Diebold Nixdorf Inc (DBD) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to Diebold, Incorporated First Quarter 2003 Financial Results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice-President of Global Communications and Investor Relations, Mr. Donald Eagon. Please go ahead, sir.

Thank you, Justin, and good morning, everyone. We're pleased you can join us. With remarks on the quarter today will be Wally O'Dell, Chairman and CEO, and Greg Geswein, Chief Financial Officer. And joining Wally and Greg is Wes Vance, Chief Operating Officer.

A few notes before we get started. A replay of this conference call will be made available today on our Web site, as well as over the phone, beginning at one p.m. The phone replay number is 719-457-0820, and use passcode 723000.

As a reminder, some of the comments today may be considered forward-looking statements. And as a precaution, we refer you to the more detailed information on file with the SEC. And while we're on that topic, in meeting the recently published SEC Reg. G, which is conditions for disclosing non-GAAP measures, this first quarter earnings release has been furnished to the SEC in form 8-K and is on the EDGAR database now.

And now, I will turn the phone conference over to Wally O'Dell for opening remarks. Wally?

Thank you, Don. Good morning, everyone. Thanks for being part of our call today. First, I would like to take a moment to thank all Diebold employees for their hard work which made our excellent results possible. Also, I would like to thank our 14 employees who were called to action to defend our country in the world in the successful Iraq war. I also wanted to recognize the support and sacrifices of the families involved. Clearly, Diebold employees and their families are making the world a better place in many ways.

I'm very pleased with our first quarter results. We were once again able to report diluted earnings per share well within our previously announced guidance, with diluted earnings per share of 36 cents on revenue of 410 million. We were able to do this despite a very challenging business environment in most of the world. Importantly, our free cash flow was excellent, with over $74 million in the quarter, compared to slightly negative cash flow in the first quarter of last year. In addition, and very importantly, we expanded margins slightly in each of our lines of businesses: financial self-service, security and voting. We were encouraged by order growth in the quarter, with total orders increasing in the high single-digit range led by Asia-Pacific and North America.

Turning to revenue, we are particularly pleased with our very strong growth in the security business, which was up over 22-percent versus first quarter 2002. Since we have now owned the former Mosler assets for more than a full year, this shows our continues organic growth as we continue to make end roads into the financial retail and government security markets. Our voting business revenue decreased versus the first quarter of 2003 due to the timing of shipments to fulfill some significant orders. However, we remained confident in our ability to achieve our annual growth targets in this business and expect to grow between 15 and 25-percent this year on top of our extremely successful 2002.

Our global self-service business increased slightly on a fixed exchange rate basis. Europe was once again weak as the economic environment, particularly in Germany, continued to negatively impact spending. Asia-Pacific increased significantly again as demand in that region remains strong and we continue to gain share. The Americas region was up slightly during the quarter, and we remained confident that the demand will strengthen during the second half of the year.

In addition, we began the rollout of our new generation financial self-service platform, introducing a new level of technology and functionality in the marketplace. This new solution, Opteva, coupled with our open, multi-vendor software offering called Agilis, will stimulate global demand for self-service and enable us to remain the clear global leader in financial self-service profits and become the global leader in revenue. We should see positive results from these offerings in the second half of this year. This new generation of offerings will give us significant global momentum for years to come.

Looking forward to the second quarter, we expect revenues to increase in the mid single-digit range versus the prior year period. We expect earnings per share of 54 cents to 59 cents, including pension expense of approximately one cent compared to pension income of one cent in the second quarter of 2002. We expect full-year earnings per share to be in the $2.32 to $2.42 range. This compares to $2.20 in 2002, and is an increase of nine to 13-percent excluding pension impacts and a six to 10-percent increase after absorbing the pension expense change. Given the environment we face, these results will clearly surpass industry and stock market norms.

In conclusion, thank you for your support, and we look forward to another year of growth and remain confident in our ability to continue to deliver superior performance in 2003. And now, I'd like to turn the meeting over to Greg Geswein, our CFO.

Thanks, Wally. Good morning, everyone. I would like to begin by briefly reviewing financial highlights for the first quarter and provide you with our outlook for the second quarter and the remainder of 2003. Net income was 25.9 million, or diluted earnings per share of 36 cents. The EPS was in the range of the company's previously guidance of 34 - 39 cents a share. This compares to a first quarter 2002 net loss of $6.6 million, or diluted loss per share of nine cents, after cumulative effects of a change in accounting principle related to goodwill. Before this effect, 2002 first quarter income was $26.5 million, or diluted earnings per share of 37 cents. This included pension income of one cent per share versus the one cent pension expense this year and almost $2 million gain from late securitization last year that didn't recur this year.

On the order front, worldwide orders for product and services increased in the high single-digit range. The Americas increased in the high single-digit range led by strong North America orders, while Asia-Pacific, again having strong orders, increased in the high double-digit range. Europe, the Middle East and Africa orders decreased in the high single-digit range. As Wally mentioned, security orders remains strong, increasing well into the double-digits.

Turning to revenue, total revenue was $410 million, up 2.3-percent and 3.7-percent on a fixed exchange rate basis. Financial self-service was down 1.1-percent, but increased .7-percent on a fixed exchange rate basis during the quarter. Security revenue was once again very strong during the quarter, up by 22.8-percent as a result of revenue growth in the financial industry, government and retail markets.

During the quarter, the revenue was impacted negatively by year-over-year devaluations of Brazilian real, offset in part by the strength in Euro and certain Asian currencies. The impact in the first quarter was approximately $5.6 million versus the prior year. Given current exchange rates and assuming a one-percent per month evaluation of the Brazilian real for the remainder of the year, exchange rate impacts would be slightly negative in the second quarter and positive in the third and fourth quarters, with a total year slightly positive.

