Welcome to Pitney Bowes Fourth Quarter Earnings Conference Call. (Operator Instructions) I would now like to introduce your speakers for today's conference call; Mr. Marc Lautenbach, 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. Mr. McBride, please go ahead.

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 the actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our 2012 Form 10-K, Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on 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. Also, for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize most of the points we will discuss during the call. These slides can also be found on our Investor Relations website. Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few opening remarks. Marc?

Thanks, Charlie, and good morning, everyone. Thank you for joining our fourth quarter 2013 earnings conference call. We have a number of important topics to cover. So let's get started. As you recall, back in May, we unveiled a new business model that we believed would help transform Pitney Bowes and deliver a more sustainable value to our shareholders, clients and employees around the world. We also believed that if we focused our efforts our three key strategic initiatives, stabilizing our mailing business, driving operational excellence and growing our overall business, especially through our participation and investment in Digital Commerce. We've begun to unlock the inherent value to Pitney Bowes. Back then, we described the transformation of Pitney Bowes as credible. Well, at that point, it was only a projection, a possible, and it's very early days. With today's announcement, we have further evidenced that our strategy is working and that we're on the right track to transform Pitney Bowes. We still have work to do, but we also have strong start and a solid foundation. We delivered excellent fourth quarter results, both in terms of what we were able to get done in a 90-day period, but even more importantly what we're able to accomplish in terms of progressing our strategic transformation objectives. Not only do our results validate our strategy, but also gives us more confidence that we are focused on the right things to continue moving our company forward. We are heading into 2014 with good momentum and are better positioned to capitalize on the incredible market opportunities that ultimately would help our clients grow their respective businesses . Turning quickly to the fourth quarter, overall revenue grew for the first time in several years. On an adjusted basis, EBIT, net income from continuing operations, and EBIT…

Thank you, Marc, and good morning. This morning, we reported results of the fourth quarter and full year 2013. Our full-year results are in line with the company's guidance for revenue, earnings per share, and free cash flow. As Marc mentioned at our Analyst Day last May, we set out three major objectives for the company. They were to stabilize the mailing business, achieve operational excellence, and invest in growth initiatives. Marc has already shared the major milestones that we've achieved to date, and I'd like to now discuss how these milestones are contributing to the business trends, which are then reflected in our financial results. I think this review will help to explain our fourth quarter results and provide insights for our 2014 guidance. First, we are stabilizing our mailing business. As Marc noted, collectively, the revenue in our mail related businesses were down just 1% in the quarter. In our SMB business, we're implementing a new go-to-market strategy, which has shifted some customer accounts to inside and online sales. This strategy is improving our sales process and enhancing our client experience while reducing costs. While there is still more work to do to implement this globally, we're already seeing improvements in the trend of our equipment sales. Additionally, as expected, the decline in our high-margin recurring revenue streams has continued to moderate and is contributing to the overall stabilization of our core mailing business. Second, we are achieving operational excellence. At our Analyst Day, we announced the restructuring program that will reduce expenses on a run rate basis by $100 million to $125 million by 2015. As Marc noted, SG&A declined by $71 million in 2013 when compared to the prior year attributable to the new go-to-market strategy in our SMB business and increased leverage of global shared…

(Operator Instructions) The first question comes from the line of Ananda Baruah with Brean Capital. Please go ahead with your question.

I had a few things, if I could. I guess the first, Mike, if you could just sort of walk back through the components of the free cash flow guidance and maybe give us some sense, order of magnitude to what degree each of those contribute? And then I just also was wondering, and you touched on this on the finance receivables, I just wanted to know also if any improvement in sales, or to what degree in the improvement in metering sales plays into that aspect of free cash flow as well?

In terms of the cash flow guidance, there's three very intentional actions that are reflected in the guidance that really make up the difference between our 2013 actual cash flow and our 2014 guidance. Specifically, they relate to the fact that we sold the Pitney Bowes Management Services business after the third quarter in 2013. So, when we remove the full year impact of the cash flow of that business out, that reduces our cash flow. Second is the intention to invest incrementally in the systems, our ERP system that will yield some long-term benefits to the organization, and third is about the finance assets in the business. To your point, the stabilization of the mailing business, in particular beginning to see equipment sales growth in that business has the benefit of stabilizing those finance receivables. Those are high-yielding assets, they contribute to recurring revenue steams, and so we view that as a very positive development in the business. Each of those items are worth $30 million to $50 million in terms of our free cash flow, so they really constitute the difference between our '13 free cash flow and our '14 guidance.

