Diebold Nixdorf Inc (DBD) 2002 Q2 法說會逐字稿

Good day, everyone. Welcome to the Diebold Incorporated second quarter 2002 financial results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to vice president of Global Communications and investor relations, Mr. Donald Eagon. Go ahead.

Thank you for joining us in our second quarter 2002 earnings conference call. Walden O'Dell, chairman, CEO and president, and Greg Geswein, our chief financial officer, will report on the quarter. Attending as well is Wes Vance, chief operating officer. A replay of this conference call will be made available today on our web site as well as on the phone replay beginning at 1 PM. For those who do not have the replay phone number, let me give it to you now. It is 719-457-0820 and of course you need the pass code, which is 574557. And as a reminder that some of the comments today may be considered forward-looking statements and as a precaution we refer you to the more detailed information that has been filed with the SEC. And now with opening remarks I'd like to turn the conference call over to our chairman, Wally O'Dell.

Thank you, Don. Good morning, everyone. I'm obviously very pleased with our second quarter earnings results. And Greg will cover our results in more detail in a few minutes. But first I'd like to break tradition somewhat with my opening comments by covering something that's very important. I've been extremely concerned about the seemingly endless news about U.S. companies with fraudulent accounting practices and poor ethical business standards. It is truly shaken the confidence of the entire investment community. In fact, I've noticed that our own discussions with the financial community have indicated an increased interest in our accounting principles and ethics. So I thought I'd spend a few minutes talking about how we run our company. I have several key beliefs that I'd like to share. I believe in open disclosure. Look back at our disclosure of a few years ago and compare it with what we disclose today. You'll see a noticeable increase and improvement in this area. I believe in fully disclosing as much as possible only limited by our need to protect our competitive position. I believe in following GAAP. I believe in good, sound accounting practices, following generally accepted principles, and making sure we're not stretching the limits. Therefore, in advance of the SEC certification requirements of financial statements, Greg and I will be going before our audit committee on August 6 and subsequently filing a statement under oath that our financial statements are accurate. I believe in strong corporate governance. We have a very independent, active board, which is committed to ensuring that management is running this business in the best interests of our shareholders. Take a look at our board of directors. You'll notice that I'm the only director that is employed by Diebold. And I am not a member of the audit committee, the compensation committee or any other board committee. Both KPMG, our independent auditor, and Diebold's managing director of internal audit have full and free independent access to their audit committee of the board. In fact, our director of internal audit provides reports directly to the audit committee of the board. I believe in compensation based on performance and creation of long-term shareholder value. Our top executives long-term incentive plan is based on improving return on total capital, earnings and revenue growth, and relative shareholder return over three year periods. I believe in maintaining the highest ethical standards at all times. I want to ensure you I hold my management team to these same high standards. Honesty, integrity, accountability and openness are the principles by which I guide this company. The SEC continues to issue guidelines for companies to follow. And we do intend to continue to fully comply. And we will continue to make improvements in our disclosure, no differently than we continue to make improvements in our business. I hope this has been helpful. In today's environment I can understand why investors have concerns. I just wanted to make it clear to our shareholders how I and the rest of our management team will continue to operate this business with the highest integrity and ethical standards. And now for the second quarter. Diebold had an outstanding quarter in a very difficult market. Great global team at Diebold really delivered again. During this period we had several significant achievements. Record second quarter revenue of 483 million. We achieved a very top of our guidance in earnings per share with excellent year-over-year improvement. Diebold election systems was accretive we gained shares in security solutions in voting. We had excellent growth in Asia. We achieved double digit order growth in every region of the world except Europe middle east and Africa which grew in the high single digits, thereby increasing our confidence in the outlook for the balance of the year and beyond. As a result we achieved guidance in the quarter and we are maintaining our full year guidance of $2.15 to $2.25 earnings per share. Now I'd like to take a moment to talk about our growth initiatives. We are making great progress in this area. The second quarter growth in securities solutions revenue of 29 percent is a real departure from the low to no growth situation we faced before the Mosier (ph) bankruptcy and our purchase of selected Mosier (ph) assets. In voting, we won two major orders. In Georgia, 54 million dollars covering the entire state. And in Alameda County, California, 13 million dollars. These initiatives will strengthen our core capabilities, lead our diversification program, and position us well for accelerated growth in both revenue and profits, and most importantly create value for our shareholders. As a result of these actions, and in summary, for the third quarter, we expect double digit sales growth in earnings of 57 to 61 cents pair share. We expect 2002 sales growth of 12 percent on a total reported basis. Resulting in 2002 earnings per share of $2.15 to $2.25, an increase of 10 to 15 percent versus the $1.96 last year. Considering the market, the economic environment and the tough competition we face, we're delighted to be in a position to deliver these results. You can count on the strong team at Diebold to deliver superior results in a difficult environment. And I'd like to close by personally thanking the thousands of hardworking Diebold associates who made these results possible. Thank you very much. I'll now turn the meeting over to Greg Geswein, our CFO.

