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Edited Transcript of PBI earnings conference call or presentation 6-Aug-19 12:00pm GMT

Q2 2019 Pitney Bowes Inc Earnings Call

STAMFORD Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Pitney Bowes Inc earnings conference call or presentation Tuesday, August 6, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam David

Pitney Bowes Inc. - VP of IR

* Marc B. Lautenbach

Pitney Bowes Inc. - President, CEO & Director

* Stanley J. Sutula

Pitney Bowes Inc. - Executive VP & CFO

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Conference Call Participants

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* Allen Robert Klee

Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst

* Ananda Prosad Baruah

Loop Capital Markets LLC, Research Division - MD

* Anthony Chester Lebiedzinski

Sidoti & Company, LLC - Senior Equity Research Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Pitney Bowes' Second Quarter Earnings Conference Call. (Operator Instructions) 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 participants on today's conference call: Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Stan Sutula, Executive Vice President and Chief Financial Officer; and Mr. Adam David, Vice President, Investor Relations.

Mr. David will now begin the call with the safe harbor overview.

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Adam David, Pitney Bowes Inc. - VP of IR [2]

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Good morning. 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 in our earnings press release, our 2018 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 many 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?

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [3]

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Good morning, and thank you for joining the call. Overall, we turned in a solid performance in the second quarter, making progress against our strategic initiatives and improvement from the start of the year. In particular, our Commerce Services' top line performed very well and exited the quarter with good momentum. E-commerce's domestic parcel volumes through our network grew 42% in the second quarter to 35 million packages processed. Additionally, SMB revenue performance improved sequentially and had good momentum heading into the third quarter.

At the end of May, we hosted an Investor Day. At that time, we laid out our long-term plan for continued top line growth and expansion of shareholder value. I won't spend this morning rehashing the presentation. However, there were several significant key messages that we delivered that I do want to reinforce and start providing a signpost, to which you can measure our progress.

The first is that we will continue to grow revenue and the growth rate will improve. In the second quarter, revenue grew 2% when adjusted for currency and the exit of direct operations in 6 smaller European markets, which we announced earlier this year.

The portfolio continues to shift to growth, particularly around shipping, which comprised 35% of our revenue this quarter. The growth in shipping is largely attributable to our Commerce Services group, which contributed 48% of our overall revenue. As a reminder, 2 years ago, Commerce Services comprised less than 30% of our portfolio. At this rate and pace, this segment is well positioned and in line with our long-term plan of being nearly 60% of our overall revenue.

Our second key message was around the path to profitability in the Global Ecommerce business. Lila Snyder, the President of our Commerce Services group, laid out the strategy, which we've driven by continued growth and scalable volumes and operational efficiency. Global Ecommerce, while not currently at optimal scale, is over $1 billion business that is growing close to 20% and is EBITDA positive today. To be clear, we won't achieve the 42% domestic physical volume growth every quarter, but anything above an average 25% will keep us on track to obtain optimal scale.

Our third message was that SMB would achieve flat or improved year-over-year EBITDA [orders] in 2021 by growing our shipping capabilities and third-party financing. These initiatives are in addition to the work we have already done to stabilize our legacy portfolio and will take time to build, but the high-margin shipping and third-party financing streams that we are creating are incremental to our current model.

In the second quarter, SMB revenue declined 4% when adjusted for currency and the direct operations we exited earlier this year. We continue to place our SendPro C, now having over 95,000 units in the market, which means we have placed nearly 1/3 of our targeted existing client opportunity in North America in less than 2 years. And we have begun to roll out the SendPro C internationally with the expectation that the product will be in all of the major markets within the next 9 months.

We are moving the complexity of mailing and shipping all within 1 device, and that value is resonating with our SMB clients. With the SendPro C, we are seeing a mid-single-digit percent increase in client payment and longer lease terms versus the comparable legacy product, ultimately resulting in higher stream revenue and cash flow over time. We are also focused on activating shipping applications, which is value-based service that comes with the product.

In the second quarter, the labels generated through our SMB products and solutions in the U.S. grew over 35% from the previous year. Additionally, in the second quarter, we started originating third-party financing through our new subsidiary, Wheeler Financial. It's still early days, however we have seen a growing interest in the Wheeler Financial offering and a pipeline that has grown nearly 5x since the mid-March launch. We have closed several deals and ultimately are helping our clients to be more successful in their business.

Within our legacy financing portfolio, our gross finance receivables grew in the second quarter when compared to the first quarter, which is an early sign of stabilization in the financing stream. Clearly, over time, we expect our legacy financing portfolio to decline in line with the market. However, we expect that rate of decline to moderate as we ramp up new third-party financing deals through Wheeler Financial.

