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Pitney Bowes Inc. (NYSE:PBI)

Q4 2013 Earnings Conference Call

January 30, 2014, 8:00 AM ET

Executives

Marc Lautenbach - President and Chief Executive Officer

Michael Monahan - Executive Vice President and Chief Financial Officer

Charles McBride - Vice President, Investor Relations

Analysts

Ananda Baruah - Brean Capital

Shannon Cross - Cross Research

Kartik Mehta - Northcoast Research

George Tong - Piper Jaffray

Glenn Mattson - Sidoti

Operator

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.

Charles McBride

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?

Marc Lautenbach

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 margins all increased year-over-year in the fourth quarter. Each of these measures is an important indicator for the quarter and highlights our progress towards our overall transformation.

Mike will provide more color on our fourth quarter results in a few minutes, but suffice it to say, I was very pleased with our performance against these important metrics. Operationally, during the quarter, we made solid progress in terms of our strategic objectives. As we've done in previous quarterly conference calls, I would like to continue to describe our progress in three chapters, stabilization of mailing, operational excellence, and growth of our Digital Commerce businesses. As Mike and I will outline, we are making progress against the key measures that we would hold ourselves accountable for in this transformation.

In terms of the first chapter of our transformation, stabilization of mailing, we said we could do better than the market and stabilize these important revenue streams. In the fourth quarter, the aggregate of our physical mail businesses, small medium business, presort, and production mail, we declined less than 1% at constant currency. The decline in the SMB Solutions group continued to moderate. It declined at 2% year-over-year on a constant currency basis. And once again, equipment sales for all of Pitney Bowes, an important future indicator of our mail business, increased in the quarter.

Similarly, we made significant progress achieving operational excellence in the fourth quarter. Again, we are using benchmarks inside and outside our industry to gauge our progress and expect progress to result in improvements in the income statement and the balance sheet.

SG&A as a percent of revenue decreased 320 basis points in the fourth quarter versus the fourth quarter in 2012, and the absolute decrease in SG&A for the quarter was $27 million. As a reminder, in May, we committed to reducing our SG&A run rate by $100 million to $125 million as we exit 2014. Against this benchmark, we reduced our SG&A by $71 million in 2013 and are on track to meet or exceed our original commitment. We continue to see material opportunities to become more efficient, while also maintaining a level of investments to enhance the performance of our company and grow our business for future.

In addition to productivity improvements in our current portfolio, we've also been addressing fixed costs remaining from divestiture of our PBMS business, which was close to $1 billion business or 20% of our pre-sale revenue base .

In terms of our balance sheet, in May, we described $100 million of opportunities to improve our working capital position as part of our operational excellence initiatives. As a result of aggressive actions to manage inventory levels and DSO improvements, we achieved that goal in 2013 much ahead of the schedule I had envisioned. The combination of our strong operational performance coupled with our working capital improvements produced a strong cash performance for the year.

There are lots of different measures of operational excellence for a balance sheet, but one important element is access to capital. Key indicators such as credit default swaps and cash bond spreads have narrowed significantly over the course of 2013. We expect to continue to fortify our balance sheet in the first half of 2014. The strength of our balance sheet is the basis of our competitive dividend and over time provides us the operational flexibility to continue to unlock value in Pitney Bowes.

The final chapter of our strategic transformation was to grow our Digital Commerce business. In the fourth quarter, our Digital Commerce business grew 18% at constant currency. This growth was powered by our ecommerce business, which continued to show double-digit sequential growth. Importantly, our software revenue also grew for the quarter. We continue to see great opportunity in our Digital Commerce businesses. Again, in aggregate, these markets represent over $40 billion of opportunity.

Finally, in the fourth quarter, we signed a multi-year licensing deal with Twitter. We also announced a partnership with Broadridge Financial Solutions to create a digital communications exchange which will sit atop Amazon Web Services infrastructure. We believe that this is an important step for digital mail and Volly business, and are excited about its prospects going forward.

Before I turn it over to Mike, let me remind everyone that we're on a multi-year journey to transform Pitney Bowes business. By its very nature, transformations take time and are lumpy. While we're very pleased with the results and the progress we're making, we're still in the very early stages. Clearly, there is much more to do. In fact, we've just scratched the surface. However, performance in the last couple of quarters gives us confidence that we are making a case and focused on the right things to improve and grow our business.