Looking at gross margin, total gross margin was 30.3-percent, up almost a full point from the 29.4-percent in 2002. We saw improved margins in both product and service during the quarter. Product gross margin increased to 35.3-percent from 33.5-percent with higher margins in each of our three business units and a lower mix of voting business in the quarter. Service margins were up a point as we saw improvement on a global basis.

Operating expenses for the quarter were 20.1-percent as compared with the 19.4-percent in 2002. The increase in operating expenses was due entirely to change in pension expense and the inclusion of the voting business for a full quarter. Remember that we didn't close on the voting business until the end of January last year - lowered pension functions and the market downturn causing net pension expense in the first quarter of 2003 compared to pension income in the first quarter of 2002. As noted earlier, this resulted in an adverse impact of approximately $2 million in the first quarter of 2003 versus 2002.

R&D was up slightly due to expenses related to the launch of our new generation ATM solution. Operating profit was 10.2-percent of revenue, up from the 10-percent in 2002, driven by the improved gross margin and offset in part by the higher operating expenses. Op rating margin increased slightly in the financial self-service business while overcoming the impact of the pension expenses.

Net income on a comparable basis was 6.3-percent in 2003 versus the 6.6-percent in 2002. And again, we did not have the benefit of almost a $2 million gain on the securitization of lease receivables which did not reoccur in this quarter.

We continue to maintain a very strong balance sheet with a net debt to total capital ratio of approximately one-percent, down from the six-percent at year-end. As Wally mentioned, free cash flow improved dramatically from the same period for the prior year improving from a negative eight million in Q1 2002, to 74 million positive in the current quarter. The improvement resulted from increased collection of receivables relating to deferred revenue and better managing of working capital.

Inventory turns improved to 5.5 from 4.9 while DSO remained constant at approximately 90 days. DSO is impacted by delayed international collections and expected to improve throughout the remainder of the year. Net cap (ph) was reduced by 49.2 million from the end of 2002, going from 62.5 million at the end of 2002 to the 13.3 million at the end of Q1 2003.

While we currently do not expense (ph) stock options, the impact in 2003 if we did so would be approximately five cents per share, compared to the four cents in 2002.

Now, turning to the outlook. We expect second quarter revenue will increase in the mid single-digit range, and we expect EPS in the range of 54 cents to 59 cents a share. And again, we'll have an impact of approximately $2 million year-over-year negative impact from pension. We expect full-year fixed exchange rate revenue growth of five to eight-percent, with our financial self-service business expected to grow two to four-percent, while security will continue strong double-digit growth with security growth of 10 to 20-percent while voting growth of 15 to 25-percent.

In North America, we remained optimistic about upgrade and replacement growth from regulatory drivers and the move to advance function hardware, as well as open software architecture. We continue to see strong growth in Asia-Pacific, especially in the areas of China and India where we have built and invested in strong sells, service and manufacturing operations. Latin America outside of Brazil continues to be a challenge in 2003 as the economic and environment remains uncertain there. We are optimistic about self-service business prospects in Brazil and are encouraged about the improvement of the political and economic risks there.

Moving to the security business, we expect demand to remain strong as we continue our strategy of growing in the financial market while making additional end roads in the retail and government markets throughout the rest of 2003, resulting in gross expectations in excess of 15-percent. Our tax rate should remain at approximately 32-percent or lower for the year.

As noted earlier, we experienced strong cash flow in Q1 and expect to generate free cash flow of 175 to $200 million for the total year. Our earnings per share guidance for 2003 is in the rage of $2.32 to $2.42 per share, which again includes the pension expense.

In conclusion, we're very pleased with our results in Q1 and delivering another earnings that we indicated to the Street and are excited about the opportunities for the rest of the year. Not only are we confident that we have the right strategies in place, we have a great balance sheet to help to us continue to focus on additional growth opportunities that compliment these strategies. Thank you, and I'll turn it back to Don now for questions.

Justin, we're ready for questions and hopefully some good answers.

Thank you, Mr. Eagon. The question-and-answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you're joining us using a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our equipment. We will presume the order that you signal us, and we'll take as many questions as time permits.

Once again, if you would like to ask a question, please press star, one at this time. We'll pause just a moment to assemble the roster.

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

Good morning.

Good morning.

Good morning, Kartik.

I just wanted to get a little more sense of the total order - you said total orders for products and services increased high single-digit. Was it more hardware or service related from an order growth perspective?

It's more product related, Kartik. We don't generally track orders for service that closely. It's so - largely what you see for orders for service is equal to revenue.

OK, OK. If you look at Europe, is it - is the issue in Europe aggressive competition? Is it lack of demand? Is it a market share issue? What is behind the ...

It is not a market share issue; it is the first two things you mentioned. Very aggressive multi-competitive environment combined with very weak economics make a brutal environment in Europe.

And kind of a last question - and I think a question we've talked about at every conference call - you guys did a great job improving free cash flow. Looks like you paid down debt. Any thoughts of buying back shares, or is the acquisition pipeline still fairly strong that you'd rather wait for an opportunity?

Well, combination of things, Kartik. We did buy a few shares back in the quarter just ended. Greg, was it 65 ...

We bought back 50,000 shares.

... 50,000 shares. So, we bought a few shares back on weakness, and again, to demonstrate some confidence. You know, we're not aggressive share buy-back guys, but we will continue to buy back shares, you know, very carefully. And yes, it is an absolutely opportunity rich environment, Kartik, and strong balance sheets are king as far as I'm concerned.