Marc, on the core business and on the recurring rev stream, I would be interested in getting your comments on how it's tracking relative to your expectations? You guys have been calling for improvement. Were you expecting this much improvement this quickly, and to the extent that you're seeing dynamics that you feel are more favorable, do you think that that could -- I guess what's your view on resonating relative to your long-term model outlook for the industry?

Yeah, I would say it's probably tracking the way that I had expected and came the way that Mike had laid out not just in 2013, but in previous years. And to some extent, this is a place where you've got, as we'd discussed, pretty good visibility. So I would say, in general, the numbers have unfolded the way we expected. I would say that the go-to-market actions have yielded better and sooner than I would have thought and have been less disruptive. Typically when you implement a go-to-market change of the magnitude that we have, you could expect some short-term air pockets. And to the team's credit, I think they've avoided all those. So as that go-to-market matures and congeals, I think there's upside.

I guess what that also suggests, Marc, that maybe for a period of time, you could overshoot, and just I mean this in a positive way , what you think the normalized model would look like in the core mail business.

Well, I'm not precisely sure what a normalized model looks like. So I guess I would just go back to my comments. I think it's probably tracking the way we would expect it. I'm pleased with how the go-to-market has unfolded, and I'm continuing to be confident that this business can drive real value.

On the EPS guidance, you're sort of calling out the $0.10 of ERP investment. It would seem that we would want to include that, since you will get benefits from that going forward. But I just wanted your clarification on how you're hoping that the folks will take that into account, the context of your guidance?

It was just to get transparency into the numbers. I mean it wasn't anything beyond that. You can make your own judgments about what to include or not include, but as I have said at the outset, we want to be as transparent as we can, so you can make the right judgments about the company.

Yeah, I would just add to that and under that it is included in our guidance number, but what we wanted to do is give the elements of differences between '13 and '14 that would allow for comparability. So if you look at '13, it's about $0.15 of tax benefits in there. And if you look at 2014, there is this $0.10 of incremental spend in the ERP business. So normalizing for those two things, the underlying growth in EPS is between 7% and 16%, which is really a reflection of the SG&A benefits as well as the contribution from improving revenue trends.

The next question comes from the line of Shannon Cross with Cross Research. Please go ahead with your question.

My first question is with regard to the e-commerce business. Marc, can you just give us some more color on what you're seeing there, maybe the revenue during the quarter, the margin trajectory when we can expect possibly that business to be in profitability as opposed to investment and how we’re thinking about things, you signed, Twitter, during the quarter. So what are sort of the next goalposts we should be looking for?

So as it relates to the ecommerce, I would say it's probably tracking again as we had expected and as we had planned for the year. In terms of the profitability, it's true that we are continuing to make investments. It's also true that the margin improvement in that business on a contribution level have, I would say, been slightly ahead of where I would expect it. So I guess to sum that up, we'll continue to make investments in that business, because we think that's got enormous potential across a broad set of markets, a broad set of clients. But at the same time, we will continue to work on the variable contribution. As it relates to Twitter, I guess there's lots of different ways to process that. I would tend to put it in a broader context, but again a reaffirmation of our broader strategy, in that you have sophisticated again technology company, well placed within the world of social media, choosing our technology. So I think it's important to kind of step back and say, why, and the basic why is social media companies are working to monetize their model, they do through lots of different things, the commerce and advertising, as well as the primary ways. And our intelligence technologies are well placed to do that. You can kind of get lost in the specific data points, but the broader point is that these technologies participate in secular trends that are losing the right way whether it's what we're doing with ecommerce or whether it's what we're doing with location-based solutions. And that's why the mosaic of all these businesses together I find so promising.

And then can you speak a little bit about the ERP system rollout, where you are in the planning and the implementation and how we should think about it through this year and maybe future years? I don't really necessarily want you to give us deadlines, because as it seems like with ERP, people always miss those deadlines, so it's probably better not to delay them out. But I mean just in terms of looking at it, how are you sort of going through the step processes, teams, what have you?

Well, at this point, we're finishing up the requirements definition, and that will take the next several months. And towards the end of this year, we'll begin rolling that out around the world. Typically as you and I discussed, the ERP implementations take two to three years. This one won't be any different. So you'll see upfront investment, as Mike characterized at the outset, followed by what I think will be importantly substantial economic benefits, but also even more important to my way of thinking a much better client experience. So I talked about 37 different billing systems. There's obviously a level of cost and inefficiency that goes along with that, but candidly doesn't present the best client experience either. So this is why this is going to have all kinds of benefits to side with it. But it will take some time to work through.