The final key message, which Stan presented at Investor Day, was that in aggregate, the key points I just discussed will drive continued growth in revenue and expand earnings and free cash flow over the long-term plan.

To summarize, I am pleased with the overall performance we turned out this quarter despite Software's disappointing results.

Revenue continues to grow on a comparable basis and earnings was in line with our expectations. We are focused on delivering a solid second half of the year, and the progress we have made this quarter has set us up to achieve our full-year targets while also setting the course for our long-term model.

Before I turn it over to Stan, let me spend a minute or so on our capital allocation strategy. First and foremost, our strategy has and remains focused on delivering long-term value. We have and will continue to invest in our portfolio ahead of the revenue, particularly around shipping and shipping-related capabilities.

As our company continues to evolve, we also continue to look at inorganic investments that get us scale in shipping and ensure we are realizing long-term value.

We continue to remain focused on the balance sheet. We know that we have several tranches of debt that are maturing over the next 2 years, and it's our intention to opportunistically pay down debt and proactively refinance the remainder.

Earlier this year, we announced that our Board of Directors authorized an additional $100 million share repurchase program, bringing our total authorization to approximately $120 million. Through the first half of the year, we completed $100 million, having purchased a total of 17.4 million shares, while also returning $18 million in dividends to our common shareholders.

With that, let me turn it over to Stan to take you through the details of the quarter, and then we will take your questions.

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [4]

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Thank you, Marc, and good morning. Our second quarter performance was a substantial improvement from the start of the year and positions us well for the second half to achieve our full-year targets.

Before I discuss the details of our second quarter, it's important to note a few items. As in the past, unless otherwise noted, my statements going forward will be on a constant currency basis when talking about revenue comparisons and on an adjusted basis when talking about earnings-related items including cash flow. Reconciliations of all non-GAAP to GAAP measures can be found in the financial statements posted with our earnings press release and on our Investor Relations website.

Also as a reminder, results in both current and prior periods reflect the new lease accounting standard or ASC 842, which was implemented on January 1. We have posted a file on our Investor Relations website with the updated recast financials.

Additionally, earlier in the year, we announced the sale of direct operations in 6 smaller European markets, which did not qualify for discontinued operations treatment and as such, prior year has not been recast.

Turning to our results. The portfolio continues to shift to higher growth markets. Commerce Services comprised 48% of revenue, which is the third consecutive quarter where it is the largest component of our overall revenue. Our shipping-related revenues made up 35% of total revenue in the quarter and that contribution continues to grow.

For the second quarter, revenue totaled $861 million, which was flat to prior year. When you take the market exits into consideration, revenue grew 2% from prior year.

Looking at revenue by group, Commerce Services grew 14%, SMB declined 4% when you exclude the impact of the market exits and Software declined 20% from the prior year.

Adjusted EPS was $0.21 for the quarter. GAAP EPS was $0.13. GAAP EPS includes charges of $0.04 related to discontinued operations, $0.03 for restructuring and $0.01 for transaction costs.

Free cash flow was $13 million and GAAP cash from operations was $17 million. Compared to prior year, free cash flow was lower primarily due to the timing of working capital, in particular, accounts payable as well as lower net income. This was partly offset by lower capital expenditures and the timing of reserve account deposits.

Looking at free cash flow to date, our attainment as a percentage of the midpoint of our annual guidance is about 2 points lower than prior year. But as we have discussed, as the portfolio increasingly moves to shipping, our second half and in particular, the fourth quarter, is becoming a larger contributor to the full year.

Looking at capital allocation. At the end of the quarter, we had $831 million in cash and short-term investments on our balance sheet. During the quarter, we used free cash flow to return $70 million to our shareholders. We repurchased nearly 12 million shares for $61 million and we paid $9 million in dividends to our common shareholders. Through the first half of the year, we completed $100 million of the new share repurchase authorization that we announced earlier in the year, purchasing a total of 17.4 million shares. This leaves $21 million of share repurchase authorization as of June 30.

Within the quarter, we also used cash for capital expenditures of $32 million, the reduction of $13 million in debt and restructuring payments of $6 million.

From a debt perspective, we ended the quarter with $3.2 billion in total debt, which is approximately $330 million lower than prior year. Last quarter and at our Investor Day, I provided additional context of our debt composition. When you take the implied debt associated with our finance receivables of $1.1 billion along with the $831 million of cash and short-term investments on the balance sheet into account, our implied net debt position on an operating company basis was about $1.3 billion at the end of the quarter.