Thanks Wally. Good morning everyone. As Wally said, we're pleased to be reporting a solid quarter in a very challenging environment. I'll review the second quarter financials and the outlook for the first quarter and remainder of 2002. For the quarter ended June 30th, Diebold reported net income of 39.8 million dollars or diluted 55 cents per share on record revenue of 483 million dollars. This compares to previous guidance of 50 to 55 cents a share for the quarter, compares to second quarter 2001 net income, excluding realignment, special charges and goodwill of 36.6 million dollars, or diluted 15 cents per share on revenue of 424 million dollars. Including realignment, special charges and goodwill, second quarter of 2001 net income was 27.8 million dollars, or diluted 39 cents per share. On the order front, we're very pleased with the orders booked in the quarter. Worldwide orders for products and services increased in the double digits. The Americas and Asia Pacific, orders increased in the double digit range, (inaudible) orders were in the high single digits. Turning to revenue, as we mentioned total revenue for the quarter was 483 million dollars up 59.Nine million dollars or 14.1 percent. And on a fixed exchange rate basis, revenues grew 14.6 percent. Financial self service revenue increased two percent and 2.4 percent on a fixed exchange rate basis. While the security segment increased sharply up 28.9 percent, as this business continues to benefit from the Mosier (ph) bankruptcy last year. Total financial self service and securities combined increased 7 percent and 7.4 on a fixed exchange rate basis. On a geographic basis, total financial self service for the Americas was up 5.6 percent and 7.6 percent on a fixed exchange rate basis. Asia Pacific financial self service revenue showed solid growth, increasing 28.9 percent and Europe middle east and Africa financial self service revenue was down 16.4 percent and 19.2 percent on a fixed exchange rate basis, given the softness in IT spending in Europe. Turning to margins, total gross margin was 31.2 percent, down from the 32 percent reported in 2001, excluding special charges. Product gross margins decreased to 34.5 percent from the 36.1 percent in the second quarter of 2001. Due to geographic and product mix, including higher security and voting sales which carry slightly lower gross margin. Service gross margins were 27.8 percent, equal to the 27.8 percent reported in 2001. Total operating expenses as a percent of sales was 18.9 percent in the quarter. Even with the 18.9 percent reported in 2001, excluding realignment and special charges. Operating profit for the quarter was 12.4 percent. Down from the 13.2 percent reported in 2001. On net income was 8.2 percent this quarter compared to the 8.1 percent reported in 2001. And both of these exclude realignment and special charges. We continue to maintain a very strong balance sheet with net debt to total capital approximately nine percent. Net debt at the end of the quarter at 100 six million dollars up from 85 million at March 31st. Net debt was impacted during the quarter by the significant working capital requirements of Diebold election systems. We had no net securitizations in the quarter and generated no gains related to securetization. DSO was 76 days versus the 76 days at the end of the first quarter. And inventory turns were five versus the five reported during the same period. As required by SFAS 142, we completed the transitional goodwill impairment test. We recorded a noncash after tax impairment charge of 33.1 million dollars or 46 cents per share, which was within the previously communicated guidance of zero to 50 million. This amount was recorded as a cumulative effect of the accounting change as of January 1st, 2002. The effect of this change was included in the six-month ended June 30th 2002 results. Reviewing the corporate and life insurance. As previously disclosed in prior filings, the company is disputing a claim by the IRS concerning deductibility of interest on corporate-owned life insurance. Management believes the company's facts and circumstances are meritorious and continues to vigorously contest the IRS claim. The company has made no provision for any possible earnings impact if successful a pretax charge of up to 35.3 million dollars in 29.3 million after tax would result. This amount represents tax of approximately 17.6 million dollars interest of approximately 17.7 million dollars. We expect resolution of this claim in March 2003. Now that the IRS has completed its audit for years 1993 through 1996, the company was required to pay the remaining taxes and interests from those years and then pursue a refund for this amount. Therefore, the company has made payments totalling approximately 31.3 million in cash for taxes and interest related to these years. There are two years remaining, 1997 and 1998 under audit, which could result in additional cash payment of up to four million dollars, including interest. No other years after 1998 are subject to this claim. We've also reviewed employee stock options. If expensed, according to SFAS 123, the impact in 2002 would be approximately five cents per share. If grants were fully expensed in the year granted instead of amortizing the expense over the investing period as required by SFAS 123, this expense in 2002 would be nine cents per share. The company recently completed a review of its pension plan. Despite the drop in the stock market, the plan remains overfunded as of July 23rd. Assuming no significant turn around in the stock market this year and return to more normal growth levels in (inaudible) years, the company expects pension income to decline from approximately $5 million in 2002 to approximately three million dollars in 2002. Two million in 2004 and near zero in 2005. Pension income excludes retiring medical expense which is considered to be part of normal operating expense is approximately three million dollars in 2002. Turning to the outlook for the third quarter. Sales growth third quarter will be in the low double digit range. EPS in Q-3 will be in the range of 57 cents to 61 cents per diluted share. Depreciation amortization should be approximately 16 million dollars. For the full year revenue growth of approximately 12 percent. And for 2002, operating profit margins, excluding pension income, for the self service business will be approximately 14 percent, while the security and voting business operating profit margins will be approximately eight percent. Four-year EPS to be in the range of $2.15, $2.25 for diluted share, (inaudible) effect of the cumulative accounting charge which represents a 10 to 15 percent EPS growth over the dollar 96 reported in 2001. For the year our effective tax rates should be approximately 32 percent. This concludes my remarks on the financials. I will now turn it back to Don for questions.

