必能寶 (PBI) 2009 Q1 法說會逐字稿

Good evening and welcome to the Pitney Bowes 2009 first-quarter earnings conference call. Your lines have been placed on 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, Chairman, 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 the Safe Harbor overview.

Thank you, And good afternoon. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found on our website at www.PB.com, by clicking on our company and investor relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or future events or developments.

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

Good afternoon and thank you for joining us today. I'll open by sharing a few thoughts on our performance and Mike will follow with the financial overview of this quarter's results. I'll then conclude with our outlook for 2009 and then we'll open the line for questions.

I'm encouraged by our performance this quarter given the context in which it occurred and the challenges in the global marketplace. During the quarter, we continued to generate robust cash flow, to streamline our cost structure and reduce our debt. These actions enabled us to mitigate some of the pressure on earnings even as we faced declines in revenue. At the same time, we continued to reinvest a portion of the savings from our cost restructuring programs into the long-term growth of the business, including consistent investment in research and development. Results were sound given the adverse impact of currency, increased pension costs, and delayed decision making by many of our customers, which characterized our operating environment.

Currency negatively affected our revenue and earnings for the quarter. The 12% decline in our revenue to $1.4 billion included a 6% reduction driven by currency. Our adjusted earnings per share from continuing operations was $0.55. This was only a 3% decline when you exclude the $0.07 per share of negative impact associated with currency and the $0.02 per share negative impact from increased pension costs. At the business segment level the adverse impact of currency on revenue was particularly noticeable in international mailing, software, and production mail. Mike will provide a more detailed break-out of the currency effects later in the call.

During the quarter we continued our focus on customer retention, expense management, and cash flow generation to mitigate these economic headwinds. Research shows us that two-thirds of business-to-business sales typically occur with existing customers. That is why it is especially important for us to maintain and strengthen our relationships with our current customers in the midst of this economic uncertainty.

Throughout our businesses we are finding opportunities to support our customers in this environment, as we seek to leverage the longer-term value of these relationships. In US mailing, for example, we were providing customers with more options to extend their lease and keep their existing equipment at no change in cost to them. As a result, during the first quarter we experienced a three-fold increase in the number of lease extensions we provided to our customers, so they could retain their existing equipment. These transactions benefit future periods' profitability, but have a less positive impact on our revenue during the current quarter, than new equipment placements would have had. We are pleased with our success in customer retention, and we remain committed to investing in the continuous improvement of our customer experience.

We are also realizing the benefits of the actions we have taken to streamline our costs and our expenses. We also improved gross margins related to both our software and support services, while our selling, general and administrative expenses declined by $53 million on a reported basis and we reduced our expenses by nearly $25 million on a constant currency basis when compared with the prior year, excluding the incremental pension expense. Our lower cost structure and expense management also helped improve EBIT margins in marketing services, mail operations in Europe, as well as US management services.

We continued to have robust free cash flow as a result of our ongoing focus on the balance sheet and lower capital expenditures. The positive momentum that we have seen in our mail services operation since we started the business continued, as revenues rose along with the volume of mail processed. We are starting to see improving EBIT margins at the sites we acquired last year, even though their integration has resulted in a slightly lower overall EBIT margin. We expect continued EBIT improvement from the business.

Before I discuss our outlook for 2009, Mike will provide an overview of our financial results.

Thank you, Murray. Revenue was $1.4 billion for the quarter, a decline of 6% from the prior year on a constant currency basis and a 12% decline as reported. For the quarter, non-US operations represented about 28% of total revenue. Approximately 10% of the Company's revenue is denominated in Euros, 7% is in the British pound, and 5% is based in the Canadian dollar. Since last year the Euro has declined about 13% in value against the US dollar. The British pound has declined about 27%. And the Canadian dollar has declined by 19%. Like most other global companies, this has affected both our revenue and EBIT results.

Based on current rates, currency will have a greater impact on our results in the first half of the year than in the second half. In addition, the strengthening dollar has increased some of our product costs, especially in non-US markets. As a result foreign currency translation reduced our overall revenue growth by 6% compared with the prior year.

