必能寶 (PBI) 2009 Q2 法說會逐字稿

Good evening, and welcome to the Pitney Bowes 2009 second 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, 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 a 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 at 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 and President and Chief Executive Officer, Murray Martin, will start with an overview of the quarter. Murray?

Thank you, Charles. 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 a financial overview of this quarter's results. I will then conclude with our revised outlook for 2009 and then we'll open the line for questioning.

It is apparent to everyone on this call that the environment remains challenging. While the capital markets have improved, the overall economic outlook remains stressed. Unemployment in the US continues to rise. The financial services sector continues to face rising credit losses, and potential significant regulatory changes.

Outside the US, economies that had been outperforming ours have now been slowing dramatically. In this environment, companies in most industries have low visibility and are therefore, being very cautious about their capital expenditures. In mail intensive industries, mail volumes continue to be weak. Despite these significant challenges, Pitney Bowes remains a healthy and solid, profitable Company that continues to generate significant cash flow, reduce debt, reinvest in growth areas of the business, and pay an attractive dividend to our shareholders.

Let me review some highlights of the quarter. Free cash flow was $204 million, reflecting our continued focus on our balance sheet and cash management. On the top line, the sustained nature of the current economic downturn has lowered all of our revenue streams on a year-over-year basis, and this trend has been exacerbated by the impact of currency. Revenue for the quarter was $1.4 billion, a 13% decline on a year-over-year basis, 5 percentage points of which was driven by a stronger US dollar. Second quarter adjusted earnings per diluted share from continuing operations was $0.55 and this was equal to our first quarter in 2009.

We reduced our SG&A expenses by 15% on a year-over-year basis, as we continue to shift to a more variable cost structure. During the quarter, our ongoing cost containment measures resulted in sequential improvements in EBIT margins in six of our seven business reporting segments, despite overall flat revenue on a sequential basis. We have seen a further slowing of business activity in several international markets, particularly in Canada, Asia, and certain key markets in Europe. At the business segment level, mail services grew revenue and EBIT through a combination of factors, including an expanded customer base, the integration of several sites, and ongoing productivity initiatives.

During the quarter, we continued to focus on customer retention as US mailing provided customers with more options to extend their leases and keep their existing equipment. The trend toward increasing numbers of lease extensions continued from the first quarter with another three-fold increase in lease extensions in the second quarter versus the prior year. As we previously noted, these extensions will benefit profitability in future periods but at a less positive impact on our revenue during the current quarter, than new equipment placements would have had. So all in all, it was a challenging quarter, but one where we saw the benefits of our aggressive cost actions and our focus on customer retention helped to mitigate the impact of the sustained global economic downturn.

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

Thank you, Murray.

As Murray noted, revenue was about $1.4 billion for the quarter, a decline of 9% from the prior year on a constant currency basis, and a 13% decline as reported. Compared with the prior quarter, revenue was essentially flat. For the second quarter, non-US operations represented about 27% of total revenue. Approximately 10% of the Company's revenue is denominated in Euros, 7% is in British pounds. and 5% in Canadian dollars. Since last year, because of the strengthening US dollar, the Euro's declined about 13% in value, the British pound has declined about 21%. and the Canadian dollar has declined by 13%. As a result, foreign currency translation reduced our overall revenue growth by about 5% compared with the prior year. Based on current rates, currency will continue to impact our results in the second half of the year. In addition, the strengthening dollar has increased some of our product costs, especially in non-US markets.

Breaking revenue down between the US and non-US, when compared with the prior year, US revenue in the quarter declined about 6%, outside the US, revenue declined by about 14% versus the prior period on a constant currency basis. As economic conditions in Canada, Asia-Pacific and much of Europe continue to deteriorate. On a reported basis, revenue outside the US was down almost 28%, reflecting the dramatic shift in exchange rates from the prior year.

Earnings before interest and taxes or EBIT for the quarter was $233 million. EBIT margin declined year-over-year to 16.9%, primarily due to the decline in revenue resulting from continued economic and currency pressures as well as increased pension costs. As Murray noted, during the quarter, we continued to focus on reducing our fixed cost structure to offset these impacts. Selling, general and administrative expenses, or SG&A expenses, declined $73 million when compared with the prior year, and improved by 50 basis points as a percent of revenue.

