on we are making investments in the business at the same time as we are taking costs out. We are very focused on continuing our R&D investment in software and expanding that. Our international channels, our marketing services business, our small business development so we are not on the cost only side. We are reinvesting very strategically where we request generate long-term benefits. Sorry for the interruption. Go ahead with the next question.

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

Thanks. Mike, I think you mentioned in your comments around your SG&A to sales ratio being up as one of the drivers being increased bad debt expense. Can you provide more color as to the customer credit quality, the aging of your receivables et cetera? Thanks.

The comment is specifically around the financial services business. I would preface this with we still have very, very good performance in both our leasing portfolio as well as our purchase power or payments portfolio. We did see some increase in credit loss year-over-year. In total about $6 million. Not inconsistent with what we saw in the second half of the year. We did see a tick up. On a year-over-year basis it was a bit higher. The good news is that from March to April, we saw improvement in delinquencies and that We believe we have a good handle on it. It is a natural outcome of the economic environment we are in.

What do you anticipate that line item to do going forward over the next several quarters?

I have think it should be relatively consistent with what we saw in the second quarter. I am sorry, in the first quarter. That would put it in line year-over-year by the seconds half when we had already seen some increased credit loss.

Same question we related to the tail wind we saw from the postal rate change in France. Can you quantify the magnitude of that tailwind, and how long do you anticipate that to last? Will that last through Q2 and Q3? Any color there would be great.

It is a one time rate change revenue benefit in the quarter. It is not unlike what we might see historically in the U.S. or any other market where they have a periodic rate change.

Any way to quantify the magnitude of that benefit or ask the question a different way, what does the organic rate look like in Europe excluding the rate change benefit?

It added 3 to 4 percentage points to the international mailing growth in the quarter.

So that implies low single digit growth internationally organically, is that right?

That is right.

How has that trended over the past couple of quarters?

I think we have seen a slight improvement over the last few quarters.

Thank you.

(OPERATOR INSTRUCTIONS). We have no questions. Please continue.

Thank you. I think that we had a very good quarter. We met our expectations despite a tough environment. We will continue to be very focused to execute on our transition initiatives to also look for new opportunities to stimulate growth, to reduce cost and to enhance the value that we deliver to our customers. Thanks for joining us.

Thank you. This conference call will be made available for replay starting today at 7:00 p.m. eastern time. The replay of the conference runs for two weeks until the date of May 20th at midnight eastern. You may access the AT&T teleconference replay system by dialing 320-365-3844. The replay access code is 918689. That number again for the replay is 320-365-3844 and the replay access code 918689. That will conclude our conference call for today. I would like to thank you for your participation, and for using AT&T executive teleconference, and you may now disconnect.