Breaking revenue down between the US and non-US for the quarter, revenue in the US declined by 7% while revenue outside the US had slightly better results in this difficult economy and declined by 5% versus the prior year on a constant currency basis. On a reported basis, revenue outside the US was down 24%, reflecting the dramatic shift in foreign currency exchange rates from the prior year.

Earnings before interest and taxes or EBIT for the quarter, was $229 million. EBIT margin declined year-over-year to 16.6% when compared to the adjusted EBIT margin the year before, primarily due to the decline in revenue that resulted from continued economic and currency pressures and increased pension costs. As Murray noted, during the quarter we continued to focus on reducing our fixed cost structure to offset these impacts. When we add back depreciation and amortization to EBIT, EBITDA for the quarter was $316 million or $1.53 per share.

Net interest expense in the quarter decreased by about $8 million compared with the prior year. We benefited in the quarter from a lower average interest rate, which declined from 4.9% last year to 4.2% this year and lower average debt balances, which declined by about $125 million compared to the prior year. Excluding an $11 million incremental tax charge associated with out of the money stock options that expired during the quarter, the effective tax rate for the quarter on earnings was 34.2%, which was slightly lower than the tax rate on adjusted earnings during the first quarter of last year. We expect that the tax rate could vary during the course of the year, within a range of 34% to 35%. Adjusted earnings per share for the quarter was $0.55, compared with our adjusted earnings per share of $0.66 for the same period last year.

As I noted earlier, strengthening of the US dollar when compared to with last year had a significant negative impact on both our translation and transaction costs for the quarter, and resulted in a $0.07 reduction in our adjusted earnings per share. In addition, there was a $0.02 negative impact to earnings associated with incremental pension expense. Excluding these impacts our adjusted earnings per share for the quarter would have been $0.64, which is similar to our results last year when the economy was in much better shape.

We took aggressive actions last year to reduce our fixed costs and continue to take additional actions aimed to enhance productivity during this difficult economic downturn. Also affecting earnings per share was our lower shares outstanding. While we did not repurchase shares during the quarter, based upon share repurchases in 2008, our shares outstanding this quarter were about 3% below what they were in last year's first quarter.

GAAP earnings per share included $0.05 per share of charges for the out of the money stock options that expired during the quarter. Additionally, GAAP earnings per share includes a $0.01 per share gain for discontinued operations, which related to the settlement of bankruptcy claims on an aircraft lease investment made by our former capital services business.

Free cash flow was $240 million for the quarter, an increase of 19% from the prior year. Our strong free cash flow was the result of our ongoing focus on the balance sheet and cash management during the quarter, particularly in the areas of accounts receivable and capital expenditures. Cash flow also benefited from a decline in finance receivables during the quarter.

During the quarter we increased our dividend and returned $74 million to our shareholders. We further reduced our commercial paper balances by $385 million during the quarter to a balance of $226 million. About $300 million of that reduction came from the proceeds of the debt we issued this quarter and the rest of the reduction came from free cash flow. About 86% of our debt -- total debt is fixed rate, and 14% is floating rate.

Again, let me emphasize the strength of our liquidity and our continued access to capital. We continue to maintain an A1-P1 rating as a commercial paper issuer and have taken the following additional actions this quarter to ensure that we preserve our liquidity and financial flexibility. We issued $300 million of 10-year notes at an attractive interest rate of 6.25%. We reduced our reliance on the commercial paper market by reducing our balances outstanding and we again have chosen not to repurchase shares.

Additionally let me remind you that we have only $150 million in bonds maturing in 2009, and no debt maturing in 2010 or 2011. We have a $1.5 billion credit facility which supports almost seven times our current commercial paper balance. And our debt and our credit facility have no financial covenants or Mac clauses, and our credit facility doesn't mature until 2011, and all of the original bank commitments remain.