Now, let me turn it over to Mike.

Michael Monahan

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 services. We're also in the early stages of implementing a new ERP system to streamline and consolidate many of our back-office operations. This program will ramp up in 2014 and is expected to be a multi-year process. We expect to make a significant investment in systems this year, but anticipate that our ongoing initiatives to reduce SG&A expense will more than offset the incremental cost. We have more wok to do, but we are well on our way to achieving operational excellence for the company.

Finally, our third objective is to invest in growth areas. In 2013, we continued to invest in our ecommerce offerings, which grew sequentially at a high double-digit rate. In our software business, we brought a new leadership with skill sets that support our new go-to-market strategy. This strategy is realigning our software sales organization with industry and product specialization and our focus on large strategic accounts. Our investment in this new software go-to-market strategy is expected to stimulate revenue growth in the software space.

Other actions we've taken include the sale of the management services and Nordic furniture businesses and the purchase of our joint venture partner's minority interest in our Brazilian business. We will also continue to rationalize our portfolio of products in the geographies in which we operate in order to improve margins and profitability.

Additionally, we completed the first phase of realigning the reporting of our business segments, consistent with how we now manage the business. Last year, we introduced segment reporting for the small and medium business with our SMB Solutions group, the Enterprise Business Solutions group and the Digital Commerce Solutions segment. Starting in the first quarter of 2014, we will shift the reporting of our shipping solution from our SMB group where it is currently reported to Digital Commerce Solutions. We're making this change, because this is how we will manage the business in the future, given that our shipping solutions are now principally software-based and are more closely aligned with our parcel management strategy that includes ecommerce.

Finally, we've taken a balanced and disciplined approach to our capital allocation strategy. We've strengthened our balance sheet by reducing debt in 2013 by approximately $675 million. These actions are helping to transform Pitney Bowes into an organization that can help our clients meet the ever-changing challenges of doing business. We and our clients are already benefiting from these initiatives, as evidenced by our financial results, and we categorize 2013 as a year of realignment and we're looking forward to 2014 as a year of investment and profitable growth.

Now let me take you through our fourth quarter and full year results. Turning to our financial performance four the fourth quarter, revenue totaled $1 billion, which was an increase of 2% over the prior year on both the reported and constant currency basis. Revenue for the quarter on a constant currency basis grew 18% in the Digital Commerce Solutions segment, grew 3% in Enterprise Business Solutions group, and declined 2% in the SMB Solutions group. The revenue results in the fourth quarter reflects a continuation of the year-over-year improving trends that the company has delivered throughout the year.

Adjusted earnings per diluted share from continuing operations for the quarter was $0.53. GAAP earnings per diluted share from continuing operations was $0.39, which includes a restructure charge of $0.11 per share and a charge of $0.02 per share related to cost associated with the retirement of debt originally scheduled to mature in 2014. GAAP earnings per diluted share for the fourth quarter were $0.44, which includes income of $0.05 per share from discontinued operations.

Free cash flow during the quarter was $195 million. And on a GAAP basis, we generated $131 million in cash from operations. During the quarter, our cash flow was used to return $38 million to our common shareholders in the form of dividend and we made $18 million in restructuring payment.

Turning to our financial performance for the full year, as I noted earlier, our results are in line with the guidance we provided. For the full year, revenue totaled $3.9 billion, which was a decline of 1% when compared to prior year on both a reported and constant currency basis. Adjusted earnings per diluted share from continuing operations for the full year was $1.88. GAAP earnings per diluted share from continuing operations were $1.49, which includes the restructuring charge of $0.21 per share and asset impairment charge of $0.08 per share and debt management cost of $0.10 per share. GAAP earnings per diluted share for the full year were $0.70, which includes the loss of $0.78 per share from discontinued operations.

Free cash flow the full year was $635 million. And on a GAAP basis, we generated $625 million in cash from operations. Overall cash flow benefited from the company's aggressive actions to improve working capital throughout the year as well as lower capital expenditures. During the year, our cash flow was used to return $189 million to our common shareholders in the form of dividend and we had $60 million in restructuring payment.