And then I don't know if Mike wants to take this, I have a question on presort business, I mean it wasn't a huge impacter on the quarter overall, but obviously the margins were pretty low relative to where they've been. So I'm curious as to what sort of normalized margins might be in there or how you're thinking about changes you might make, or is this just sort of a new normal because of some of the rate changes that went through last year?

Well, the thing about rate changes is there's new rates each year. And some of the rate changes in '13 were a little less favorable to us, as well as we have been sort re-stacking labor and those types of things a bit. As we look ahead to '14 and as I noted, we see opportunities in the new rates to leverage the way our network is configured to drive improvements. So despite the fact that the margins were down a little bit, they were still about 17%. So a very solid margin for that business. But we do see some opportunity in '14.

The next question is from the line of Kartik Mehta with Northcoast Research.

I wanted to ask you just your thoughts on the debt potential of the company and the free cash flow you're going to generate in 2014 and maybe what your priorities will be? Is there a certain level of debt you're trying to get to? Is there a certain level of cash you'd like to have on the balance sheet?

Well, I think in terms of the debt profile, as I noted, our debt levels are down about $675 million year-over-year. So we think we've made good progress on that front. We see our pension plans at nearly fully funded status and U.S. qualified plan. So as we look at the total capital structure, I think it's improved dramatically and in good shape. But we'll continue to look at maturities of the debt we have outstanding and decide what we do as we go forward from here. Those are the main areas of focus for us. In terms of the free cash flow, given the dividend we have, which we think is still a very good competitive dividend rate, the free cash flow is more than sufficient to cover that dividend and leave us with excess free cash flow that we can reinvest in the business and some of that's baked into that guidance already, as well as look further. So I think we have more flexibility today than we did a year ago and we'll continue to manage that.

Marc, you mentioned, I think, in your remarks about investing in the software business. How much of that investment is potentially doing some acquisitions, make the offerings stronger or buying something that you don't have that you think could help further strengthen your offering?

Well, as I said all along, we would look at acquisitions opportunistically. I continue to think that we've got the quality of assets that we need. So the types of opportunities that we would look at would be very targeted and focused to sell out capabilities that we need. And traditionally those are make versus buy decisions. So it's part of the arsenal. It's part of the consideration. But it would be a very focused and targeted set of moves if we had to do that.

The next question comes from the line of George Tong with Piper Jaffray. Please go ahead with your question.

Just a couple of questions on Digital Commerce to start. First, just wanted to revisit the eBay relationship. Can you give us an update on how many countries you're now serving versus your long-term target and any plans to potentially add the capacity to your facility?

In terms of the ecommerce business, obviously we're serving eBay as a very key customer, but we have other customers in that business as well. In terms of the eBay relationship, today we're in about 42 countries. And that will continue to evolve in terms of eBay's priorities to get to other incremental markets around the world. And we work with them on a very closed basis to ensure that we're meeting their needs as they evolve on a global basis. In terms of the capacity of our facility, we went through the holiday season in very good shape, handling all the volume that came through. So we feel we're in good shape to grow with that business.

And just wanted to dig a little bit deeper also on the Twitter deal. Is this a potential sorts of ongoing recurring revenue streams and how should we think about the scale and margin profiles associated with the contract?

In terms of the Twitter deal, we did mention that it was a multiyear agreement. So it is a licensing type agreement with ongoing maintenance. Obviously it's our first implementation with them around technology and we'll continue to look at ways to serve their needs as we go forward.

And then margins in Digital Commerce, do you see any investment milestones in 2014 that could potentially slow the momentum you're seeing in margin expansion?

Well, what you're seeing in margin expansion there is a combination of two things. One is as we gain scale in the ecommerce business, even though we're investing into that, we're beginning to get some benefit of the scale within our facility against the fixed cost of the business. The other is within our software business. We continue to refine our go-to-market strategy, as I talked about, and manage the overall expenses in the business. So we have an opportunity to continue to expand that margin as we gain scale in the Digital Commerce business. Today, that's about 17% of our total portfolio. Obviously, getting good growth in that business will allow us to scale that further.

I just have one additional point. We talked about previously, we are investing in a more specialized sales force. So we're doing that within the envelope of SG&A that we had, that is not incremental investments, I would assume that that would be a more productive use of that resource going forward.

