Diebold Nixdorf Inc (DBD) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Diebold Inc. first-quarter 2005 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 the Vice President of Investor Relations, Mr. John Kristoff. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us for Diebold's first-quarter conference call. Providing remarks today is Wally O'Dell, Chairman and Chief Executive Officer, and Greg Geswein, Senior Vice President and Chief Financial Officer. Also with us today and available to answer questions is Eric Evans, President and Chief Operating Officer.

Just a few notes before we get started on today's call. The replay of this conference call will be available at 1 PM today on our website, as well as via the phone replay at area code 719-457-0820 and the passcode is 120403. Also, 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 that has been filed with the SEC.

And now, with opening remarks, I'll turn it over to Chairman and CEO Wally O'Dell.

Thank you, John. Good morning, everyone. Thanks for being part of our call today. I'm very pleased that we once again were able to report solid financial results with earnings per share well within our previous guidance, accompanied by very strong free cash flow. Our total revenue in the first quarter increased 8.4% on a GAAP basis and 6.5% on a fixed exchange rate basis to 540.2 million. Excluding the previously announced restructuring charges and the effect of a higher-than-expected tax rate, earnings per share were $0.45, up 12.5%. Combined revenue from financial self-service and security grew 10.5% on a GAAP basis and 8.6% on a fixed-rate basis. Total financial self-service revenue grew 7.4%, or 4.9% on a fixed exchange rate basis. Financial self-service revenue growth was somewhat less than expected due to disappointing revenue performance in EMEA as we completed the restructuring of our plant there. However, we are encouraged by the strong double-digit order growth in that region as we near completion of Opteva certifications by major customers. With the strong orders achieved, a solid backlog in place and a fully functioning restructured manufacturing facility, we expect to achieve double-digit second-quarter revenue growth in EMEA and meet our previously stated guidance for total financial self-service revenue growth for the year.

Security revenue grew 19.9% during the quarter, or 19.6% on a fixed exchange rate basis. This was due to a combination of continued organic growth in our base business as well as the successful integration and strong performance by our recent acquisitions. We are poised to continue our strategy of growing this business through market share gains, new markets and strategic acquisitions, particularly outside the United States.

Election Systems revenue was in line with previous guidance for the quarter. But we have revised full-year revenue expectations upward as Ohio now seems poised to move forward with a greater mix of touchscreen voting terminals than previously expected. We were able to achieve this by adding voter-verifiable printers to our touchscreen terminals while reducing the overall terminal price to the state. While this reduces the potential margin on this business, it gives us the opportunity to convert our existing inventory of these machines into cash flow in 2005. This opportunity, coupled with strong free cash flow in the first quarter, gives us confidence in raising our free cash flow guidance for the year by 10 to $20 million, to $210 million to $250 million.

Looking forward to the second quarter, we expect revenue to increase 10 to 15% on a fixed exchange rate basis with strong performance across all businesses. Currency effect is expected to be approximately 2% favorable versus the prior-year period. Financial self-service revenue is expected to increase 11 to 14% on a fixed exchange rate basis, while we expect security revenue to grow 17 to 21%.

Election Systems revenue is expected to be 20 to $40 million for the quarter, depending upon the speed with which Ohio moves forward. Based upon these revenue assumptions, we expect earnings per share to be in the $0.60 to $0.66 range, including $0.01 to $0.02 of restructuring charges. This compares $0.60 in the prior-year period.

For the year, we're planning on consolidated fixed-rate growth of 10 to 13% with an additional 1% from currency. We expect service fixed-rate growth of 7 to 10%. We expect the security business to grow 17 to 20% on a fixed exchange rate basis and Election Systems business to generate between 85 and 95 million in revenue and Brazilian lottery systems revenue of up to $10 million.

While we are encouraged by the continued strong order growth for Opteva, we're face with rising fuel costs, which are expected to impact full-year earnings per share by $0.02. As a result of the impact of fuel prices, an additional $0.02 impact from a higher than previously anticipated tax rate and a $0.01 impact from slightly higher restructuring charges, our current full-year earnings per share guidance is now $2.80 to $2.93, including $0.09 to $0.12 of restructuring charges. This represents a 15 to 19% increase in earnings per share over 2004, excluding the impact of the restructuring charges.

In conclusion, we remain confident in our ability to continue to deliver superior performance in 2005. We are encouraged by the continued strong order growth in the financial self-service and security businesses, the progress we are making in Election Systems and the very strong expected free cash flow for the year.

And now I'd like to turn the meeting over to Greg Geswein, our CFO.

Thanks, Wally. Good morning, everyone. As Wally said, we're pleased to report solid revenue, earnings and free cash flow for the quarter. Revenue was $540 million, up 8.4%, while EPS was $0.37, a decline of 7.5% but within previous guidance of $0.35 to $0.40 a share. Net cash provided by operating activities was $78 million, up 389% from prior year, while free cash flow improved almost $60 million in the quarter. Our restructuring charges related primarily to the realignment of the Company's operations in Western Europe were $7.3 million or approximately $0.07 per share, and that was in line with our previous guidance. And the first-quarter 2005 effective tax rate was 32.8%, compared with previous guidance of approximately 31.5%. The higher first-quarter effective tax rate reduced reported earnings per share by approximately $0.01. As Wally indicated, excluding the impact of both restructuring charges and the higher effective tax rate, diluted earnings per share in the first quarter would've been $0.45 a share, or up 12.5%, higher than the first quarter of 2004.

