必能寶 (PBI) 2010 Q3 法說會逐字稿

Good evening and welcome to the Pitney Bowes third-quarter 2010 earnings results 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 the Safe Harbor overview.

Thank you. Included in this presentation are forward-looking statements about our expected future business and financial performance, forward-looking statements about risk and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our 2009 Form 10-K annual report and other reports filed with the SEC that are located 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 developments.

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

Good afternoon and thanks for joining us today. Let me start by sharing some thoughts on our performance. Mike will follow with the details of our third-quarter results and then we will take your questions. Overall this quarter we achieved performance in line with the prior year in both revenue at $1.3 billion, excluding the impact of foreign currency, and adjusted diluted earnings per share of $0.55. We, like others, have seen an uneven recovery in the global economic environment, which has been characterized by low job growth and a lingering weakness in consumer confidence and spending. This quarter, however, we did see some signs of improvement in certain segments of our customer base. We experienced 10% increases in both equipment sales and in software revenues. The growth in equipment sales included a 5% increase in US mailing equipment, which was the first year-over-year increase in seven quarters. Double-digit equipment sales growth in production mail also included the installation of a some of our advanced systems in several accounts in the Enterprise customer segment.

The positive equipment sales performance in the segment of our business that serves small to medium-sized businesses was led by placement of Connect+, our latest generation of mailing solutions. We recently launched Connect+ in the UK and will continue its global rollout in phases over the next few quarters. Connect+ provides full-color process printing on the envelope, as well as web-based functionality. We expect this innovative system to be a key component in driving future mailing equipment sales. During the quarter, our software revenue growth was driven by increased demand for data management, analytics, and CRM solutions. We also saw continuing demand in growth in our presort operations, driven, in part, by a greater participation in the standard mail market. This is the second consecutive quarter of year-over-year growth in this segment of the mail stream .

The equipment sales and software revenue growth drivers represent important early milestones in returning our total revenue to growth. It is important to remember, however, as we have discussed in previous calls, our recurring revenue streams of financing, rental and supplies will lag in growth because of the lower equipment sales in prior quarters. During the quarter, we continued to see benefits from our actions to reduce costs and enhance productivity, which resulted in an improved EBIT in international mailing, production mail, management services and marketing services. Software EBIT grew at a double-digit rate when the costs associated with the acquisition of Portrait Software are excluded. Our increased shipping costs related to our growth and participation in the international e-Commerce parcel market reduced EBIT in our mail services operation . We continued the implementation and acceleration of our strategic transformation program. As a result we achieved net benefits of more than $35 million during the third quarter and approximately $65 million year to date. Given the benefits we've been able to achieve year to date, we now target net benefits from our transformation program of about $100 million this year .

Let me now turn it over to Mike for a discussion of the third quarter

Thank you, Murray. As Murray noted, revenue was $1.3 billion for the quarter, a decline of less than 1% when compared with the prior year and unchanged, excluding the impact of foreign ex -- of foreign currency. Breaking down our revenue for the quarter between US and non-US operations, US revenue declined by about 1%. Outside the US, revenue was relatively flat versus the prior year. Excluding the impact of currency revenue outside the US increased 3%. Non-US operations represented 29% of total revenue. Adjusted earnings before interest and taxes, or EBIT, for the quarter was $228 million, which was about 1.5% lower than last year. During the quarter EBIT benefited from a favorable adjustment related to the leverage lease portfolio in Canada, but was impacted by costs related to the acquisition of Portrait Software, higher international shipping costs and mail services, and higher personnel and pension-related costs. Because of our ongoing productivity initiatives we were able to reduce our cost as a percentage of revenue in the quarter for equipment sales, software, rentals and support services when compared with the prior year.

Selling, general and administrative expenses, or SG&A, costs were flat when compared with the prior year on a reported basis and declined by about $5 million on an organic basis despite the reinstatement this year of certain employee-related costs. Excluding the acquisition costs that Murray are noted earlier, EBIT margins improved year-over-year in six of our seven business segments. These improvements in EBIT margins were a result of our continued focus on reducing our cost structure and increasing our operating efficiency across all of our business segments.