The benefits of reduced SG&A are not apparent in our year-over-year EBIT margin results due to declining revenue. However, as we previously noted, on a sequential basis, we improved EBIT margins in six of our seven reporting segments, despite flat revenue. When we add back depreciation and amortization to EBIT, EBITDA for the quarter was $321 million or $1.55 per share. Net interest expense in the quarter was about $54 million, about equal to the prior year. The average interest rate in the quarter was about 4.5%, again, comparable to the prior year.

Excluding a $900,000 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 34.4%. This was slightly higher than the tax rate on adjusted earnings 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 $0.69 for the same period last year, but the same as our adjusted earnings per share in the first quarter. As I noted earlier, strengthening of the US dollar when compared with last year negatively impacted both translation and transaction costs for the quarter, and resulted in a $0.04 reduction in our adjusted earnings per share. In addition, there was a $0.01 negative impact to earnings associated with incremental pension expense. Also, you should note that last year's earnings included a $0.03 per share benefit related to a legal settlement in Europe regarding technology and commercial assets. In addition, earnings per share benefited slightly from lower shares outstanding, due to share repurchases in 2008.

GAAP earnings per share included charges for out-of-the money stock option that's expired during the quarter, amounting to less than $0.01 per share. Additionally, GAAP EPS included a $0.02 per share gain for discontinued operations, which related to the resolution of certain potential indemnification liabilities. Free cash flow was $204 million for the quarter, essentially flat with the prior year. On a year-to-date basis, free cash flow was $444 million. Our continued strong free cash flow was the result of our ongoing focus on the balance sheet and cash management, particularly in the areas of accounts receivable and capital expenditures. We continue to generate cash from reduced finance receivables, which helped offset increased tax payments during the quarter.

During the quarter, we returned $74 million to shareholders in the form of dividends. As in the first quarter, we have again chosen not to repurchase shares in order to preserve our financial flexibility. We further reduced our commercial paper balances by $91 million during the quarter, to about $134 million. Year-to-date, we've reduced overall debt by $179 million. About 88% of our total debt is fixed rate and 12% is floating rate. We continue to maintain an A1, P1 rating as a commercial paper issuer and continue to take actions during the quarter to ensure that we preserve our liquidity and financial flexibility.

The Company's stockholders equity improved by $172 million during the quarter, because of an increase in retained earnings, improved currency translation versus the first quarter, and the issuance of shares to employees as part of our employee stock purchase program. The equity balance is now a negative $30 million due primarily to the unfunded position in our pension plan and unfavorable year-to-date currency translation versus last year. It's important to note that a negative equity position does not impact our debt, our ability to continue to pay dividends, 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 second quarter, we eliminated an additional 465 positions, bringing the total to 2,743 positions eliminated since the inception of the program in the fourth quarter of 2007. The remainder of the more than 3,000 identified positions will be eliminated during the balance of 2009. We had $16 million in cash payments related to severance during the quarter. We generated about $32 million in incremental pretax benefits in the quarter, and $65 million year-to-date, a portion of which is being reinvested in the business to enhance customer value and gain operational efficiencies.

We remain on target to generate in excess of $100 million in incremental benefits in 2009, of which we will continue to reinvest a portion in the business. These savings continue to help mitigate the impact of the current economic downturn on our financial results. Finally, you'll notice we have financing interest expense on the P&L. We thought it would provide more transparency into the costs and profitability of our financial services business. We had allocated a portion of our interest expense to the cost of financing, based upon a debt-to-equity ratio and the average interest rate for our entire debt portfolio for the quarter. That concludes my remarks. Now, Murray will provide some insight about our plans going forward and then we'll take your questions.

As you saw in our earnings release, we are adjusting our 2009 guidance based on year-to-date results, recent trends in the business, and our market outlook for the second half. Importantly, we are reaffirming our free cash flow guidance in the range of $700 million to $800 million. As Mike mentioned, through effective management or a balance sheet and control of capital expenditures, we are on track with the cash flow guidance we previously gave, despite lower than previously expected revenues. While we are reaffirming our cash flow guidance, we are reducing our outlook for revenues and adjusted earnings per diluted share from continuing operations. We now expect 2009 revenue on a constant currency basis to decline in the range of 4 to 7%, when compared to 2008. On a reported basis, we expect the year-over-year decline to be in the range of 7 to 10%, which includes an estimated 3% negative impact from currency.