The remainder of my discussion will focus on the results of the fourth quarter. All income statement-related references and net results are on an adjusted basis. Adjusted earnings before interest and taxes or adjusted EBIT was $195 million this quarter or 3% higher when compared to prior year. Adjusted EBIT margin was 18.9%, which was 20 basis points higher than 2012. Adding back depreciation and amortization, adjusted EBITDA for the quarter was $239 million or $1.17 per share.

SG&A for the quarter was $365 million, a decline of $27 million or 7% versus the prior year. As a percent of revenue, SG&A was 35.4%, which was an improvement of 320 basis points over the prior year. In the quarter, we recorded a pre-tax restructuring charge of $30 million where actions aligned with our previously announced plan to reduce cost.

Net interest expense, which includes financing interest, was $45 million, which was relatively flat to the prior year. Average outstanding borrowings during the quarter were $666 million lower than the prior year. The average interest rate this quarter 5.4%, which was 74 basis points higher than the prior year. The effective tax rate on adjusted earnings for the quarter was 25.1% versus 28.2% last year. This quarter's tax rate includes benefits related to the favorable resolution of certain tax issues.

Looking at the balance sheet, we had $3.3 billion of debt on the balance sheet at the end of the quarter, which was $671 million less than at the end of last year.

Now, I'd like to discuss the fourth quarter results for each of our business segment. This information can also be found in our earnings press release, in the slides that we posted to pb.com website under the Investor Relations section. North American Mailing revenue declined 4% versus the prior year. Overall North American Mailing revenue had the lowest rate of decline in some time. In the U.S., equipment sales revenue grew 2% versus the prior year, in part benefiting from the new go-to-market strategy. Total equipment sales growth, however, was offset by lower sales of non-mail related multi-function devices in Canada.

Recurring revenue streams declined at a lesser rate than prior year, continuing a year-over-year improvement trend, benefiting in part from positive growth in suppliers' revenue. EBIT margin was 42.8%, which was an improvement of 470 basis points versus the prior year as a result of improved gross margin and ongoing cost reduction initiative. During the quarter, North American Mailing made substantial progress implementing its new go-to-market strategy, which is enhancing the client experience and improving the sales process, while at the same time reducing costs.

International Mailing revenue for the quarter was $159 million and EBIT was $19 million. Year-over-year revenue grew 1%. Revenue benefited from slight growth in both equipment sales and recurring revenue streams as the international market continued to experience improving population trend. EBIT margin was 11.6%, which was a decline of about 390 basis points versus the prior year due to the mix of products sold and higher equipment cost related to currency.

Turning to the Enterprise Business Solutions group, production mail revenues for the quarter was $151 million and EBIT was $21 million. Year-over-year revenue increased by 6%. Revenue benefited from increased production print installation globally as well as the installation of sorter equipment in Europe. Revenue also benefited from ongoing growth in supplies. EBIT grew 1% versus the prior year. EBIT margin was 13.7%, which was a decline of about 70 basis points versus the prior year as a result of the higher proportion of printer sales, which are lower-margin products compared to sorting equipment.

Presort Services revenue for the quarter was $108 million and EBIT was $18 million. Year-over-year revenue was flat to the prior year, which is the net result of an increase in new business being offset by a decline in revenue per piece of mail process. EBIT margin was 16.9%, which was a decline of about 500 basis points versus the prior year in part due to increased labor cost associated with process and year-end volume. The presort business also experienced pressure on its margins this quarter and throughout the year because of the USPS postal rate case change that occurred at the beginning of 2013. The rate case reduced the discount spread on certain presort categories of mail. As a result, we've taken a number of actions to reduce cost to mitigate the impact of this change.

Turning to the Digital Commerce Solutions segment, revenue was $176 million and EBIT was $23 million. Year-over-year revenue grew 17% on a reported basis and 18% on a constant currency basis. This growth was driven primarily by an increase in transactions associated with the company's ecommerce solutions for cross-border package delivery. Revenue also benefited from growth in services related software revenue, but it was partially offset by a decline in marketing services revenue. EBIT margin was 12.9%, which was an improvement of 370 basis points versus the prior year as a result of the leverage related to the scaling of our ecommerce business as well as lower net investment in Volly. EBIT margin, however, was again impacted by the continued investment in infrastructure and software development for ecommerce.