While the Company has substantial retained earnings our stockholders' equity was adversely affected by $59 million in currency translation adjustments. After factoring in earnings and dividends paid, the stockholders' deficit increased by approximately $14 million to a deficit of $202 million at the end of the quarter. It is important to note this does not impact our debt, our ability to continue to pay dividends, our credit ratings -- or our credit ratings, and the Company remains in a strong financial position.

Let me now update you on our transition initiatives announced in November of 2007. In the first quarter we eliminated an additional 352 positions, bringing the total to almost 2,600 positions eliminated since the inception of the program in the fourth quarter of 2007. The remainder of the 3,000 identified positions will be eliminated during the balance of 2009. We had $33 million in cash payments related to severance during the quarter. We generated about $32 million in incremental benefits in the quarter, a portion of which is being reinvested in the business to enhance customer value and gain operational efficiencies. These savings continue to help mitigate the impact of the current economic downturn on our financial results.

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

We continue to believe in the underlying soundness of our business and our value proposition to our global customer base. We maintain a high percentage of contractual business which provides recurring revenue, earnings and cash flow. In addition, our recent restructuring initiatives have reduced our fixed-cost base, and we are continuing to take actions to further reduce our operating expenses.

We have reduced our debt and maintained consistent investments in the growth of the business. Yet, earlier this year when we provided 2009 guidance, we noted that prolonged economic weakness, unanticipated currency fluctuation, and the significant increase in pension costs, could continue to offset the benefits from our actions and impact the 2009 reported results.

We have seen the impact of these headwinds reflected in our results for the quarter. We have also seen the global economic deterioration continue, and the related impact on customer behavior, and decision-making for capital spending in the office technology market. That is why we are adjusting our guidance. On a constant-currency basis, we now expect 2009 revenue to decline in the range of 1% to 4%. This is down 2 percentage points from our prior guidance.

On a reported basis, we now expect revenue to decline in the range of 6% to 9%, which includes an estimated 5% negative impact from currency. As a result we expect adjusted earning per diluted share from continuing operations for the year will be in the range of $2.40 to $2.60. This range includes the expected negative impact of $0.30 to $0.35 per diluted share from currency and incremental pension expense.

Adjusted earnings per diluted share from continuing operations excludes an annual estimated $0.06 per share non-cash tax charge associated with out of the money stock options that expire principally in the first quarter of 2009. On a GAAP basis we expect earnings per diluted share from continuing operations for the year will be in the range of $2.34 to $2.54. The strength of our cash flow in the first quarter gives us confidence to reaffirm our free cash flow guidance in the range of $700 million to $800 million for the year.

We remain committed to enhancing our operational efficiency. We will continue to take the necessary actions to address the immediate needs of the business, while providing the flexibility to invest in growth and enhance customer value. We are focused on strengthening our position for the long-term value creation and we believe we are poised to generate strong profitable growth when the economy begins to improve.

Thank you. And now let's open the line for questions.

Certainly. (Operator Instructions). And our first question comes from the line of Shannon Cross with Cross Research, please go ahead.

Hi, good afternoon, a few questions for you. The first one is can you talk a little bit about sort of linearity in the quarter. Obviously you're hearing push-back in terms of decision-making. But just kind of curious maybe on a geographic basis how customers were responding? And how sort of sales progressed maybe versus a typical first quarter?

We have particularly in production mail and in our software business continued to see deferrals in decision-making. And we see this as long-term. The opportunity is still there, and we still are looking forward to getting those transactions at a later date. But they continue to hold back.

In the mailing business, as I mentioned, we have had customers not looking to make long-term commitments the way they have in the past or capital expenditures, so we have extended our lease program to include the ability to extend the lease itself. And this is very positive for us on the long-term, but in the short-term has a negative impact on the revenue side, as the revenue comes in over term rather than a new equipment sale.

In answer to your question around the world, the UK has been similar to the US. The rest of Europe has been slightly better. As you can see in our results that on a constant-currency basis, we're performing 2% stronger in Europe. Asia-Pacific, has seen on the large transactions similar results to the US. So that's sort of a general overview. The mailing side in Asia continues at about its historical pace.