Thank you, Greg. Wally. We'd like to now open it 00:16:58 up for questions.

Today your question and answer session will be conducted electronically. If you would like to ask a question, indicate by pressing the star asterisk key followed by the digit 1 on your touchtone telephone. We'll take as many questions as time permits in the order you signal us. We'll take our first question from Sam Ramraw (ph) with Lehman Brothers.

Good morning. Good quarter. Congratulations.

Thank you.

Just have a couple of questions here. Can you talk about the demand for domesticadiums (ph) in the second quarter, the trends in the quarter?

Our U.S. orders for APMs in the second quarter were good and up over prior year. I don't think I would want to get any more specific than that. But orders were good.

Okay. Can you talk about pricing in the quarter, Wally, in terms of product versus services, and with the services like which regions benefited the most?

Well, with the exception of Latin America, our service business has been good. Pricing is - it's a tough market. Everybody is very eager. Everybody is trying to get cost reductions. Our customers are very eager to do that. So it's a very challenging market in that area, but we've been able to manage that well.

Because I thought your gross margin services business was much higher than I had expected. Was there any contributing factor to it or was it just -

Our service margin was the same as the prior year, which is a combination of providing efficient service, doing a good job. We think those margins are about where they should be.

And lastly, I thought your second quarter SG and A would track your first quarter level in dollar terms at roughly six to six odd million but they came in around 74 and change. I thought (inaudible) would be flat.