So, have prices of the opportunities that you have looked at, are they declining?

Certainly share prices of targets have dropped dramatically. I think it takes a little time for their expectations for what they might be able to achieve to drop.

Thank you very much.

You're welcome, Kartik.

And proceeding to Reik Read with Robert W. Baird.

Hi. Good morning,.

Good morning, Reik.

Good morning, Reik.

Just wanted to ask a little bit on the guidance. You guys had dropped the high-end of your range from 245 down to 242 and, you know, sub-segmenting that down to voting range last quarter was - the high-end was 30-percent. You have dropped that down to 35 - the ATM from five down to four. Can you guys comment on what you're seeing and what the rationale is for doing that at this point?

Sure. The first thing - you know, we didn't make the target range in the first quarter. As far as I'm concerned, when you don't make the top of the range, then the old top of the range for the year ought to be adjusted slightly. So, that's the basic thing behind that.

Secondly, as each quarter progresses, the length of period that is unknown is shortening, and so the size of the range should shrink. And traditionally at this point, we have shrunk the range from 10 cents to something larger at the beginning of the year. And in general, in terms of trading conditions, markets have not picked up. What we have been able to do, we have been able to through sheer determination and cost control and technology introduction. So, we feel that what we're accomplishing, we're doing despite very, very tough environment. And so - and we always try to give really clear, clean guidance as to what we think we can do. And so, that is how we modified slightly the range.

OK. And then, Wally, if you could spend a minute on the ATM side - and I guess specifically you guys had referred to, you know, a number of the catalysts that are out there in terms of the ADA, triple des (ph), check truncation, do you guys have a sense right now, if we look at the banking universe and say that that is 180,000 ATMs - you know, what - what are the banks telling you in terms of what percent of that universe that they may upgrade over the course of the next couple of years? I think a lot of these things are really due to hit in '05, so I assume by then is when it would occur.

Yes, I can't give you a percentage. What I can tell you is that the rate at which people upgrade has to do with the technology change, and the fact that we're introducing really feature rich new technology product and software - and I believe our competition is doing and will do the same - I see that driving an increased rate of investment. And of course, you mention all these other things that are happening in terms of ADA and check truncation and various types of functionality. All of these things should help increase demand and help grow the market. So, our products themselves, the new offerings, we just released some of the models. We're getting all the certification of the software and hardware, and that is why we have said in our release that we think that as we move into the second half of the year, we should start to see significant benefit from that.

And can you comment a little bit more on that? I mean, do you guys have a sense, or at least what are the banks telling you with respect to CAPEX that they have right now as a kind of on plan? Is it better? Is it worse than you would have expected?

It varies dramatically around the world, so if your question is directed to the US, I think you're going to see that most financial institutions are having excellent results and they are investing heavily in this space and will increase that as we move forward. It's their most cost-effective channel to the market? It's the channel that their customers prefer, and the functionality we're bringing to this - in this security and fraud protection we're brining bring to go this should increase demand.

OK. And then, just the last question for me - on the voting side, you mentioned that there was some shipments delayed - really, you were talking about timing issues. Can you tell us, one, what those timing issues were; and two, how much was delayed; and three, now that we're three weeks into the quarter, have you seen that - those items been shipped at this point.

No, they have not been shipped, and it's not just like we shouldn't ship - and I didn't mean to imply shipment delays on our part. The basic scenario is in even number years, the customers want their equipment early in the year and in odd number years, they're more willing to wait until later in the year because there is no real pressure point like in the November time frame. So, some of the things that we thought might go into the first quarter will go in the second.

States and municipalities are taking their time to move ahead because, one, they have very tight budget crunches and they're waiting for the government - the Federal Government funding to show up. But when we look at our outlook, it remains good and remains good for the second, third and fourth quarter. I would say that the delay, from what we expected in the second, might have only been in the seven to $10 million range.

OK, great. Thank you very much.

And moving on to Jay Stevens with Buckingham Research.

Yes, thank you. Good morning.

Good morning, Jay.

Good morning, Jay.

Greg, firstly, could you repeat the revenue guidance that you were giving for the total company and the segments? I couldn't write fast enough, and I had trouble figuring out whether all the items were in constant currency or dollars. And then, secondly, on the currency point when this we look at the breakdown in EMEA - Europe, Middle East, Africa - we see on a fixed exchange rate basis, your revenue was down 12.8-percent, up 3.3 in regular dollars and - does that mean currency swung the numbers by 9.5 points? Am I doing that correctly?

That is exactly right. You probably - yes.

Probably 15-percent is the actual number, Jay. So, you're absolutely right. On the outlook from the revenue standpoint, what I talked about in the second quarter was mid, single-digit increase. Then for the full year - and when I talk about these, Jay, they're all in constant currency.

Oh, OK.

So, for the full-year, fixed exchange revenue growth of five to eight-percent, and that is broken down to financial self-service of two to four, security is 10 to 20 and voting from 15 to 25.

And Jay, if I can add a little to that. We said that given currency assumptions that the year would be slightly positive; we're talking like two-tenths or three-tenths positive. So, currency for the year is very neutral at the moment. And secondly, when your comment about Europe, you actually need to add the 3.3 to the 12.8 because they're opposite sides ...

OK.

... currency is a 16.1-percent affect year-over-year for our Europe business. Now, if you look at European currencies alone, you'll find that it is even more that that. And the reason why it is only 16-percent for us, you know, a lot of our European business is in Africa, in eastern Europe and various other things, so that is a trade-rated number for us of 16. If you were looking at pure western Europe, it would be even more.

Yes, I think the Euro in the quarter was up over 20-percent.

About 23-percent, Jay.