That concludes my comments on our financial performance of this quarter. Now, I'd like to discuss our 2014 guidance.

The company expects to further align business performance in 2014 with what we outlined at our 2013 Analyst Day. Additionally, we expect there will be no significant changes in the economic and postal environment in 2014 as compared to 2013. Revenue growth is expected to improve in the Digital Commerce Solutions segment, as it benefits from the anticipated growth in ecommerce and Software Solutions businesses. Last, some modest revenue growth is expected in the Enterprise Solutions group against the strong 2013 production mail comparable.

Also, we expect that the 2014 postal rate case will have a modest positive impact relative to 2013 on Presort Services based on our network efficiency. We anticipate a continued improvement of our revenue in the SMB Solutions group as a result of ongoing improving trends in equipment sales and recurring revenue stream. U.S. Mailing business should also benefit modestly from the 2014 postal rate case change. For the first time, the United States Postal Service is offering a $0.01 postage discount from either users.

We expect ongoing reductions in SG&A costs, which would more than offset the incremental expenses associated with the investment in the new ERP system. The company expects a tax rate in the range of 29% to 31%. This range reflects our changing business mix. Free cash flow in 2014 will reflect lower cash from operations as a result of the sale of the management services business, the further stabilization of finance receivables and incremental capital investment related to the new ERP system.

Based on the assumptions I just outlined, the company's 2014 guidance is as follows. Revenue, excluding the impact of the currency, to be in the range of 1% decline to 2% growth when compared to 2013; GAAP earnings per diluted share from continuing operations to be in the range of $1.75 to $1.90, which includes expenses of approximately $0.10 related to our new ERP system. Excluding this incremental expense and adjusting for the $0.15 of tax benefit in 2013, underlying earnings per share are showing meaningful year-over-year growth.

Free cash flow is expected to be in the range of $475 million to $575 million. This guidance excludes any unusual item that may occur or additional restructuring actions as the company implements plans to further streamline its operations and reduce costs.

That concludes my remarks. Operator, you may now open the line for questions.

Question-and-Answer Session

Operator

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

Ananda Baruah - Brean Capital

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?

Michael Monahan

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.

Ananda Baruah - Brean Capital

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?

Marc Lautenbach

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.

Ananda Baruah - Brean Capital

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.

Marc Lautenbach

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.

Ananda Baruah - Brean Capital

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?

Lautenbach

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.

Michael Monahan

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.

Operator

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

Shannon Cross - Cross Research

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?

Marc Lautenbach

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.

Shannon Cross - Cross Research

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?

Marc Lautenbach

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.

Shannon Cross - Cross Research

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?

Michael Monahan

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.

Operator

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

Kartik Mehta - 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?

Michael Monahan

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.

Kartik Mehta - Northcoast Research

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?

Michael Monahan

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.

Operator

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

George Tong - Piper Jaffray

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?

Michael Monahan

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.

George Tong - Piper Jaffray

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?

Marc Lautenbach

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.

George Tong - Piper Jaffray

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?

Marc Lautenbach

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.

Marc Lautenbach

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.

George Tong - Piper Jaffray

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?

Michael Monahan

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.

Operator

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

Glenn Mattson - Sidoti

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?

Marc Lautenbach

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.

Glenn Mattson - Sidoti

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

Michael Monahan

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.

Glenn Mattson - Sidoti

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

Michael Monahan

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.

Glenn Mattson - Sidoti

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

Michael Monahan

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

Operator

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

Ananda Baruah - Brean Capital

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.

Marc Lautenbach

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.

Ananda Baruah - Brean Capital

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?

Marc Lautenbach

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.

Operator

There're no further questions. Please continue.

Marc Lautenbach

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.

Operator

Thank you. Ladies and gentlemen, this conference will be available for digitized replay beginning today at 10:00 AM Eastern running through Saturday March 1, 2014, at midnight Eastern Time. You may access the AT&T playback service by dialing 320-365-3844 and entering the access code of 313721.

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

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