Our expected range for 2009 full year adjusted earnings per share from continuing operations is $2.15 to $2.35. This range includes the expected negative impact of $0.23 to $0.28 per diluted share from currency and incremental pension expense. On a GAAP basis, we now expect earnings per diluted share from continuing operations for the year will be in the range of $2.09 to $2.29, which includes a $0.06 per share non-cash tax charge associated with out-of-the money stock options that expire during the year.

I would like to put these guidance adjustments into perspective. We continue to move aggressively to streamline the business and to maintain the financial flexibility needed to preserve and improve margins as well as cash flow. All while supporting reinvestment in the growth areas of our business, and returning capital to shareholders. While our actions have enabled us to mitigate some of the pressure on earnings, they have not been enough to offset the impact of the sustained economic downturn across our revenue streams. In the first quarter, we had expected a stabilization in mail-intensive industries for the balance of the year. However, in the second quarter, we have seen deeper and more protracted mail related business contraction, as evidenced by the continued decline in US mail volumes. Additionally, we have seen similar trends in some key geographic areas outside of the US. We are now anticipating that these conditions will continue through the balance of this year.

With virtually all industries facing an uncertain economic environment and reduced visibility of revenues and earnings, many of our customers are being even more cautious about capital purchase decisions and delaying them when they can. While the economic environment continues to be highly uncertain, we remain focused on the things that we can control. We are committed to driving structural and process improvements across the organization and identifying and implementing meaningful cost reductions.

As a result, we are engaging a leading consultant to assist us with this process. We will provide more details regarding these additional initiatives on our third quarter earnings call. In short, we remain focused on strengthening our long-term ability to generate value for customers and shareholders while ensuring that the Company is in the best possible position to capitalize on the eventual economic recovery. Thank you, and now let's open the line for questions.

(Operator Instructions). Our first question from the line of Chris Whitmore with Deutsche Bank. Please go ahead.

Thank you very much. Wanted to get a little more color in terms of what you're seeing in mail volume. Can you quantify the rates of mail volume decline you're seeing from a USPS reported basis, and what you're experiencing through your own equipment?

First of all, Chris, if you saw the Times today, there was an article on the post office and they mentioned declines of 29 billion pieces of mail, and that was against $203 billion.

About 13 to 14% in terms of their projection.

And how does that compare to what you're experiencing in the metered mail volume segment?

I think if you look at supplies of the surrogate, we see decline in supplies in a similar range.

If you look at your business over time, how does it correlate to mail volume? Is there a pretty strong correlation between the two?

It sort of depends, Chris. If you have lower volume declines, there's not a correlation because people are generally using the equipment as a service and the supplies effect would have a correlation but not usage. When you have a larger swing, which gets up into the double and into higher rates, then you end up with people in postponement of decisions, which is the area that we're in at this point, and then you have a direct effect on service and supplies volumes. So that's sort of -- I would say in the 4 to 6%, there isn't that much correlation, and then as you move upstream, it starts to correlate more.

I'm a little perplexed by the USPS's response to the weak mail volume. Looks like they're raising rates, raising prices on mail, raising postage prices. Wouldn't that prolong or translate into incremental volume weakness, due the higher costs?

I think that is certainly a challenging item in a tough economic environment, when you raise costs.

I think they are trying to do some things like a summer sale to encourage volume activity for mailers in obviously a challenging economic period. So they're I think implementing plans that are aimed at stimulating volume.

I think as you look at what they're doing, they're focusing on the high volume mailers and looking to provide breaks there to generate the volume and the small piece mailers would have less effect on the overall volume. It's really in the promotional mail, which has had significant decline, as well as in the -- as well as mainly in the financial services sector. So they're trying to stimulate that with a series of promotions but those are very early on as to what the reaction and take rate will be.

My interpretation is most of those were targeted at the direct mail rather than first class metered mail. Is that correct?

That's correct.

Okay. Secondly -- second topic I wanted to understand a little bit better is the commentary around potential for future cost actions. You're hiring a consultant. Does that imply that you've tapped most of the low hanging fruit in terms of what you see in terms of additional cost cutting? Can you flesh that out a little bit?

Sure. I think that we have done a very good job at looking at how to improve our overall independent business unit structure. And what we're looking at is a more over-arching look at the business and the structure and how we can look at better functionality across all businesses and we believe it is beneficial to have a third party look at it without a preferred view. And bring us ideas and thoughts from the outside.