Versus the prior year's average, that's right. But we do it currency by currency trade rated and for us that was 16-percent.

All right, let me just get off the currency kick for just a moment. In Europe itself, how is pricing, Wally? We know last year you talked about tight pricing. And I'm just wondering how the first quarter unfolded again relative to pricing?

Well, first of all, I want you to know that we are holding margin in this environment globally, OK? But the pricing environment in Europe is really, really difficult. Very aggressive competitors, including ourselves. Some trying to gain share, others trying to avoid losing it. The customers are very aggressive in looking for price. So, it is a brutal scene and I'm very proud of the way we're managing that.

And just a follow-up, Wally, the new machine's being introduced, Is that worldwide when they're announced, US and Europe and Asia, all at the same time?

These are global products, but to introduce them requires certification of hardware and software and different kinds of software so it's a rollout by country with slightly different timing, but this is clearly a global launch and we'll be in the process of launching and adding, you know, for a year.

So, is US first? Is that correct ...

No.

No?

It's global watch, country by country, depending on features and software requirements. Maybe Wes can add a comment about the timing here.

That would be helpful.

Yes, Jay, the timing, as well indicated, is on a country by country basis. It even gets down to a customer by customer basis depending upon certification of software and hardware within the geography or within the customers specifically. Our primary focus at this point in terms of the certification and roll out is focused on the US and Europe where we can get the fastest traction and we move quickly into Asia-Pacific and other regions of the world from there.

And how would will you handle this, Wes? Will it be just a release or will it be a conference? What do you intend doing since this is really a major event?

In terms of the announcements?

Yes.

We've been doing them.

Yes, we have already had significant events in Asia-Pacific, in Europe and in the US to rollout the new product launch and introduce it to customers. That took place the week of March 11th around the globe, and so we have rolled that out in a very formal fashion, Jay, already.

We had it at the CiBit show that same week in Germany, we had it at the show at Singapore - so it was a global, single incident launch.

Thank you.

Our next question comes from Allen Zigwell with First Manhattan.

Good day, gents.

Good morning, Allen.

Good morning, Allen.

Good Morning, Allen.

I have a couple of quick questions, which will add up. Could you talk about the other line on the P&L statement: what was in there; as it a pretty significant swing?

Yes, Allen ...

... other income?

Yes, other income slash expense was up quite a bit. Could you just tell us what was in there, please?

The securitization last year not recurring of 1,000,008 something. So, that was the biggest difference. And then, also in that line as you see is minority interest. Minority interest was up as well which is a negative - to that line.

And so, and then the offset would be - but you had probably more interest income I would think?

We would have had slightly lower interest expense in the quarter.

OK. So, that was the biggest change, all right.

Right.

Number two, could you talk about maybe some of the security wins. You know, you have expanded and talked about retail and, you know, things outside of what we would ordinarily see. Could you maybe, you know, give us a little flavor of what is going on there in the security business?

Allen, this is Wes. Just to give you a little bit of a follow-up. I'm not sure but I think what you're looking for here is specifics as it relates to the different areas that we're working in retail, government and otherwise and I can give you some general guidance on that. We have had some pretty significant growth in the retail area with respect to electronic security as we have looked at grocery stores, retailers in general and being able to install different kinds of monitoring systems that give them better performance and better capability within their geographies.

With respect to government, we have had some pretty significant progress into things like military basis, protection along military fronts and in terms of electronic security and other security kinds of measures that they're looking for as well. And then we continue to look at the financial industry and the combination of security solutions in the financial industry. And we've seen significant growth along those line as well. Without getting into specific customers or specific orders, that is a pretty good general overview of where we are. We see growth in each of those areas and will continue to focus on growth in retail, commercial, government and financial institutions all combined.

Are these contracts soft -- just selling a product or is it selling a package of services as well?

It's primarily the installation and the sell of a comprehensive solution so it's going in and working with the retailer or with the entity that we're selling to, to determine what solution they need specifically designing a solution to meet their needs and then selling the product, the installation and in some cases monitoring services as well to go along with that.

OK. And one or two quick other things. You made the announcement did your the quarter - this is for you, Wes - working with Concordia Fes (ph) on their ATM network? Could you maybe elaborate on that a little bit?

Yes. It was a pretty exciting response from Concordia as we looked at the certification of our new offerings with them and we collaborated with them very quickly to get in and make sure that we were certified on their network as quickly as possible. That was a very short lead time kind of event and a very great response for the market. As you know, Concord probably provides transaction services for the largest group of ATM's in the industry within North America. And so, we got through that very quickly. They were very satisfied. We're very happy to be aligned with them in terms of make that go service available across this new product line and we believe that will give us some quick penetration into the market as customers who use Concord serves start buying our product.

So, was there a contract that was tied to that or was it just a recognition that your products are better? I'm not sure what it was. What the it is?

It is not necessarily a contract. It's simply saying, "We certify that these products work across this network," so the multitude of customers that use the network are now confident that we're certified and can use that product across that network.

OK. And last question, in your lease you talked about significant orders and the first one was 24 million in Europe, which doesn't exactly jive with the comments how orders are not doing that well there but yet there is not a lot of mention about orders in the US. So, I'm a little confused because, you know, it sounds like just the opposite of what seems to be going on. Could you elaborate on that a little bit, guys?

Probably a couple of things that we can bring to light there, Allen. First of all, orders in Europe, Wally commented on the very difficult pricing pressure that we're facing in Europe. The economy is relatively weak. We saw orders at the end of the first quarter in a pretty solid state. So, we're not - while the economy is difficult in Europe while pricing is a challenge, orders within the European environment were in pretty good shape going forward. Greg, I don't know if you want to add any comments related to orders or specifics in Europe?