Thank you for asking that. The main driving factor that's different is the ramp-up in the voting business. You see the loading business is much more bigger in the second quarter than it was in the first. And there's operating expense associated with providing the product and services and sales and support and all that that goes with these big wins in the voting business. And there was a little bit of increased spending associated with some of our growth initiatives and then I'd say a little bit of engineering investment. But it's in line with prior year rates and it's driven up a little bit by the new voting business.

Lastly, Wally, could you update us on your expectations on voting machine revenues for this year.

108 million for the year.

I'm sorry, you said 108?

108. We the last time talking about 100 to 115. It appears that - I know the latest forecast is 108. A big chunk of that being of course a charge in Alameda. Those two orders that are referenced in the release, both fully ship, of course. And then of course Maryland. It's Maryland, Georgia, Alameda County and others.

Thanks.

We'll take our next question from Kartik Mehta with Midwest Research.

The margin on the voting business you indicated in the release you thought it would be eight percent. Are these the optimal margins for that business or do you have opportunity to increase those margins as we go into next year?

Well, of course that was an estimate and that includes different big orders. Some which have higher margins than others. If you have an aggressive market and big orders, eight percent is probably the right kind of number. It's possible it will be a little higher than that. We've been higher than that on some orders. So I'm not making margin forecasts by business unit. But I would certainly like to see it higher than eight.

And yesterday you announced a strategic movement in India for the ATM market. Could you talk about how that will benefit Diebold going forward in terms of capturing more business in that country?

There's a couple things. For those who don't know, we've announced an activity with Tata in India where one of their operations that Tata Infotech will be manufacturing Diebold product under contract for Diebold. The benefit of that to us of course will be faster delivery times in the Indian market. And the reason we're doing it is the dramatic growth in India that has already occurred and will continue to occur until - that will help us protect our strong market position in India.

Kind of a last question. You have a stock repurchase authorization in place. I haven't seen you buy back much stock. Can you talk about what your thought process is, when you think it's appropriate to buy back stock?

We certainly think the stock is very cheap at these prices. And we have had some significant working capital requirements for the voting business. And we've done a couple small deals. Certainly at these prices we'll probably be buying some stock. And we have authorization to do so.

Thank you very much.

Our next question comes from Jay Stevens with Buckingham Research.

Thank you. Greg, would you give us a depreciation and cap ex estimate for the entire 2002 year. I'd like to have it accurately in the model.

On, I'd say, depreciation and amortization for the year it should be in the 60 million dollar range.

Say that again.

60 million, 60 to 62.

How about cap ex?

It's running a little bit behind what we had originally forecast. We thought it would be 50, 55. Right now it's running well below that. So I would say probably more in the 40 million dollar range.

Any color on the level of receivables and inventory, where they are, where they might be headed in Q-3, Greg?

I would like to make a comment. There was a slight increase in our inventory between the end of the first and end of the second quarter. And that's almost entirely voting equipment inventory to complete these big orders which all ship in the third quarter. Our receivable and inventory numbers are solid. We didn't demonstrate any improvement in the ratios during the quarter. And we certainly expect to moving forward.

And a big chunk of the receivable was in fact came from Diebold license systems. So we should see significant improvement in the second half of the year.

Just one final question for Wally on the guidance on voting machines, does that suggest that after the November election that the bulk of your orders will be shipped for the November election and that in the fourth quarter there will be a slowing as the states all take a breather and look at next year?

Absolutely. What you will find in the voting business is almost no revenues in the fourth quarter related to new equipment shipping to customers. They want to get their equipment in hand well in advance, with that, test it, put it in place, get people trained on it. So you won't see a lot of October, November, December volume. I can't remember the right number right now but of the 108 it's probably only seven or eight of that is in the fourth.

Thanks Wally. Nice quarter.

If you would like to ask a question, press star 1 on your touchtone telephone. We'll now hear from Matt Summerville with McDonald Investments.

I wanted to talk, Wally, about Europe a little bit. Can you give us some more color on the situation you encountered in the second quarter? Additionally, can you also put that in the context of as we look into the third quarter in the back half of the year, what you're seeing on the forward book. I know you talk about high single digit increases, that gives you increased conviction that the third and fourth quarter are indeed going to be better than what we saw here in the second?