While we've clearly done a lot to improve our productivity, we remain committed to doing even more through our strategic transformation program, especially in the current environment. Strategic transformation is enabling us to improve the way we go to market and interact with our customers, plus we are putting in place new processes and systems that will make our operations more streamlined and profitable, allowing us to better leverage future revenue growth. When we add back depreciation and amortization to our adjusted EBIT, adjusted EBITDA for the quarter was $303 million, or $1.47 per share. Net interest expense for the quarter, including finance interest, was $51 million, flat when compared with the prior year. The average interest rate in the quarter was about 4.2%, about ten basis points higher than the prior year.

The effective tax rate for the quarter on adjusted earnings was 33.1%. This was lower than the tax rate on adjusted earnings last year, which was 34.3% . The lower tax rate in the quarter was the result of favorable tax planning transactions. We expect the tax rate on adjusted earnings could vary during the course of the year depending on the timing and mix of business and other factors, but we still expect be average tax rate should be within a range of 34% to 35% for the year. The GAAP tax rate for the quarter was 32.8%.

Adjusted earnings per share from continuing operations for the quarter was $0.55, which was equal to our adjusted earnings per share of $0.55 for the same period last year. Currency exchange rates did not have a significant impact on earnings for the quarter. GAAP earnings per share included pretax restructuring charges that totaled $34 million, or $0.10 per share in the quarter. GAAP EPS in the quarter also included a $0.01 per share loss for discontinued operations, which was related primarily to interest on uncertain tax positions associated with our former capital services business. Free cash flow was $221 million for the quarter and $673 million year to date . During the quarter free cash flow benefited from the unwinding of an interest rate swap position, which generated $32 million, and also from lower finance receivables.

During the quarter we returned $77 million of cash to our shareholders in the form of dividends. Also, based on the strength of our free cash flow and the price of our stock we opportunistically purchased about 4.7 million shares during the quarter for $100 million. We have $50 million in share repurchase authorization remaining . We reduced our commercial paper balances this quarter versus the second quarter by about $12 million to $132 million. About 84% of our total debt is fixed rate and 16% is floating rate.

Now let me highlight a few points about our strategic transformation program. In the third quarter we continued to implement initiatives identified by our project team and have added other initiatives that we'll implement throughout 2010 and 2011. During the third quarter our restructuring charges were largely for severance costs related to the elimination of about 370 positions across the Company. Since the program's inception we have eliminated about 1,700 positions. We are achieving net savings identified by our strategic transformation program more quickly than was originally anticipated as a result of disciplined implementation. Therefore we have achieved net benefits of approximately $65 million year-to-date and now expect to realize net benefits of about $100 million in 2010. We're still targeting annualized net benefits for the full program in the range of at least $150 million to $200 million by the end of 2011 and we expect to achieve the full annualized run rate of benefits in 2012.

So that concludes my remarks, now Murray will

As you saw in our earnings release, we are maintaining our revenue guidance and narrowing our earnings guidance for the year. We also now expect to be at or above the high end of our guidance range for free cash flow. These changes reflect our results for the first three quarters of the year and our outlook for the remainder of the year. The global economy and business environment appear to be stabilizing in some areas, but still remain uncertain in other areas, such as small business. Excluding the impact of foreign currency we continue to expect revenue for the year will be in the range of flat to a 3% decline when compared with the prior year. Adjusted earnings per share for the year is now expected to be in the range of $2.15 to $2.22, and GAAP earnings per share is expected to be in the range of $1.54 to $1.69. Our guidance range for GAAP earnings per share includes tax charges of $0.13 per diluted share related to out of the money stock options, certain capital lease transactions outside the US, and the impact of healthcare legislation enacted in the beginning of the year.

As I mentioned earlier, we have accelerated some of our actions related to the transformation program and have generated more benefits and costs than were originally targeted . Therefore, we have narrowed our range for estimated restructuring and asset impairment charges for the year to $0.40 to $0.48, which are included in our range of estimated GAAP EPS for the year. We now anticipate generating free cash flow for 2010 at or above the high end of our stated range of $700 million to $800 million. We continue to take actions that will help position us for long-term growth while navigating uneven business and economic conditions in the near term. That is why we remain focused on investing in growth and driving innovations, while streamlining our business operations and creating more flexibility in our cost structure.