Allen, I think we talked about before, we saw very strong December, very strong January and February in Europe. We saw a little bit downdraft a little bit in March. As Wes said, I think we have a pretty good backlog as we go into the remainder of the year in Europe.

And in the US, do you have much of a backlog?

Orders continue to build pretty strongly in North America, Allen.

Yes. Our orders in North America were good. One of the things - we have tried to be a little cautious in just announcing our orders from a competitive point of view. I mean, we have a lot of disclosure here, so we want to be a little cautious in what we announce because of competitive attack and - but our North America orders were good and our new generation solution has been very well received.

Thanks, guys. Thank you.

You're welcome, Allen. Thanks for your support.

And moving on, this question will come from Matt Summerville with McDonald Investments.

Hey, good morning.

Hey, Matt.

Hey, Matt.

A couple of questions. One actual follow-up to a prior question regarding the North American orders strength. I believe in the press release said it was up in the high double-digit range or at least in the double-digit range. Is it fair to it conclude at this point, as we haven't moved into the back half of the year, where you're anticipating a big upswing in demand from Opteva that that order strength relates primarily, if not solely, to the security and voting businesses?

No, Matt. It's actually a combination. We continue to receive good orders for our former product - for IX product, and there is a lot of reasons for it customers to continue to use that product. It's a good product, but we see a combination of increased security orders, increased orders for Opteva - although some of that will be delivered later in the year - strong orders for the IX product and Tom, perhaps, can - or we can perhaps talk a little bit about voting. I think we're going to - what we have indicated is that we will continue to actually take ...

Our voting orders have been fine, but, Matt, our North American orders were good in each business segment. And when we say high single-digits, that means near 10.

OK. Now, would - would you say that the demand environment for Diebold in North America has improved on a sequential basis from the fourth quarter into the first and now moving into the second? Or is it kind of a status quote type of situation sequentially?

I would say it's grudging improvement. We're fighting for it - a slight improvement. Some of it with long-lead times, but, you know, as we introduce our new solutions, I see that continuing to build. And of course now that the uncertainty in Iraq is behind us and if we can get a stimulus tax package through like the President wants, then that would be good for the economy and good for us.

OK. You know, one of the things you announced with respect to Opteva was a pilot, a USB - I believe that was a press release you guys issued. Can you maybe talk about any other significant pilots without naming names in North America? How many do you have running out there now?

Well, the most important thing announce is one of the major US banks gave us a 200 unit order for Opteva. And we're off and running, and then Wes can add to that.

Matt, we have a number of pilots that are underway. We won't get into a lot of detail as to where those are, but we did announce the US Banc pilot openly. There has been a great response to the new product line and a lot of institutions that are very interested in the product. So, that is about as far as I can go.

But it's a number of pilots, so it's off to as good of a start as we could have hoped.

Anecdotally, Matt, we've had - as you know, we had the global solution center here at the world headquarters, and we have had a record number of customers coming through looking at various solutions and so forth. And again, while it is anecdotal, I think it is very encouraging for us that the interest is very strong out there.

These are customers all - from all over the world coming in see this product line.

And they're basically saying, "This is exactly what we need."

OK. A couple of follow-ups. Asia-Pac, your business was up - round numbers about 30-percent year-over-year. Obviously, a very strong showing here. Do you anticipate those sort of comps to continue throughout the year? Sounds like visibility in that business, speaking to Asia-Pac solely, you know, perhaps looks a little bit better than what you have in EMEA. Additionally, with respect to Asia-Pac, you mentioned that you thought you picked up some market share, and I was wondering if you could talk about how you felt market share trended in the Americas region and in EMEA during the quarter as well.

Well, sticking with AP for the moment, clearly 30-percent growth is market share gain, and we think the market in Asia-Pacific is growing at about 12, 12 to 15 maybe. So, whenever we are well above that, we know we're gaining share. We know we gained share the last few years.

The other thing I would like to say is it is our lowest share market, so we have a great opportunity to gain share there. We're going after it, and you know - and we have been exceedingly successful there. I would say it's our view that in each region of the world, we have been gaining share over the last three years in each of the last three years. It's impossible to say about market share in quarter one by region. One, no one else has reported, and two, it's not a particularly relevant measure, you know, to try to gauge share by quarter because it depends on so many things.

So, we always look at that as we go along, but the clear measure is for the year by region and globally, and we're feeling very, very good about what we have been able to accomplish with the solutions we had. And we feel unbelievably confident about what we can do as we go forward with the solutions we're now rolling out.

OK. A couple of other items for Greg. Can you talk a little bit about the delay in which you experienced with international collections? Can you give us some more color on that, and the magnitude, if that is possible, when you expect to collect it?

I think a lot of it, Matt - as we had a lot of revenue in the month of March that came through, so you saw some delay there. We saw a little bit of delay in the Asia-Pacific region, and all those we expect to collect, you know, going forward here in the next couple of quarters, so ...

This isn't a collectability issue.

Absolutely not.

OK.

Absolutely not. All timing.

And if you look at the free cash flow during the quarter, can you also just provide more color around the increased collections over receivables related to the deferred revenue, what that had to do with?

Well, the deferred revenue - you know, the service contracts, Matt, you know, are built either annually or quarterly or so forth. And we had record collections here in the US in January, February and March that were very significant. And that really drove that improved free cash flow. You know, Matt, that we have talked about 175 to 200 million for the year in free cash flow, and quite frankly, you know, I'll be disappointed if it is not something with a two on it.

Great. Now, a follow-up to that, how much of the free cash flow that you're forecasting for the year would come from working capital improvement?