Okay. And last question from me was along the rental revenue line. That surprised me a bit to the down side. Can you talk about the dynamics in the rental line? Does that just reflect past weakness on -- and existing weakness on equipment sales and can you walk me through how lease extensions, how that flows through the income statement one more time? Thanks a bunch.

First, on the rental. Obviously there is some currency impact in there as well as there are some impacts for lower rental revenue related to copiers in Canada, around some fleets. So the underlying I'd say mailing rental revenue decline is in the high single digit rate, which I think is sort of tracking with recent history. In terms of the lease extensions, what they really comprise of typically with a customer, we would look at selling a new piece of equipment to the customer. That essentially would be treated at a sale transaction up front. We would record financing income over the period.

When we do a lease extension, the sales value of that transaction is going to be somewhat less than what a new piece of equipment would be, because it's the value of that equipment going forward that they've already had. So we get lower sales treatment up front, but it remains a good cash flow and a very positive margin transaction over time. But there is a net, something lower, total revenue and certainly in the current period you get less sales value for that.

What percentage of the contracts that are coming due are extending leases versus upgrading equipment?

We've seen this year about a three-fold increase in the leases. In terms of absolute percentages, I don't have that at my fingertips but it's obviously a meaningful increase. It's a little less than a third. Probably between a quarter and a third of the transactions.

Thank you very much.

Thank you.

Our next question is from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Hi, thanks. My first question was regarding your guidance. Doesn't sound like you are in your guidance you are not assuming any sort of incremental improvement in the environment for the second half of this year, which makes sense. And you also highlighted international as well as financial services being particularly weaker spots for your business. Just wondering, the assumptions that you're making in the second half of this year, are you just being conservative just because there's still limited amount of visibility in terms of customer spending, purchasing decisions, et cetera? Or are you getting explicit directions or -- in terms of thoughts, spending positions from customers, indicating that there wouldn't be any acceleration in terms of pickup in spending for the second half of this year?

I guess as we look at it and we've looked now at six months of the year, we have not seen an upswing that we had expected would start occurring in the second, third and fourth quarter, particularly in the mail intensive areas. So it is only prudent to take that out of the projections that we have given and assume that it will be relatively similar for the balance of the year. We would like to be optimistic that it will accelerate, but we believe that it's better to look at it as an as-is business, structure our business around the current environment, and then when we see the return of growth in those areas, we'll see significant benefits.

Got it. Okay. And then just secondly, on the three-fold increase in terms of lease extensions that you're seeing, I think you have talked about the dynamic between sort of the lower upfront sales and the positive aspect of that kind of transaction is the profitability should be accretive or positive to the overall margin profile over time. Can you quantify or maybe provide a little bit of color in terms of timing on when those transactions are expected to be beneficial and showing up on your margin profile and assuming that's the case, assuming that we do get to eventually a recovery in terms of revenue and sales stabilization, does that mean that your margin profile is going to -- is just going to be showing incremental leverage just because of the amount of lease extensions that you're signing right now?

Yes, I would have to say, it's very difficult to isolate that in the context of all the moving parts in terms of as you move forward. The answer is yes, it should have a positive impact. Obviously, one of the other key factors is just the overall new written business or new leases and all as well, and then that's kind of blended into everything else that's within the financial. So we have not seen a full year of activity yet, so we would not expect to see that really begin to filter through until we have a full year of activity roll over.

Got it. And just a couple of housekeeping questions. Just regarding your guidance, in terms of the implied operating margin profile for the second half 2009, can you just delineate the margin assumptions that you're assuming in your guidance, are they the flat? Down? Or up? Versus what you have generated in the first half.

Basically, we go with the guidance on the revenue and EPS, and I really don't want to get into guiding on individual margins.

Okay. And just lastly, the currency extension this quarter, $0.23, $0.28 was a little bit smaller than the $0.30 to $0.35. Was the reduction purely due to changes in terms of currency assumptions? Thanks.

It was a change in currency assumptions to a degree and then there was some favorability related to the initial assumption about pension, we we had originally anticipated it being a $0.07 negative impact, we now expect it to be $0.04. We saw some improvement relative to that as we looked at the valuation of the pension relative to the number of participants and wage rates and those types of things and adjusted the impacts for that.

Okay. Thanks.

And our next question is from the line of Shannon Cross with Cross Research. Please go ahead.