Thank you. Now let's open the line for

Thank you. (Operator Instructions). We will now go to the line of Chris Whitmore. Please go ahead .

Thanks very much. I was hoping to get a little more color on the faster-than-expected savings realization. Where are you realizing the faster-than-expected savings and why haven't we seen the overall targets move up for the entire program?

Sure, Chris. It's really come in a couple of different ways. One is in terms of accelerating the position reduction. We have a number of projects across of the business unit that we've identified and put into place. The other is the acceleration of some of our procurement savings programs where we were able to go out and identify categories where we could get better-than-expected reductions in cost of doing business. In terms of its fall through in the numbers, part of that is really reflected in our original targets around revenue were a bit higher, and the financing income is very high margin and that's somewhat lower than we anticipated at the beginning of the year. A slower start in sales so that's reflected in the total numbers.

So if I take the $0.03 and added it to the incremental cost savings what's that total EPS number in terms of accelerated cost savings plus the $0.03 from the leverage lease portfolio?

Well, I think taking leverage portfolio's just one item of a number of pluses and minuses. If you look at the mail services business there's an offset in the other direction. So we think the $0.55 represents good operational results.

Okay. And then maybe can you provide a little more color on the recurring revenue streams? I think those were in aggregate below most people's expectations. Specifically on supplies, why was supplies lighter this quarter? Is that a reflection of mail volume? And then secondly on financing, is there an effort to move toward less financing in these engagements by the customers? Are they looking for third-party [source] financing, or maybe can you provide some color on the -- maybe the dislocation between equipment sales and financing?

Sure, let me do the financing first. There is an actual lag between lower equipment sales and the impact on financing revenues, so as the asset base has come off and we've not put an equivalent amount of sales on -- keep in mind that what comes off the base, as the average lease is four years long, will be sales activity that we had four-years ago. So because we had lower sales activity, particularly at the tail end of 2008 into 2009 and then, obviously, in the first half of 2010, that has the effect of reducing the asset base as a the earlier sales roll off but it's on a lag basis. So as we talked about back in May at our analyst day that's going to be a year-plus lag before we see the turn in the finance income, if we see continuing growth in the sales side. We did see that the rate of decline in financing income came down quarter to quarter.

And your other question was about supplies. Supplies really has two components to it. One is, obviously, our traditional ink supplies and that is basically volume related, related to mail volumes in terms of the number of [indisues] generated, so that is tied to that. The other piece is non-ink supplies that we sell across our business was down a bit.

Okay and then last for me. If you look at a normal equipment seasonality in Q4 it seems to be mid-teens roughly, is that a fair assumption for this year, or should we expect something better than that being driven by the Connect+ product launch? Thanks very much.

The -- I would say that the fourth quarter should follow similar trends to the task and we are continuing to see benefits from Connect+ and it was launched mid-quarter in the UK. We won't have any others until the beginning of next year in other countries, so I would expect it to be in the similar range proportionally.

Okay, thank you very much.

And, Chris I would just add one other comment relative to supplies. It was level quarter to quarter and on financing actually up slightly quarter to quarter, so we did see a leveling in the consecutive quarters.

Thank you, and we'll now go to the line of Ananda Baruah. Please go ahead.

Hey, guys, thanks for taking my question. Can you comment on any changes that you made for the lease extension program for the last quarter and any impacts you may have seen this quarter (inaudible) expected impact going forward?

The lease extension program is basically staying the same quarter to quarter, On a year-over-year basis it's up considerably but over the last number of quarters it's been basically flat in units. So we -- as you recall we had a significant step up early in the year in that extension. We have seen lower extensions at the high end where we've introduced new product, so in the Connect+ area, particularly, there is less extension as people are moving to the new product. But across the board it is basically the same quarter to quarter.

Got it. And, Murray, is there anything that you guys are doing to try to get folks to -- I get the sense that (inaudible) lease extension program was? Do have any comments out?