As you went through the quarter, did things get worse or sort of stabilize? Just any -- any indication and now that we're a little bit into this month?

We certainly saw early in the -- through the first part of the quarter a significant change from the fourth quarter, and it's now running more in line towards where it was. But it's still not to the level that we would want it to be.

So it's not getting worse but it's not rebounding, either, which is kind of what we've heard from a number of companies?

Yes, it's pretty -- there was a real heavy hold-back early, but it hasn't really bounced back.

Okay. Great. And from the standpoint of working capital, I don't know, Mike, if you can maybe discuss sort of and sources of cash, since you're holding to your cash estimates, I'm sure finance receivables is one, but just how you are thinking about where the cash is going to come from and maybe if there has been any change since -- when you talked to us after fourth quarter?

Sure, no, I think we feel very good about the cash flow. We did see less working capital usage in the quarter, which is typical in a first quarter scenario. We saw good movement in our accounts receivable balances in terms of freeing up cash. And we did have tighter controls around our capital expenditures, so we saw that come in, as well. So I think as we look out over the course of the year, we do expect the cash flow to be pretty consistent in terms of its sources. We did see some generated out of the finance receivables, as well. The only variable quarter to quarter would certainly be tax payment timing can be different over the course of the year.

Okay. Great. And then my final question to whoever wants it is, when you're thinking about the numbers, because this is obviously the second time you've taken numbers down and we're kind of in an unprecedented economic climate, how would you say you're viewing this guidance? I mean are you being conservative? Is this sort of, if things remain where they're at? I don't know. We're just trying to get an idea of when you approached --

Let me take that, Shannon, because I think it's helpful to put it in context. I think, as you said, we have an economic overlay here that is quite unique. And when you look at the guidance that we've given X currency, which I think it is only appropriate to look at it on a constant-currency basis, we're talking about revenue down of 1% to 4% in a office technology business. And if you just take the mid-points, and I'm not suggesting that's our guidance, but I'm just using that as a reference point, the midpoint of our guidance range and add back the impacts of currency and pension, you would come to a number that is around flat to plus 2% in terms of EPS growth.

So when you look at that relatively small revenue decline and you look at the positive leverage that comes from the actions that we've taken, and that's reflected in EPS, we think it was prudent to take the guidance down given the fact that I think everyone would say the first quarter was a more challenging economic environment than the fourth quarter. We obviously wanted to reflect that in our guidance to be confident that we had -- had adjusted our numbers to reflect the outlook. I think the other is, if you look at the comparisons first half to second half, the first half of last year, we didn't have the same economic environment that we had in the second half of the year. So that's reflected in our guidance, as well.

Okay. Thank you.

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

Thanks very much. I was hoping to get some color on the mail volume trends you're seeing, particularly in first class metered mail. I saw some data recently that suggested those mail volumes were declining in the double-digits. Is that consistent with what you're seeing?

Yes. There's been, if you average a couple of quarters, it's been in the high single to low double-digits. So it has been right around double-digit decline in mail, which is sort of in line with historical events where there has been recessionary economies. And what we have seen historically is that volume comes back pretty close to where it left. And so we are seeing that. At the same time our business model is not directly dependent on volume. Certainly some of our revenues are volume-related when you look at our services business, which has a volume base, or our mail business, when you get into supplies. But the devices are really access devices rather than pure volume driven.

To what extent is there excess capacity of mail creation equipment out there in the installed base and what is your exposure to that segment of the industry?

I don't -- I wouldn't say there's an excess. It depends on which market segment you're looking at. In the low to mid-market I wouldn't see an excess of equipment, but I do see a slow-down there as people put off those larger capital expenditures, similar to the higher end. On the higher end there has been consolidation in the space, and that's where we have really benefited with our highly integrated equipment with ensuring the integrity of the mail, where we lead in that space. So there's been contraction of units, but expansion in the capabilities and, therefore the cost of those units.