We remain focused on the balance sheet. We have several tranches of debt that are maturing over the next 2 years, and it is our intention to opportunistically pay down debt and refinance the remainder. We have well-established relationships with our bank group and are structuring our proactive refinancing plan that reflects the diversity of funding sources, and we'll leverage the capital markets as appropriate.

Looking at the P&L, starting with revenue performance by line item as compared to prior year. Business services revenue grew 14%. We had declines in rentals and financing revenues of 4%, support services and equipment sales of 7% and supplies at 15% and software 20%.

The market exits from earlier in the year impacted the year-to-year decline in several of the line items, resulting in a 2 point negative impact on the overall revenue comparison in the quarter.

Gross profit was $380 million with a margin of 44.2%. This is a decline of 4.6 points from prior year, which largely reflects the shifting mix of our portfolio.

SG&A was $276 million, which was a decline of $13 million from prior year. SG&A as a percent of revenue was 32.1%, which is over 1 point lower than prior year.

R&D expense was $23 million or 2.6% of revenue. Compared to prior year, R&D expense declined about $1 million and was relatively flat as a percent of revenue. EBIT was $83 million and EBIT margin was 9.6%. Compared to prior year, EBIT declined $29 million and EBIT margin declined by about 3 points, driven primarily by the gross profit decline.

Interest expense including financing interest expense was $39 million, which was $3 million lower than prior year as a result of the debt we paid down over the course of last year.

The provision for taxes on adjusted earnings was about $7 million. Our tax rate was 15.2%, which reflects the resolution of certain tax examinations in the quarter.

Average diluted weighted shares outstanding at the end of the quarter were $178 million, which is about 10 million shares lower than prior year as a result of our shares repurchased.

Let me now discuss the performance of each of our business segments this quarter. Within our Commerce Services group, revenue was $410 million, which is growth of 14% over prior year. EBIT dollars and EBIT margin were essentially breakeven. EBITDA was $24 million and EBITDA margin was 6%.

In Global Ecommerce, revenue was $282 million, which is growth of 19% over prior year and a 10-point improvement from first quarter's growth rate. Within Global Ecommerce, our domestic parcel services delivered strong double-digit revenue growth as volumes continued to ramp up through our network. We continue to grow volumes both through our services in China as well as our expanding domestic client base. The domestic parcel volume growth we saw this quarter exceeded expectations and continues to validate the strong value proposition and opportunity we have in this market. As a result of the strong opportunity and growth we are seeing, we continued to expand our network by adding capacity.

Shipping solutions also delivered strong double-digit revenue growth as volumes through our shipping APIs and delivery services accelerated in the quarter. The segment's revenue growth was partly offset by a decline in Cross-Border, though the year-to-year decline in our Cross-Border business has improved from prior quarters.

EBIT was a loss of $16 million and EBIT margin was negative 6%, EBITDA was a positive $1 million and EBITDA margin was less than 1%. Margins in the quarter were impacted as we continue to invest in growth opportunities including marketing programs along with investments and operational excellence initiatives.

Additionally, margin was impacted by product and client mix. In the quarter, we saw a majority of revenue growth come from faster-growing but lower-margin services. As we discussed last quarter, some of this is market-driven and some we can influence through actions to be more purposeful to drive mix and productivity. We remain focused and excited about the long-term opportunity for us within this business.

We continue to make investments to drive long-term value and are seeing true operational signs where these investments are paying off. Our average domestic service delivery time is just under 3 business days and 47% of our domestic packages are delivered within 2 business days.

Investing in our network for speed and reliability is one of the keys to success of this business. Scale and density will drive positive EBIT, and our domestic physical volumes this quarter continued to improve, growing 42% to 35 million packages processed.

Within Presort Services, last quarter we spoke about initiatives we are taking to improve the trends in this business. We are encouraged by the early signs of progress we saw in the second quarter. Revenue was $128 million, which was growth of 4% over prior year. Compared to prior year, we grew total volumes processed by 2% to over 4.1 billion pieces in the quarter.

Volumes grew across all categories with the major drivers being Marketing Mail and flats. We also saw an improvement in our revenue per piece. As we have discussed, we are working with a third-party to layer in productivity initiatives and a new pricing strategy, and we have started to see these actions yield results in the second quarter.

Revenue per piece and labor costs per unit have both improved from prior year and from prior quarter, which has resulted in an improved EBIT margin. We expect further improvement throughout the second half of the year. EBIT was $15 million and EBIT margin was 12%, which was an improvement over both prior year and prior quarter. EBITDA was $23 million and EBITDA margin was 18%.

Turning to our SMB group. Revenue was $378 million, which was a decline of 7% from prior year. Excluding the impact of our market exits, revenue declined 4%. EBIT for the group was $125 million and EBIT margin was 33%. EBITDA was $137 million and EBITDA margin was 36%.