Based on that forecast, there would be some improvement in working capital, but we're not - we wouldn't forecast in those numbers huge improvements in working capital. Now, you get something north of 200, then you would have a pretty significant improvement in working capital.

OK. And then last, just on the voting business, did you provide top line guidance for the second quarter for voting?

We did not. It's impossible to do that, Matt. What you're talking about is a number of large orders and large customers and things move around, and there is no point in getting into, we used to count this state in and this one went in and this one came out. I wouldn't do that. I mean, just, you know, smooth line it and wait to see how they rollout, and we try to give you full year guidance. But things ship in June or they ship in July. This is not a shipping or manufacturing issue at all on our part; it's when the customer wants the solution, when they want to test it, when they want to try their software. And those things move on a daily basis.

OK. That's all I have. Thanks, guys.

Thank you, Matt.

Thanks, Matt.

As a reminder, if you would like to ask a question today, please press star, one. If you do find that your question has been answered, you may remove yourself from the queue by pressing the pound key.

We'll take our next question from Steve Tabb from Tocqueville.

Hi.

Hi, Steve.

Hi, Steve.

Hi, Steve.

I'm interested in the - I have a few questions. The first one pertains to the security solutions. I notice that it's almost entirely in North America and not in the rest of the world, so I was wondering why that was the case. And secondly, I'm trying to understand better what you mean by security solutions. Not just the physical security like the combinations on doors, TV surveillance - what do you mean exactly - not exactly, but in general by security solutions, and why are they confined almost to North America?

Thank you, Steve. The history of Diebold is that was our core business and it was a US business and we built it - that US business - around the core of vaults and safety deposit boxes and various security devices. As far as the global opportunity, the security business doesn't easily lend itself to, let's say, an export-led strategy. And so, to get into the international security business is really a major overseas investment in terms of either manufacturing or acquisition, and we really haven't done much of that, although we have made an investment in China in the security business. So, in terms of what we offer, besides the obvious things like vaults and vault doors and security consulting, there is all kinds of electronic security devices, monitoring cameras, access control - we need to add anything to that?

Digital video recording and the broad solution set, Steve, is the combination of any or all of those solutions coupled together to provide a comprehensive solution. So, it might include access, it might include closed-circuit TV, digital video recording, monitoring from a remote site and location. It could be any number of elements that go into that broad comprehensive solution.

Steve, Wes makes a great point there. On the security side, often what we are is integrators of various products of cameras, et cetera, so that we're more like a consultant, an integrator, the deliverer of a security solution, and we don't necessarily manufacture all the individual devices.

Well, if you're an integrating as opposed to a manufacturer, why can't it be done - you know, why can't you enter some foreign areas?

We certainly can and we probably will. A couple of things, like I said, though, our core security business was a US one. We have gone international and global with our financial self-service solutions. Historically, the view of the security market was that it was kind of a dead market and, you know, just concrete and steel and not growing. And of course, over the recent period of time, the view of the security opportunity has changed significantly with what is happening in the world today from both a violence and terrorism point of view.

All right. Thank you for answering those questions.

You're welcome, Steve.

Now, on the question of goodwill I notice is up $15 million in there - in the three months. What is that attributable to?

Yes, well that's - I'm glad you asked that. The - some of the goodwill is international, as you know, and therefore it goes up and down with exchange rates. And seven million of the increase in quarter-to-quarter was that amount. In addition, there were three small investments: the DIMS voting acquisition had about four million in goodwill associated with it and - I guess there's two acquisitions. There's was two things in voting that that came to five million total, and then there was a very small investment in Italy in the service business that had about two million associated with it.

OK. I once brought this question up. You know, your inventory turn is based, I think, on your total sales. But how much inventory is required to provide your service revenues?

Well, actually, Steve, it's based on cost of sales, the inventory turns.

Yes, but how much in the - in the course of sales of service is materials, is inventory? Is it all - you know, is it mostly labor?

Steve, you get into an important combination there, and it is a good question because while service - part of your service is the actual inventory cost of sales, it becomes important to balance your inventory for quick response time to your customers. And while we look at our inventory, look at it on a global scale, we look at where we need inventory and parts in order to provide service to meet the service level agreements that we have entered into with our customers.

Our focus on inventory and improvement in working capital has a lot to do with inventory improvement, and you'll see in the release that we have improved our turns and we focus on continuing to increase our returns and we do that in a number of ways. We do that by minimizing the number of sites where we have inventory. We look at shortening our lead time specifically for that inventory to the site where it's going to be needed. And then, we work very tightly with our suppliers to get them to provide that inventory on a just in time basis to reduce our lead time and improve our total performance.

But Steve, when I review inventory with Wes, I'm absolutely using your great ideas here to help keep the pressure on. And we are going to continue to get improvement in inventory turnover. So, thank you.

All right. My other question is, I mean, a lot is going on in Brazil with the new government and Lula. Could you give a little color on what you see in Brazil now?

Well, first of all, the whole world was very, very worried, you know, as the country sort of voted out the pro-business side and moved to the - let's say the more liberal side. And everybody has been assured by Lula's confirmation of the basic surplus requirement, about the ministers he's appointed, the way he has handled the IMF and his debt situation. And the interest premium that Brazil has to pay above say global rates has dropped dramatically as a result of that. And also, therefore, while the economy - the exchange has dropped to about four to the dollar, it is now closer to three - it's 303 as of yesterday. So, that is all very, very encouraging.

And as far as the economy in Brazil, all of those things have been helpful and banks are spending. And we're doing pretty well there, particularly when you look at it on a local currency basis. And so, while we were very concerned six months to a year ago, we feel much, much better now.