That's helpful. And then last question, you've indicated you're expecting a relatively similar environment in the postal industry in 2014 versus 2013. What do you as potential source of upside or downside versus your expectations?

Well, there was fairly meaningful improvement in the fiscal year '13 if I look at just from the U.S. perspective versus fiscal '12. I mean our volumes were down 5% in 2012. They were down just 1% in 2013. And within that, there's obviously components that are growing faster than others like packages. So we're in an environment of relatively stable volumes. And so looking ahead, we're projecting against that type of environment. And that's what I was referring to.

The next question comes from the line of Glenn Mattson with Sidoti. Please go ahead with your question.

I guess along the same line, with the sales force realignment, could you say where we are in the process, how far along we are and I guess when those results might materialize?

I would characterize it this way, Glenn. The teams had the right uniforms on. So they're in the right formations. And we're working on building their skills. We characterize this as an effort that will take 18 months to kind of fully implement. We've started early fourth quarter. So I expect incremental improvement in each of the coming quarters kind of at a normal steady pace towards the beginning of '15.

And I guess on the Digital Commerce base, what would you say ultimately the goal is to get margins at?

I mean that's really going to depend on the mix of business and the opportunities. So we're early days, but clearly we're already at a double-digit margin. Obviously each component of that Digital Commerce business has somewhat different profile, the software business having the highest margin profile. The ecommerce business, because it's a combination of services and software, somewhat less. But our goal is to continue to improve that as we scale both on the software and the ecommerce side.

And then lastly, what kind of effect do you expect from the penny discount on the meters, if any?

It's early days really in terms of the opportunity around that. But the important thing is a recognition that the meter provides real value in the overall postal system. And as our customers look at the total spend around this, we can provide incremental value by allowing them to access that discount. So obviously we're communicating that to our customers and looking at ways that we can help them manage the overall postal cost.

Okay. Is that generating some interest from the customers when you readjust them on that?

Today, we're really building awareness around that, because it's shipped out.

The next question comes from the line of Ananda Baruah with Brean Capital. Please go ahead with your question.

Marc, one question that we get with regard to sort of some of the newer growth initiatives, sort of ecommerce and some of Twitter, Facebook initiatives is what does the competitive environment look like in the context of the longevity, sort of the penetration of the strategy from folks. And I would love to get your comments on what the competitive environment looks like and how you guys feel you're positioned and why inside that competitive environment both currently and look out forward? Thanks.

Well, there's not a single answer. Each product has a slightly different, in some cases dramatically different, competitive environment. So if you look at some of things that we are doing around ecommerce, that market is still relatively nascent, obviously growing very quickly. That said, I'd like our competitive position as we work around the industry and as we get affirmation from the clients and potential clients. All that seems to line up. Location intelligence on the other side of it is a more mature market with more entrenched competitors. But again, when you look at the clients that we're landing, it gives you a sense that you've got real capabilities there. So I'm balanced. We spend a hell of a lot of time trying to understand the competitive environment and we are careful and thoughtful about where and how we deploy our resources. That said, I like our competitive position in all of our markets.

Just a more mature nature on the locations intelligence market and given the relationships that you've recently struck, would that suggest that you guys actually have IP that is certainly towards the higher end of the industry and maybe even therefore have some kind of competitive barriers given the relationships that you struck?

Well, I would certainly affirm the first part of your question in the sense that we like the IP that we have in that business. Competitive barriers, I'm not so sure I would necessarily try to characterize that. These are obviously very dynamic markets and you need to keep your eye on the horizon of the competitive environment.

There're no further questions. Please continue.

Great. Let me conclude this morning. I appreciate everyone joining the call. I want to conclude by saying that we had an excellent fourth quarter not just in terms of our financial results, but importantly in terms of our strategic transformation. We're beginning to see the promise of the Pitney Bowes' business model unfold. That said, I want to remind everyone again that transformations typically have ups and downs along the way. And while we're more confident that ever about our long-term prospects, this will not be as great a shot. We made excellent progress so far and in many ways much faster than we would have expected. But there's still a lot in front of us. It's been over a year since I've joined Pitney Bowes. In this very short period of time, I'm continually impressed by our technology, our talent and the vision and the passion of our teams in each of our businesses. I'm confident as we continue to execute our strategy will unlock the full value of Pitney Bowes. Thank you again for joining us and I believe that concludes this call.