North America Mailing revenue was $303 million, which was a decline of 5% from prior year and an improvement in trend from prior quarter. Equipment sales declined 7% from prior year. However, we ended the quarter with a significantly higher backlog compared to prior year.

We continue to make good progress in bringing our SendPro C to market. Since launching, we have placed over 95,000 units and are on track and transitioning our client base into the new product.

Recurring revenue streams declined in line with the average of the last 4 quarters, which is an indicator of the portfolio stabilizing.

Within our legacy portfolio, our gross finance receivables grew in the second quarter when compared to the first quarter, which is an early sign of stabilization in the financing stream.

Business services revenue also grew, which is helped by our new shipping capabilities. EBIT was $113 million and EBIT margin was 37%, which is an improvement from prior quarter and relatively flat to prior year despite higher costs associated with the tariffs related to China. EBITDA was $123 million and EBITDA margin was 40%. EBIT and EBITDA margins benefited from lower expenses.

In International Mailing, revenue was $75 million, which was a decline of 15% from prior year. Excluding the impact of our market exits, revenue declined 3%, driven by lower supplies and service revenue, partially offset by higher rental revenue. We experienced weakness in the U.K. and Germany, which was partly offset by growth in France. EBIT was $12 million and EBIT margin was 16%, which is an improvement over prior year of about 2 points mostly due to lower expenses. EBITDA was $14 million and EBITDA margin was 19%.

Turning to Software Solutions. Revenue was $72 million, which was a decline of 20% from prior year, driven by lower license revenue but partly offset by higher data subscriptions and SaaS revenue. Prior year included several large renewal license deals, which impacted the revenue comparison this quarter. In fact, the second quarter last year was the best performance we saw for a second quarter period in 5 years, hence making it a tough compare.

As we have talked about in the past, our software business tends to be lumpy due to the timing of new deals and renewals. As we look into the second half, we enter with a pipeline of healthy deals. We are confident that this business will deliver full year revenue and EBIT in line with our expectations. EBIT was $2 million and EBIT margin was 3%, which was a decline of 17 points from prior year, mostly due to the decline in license revenue. EBITDA was $4 million and EBITDA margin was 6%.

Let me now address our 2019 guidance. We are reaffirming our full year guidance and still expect revenue, excluding the impacts of currency, to grow in a range of 1% to 3% as compared to prior year; adjusted EPS to be in the range of $0.90 to $1.05; and free cash flow to be in the range of $200 million to $250 million.

As we have communicated, the portfolio continues to shift to growth, specifically around shipping, making the second half of the year and in particular, the fourth quarter, increasingly our largest revenue-, earnings- and cash-generating quarter. As a result, we expect third quarter adjusted EPS attainment to the full year to be approximately 1 point higher than the second quarter's attainment.

Finally, we believe the progress that we have made in the second quarter positions us to achieve our full year guidance.

With that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question here will come from Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [2]

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I guess my first is just on cash flow. I understand it's a back-end loaded year, but can you talk maybe a bit about what the key drivers will be to be able to meet your cash flow target for the year? And then I have a couple of follow-ups.

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [3]

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Sure. So first as we looked at first quarter and second quarter, if you look at the first half in total and compare that on a year-to-year basis, our attainment is roughly 2 points below where it was last year. And if you look at the back half of the year and compare, I think it will become clear that this is a doable target. Last year we did nearly $250 million of free cash flow in the back half of the year. And to hit the midpoint of the guidance, we need to do about $180 million or so.

But here are the drivers. First and foremost, net income as we expect to continue to improve as we go through the back half of the year, and then the other big driver will be working capital. We've mentioned accounts payable specifically in the prepared remarks. And I think if you think about the business shifting more and more to the back end of the year, that will make sense that accounts payable will also improve as you go through the back end of the year. And then we continue to work on things like DSO and cash recognition. So we're confident in our ability to deliver that free cash flow in the back half of the year.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [4]

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Okay. And then when we think about your cash balance, how much cash do you need to run the business? And basically, I'm wondering -- and you mentioned, I think, using some existing cash to pay down debt. And clearly, I assume you're going to try to roll the debt in various ways. So what do you need right now, given the changes in your business model sort of from an interquarter standpoint to make sure that you have enough to run the business?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [5]

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Sure. So let me give you a feel for the overall cash. So today, we have cash and short-term investments of $830 million. That kind of breaks down of $770 million in cash and $60 million in short term.

If you take a look at that, there are different components to the cash, Shannon. First, the cash that's associated with PB Bank is around $250 million right now and that is not accessible for parent needs. We can use that cash to fund our third-party financing initiatives.