I notice that - as you said, that the company didn't expect exchange gains in the second quarter either, but you did in the second half. Is that in any way due to increased hedging or is it just ...

No. Steve, we're really just - in that conversation, we're talking about revenue, year-over-year comparisons. And the way we calculate that - of course, the rates for every month and day for every currency are well-known for last year. And so, what we're doing is looking at what has happened so far this year. First quarter's actual, we can see the year-over-year comparisons. As we move forward, we just started with existing rates. We put a slight devaluation in of one-percent a month under real just to recognize the difference in the inflation rates. And when you do that to prior year, it remains somewhat negative in the second quarter. But most of that Brazil devaluation had occurred in the latter part of last year. So, that swings year-over-year positive when you get out there in the latter part of the year. So, that is how we did the math. We're not making any projections or predictions about what future rates will do, we're only trying to inform our investors of, given what has already happened, what that implication would be for our financials as we go forward.

OK. And one last comment. Somebody suggested that you increase buy backs. I wanted you to know, as a stockholder not an analyst, I would like you to increase dividends instead of buy backs, and I think you should - I think you're aware that a lot of your stockholders are pension funds, 401(k)s, IRAs, foundations that don't pay any taxes on dividends either. But thank you very much.

All right. Well, Steve, we will add that to the scorecard. That is one more for dividends. OK, thank you.

Next question comes for Kevin Merrit with Fiduciary Trust.

Good morning.

Hi, Kevin.

Morning, Kevin.

Hi, Kevin.

I'll echo Steve's commends in regards to dividends.

Thank you.

I just have a few questions. Greg, what are you looking at in terms of CAPEX for the year roughly?

Should be right around $50 million, Kevin.

Great.

By the way, Kevin, just to point out for Diebold, Diebold is the number one company in the US for consecutive increases - 50 consecutive increases in dividends.

I'm aware of that, and it's looking for 51 next year, right?

Well, we can't make any predictions really about next year's dividend right now, but if our earnings would be in line with our guidance, then it would be normal course for us to consider an increase in the dividend.

Good enough. Wes, I was just curious on the software side with the new machines. Are you getting any interest in LINUX at all, and is that something the company is exploring?

Yes, we are hearing more and more interest in LINUX, and yes, we are exploring it. We use a process within our company called our product realization council to evaluate market demand and customer concerns and where we want to go strategically with the different software and applications. And LINUX is on our agenda.

Great. And finally, Wally, could you just give us a quick update on how you feel about the competitive environment within the voting business? I know it is a seasonally slow period, but, you know, the opportunities you have seen begin to narrow down, how do you feel relative to say six months ago?

Yes, I feel exceedingly good, and you say six months, so that's a perfect question. I felt like the election day in November last year was a watershed moment for future buyers to make a decision. And the way we handled our equipment, software and support went exceedingly well compared to any measure including our competition. And I felt that was like voting day for future decisions and we won. So, I feel really good about our relative share going forward in voting.

And just a quick follow-up, from a policy point of view, you know, what kind of shape do you think we're in? It appears we have some good support from the federal side, but as you mentioned before, the states are not in the best of shape physically at the moment. Is there enough to counter that coming from the Feds?

Yes. Let's say this: if there wasn't any federal money, there wouldn't be any voting spending period.

OK.

So, it's the 95-percent funding from the Federal Government that is going to keep this alive and going. Even with five-percent, the states are having trouble finding their money, but they of course will. And they're also very cautious to make sure that federal funding is actually there, and they really sweat bullets over these decisions. So, you know, dealing with the governments and government spending for this topic, given all the pressures that are there on deficits, Medicaid and Social Security and various other problems in prison spending and education, it's important that the Federal money be there. And of course, if the Federal money wasn't going to be there, we wouldn't have done this to begin with. So, it all comes together with the Federal support.

Great. Thanks very much.

You're welcome.

Thanks, Kevin.

Our next question comes from Jim Rosenberger with Bernstein.

Hi, thank you. A couple of small questions. You have a line item I have not seen before, which is rotable spare expenditures. Can you explain that?

Yes. Those are parts for service, but Greg, do you want to explain the accounting and how that works?

Yes. They're inventory parts for the service side, but they're actually end up in fixed assets, Jim, and they're then depreciated over a certain life.

These predominantly, Jim, represent service modules that we take back in and rebuild as we service the product. And so, we keep an aspect of that capitalized and rotate that from one service call to the next.

And there has been absolutely no change in any accounting principles here or how we do anything, but for clarity for our own purposes, we start to segment capital spending from rotable spending and inventory so we can manage each part better. Useful life on those, Jim, is typically about five years.

So, they will stay on your balance sheet for five years?

They get written off ...

... depreciated over five years.

OK. And then, I'm curious on the minority interest line. You dissolved a partnership in France. Was that making money or losing money?

Can you say that again, please?

The Diebold services essay (ph) in France which was dissolved and brought onto your - through your income statement and minority interest eliminated, was that making money or losing money?

Well, if we knew what company you were talking about, we might have an answer, Jim, but I'm not sure what you're talking about.

Oh, well, it's in your annual report under Minority Interest.

It must have been a non - oh, if you're talking about last year, that might have had to do with the service joint venture.

Yes. It was Searssy and Solimatic (ph).

... Italia (ph).

Yes. Last year, you know, we had a joint venture that we were doing some service in France through, and I think we have terminated that relationship.

... and the required associated value, so that is unbalanced (ph). But your question on minority interest, Jim, the biggest piece comes out of China with the joint venture there.