Thank you. Good afternoon. My first question is on gross margins for equipment and for rentals. Can you talk a little bit more in detail about what you're seeing there, mix shift, maybe lower margin products. I know you talked about capital equipment spending being down. But you how should we think about your margin potential off equipment sales and rentals, for that matter, for the next two quarters?

Yes, in terms of rentals, it's obviously a mix of new products going in as well as the extension of the existing products. And a bit of a mix shift between the products that we have there. So as I mentioned this quarter did have some impacts of copier rentals that probably skewed it a bit but I would not expect the margins to be significantly different on a go forward run rate as we've been trending there.

In terms of equipment gross margins, the impacts that we have seen have been less around product mix and more about product cost, based on currency impacts. So as that mitigates, we have product cost that's dollar denominated that goes into non-US markets is one factor and then we have yen-denominated products that come into the US and other markets. So those are the things that have been weighing on it but not a significant change in margins relative to the underlying product set.

Okay. And then can you talk a bit about linearity in the quarter. I'm curious as to -- I think you said things got worse but I wanted to confirm that I heard that correctly or how should we sort of think about what your customers are saying as they exited the second quarter?

As we looked at that, Shannon, we saw a decline in mail volumes, which we had expected to -- a decline in the decline. So we had expected it to be a little flatter than it was and start turning positive in the back half of the year and we've now projected that out as in the current range. So that's really where that shift has come, is that we're not expecting that to recover and then similarly in the international space.

I was going to say, from a commercial printer standpoint, are you hearing any -- you said Europe got worse. I think this is one of the first times you've had Canada actually pointed out by anyone. Maybe you could talk a bit about what you saw geographically. Any more color you could provide would be helpful.

What we've actually experienced over the last three quarters is Canada and Europe have been staying -- significantly outperforming the US environment. And what we have seen is them moving to basically the same types of dynamics as the US environment, and that shift occurred in the second quarter. So we're now looking at them and treating them as similar to the US, whereas historically they have been running better than the US.

And if we look at to some extent -- I hate doing math on a call but just a couple of quick points. It looks like you're sort of on -- if you assume you just sort of straight line it, about $1.48 billion, $1.5 billion for the quarter, for the remainder of the year. I guess I'm struggling with why you think EPS on a quarterly basis would be down if you're continuing to cut costs. I mean, is this margin shift? Is it pension? I don't know. If you could just sort of walk us through. Is this just overly being cautious which is absolutely fine in this environment, but if you could walk us through your thought process there.

Yes, Shannon, the revenue and EPS guidance projects those run rates out. We have not incorporated into this guidance significant additional cost cutting beyond the program that we've had in place. What we're really doing is beginning a process that will be implemented beginning in the second half. Obviously, we're going to continue to look at near term opportunities and implement those but in terms of significant incremental cost out of the business, we're evaluating that now.

Okay. And then Mike, a question on working capital as we go through sort of the second half of the year. You've obviously been very good at sweeping cash from the balance sheet. How should we think about opportunities as revenues come down, it really is theoretically but how should we think about it for the second half of the year, seasonality wise, anything we should take into account as we look at third and fourth quarter cash flows?

In terms of seasonality on working capital, I don't think there's anything dramatically different there. We tend to obviously build receivable balance at the end of the year somewhat and that's not unusual in the fourth quarter. But in terms of the other elements of working capital, we expect to continue to employ the same strategies that we have. We've been able to keep our CapEx investment under control and below the prior year. So I think on all fronts, we expect and that's why we reaffirmed our guidance for the full year of the $700 million to $800 million in free cash flow to be able to manage against that.

And one final question. I'm just curious from a leasing standpoint, what are your -- like how are your customers sort of -- are you seeing a deterioration in the credit quality that you're looking at and I know you don't have any exposure to CIT but does that play in at all with any distributors? We're just trying to make sure nobody has exposure to that, although I guess they did just get some more money, but just sort of as you look at the credit world and where you might have exposure, either in the supply chain or within distribution, anything to be aware of.

Sure. In terms of our lease portfolio, continues to perform well. Delinquencies and credit losses were right in line with the second quarter of last year, so when things started to get a little worse, so despite really things being more challenging, we've done a number of things around our financial services business to contract some credit lines to enhance our collection efforts and all and we've been able to maintain a good collection rate and a pretty steady credit loss profile.