If we take a look at what we need from a working capital basis, we basically look at around $300 million to run that business and use that. Now one other aspect of this is the amount of cash that's in the U.S. versus non-U. S. Right now, we're running about 80:20. That will change, and it goes up and down. We continue to work and clean up intercompany loans and things like that. As a matter of fact, we did some work in intercompany loans this quarter and repatriated an additional $24 million, and that was some great work by my tax and treasury teams. So we continue to work that cash balance. But roughly, we need about working capital of around $300 million worldwide.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [6]

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Great. And then just one last question for Marc. From a geographic standpoint, clearly, a number of companies have called out weakness in Europe. I was curious, I know you sold off some of the smaller countries and moved to distribution. But just in general, maybe if you could talk about what you're seeing in end markets? And sort of obviously there has been a pretty good response to your new product. So I'm just curious if you've seen some of the concerns that others have talked about?

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [7]

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Yes. I would bifurcate between macro conditions and micro conditions. So the macroeconomic perspective, I see the same thing that everybody else sees. You see, from a European data perspective, concern -- deeper concern, candidly, in the U.K. as you get closer to Brexit and in Asia obviously issues that are going on in China and candidly, at a bilateral level between China and the United States are concerning.

So those are the macroeconomic things you see, pretty much same as everyone else. From a microeconomic perspective, from a Pitney Bowes perspective, our international business was minus 3%. So pretty darn good performance. And as we contemplate the next several quarters, that performance coupled with the new product gives us a degree of optimism that we will weather whenever macroeconomic storm occurs.

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Operator [8]

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And we'll go to the line of Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [9]

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A few, if I could, just sticking with the business environment questions, Marc. It doesn't sound like you guys feel like you're seeing sort of sales pressure, demand pressure intensifying. Can you just give us some context about what your experience through the quarter was just from like a week-by-week basis with regards to demand environment? And then I have a couple of follow-ups.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [10]

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Yes. It's a good question. And candidly, as we exited the first quarter, we pointed towards momentum as we exited March into April. I would say that same trend continued in the second quarter. If you look at how the second quarter evolved, and I'll put software off to a side for a second because I think that was -- those issues were internal to us, the quarter accelerated both from an SMB as well as a Global Ecommerce perspective. SMB partially because of the new product, partially because some pretty clever marketing programs as well as some very good sales execution had, I would say, increasingly good performance as the quarter evolved. Global Ecommerce, again, I think they performed well, but we're just camped out in Global Ecommerce in a market that's got such strong growth to it that -- we're doing better than market for sure. 42% increase in parcels through our network is a heck of a lot better than the network. But the answer is the same is that the demand environment for us improved throughout the quarter. And candidly, I think that same trend will exist throughout the back half of the year. We're very confident in the back half of the year from a top line perspectives.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [11]

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And could you just provide a little more context with regards to the remarks around adding capacity and the volumes that you're actually seeing in China?

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [12]

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Sure. So added capacity takes on a couple of different dimensions. We've added a couple of different nodes to our network. We've added 4 nodes to our network. And we've consolidated, replaced, kind of upgraded another 2. So that's to both consider increased geographic presence, which is important for the economics of that business, but it's also -- if you look at our sites, candidly, they need to get bigger as they accommodate more volume. So that's how the network will continue to evolve. We'll add more sites. We've got 2 important nodes that are coming online in the East Coast and then 1 in LA that will be important for peak.

So we continue to invest in demand therein and again, we do that -- ahead of demand and we do that because if you think about when we bought the logistics business and they hadn't done that, you lose a lot of clients because you can't accommodate the service levels. So you've got to build the network in front of demand. So that's kind of the basic personality of the investment and the dynamic of that business.

China -- to answer your question on China inbound, again, notwithstanding the tensions between the 2 countries, China inbound is a very fast-growing business for us and one that we're -- and we talked about $100 million businesses in the Analyst Day in May. This will be our next new $100 million business.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [13]

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And just last one for me is, at the Analyst Day you guys gave a lot of good context around plans for sort of handling the debt portfolio holistically. Can you just give us an update there? Maybe talk to sort of how you're thinking about it? I think this was back in May and maybe any context you could give around timing at least at the higher level will be helpful, too.

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [14]

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Sure. So Ananda, first, we remain focused on the balance sheet. We highlighted this in our Analyst Day and you see it as we walk through the rest of our performance here. If you take a look, the first step is going to be our credit facility. Now that goes current in January of 2020, but our intention is to renegotiate that in the back half of 2019. And so that will be the first step as we go through this.