I think it's clear the second quarter year-over-year comparisons are the worst of the year. The fist wasn't good. The second was bad. Our orders in the first half were reasonable. And our third quarter and fourth quarter numbers year-over-year comparisons will be significantly better.

Will be positive?

I don't have the number in front of me at the moment. Third quarter revenue - let's say about neutral at the moment. But I'll have to actually check that. Dramatically better year-over-year comparisons in the third than in the second and approximately neutral - we're having people checking numbers right now in the room here. If we don't have it we'll get back to you off line.

Wally, can you talk about countries specific trends in Europe, are there specific areas that are performing better than others. Are there specific areas of more dramatic weakness as you look across the continue net.

Yeah, it varies by country. We had good results in eastern Europe and I believe in Italy. Less favorable results in France and Germany. We're not that significant in the UK but our results were okay there. I think that's about all I can add at this point.

That's helpful. I appreciate that. And then, Greg, looks like your tax rate took a tick down, maybe 80 basis points or so from the first quarter. Can you talk about what happened there and what we should be modeling for the tax rate in the third and fourth.

This is Wally answering that question. We look at what the rate should be for the year and we try to use it. What we've determined with some competence is that this rate should be 32. We have a slightly higher rate than that in the first. So you see a slightly lower rate than that in the second. But you should plan on the third and the fourth being 32 as is the first six months.

You're continuing to show nice gains in Asia compared to the numbers a year ago. Do you expect that trend to continue in the back half? How is demand holding up there?

Demand is holding up fine. We expect to continue. I've never been happy with our low market share there which we're working hard to improve. I guess you can see it in the numbers.

Thanks a lot, guys.

Moving on we'll hear from Jeff Imersham (ph) with Shareholder Value Marketing.

Quick question on the ATM business, particularly the competitive, where you seem competitively right now, particularly the footprint and the national NCR deal with 7-Eleven and how you would compete in that footprint.

I don't want to get into competitive discussions. I can tell you we like our offerings. We like our functionality. We like our software solution capability. And I would say that we have been gaining market share. You'll have to see everybody else's numbers before we can know how the quarter turned out.

Great. Thank you.

Final reminder. If you would like to ask a question today, press star one. We'll take a follow-up question with Kartik Mehta with Midwest Research.

I wonder if you could talk about the test you have going on with the major retailer, how that test is going and what the acceptance level is from a consumer standpoint as you've seen it so far.

I'd like to turn that one over to Wes Vance, our chief operating officer, who is in the room this morning.

We have a number of pilots going on with retailers. Do you want to be more specific?

I'm more interested in the WalMart test you're going doing.

We have a number of different things that are going on with WalMart. Maybe what we can address more openly is some of the things we've talked about in the past, the money order pilot we have in place with WalMart. That's been very effective. We've seen an increase in the volume of the ATM itself as well as continued climbing volumes for money order demand at the terminal. So a pretty positive experience with respect to that particular pilot.

How did Brazil perform in the second quarter as far as pro comps is concerned?

They were very favorable for us versus last year. So they had a reasonable quarter.

Would you anticipate that to continue throughout the year?

We have a forecast significant year-over-year improvement. As you may know the currency there has certainly crated it's approaching three to the dollar. So we haven't commented on our foreign exchange impact. As one might have expected that the change to be helpful in the quarter. It certainly was in Europe. But the Brazil currency has dropped enough to offset that. So they're right next door to Argentina and dealing with all the problems there. So we've had gratifyingly good results there. But translation has impacted the size of that business when we report it in U.S. dollars. But so far they're approximately on the original year's plan in terms of operating profit dollars.

Thank you very much.

Gentlemen, there are no further questions. I'd like to turn the call back over to you for closing remarks.

I want to take the opportunity at this time to thank everyone for joining us and if you have any further questions please feel free to call me or John Chrisoff (ph). Have a great day.

That concludes today's conference call. I'd like to 00:33:46 thank everyone for their participation.