All right. Well, that leads into my next question. Assuming that China market is a good hot one and you continue to grow that well, should we assume that minority interest will grow faster than your operating income line?

Well, remember that all of the income is above the line, and then you have to remove the minority's portion below the line. And of course, if that goes up more rapidly than your general profits, then both numbers increase faster than the general number, which is what is happening right now.

Do you have a forecast for minority interest for this year?

We do. We had rather not give - we would rather not give that out.

OK. It was a good review. Thank you very much.

You are very welcome.

Our next question comes from Barry Lebets with Alison Capital.

Hi, guys.

Hi, Barry.

Morning.

Two quick questions. First, on the - can you just review your operating margin targets and what revenue levels do you think we need to get there? And when do you think we're going to start to see the positive impact from the new products as well as the ERP roll off on your operating margins?

Well, I think what we said target over the next couple of years, Barry, from an operating margin standpoint is to get north of 14-percent. That is really - we'll get some improvement on the gross margin line from the new product as we roll it out. We really have not quantify that to the market. And then, really as we talked about the model, we get a little bit of improvement there and leverage and infrastructure from an operating expense standpoint, and that ends up with, you know, a pretty good 14 plus percent operating profit margin.

Is there a certain revenue level that you're targeting to hit that, or you would rather not give that out?

Well, we - as you go forward, you know, everything is sort of variable. So, we hold ourselves to achieving those kinds of numbers sort of irregardless of those kinds of topics. In other words, we have to manage cost of product and operating expense spending and how we structure our business in such a way to deliver that over time.

OK. Last question is just on the check cashing act. Any update on what you're hearing from banks? Do you think we'll start to see trials of check cashing - meaningful trials in the second half of this year? And how important is the past of the act and where do you think we are with that? And is that an important driver for you guys?

The latest I heard is that it will pass this year; it has not passed yet. There are meaningful trials underway. Some banks are moving ahead on various imaging projects without the legislation, and I think as we move forward with the solutions that we have and the benefits to the financial institutions of this kind of activity, this will really occur and get some momentum behind us.

Do you think we'll start to see that in the second half of this year?

Well, I don't think you'll see enough of it in the second half of the year that it will make a meaningful difference in our global results, but yes, there are things happening now that will show up in our second half.

Are you participating in these trials?

Absolutely.

OK. Thank you.

Thanks, Barry.

And we have a follow-up question from Jay Stevens with Buckingham Research.

Yes, thank you. Wally, in the past you've given some color on the operating margin in election machines, and could you do that again if that is possible on just, you know, the information that you have so far? And Wes, for you I have a question about US Banc taking the first Optevas. Were they a prior Diebold customer or this is a new customer for you?

Well, the first part of your question, I think we've said things like around eight to nine-percent in voting, and that certainly held true in the first quarter, and I think will continue to hold true as we move forward. And then hopefully we can do better than that as we, you know, continue to expand.

I was very pleased with our - you know, our first quarter margins are generally lower than our whole year, so the relevant comparison is versus prior year. And we were able to deliver good margins in each of our business and increase margins overall, and we think that is because we have had the correct view of spending in cost and application of technologies for what we do, and that we're managing our business in a know nonsense comprehensive way and delivering these reasonable margins and improving margins, despite a very challenging economic and political environment ...

Now, my model does show that, Wally, that gross margin and operating margin are both up a little bit from last year's first quarter.

Good. So do mine.

I'm just trying to factor in your guidance on voting machines going forward. Now, how about the question about US Banc? Were they a prior customer of Diebold, or are they a new customer?

No, Jay. They have been a prior customer of Diebold. We have had a good lasting relationship with US Banc.

Good, thank you.

You're welcome, Jay.

And we'll go back to Matt Summerville with McDonald Investments.

Just a couple of quick follow-ups. You guys had given quite a bit of color on the pricing environment in your ATM business in Europe. I was wondering if you could compare what you're seeing in Asia-Pac in the pricing environment and what you're seeing in North America - kind of as a comparison? Is it the situation as severe, not as severe? How does that stack up?

Well, first of all, we're always trying to give good value to our customers at reasonable prices. So - but as you look around the world, you know, the more competitors you have in the rougher the economic environment, the more aggressive the pricing will be. So, you know, the Asian pricing environment is reasonably stable. The US environment, you know, people are looking for cost reductions and benefit from what we do, but nothing - nowhere is it as chaotic and troubled as it is in Europe.

And what I hold ourselves account to, Matt, is irregardless of what's going on, we need to control costs and manage technology application it in such a way that we can do what the market demands and have good margins and good return for our shareholders. And that what's we have been trying to do, and I believe that's what we have been accomplishing for the last number of years.

And if I compare the consolidated P&L in the press release to the first quarter of '03 to originally reported results for the first quarter of '02, were there some expense reclassifications between cost of goods and SG&A? And if there were, can you give me some color on what occurred there?

There were some very minor reclassification of things that were in operating expense that moved up the cost of sales. Greg, can you ...

... see here, Matt.

And Matt, we may need to go offline with that.

... probably given the time here, Matt ...

But the revenue and OP didn't change as far as I know, and there might have been some slight - I mean, there were some slight operating expense things that moved up. And what we're comparing now versus prior year this year and last year are totally consistent.

Yes. We can talk a bit more offline on that, Matt.

Very minor.

Thanks, guys.

You're welcome.

Justin, we'll take one more question.

Actually, Mr. - actually, sir, we do not have any further questions. I'll turn it back over to you.

Great. On behalf of all the 13,000 employees of Diebold, we thank you for being with us today, and have a great day.

Thank you, gentlemen.

That does conclude today's conference call. We thank you for your participation. You may now disconnect.