And we do have several tranches of debt that are maturing over the next couple of years. It's our intention to pay down where we can opportunistically and then to proactively refinance the remainder. We have been working with our bank group for a number of months with the treasury team, and we're structuring a proactive refinancing plan that includes the diversity of funding sources and we'll leverage the capital markets as appropriate. So I think what you'll see is that we do this earlier for the credit facility and that we take a proactive approach to the debt maturities.

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Operator [15]

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And next we'll go to the line of Anthony Lebiedzinski with Sidoti & Company.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

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So obviously, I know you guys are pleased with the parcel volumes up 42% and revenue in double digits. So just wondering how should we think about the investments in the market growth opportunities, marketing programs and other initiatives. Just wondering at what point should we expect maybe a moderation in those investments?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [17]

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So first on the investments, I think you have to step back and look at where we're going. And if you look at, you cannot drive 42% volume growth with investing in our current quarter. This comes from a period of time of adding capacity, of adding the right marketing programs and building out the right types of offerings for our clients. If you look at that, clearly, it's resonating in the marketplace with 42%, but that happens over time.

I think there are a couple of important points here. First, we launched over 60 new clients in Q2. So this is a big deal as we go through. We talked about our last 12 months in the last call. We've had better churn metrics. We're starting to see more cross-sell across our offerings. And I think as we look at that, Anthony, we're looking at what does it take to continue to grow this business to scale? So we're going to continue to make those investments. What you will see, though, is as we gain that scale, you'll start to see the improvements in the economics. And as we go through the back half of the year, I think you should expect that you'll see those improve over time.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [18]

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I'll just add a point here. I mean -- I think about this slightly differently. I don't think about when we're going to stop investing. I think about how much of this market I can capture. So this is a market that the economics are driven by scale. So the more scale, the more volume I can put in my network, the more profitable, ultimately, this will be. So as I said, it's unlikely that we're going to get 42% volume growth every quarter. But candidly, as long as you see that kind of demand and you're winning in the market, given how the economics of this opportunity works, you're going to do it. I'm going to do it because there's first mover advantage, and this is network economics at its course. So the more full the trucks can be, the more density you can have in particular lanes, the more profitable you will be. So I think about that question in a slightly different context.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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Got it. Got it. And I did not mean to imply that you would stop investing. I was just wondering as far as kind of where we should see a pickup in profitability.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [20]

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We'll stop investing when the demand begins to moderate.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [21]

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Right. Exactly. So as far as your guidance, just wondering what is kind of the embedded expectation for overall parcel volumes for the full year in 2019?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [22]

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I think as you think about this for the year-end guidance, first, we're reaffirming our full year guidance, and that has the revenue growing 1% to 3%, adjusted EPS of $0.90 to $1.05 and free cash flow of $200 million to $250 million. Now Global Ecommerce is certainly an important part of that. And again, as Marc said, we don't expect that the 42% is going to necessarily continue through the year, but we are expecting a healthy demand through the back half of the year. And that's going to take place in just the physical parcels. But candidly, we also expect to see increases in our print labels through that part of that business. And as we grow here and add new clients, we expect to get the benefits of that scale. So this -- certainly, Global Ecommerce is going to play an important part, and I think that we'll see improvement as we go through the year.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [23]

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The long-term economics were -- configure that business growing parcel volume 25%. I would just say as you point to the back half of the year, Stan captured the dynamics well. The only other thing I would point out is we have wrapped on the currency issues from last year. So if you think about the 2018, the dollar became disproportionately stronger in the second quarter, so the Cross-Border business had been a drag on our overall results. And it's hard to say that when Global Ecommerce grows 19%, but Cross-Border was a drag on the overall results in the first half. I don't think the Cross-Border business is going to get crazy from a growth perspective in the second half, but it should be less of a drag, for sure.

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Anthony Chester Lebiedzinski, Sidoti & Company, LLC - Senior Equity Research Analyst [24]

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Okay. That's very helpful color. And on the Presort side of the business, so -- and you touched on this already in your remarks. I just wanted to get a little bit more clarification. So you brought in a consultant to address some of the issues with profitability. Has that initiative been completed? And are there any other key learnings from that initiative that you want to -- you may want to touch on?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [25]

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So the initiative is not complete. As we start -- as you know these -- when you're dealing with this amount of labor and this type of market, I think it's important to step back and say it's not a point in time. You're going to always drive productivity. I think if you step back, we clearly have progress in Presort. I met with the team earlier this week. And if you take a look, revenue grew 4.4% on 2% volume growth. We saw an EBIT margin improvement of nearly 2 points year-to-year and 1 point quarter-to-quarter. So our work on these -- and remember, these areas include operations, scheduling, dispatch, logistics, pricing. We expect that we'll see continued improvement in the back half of the year. And our arrangement with this consultant ensures that they participate in that and continue to help us drive that.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [26]

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Yes. I would say the diagnostic is mostly complete, although we continue to learn more. I would say just step back and what have we learned? I mean this is a business that has been really successful for a decade and it's been successful by managing 2 basic variables: One is volume through the network and the second is 5-digit capture. Those 2 variables continue to be important, but what happened over the last 12 or 18 months is the labor market tightened up and transportation expense got increased. So the broader lesson is you've got to keep your eye on an array of variables as macroeconomic, in particular labor and transportation conditions evolve.