And no exposure to any --

No meaningful exposure to CIT.

Okay. Thank you.

Our next question is from the line of Ananda Baruah with Brean Murray. Please go ahead.

Thanks, guys for taking the question. Just a follow-on to I think the first part of Shannon's question. So it looks like you guys collectively the second half of the year are sort of projecting flattish. And it sounds like maybe linearity, sort of deteriorates as you went through the quarter. I hope this isn't too granular but -- so is it the spirit of it look, things have gotten worse, maybe expect EPS to actually be down in the third quarter and then you'll sort of see sort of the typical slight seasonal improvement in the fourth quarter? Because that seems to be what the detailed revenue model would be implying. Just want to make sure we get that right and we're in line with what you guys want us to take away for the third quarter.

Obviously we only give annual guidance, but I would anticipate that you would look at your models and apply that accordingly.

Okay. And I guess if you could just -- just looking at -- like I mean, we get that I think that international was weaker than anticipated and deteriorated as you went through the quarter and that you didn't see the pickup in the mail volume that you thought you would. And in the press release, I think you pointed to financial services as something that hasn't really come back yet. Can you maybe just provide a little more detail around the areas more specifically that you were surprised by other than -- sounds like financial services is an area that you got a little bit surprised by. Are there any other areas that you got surprised by as well?

Financial services continues to be the highest mail intensity market, and that's the one where the recovery will affect the mail the most. When you look at that, it has the large first class mail component and it has a large standard mail component and a large direct marketing component and those areas have been really brought down and that will have a significant positive, although it tends to lag for us a little bit as it starts to curve back, but that's really why we focus on the financial sector, because it's been so mail intensive and we're looking forward to that. At the same time, in the larger ticket items where they've held back on their capital expenditures, particularly in our production mail equipment and our software, those are the two areas that are -- they have a much larger share of their business in that segment and those holds on capital are still being in place as they work through their financial issues.

Murray, I appreciate the detail. Could you -- so if we think about the revenue buckets, maybe production, production, US mailing and also equipment sales versus rental, which were the ones that you were most surprised by in the second quarter?

I'm sorry, could you repeat that?

Yes. For sure. As it pertains to financial services, amongst the buckets that you break out your revenue, equipment sales versus rentals and then maybe production mail versus US mailing, which of those buckets were you most surprised by, I guess to the down side in the second quarter, the impact from financial services?

Sure. Financial services tends to be biggest as a customer base in the production mail and software businesses and so clearly we would see that in their readiness to invest in large ticket equipment and software leases. So it would tend to show up in those segment more readily.

I just want to make sure that I understand clearly. So when you talk about you were surprised by mail volumes not sort of flattening out as you expected them to, is that -- is financial services really the segment? This is the question I thought we were just talking about but it is finance services that as a vertical most surprised you with regard to mail volumes not flattening out?

I think that yes, that is true and we would have expected that we would have seen some positive return as they've gone through and look at resoliciting business. So we had expected flat to positive rather than negative. Also, in the international segment it was also financial services and that's where we saw a bigger change in the quarter, which I mentioned earlier is that the international markets have now come down to a run rate similar to the US and they've been outperforming that, so their financial markets are now having a larger effect and that's spread across both traditional mail, as well as software and production mail, and is now at a run rate similar to what we experienced in the US.

Okay. Thanks. And then just one last one from me. I guess the hiring of the consultancy and I guess Murray, your comments of expect some sort of update on that process on the third quarter call, I mean, should we also expect updated guidance by that time, or I guess what should the expectation be, if any, when you update us on the -- sort of the consultancy in there.

I think the plan at that time is to outline the program and give a sense of the areas of focus.

Okay. That does not mean, though, that you might put some numbers around it?

I think we would look at what the scope and scale of the program would be at that point in time, but we're early in the process to really get to that point.

Okay. Thanks a lot.

Thank you.

We have a question from the line of Lloyd Zeitman with Bernstein. Please go ahead.

Good afternoon, folks. I was just wondering if you could clarify something that was mentioned earlier concerning the article that was in today's Times about the postal service. Could you run through that again for me? Because I was just wondering about the 27 billion piece decline that was mentioned in the article and how that correlates to your experience.