No, we're not expecting any particular change in behavior. We like the lease extension program, as we discussed earlier. It allows us to extend the length of the asset and eliminates a lot of the cost in going out there. So although it has a lower sales revenue in the initial period, over the contract period it has a very good return for us on a comparative to a new piece of equipment. Certainly as we launch a new technology, such as the Connect+, in those segments we would expect to see a lower lease extension as people migrate to the new technology, which, as you recall, is full-color, process color print and web-based solutions, which allows them to move forward into other web-based solutions around their mailroom.

Great. And you mentioned that (inaudible) remained soft for the quarter. Could you just drill down a little bit further and give -- fill us in if your saw any change in what just the business environment looked like during the quarter? Any details would be helpful.

Sure. What we are continuing to see is, first of all it in the enterprise segment that there is -- the recovery there is still a little lumpier but it is recovered considerably. You can see our enterprise sales are starting to move nicely positive and we're expecting that trend to continue. On the other hand, in the small business segment the larger customers in the small business segment are showing more stability and positive, but as you move down the small business segment, which is closer to consumer, the uncertainty in the environment is still leaving those customers in an uncertain (inaudible) as to how they manage their business portfolio going forward, so that's the area. It's sort of started to narrow. From everywhere to enterprise has now moved stable to positive. The large of the SSD is improving, but the mid and low end, which is a very large volume of customers, are still what I'd say closer to consumer attitude.

Thanks, that's helpful, and just -- this last one for me. On mail service it seemed to have a pretty nice sequential increase, so what would be the cause of that? What were folks -- what would folks be adopting this quarter or last quarter? I would have thought that was the same contract.

Well, we continue to see a growth in our presort services business, in particular. The -- we're seeing more and more people adopting our service so we're continuing to gain in actual process volume and particular since we're adding the intelligent mail barcode it eliminates that expense. The density that we're getting in the first class so that we get a higher five digit and then we're seeing significant growth in the standard mail segment. It is at the 14%, so we are seeing more and more adoption in standard. If you recall we were primarily first-class mail but now the standard mail is accelerating. So it's been very positive for us. Even while some of the segments of mail have shrunk over the last three years we continue to grow volume in that space and we expect to continue to do that.

Thanks a lot, Murray, and I appreciate it. Apologize for the background noise, I'm in the airport.

Okay, no problem.

(Operator Instructions). We'll now go to the line of [Gregory Cherwatgo]. Please go ahead. And he has actually taken himself out of the queue. We'll now go to the line of Shannon Cross. Please go ahead.

Yes, hi, this is [Austin Bernardis] in for Shannon Cross. If I may I have a question with respect to your outlook for the year. What gives you the confidence that you have for the full year today versus what you were seeing for July. Is it anything in particular related to a geography, or are you hearing any particular feedback from either your customers or the feet on the street, or is it just a matter of where we are in the business cycle?

I think it's a number of things. One, we are closer to the end of the year and on that larger transactions the written business continues to be there, which gives us more security on the high-end transactions, which you generally can't write and bill in the same day. There's a longer time window. So seeing some of that business coming in in the written side in the third quarter, which translates into billings, gives us more confidence. And then I think when you look -- as we around the world and see it's a little sporadic in some areas of the world on the high end but it continues to be improving in our small business segment. We're seeing some improvement but not the improvement we want. So we've moved from where we had less certainty around stability of that segment to where we might not see dramatic improvement but at least are more confident in some of the stability in that area.

And with respect to the leases that you renewed in quarters past, I'm assum -- I believe you must have anniversaried some of them by now and I wanted to know what are those customers who have already extended their leases doing when the new due dates come up?

There are very few that would have come up by now, but there might be a few but most of those were three-to-four year extensions, not really shorter term. So there might be a few but it's not material. And we'll see more of that activity coming late next year and into the following year, and so we really wouldn't be seeing anything there at this moment.

Understood, thank you. And one final question is would you be able to provide any color on the level of competition you're seeing within Europe, in particular?

Actually we've had some very good results in Europe. We continue to see our share moving positively in most countries in Europe and Europe in total. The launch of our Connect+ product has been received very well in Europe so we continue to see good improvement in our positioning there.

And just finally, from what you've seen in the first month of this quarter are you at all concerned with some -- with the European market potentially being slightly weaker?