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Operator [27]

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And our next question will come from the line of Allen Klee with Maxim Group.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [28]

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With Wheeler Financial, can you tell us how much money was put to work providing financing during the quarter? And do you still -- and how much -- or do you still think that the same amount can be put to work for the whole year that you originally thought?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [29]

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Yes. So just a reminder for those maybe who haven't -- aren't as familiar. Wheeler Financial is a subsidiary for The Pitney Bowes Bank that we've set up to help drive small- to middle-market clients acquire assets they need to grow and expand their own business. So this will be third-party lending that can take the form of loans or leases. So we started this and we've been very deliberate. And I used that word specifically. We want to do it right. We want to do it with meeting all the regulatory requirements, the right item for our clients and going out.

So while we have started writing this in Q2, we have not written a lot of new business yet, but we are encouraged. Since launching Wheeler, the pipeline of deals has grown nearly 5x. It's over $125 million now for the overall pipeline. So we're going to see how the progress goes in the second half of the year.

What I would tell you though is that we are going to be deliberate. We are going to do deals that make sense. We've walked away from deals that don't make sense financially. We're looking to address the needs of our clients and do that in a proactive way. So we're going to see how the back half of the year plays out. I think we've gained some momentum here going through Q2. We're encouraged by the pipeline and encouraged by the first set of deals that we've announced.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [30]

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Okay. And then shifting to Global Ecommerce. Can you expand on the comments of margins down to a mix shift to faster-growing areas? What that means and does that have any implications on your longer-term margin guidance for this segment? And then one other thing on the segment is you talk about the domestic market and then Cross-Border. Can you help size us of how much of Global Ecommerce is domestic versus Cross-Border and the growth rates of each one?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [31]

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The margin is a component here. So if you take a look at margins, we step back, we had good volume growth here and delivery of 42%. We've talked about the investments that we've made, but we are seeing a mix in the business. This was contemplated in our Investor Day presentation. And you see that here with what we've announced. Delivery far outpaced the higher-margin returns business and Cross-Border improved, but it's still a drag.

So that's kind of the mix dynamic that you're seeing within the business is delivery, which is the lower margin, has far outpaced returns in Cross-Border. We expect that that's going to ebb and flow, but there are a few different items that I think you need to take into account. First, we are starting to see more cross-sell within that. And what I mean by that is lining up shipping and the deliveries with fulfillment and selling them as bundles. That cross-sell as that grows I think has 2 things. One, we serve our clients better. They get a more end-to-end experience. Two, it also makes it stickier and allows us to build the margin profile across that business. So we expect that margins will improve as we gain scale through this. But as we do look, we continue to see that return is not growing as fast as delivery is. And that will ebb and flow through time.

And your question about domestic versus Cross-Border, we haven't put out the exact sizing on that. What I would tell you is we look at where the opportunity and demand is and that we go after that demand. So China inbound, Marc shared that we expect that could be our next $100 million business. That's growing. We're going to continue to go after that demand, but we're also doing domestic. And when you look at domestic, we've added over 65 new clients this quarter in total. We're going to go where that demand is and where we can best leverage our network. Remember, even Cross-Border comes in and lands within our network domestically. That's why the 2 facilities Marc mentioned in California and on the East Coast are so important. So that's how I'd answer that question, Allen.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [32]

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I'd say also that the lines were a little bit between Cross-Border and domestic. The example that Stan gave about China inbound, I mean candidly, that's not -- you can recognize that neither of the segments. So it's not that we're trying to be opaque here. It's just we want it to be very useful metric to put out there.