In previous calls you talked about the bulk of or significant leases coming due this year and that perhaps driving a little bit of a tailwind to the business. What are your expectations now, what's factored into your existing guidance in terms of the amount of lease extensions or renewals versus upgrades?

Well, the -- we are seeing the increased leases coming through. They are up significantly in the quarter, and we expect to continue to see that. That has been offset by the lease extension program where we have tripled in the quarter the number of lease extensions. So when you look at the revenues generated from a lease extension versus a new, you get a significant change. If you go through the entire period of the extension, the profitability is fairly strong compared to a new placement. So there is a definite impact there on the revenue and the timing on the profit. But we are seeing them. We see it as a continued positive, but with the shift, we aren't getting the direct benefit in the current period.

Was that -- the last question here. With that as a backdrop I'm trying to understand the rental line a little bit better being incrementally weaker on a year on year basis, despite this phenomenon within your installed base. Can you maybe help flesh that out a little bit for me? And that's it. Thanks a lot.

Yes. Chris, if you look at rental line it is down 9%, but if you adjust for currency, it's down 5%, which I think is more consistent with what we've seen in prior periods. So I think the bulk of that adjustment is related to currency.

Okay. Thank you.

You're welcome.

(Operator Instructions) And we'll take a question from the line of Julio Quinteros with Goldman-Sachs. Please go ahead.

Hi, thanks, this is Vincent Lin sitting in for Julio. Just a question on the constant currency revenue growth guidance. It sounds like the full-year guidance implied some -- a less decline for the rest of the year than the 6% decline you posted this quarter. I just wanted to make sure that it was just purely a function of easier comparison moving through the year? Or is there something else we should be expecting?

No, clearly the second half of the year 2008 reflected some of the impacts of the -- of the economic environment, and so that's reflected in our guidance.

Got it. And just, secondly, I'm wanting to understand, maybe you can just comment on your revenue exposure to the larger enterprises, versus small, medium businesses. Obviously we have been seeing a lot more bankruptcies on the SMB side, I'm just wondering if you are seeing any impact because of that?

Actually bankruptcy impacts to us in terms of our credit losses actually declined in the quarter relative to the fourth quarter of 2008. So on a sequential basis we've seen an improvement there. In fact, our credit loss provision or credit losses in the quarter, were lower than the fourth quarter, as well. So we have seen good performance out of our collections organization to manage that, but also in absolute terms fewer bankruptcy related credit losses.

Okay. And then looking at the guidance just really quickly on the margin side, just based on the midpoint of the guidance, it looks like the EPS reduction is more pronounced than on the revenue side. I'm assuming that that probably implies a lower margin trajectory than you previously were assuming. So maybe you can provide a lot more -- little bit more color on that? Just specifically, when we were looking at this March quarter, looks like production mail and the software had a larger in terms of year-on-year basis had a larger decline in terms of operating margins?

Yes, if you look at software, actually their gross margins improved. So there is a fixed cost base there, and in particular investment in the R&D in product, and in the changeover the R&D infrastructure that we talked about, that would impact their operating margins. So that is reflected there. Production mail margin have been impacted somewhat by the fact that a good portion of the revenue we generate in production mail is outside of the US. And the product is generally manufactured in the US, so there is some impact of the difference in cost base for the non-US entities.

Okay. Thanks.

We do not have any further questions in queue at this time. Please continue.

We are encouraged by our results and our ability to minimize earning declines even with continuing declines in revenue. These results are even more notable given the adverse impact of currency, of pension expense, and the continued severity of the economic environment. To mitigate the economic headwinds during the quarter, we focused on customer retention, expense management, and cash flow generation. We continue to focus and see robust cash flow generation, we continue to streamline our operations, and to reduce our debt. Thank you for joining us.

Ladies and gentlemen, this conference will be available for replay after 7 p.m. Eastern today through May 19th at midnight. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code of 994734. International participants may dial 1-320-365-3844. Those numbers again are 1-800-475-6701 or 1-320-365-3844, with an access code of 994734.

That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.