It's actually a little early for us to get data that we can mention, that we can really look at because the month is basically just closing and by the time you aggregate all that countries, et cetera, it would be hard to do that. But we're expecting to see similar trends and we really don't have anything on a specific month at this point.

Got it. Thank you.

Thank you and we'll now go to the line of [Gregory Cherwatgo]. Please go ahead.

Hi, thanks for taking the question. Just had a quick question along the lines of the credit profile. Was wondering if there was any target metrics or target ratings that the Company's going by?

Yes, we believe being an investment-grade credit is an important metric for us given the financing of our financing business, and so we have generally managed around those types of ratings and we feel comfortable that the cash flow of the business is able to support the investment profile that we have in the business today.

Great, thank you.

We have a follow-up question from the line of Ananda Baruah. Please go ahead.

Yes. Just circling back on the opportunity next year for the Connect+ hardware issues, can you just characterized how big the opportunity may be from (inaudible) bump above and beyond (inaudible) on a broader basis?

As we look at that market segment it's in the area of 10% to 15% of our customer base and so it's not that it is a product that's designed for a wide range of customers. So although it is significant within a segment of market it is not going to have a massive overall effect on the business. I think the thing there is it is an indicator of the trend in mail, it's an indicator of people's acceptance of new technologies and capabilities, which is really what we're looking for as we launch other services throughout the year in both the software side. As you recall, this is a software-based product that really opens the portal for mailers and this then shows is what the acceptance of that is to add other web-based services in and around our other product portfolio.

Got it, thanks. And then you mentioned that your shares then were sort of nudging up in Europe. I would imagine that comment (inaudible), but can you clarify that, I guess? And then what's been going on with share in the US and how would you characterize the (inaudible) price competition in both the US and in Europe?

Well, firstly there are two competitors in Europe of significance; (inaudible) and [Neopost], and although there's one or two very small competitors, in general the share would be a mix of those two companies. As to in the US our share numbers are staying basically the same. They tend to float plus or minus within a couple of tenths range and that usually has got to do with timing of reported results by the companies on both sides, so that's basically staying stable. And from a price point of view we're seeing fairly constant average selling price across the board, so there isn't anything that (inaudible) material positive or negative on (inaudible).

Thanks a lot, just one last one for me. How -- I don't know (inaudible), but how active (inaudible) as we move pre-2011?

And so, Ananda, I think if I understood -- and maybe you could mute your phone. I think if I understood your question correctly it was about share buyback. We did buy $100 million in the third quarter, really being opportunistic around a low stock price in July and August. Bought back 4.7 million shares we have $50 million remaining authorization. I would say we would continue to balance the options we have around whether it's acquisitions, reinvestment in the business or share repurchase as the opportunities present themselves, and such time we use the authorization we obviously would go back to the board and discuss any further authorization.

Okay, guys, thanks a lot.

Okay.

And will go to the line of Steve [Cerille]. Please go ahead.

Yes. Did acquisitions contribute anything to the top line in the quarter?

It was less than 0.5% in terms of revenue contribution. We had the Portrait acquisition for part of the quarter so it's a relatively small contribution.

Okay. And of your cash can you give us a split how much is held domestically, how much is held overseas?

Yes, I think there's -- of our $350 million plus of cash about $100 million of it off is offshore and the remainder in the US, a portion of which is associated with our bank, Industrial Loan Corp.

Great, thank you.

We have no further questions in queue, please continue.

Thank you for your questions, I appreciate them. This quarter, as I previously mentioned we did experience 10% increases in both equipment sales and software revenue, including double-digit equipment sales growth in production mail and mid single-digit equipment sales in both the US and international mailing. While this is an early indicator of improving business conditions in parts of our customer base, growth and in recurring revenue streams will lag the trends in equipment sales . Six of our seven business segments had improved EBIT margins, excluding the acquisition costs related to Portrait . We achieved adjusted EPS of $0.55, which was equal to the prior year, and we now expect to realize net benefits from our strategic transformation of about $100 million in 2010 as a result of our disciplined focus on implementation. So I want to thank you for your time this afternoon and have a

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