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Allen Robert Klee, Maxim Group LLC, Research Division - Senior VP & Senior TMT Analyst [33]

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Okay. And then when you originally -- in your -- I think in your fourth quarter of '18 earnings call when you gave your '19 guidance, you said that if the China tariffs got increased from 10% to 25%, that would have something like $0.04 or $0.05 impact to your guidance for the year. And then that has happened. So is that going to have an impact on your full year guidance or do you think that you're offsetting that through other things?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [34]

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So first, thanks for question on the tariffs. Obviously, there's been a dynamic environment here and it has changed. You're correct, what we said back in the fourth quarter was the tariffs we had assumed in our guidance were based off the 10%. The 25% tariffs are in effect on a good chunk of our business here. And in fact, with this latest announcement of the next tranche of 10% tariffs added on to that, we think that the total impact from tariffs right now is going to be somewhere in the neighborhood of $0.04 to $0.05. So higher than what was originally assumed in our guidance. And as we look at that, you've seen what we've done through the first half, we are doing -- working with our partners to try to mitigate that and offset it, but that is a headwind as we go into the back half of the year.

If we take a look at some of the items we're doing, working with our supply chain partners, it is relocating the source of supply that's coming in. We did some strategic items around inventory and then we've looked at alternative suppliers. Some of these are short term and will help us in '19, some are longer term that will help us in 2020. But it's clearly going to have an impact on the year and that headwind is going to be $0.04 to $0.05 versus an original assumption of $0.02.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [35]

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The other thing I would add is we reaffirm the guidance.

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Operator [36]

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And now we go to a follow-up question from Ananda Baruah with Loop Capital.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [37]

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Marc and Stan, just in the prepared remarks, you had mentioned something about M&A. I believe you said kind of inorganic opportunities. Is there an opportunity or -- here's what I would love, just some context around the broader opportunity in shipping to be able to add scale over time in a material way. Yes, what does the landscape look like there?

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [38]

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Yes. So first of all, I would say inorganic could be an acquisition. It can also potentially be a joint venture or take other forms beyond a pure acquisition. We worked candidly at the landscape of potential acquisition targets for shipping. There are some decent targets out there. I hate the prices. So right now, I would say we're not a likely buyer, given these prices. If price environment changes and the risk of some of these acquisition changes, we'd reconsider. But along with our banking partners, we've taken a pretty robust look at what's out there. And while we're open to it, as I said in the remarks intellectually, not at these price levels.

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Ananda Prosad Baruah, Loop Capital Markets LLC, Research Division - MD [39]

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Got it. Is there anything that you can share just about how their price makes you feel like they're elevated above normal or are they sort of like typical, but you'd want to see them come in?

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [40]

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Yes. So let me double-click, if I could -- I would say the prices are high as you contemplate what's going on in the transportation logistics market overall. So there's a lot of demand. We probably could have gotten through that, but there is a second dimension, which is more concerning, that is the labor laws in particular as it relates to many of the logistics companies are in flux. So that makes it really hard to contemplate the risk associated with any particular acquisition. So I'd say the prices are high. I'd say the risk because of some of the things that are going on in the legal world has become really hard to assess.

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Operator [41]

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And currently, we have no further questions in queue. I can turn the call back over to Mr. Lautenbach, if you have any closing comments.

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Stanley J. Sutula, Pitney Bowes Inc. - Executive VP & CFO [42]

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It's just Stan here. I want to clarify one item. So Allen, you asked about the tariffs. Just so I'm clear, we are reaffirming our full year guidance knowing that, that tariff impact is $0.04 to $0.05.

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Marc B. Lautenbach, Pitney Bowes Inc. - President, CEO & Director [43]

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Thanks, Stan. So listen, I'm going back to one of the other questions. If you had to sum up the quarter in a single word, the word I would choose is momentum. Momentum increased throughout the quarter. As we look at the month of July, we see that momentum continuing to increase.

If you double-click on the complexion of the business, SMB has got strong momentum, partially because of the product announcements and the pending product announcements, partially because a higher backlog that Stan pointed to as we exit the quarter and I would say some pretty darn good sales execution around the world and some marketing programs, in particular some marketing programs that are aimed at competitors that are working.

Within Global Ecommerce, listen, it's just a fantastic market. We're well positioned within what I'd characterize is relatively small niches within the Global Ecommerce market, but niches that we think we can win in and niches, importantly, that we can win and be profitable in over time. And candidly, as we get to the back half of the year, if you think about the revenue performance of the Global Ecommerce business going from 9% to 19% first quarter to second quarter, we see that momentum continuing into the second half of the year. So I really like how we're positioned. Software, candidly, was disappointing in the second quarter. I'd say they've got a robust pipeline of deals in the second half of the year. We're certainly, unfortunately, accustomed to software having some up and down quarters, but they've got a very robust pipeline as we get into the second half of the year, and we continue to be very confident about our channel execution there. So all in all, good quarter but excited about the momentum that we bring into the second half.

With that, we'll close this call and we look forward to talking to you all soon. Thank you.

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Operator [44]

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