Lloyd, when we look at that, we see a relative to that and it varies in the business, so you really -- we look at it on a more segmented basis, which usually comes out later, as to how much is in first class single piece, how much is in standard mail, flat, et cetera. In general, that trend has trended down in the second quarter, as far as the decrease in mail volume. It's been slightly more in some segments, but generally you could say that it follows that across most segments with some variation. We would see that in the first class piece would be traditionally in the metered mail equipment. The standard mail and flats would be more in our high end production equipment. And then of course that flows over into data quality in our software side.

Okay. So then what you're seeing is similar in terms of the trend that the postal service is seeing?

Yes, I think, Lloyd, it's difficult to make a direct correlation between current changes in mail volume and our business specifically, but I think what we're pointing to is the fact that it's indicative of the challenges in mail intensive industries that are our customer base where there is some volume related revenue streams in our core businesses, would be around the supplies side of the business. But the other businesses like production mail software, the others that Murray was speaking to, obviously would be impacted by decision making and the condition of those industries that tend to send a lot of mail.

Right. Right. And in the supplies area, you had another double-digit decline on a year to year basis. Are you seeing any signs of other supplies vendors moving in here, let's say generic supplies?

There's always been a small portion of generic, but we have not seen any uptick in that or share shift. The supplies business is more directly related to volume, because it is really consumed on a piece by piece basis, so it is closer to a one to one relationship. The equipment, if you consider someone has a piece of equipment, they would utilize that, regardless of mail volume and then they might change the size of it over time or as we've indicated, they might defer an upgrade on that equipment and stay with the same unit for an extended time period. But the supplies component is very directly related to volume.

Okay. And could you comment on the health of your subcontractors and partners? Are there any let's say decidedly negative situations in that area?

We have a pretty robust process of vetting the credit worthiness of our vendors and particularly critical suppliers and we've ensured that, one, the major ones are in good financial stead, and then any place where we've had some concerns we've made sure we either have secondary suppliers or alternative ways of sourcing product. But no material issues.

All right. Thank you.

And we have a question from the line of Steve Searle with Conning Asset Management. Please go ahead.

Good afternoon. Could you just comment on the potential impact of the financial regulatory changes that are being tossed about? I know your Company's name has been mentioned specifically in a few articles that I've seen.

Yes. We have an ILC that we do utilize and is part of our financial services business. We watch things closely. We are not expecting any near term effect on that and we certainly have always looked at what contingencies would be available to us if we were not to have continuous access to that. We think at this point the risk is -- we don't see the risk as extremely high in the near term, and we think that we would have sufficient time to be able to adjust if there was some change there.

Okay. Thank you.

And we have a question from the line of [Brian Sigrud] with Merrion Stockbrokers. Please go ahead.

Just this morning, the Costar Group article released some details on the USPS proposed restructuring that needs to be completed before October 2010. It's specifically related to a closure of a large number of their retail and distribution outlets around the country. At this early stage, what effect do you see for yourselves on -- of this restructuring and also does your new guidance reflect the restructuring from the USPS? Thanks.

First of all, our guidance stays within '09. And so it would not show anything from that. The second component is the Postal Service has been very positive on its continuing to do work share-based programs and you can see that in our mail services business, which has continued to grow, even in a challenged volume base. We've continued to expand the customer base there, and we work very closely with the postal service. At the same time, we have developed a kiosk or self-service devices, and those are becoming increasingly popular, and if there was a change in how people were to access services, we could see where there could be some long-term benefits for us in providing those types of services.

Are there any further questions?

We have no other questions in the queue .

Just in summary, I'd like to thank all of you for your questions and I trust that we've been able to give you some detailed response to those questions. This has been certainly some of the toughest business environment for most companies that they've faced in decades. But Pitney Bowes at this time continues to remain solidly profitable and continues to generate strong cash flow. We continue to reduce our debt and at the same time we continue to reinvest in growth areas of the business, while we're paying an attractive dividend to our shareholders.

We have a process designed to identify meaningful additional opportunities for operational improvements in order to preserve and to improve our margins as well as our cash flows. This process is working, as evidenced by the sequential increase in EBIT margins in six of our seven businesses this quarter, and the reaffirmation of our full year 2008 cash flow guidance. We are engaging as we mentioned a leading consultant to assist us with the identification of additional operating improvements and we will provide more details of this on our third quarter earnings call. Thank you very much. And have a great day.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We do thank you for your participation and for using AT&T's executive teleconference service and you may now disconnect.