Again, we reported strong orders in Europe and the Americas. Asia-Pacific's financial self-service orders increased in the single digits after an exceptionally strong fourth quarter of 2004. Product orders for the quarter excluding building were the highest first quarter in Diebold's history. And Opteva has been a significant percentage of global ATM orders with nearly 109 million in orders in the quarter, with almost half of that amount coming from the international locations. This is the third quarter in a row with approximately $100 million of Opteva orders.

As noted, first-quarter revenue, a record $540 million, up 8.4% on a GAAP basis and 6.5% on a fixed exchange rate basis. A positive currency impact in the first quarter was approximately $9 million or approximately 1.8% versus the prior-year reported results. The financial self-service revenue grew 7% on a GAAP basis and 5% fixed. This is led by strong growth in Asia-Pacific and the Americas and offset in part by EMEA, which was down 14% on a fixed-rate basis.

The security business was up double digits for the 14th quarter in a row as a result of recent acquisitions and strong internal growth. And the Election Systems business decreased from $15 million in the first quarter of 2004 to $6 million this quarter. Our product gross margin was 28.9%, a decrease of 3.6 percentage points from 32.5% in the first quarter of 2004. Included in the product cost of sales in the first quarter of 2005 was approximately $6.8 million in restructuring charges, which adversely impacted product gross margins by 2.9 percentage points. The remaining decrease in product gross margins was attributable to weaker international product gross margins, especially in Europe, and lower licenses and product margins on overall lower voting revenue levels.

Service gross margin was 23.7%, a decrease of 1 point from 24.7% in the first quarter of 2004. This decline was a result of continued pricing pressures and increased fuel costs. Included in the service cost of sales in the first quarter of 2004 -- or 2005 is approximately 400,000 in restructuring charges, which adversely impacted service gross margins 5.1 percentage points.

We did achieve excellent leverage on the operating expense line as total operating expenses for the quarter as a percent of revenue was 18.4%, down from the 19.3% in the first quarter of 2004. Improved leverage of selling, general and administrative expenses was achieved due to aggressive cost controls on personnel costs. The aggressive controls on personnel costs included strictly limiting the rate of replacement and new hires, limiting base competition increases and continuing a corporate-wide efficiency program. Operating profit was 7.6% of revenue, down 1.2 percentage points from the 8.8% in the first quarter of 2004. Included in the financial results was $7.3 million of restructuring charges, which adversely impacted operating profits by 1.3 percentage points. So, excluding the impact of these charges, the operating profit margin would have been 8.9% in the first quarter of 2005.

Other expense and minority interest increased slightly, moving from 900,000 in expense in the first quarter to 1.3 million of expense in the first quarter of 2005. The net income was 4.9% of revenue compared to the 5.9% in the first quarter of 2004. The decline in net income as a percent of revenue was mainly the result of the $7.3 million restructuring charge and in addition, the effective tax rate in the first quarter of 2005 was 32.8 compared to 32% in the first quarter of 2004. This increase in effective tax rate in the first quarter of 2005 was due to the settlement of a prior-year U.S. state tax issue.

The Company's net debt was $45.6 million at March 31, 2005. That compared to net debt of $60.1 million at March 31, 2004. The $14.5 million decrease in net debt for the year was due to the positive impact of $231 million of free cash flow, partially offset by 51.2 million invested in acquisitions, $55.4 million spent to repurchase the Company's stock, $54.5 million in dividend payments, 26.4 million invested in other assets and 19 million in foreign exchange impact.

In the first quarter, free cash flow improved by $59.6 million, moving from a cash use of 1.2 million in the first quarter of 2004 to 58.4 million in the first quarter of 2005. And, as well, I mention the substantial portion of the improvement was a result of improved trade receivables collection. DSO was 83 days at March 31, 2005, a 13-day improvement from the 96 days at March 31, 2004.

The 12-month moving average inventory turns declined slightly from 5.3 at March 31, 2004, to the current 5.1 turns.

We estimate that if stock options were expensed in accordance with SFAS 123, the full-year impact in 2005 would be approximately $0.07 per share. And the SEC has postponed the effective deadline for adoption of Statement 123R to the first annual period beginning after June 12, 2005. We're currently starting the new rules, but have not yet quantified the impact of adoption, nor decided whether we will implement this standard in the third quarter or wait until the first quarter of 2006. Full-year 2005 guidance does not reflect any expensing of stock options.

Wally summarized the outlook for the second quarter and year; just a couple of additional comments. Currency exchange is anticipated to be approximately 2% favorable versus prior year in the second quarter. Depreciation and amortization is expected to be approximately 20 million with an effective tax rate of approximately 32%. Pension expense is expected to increase by approximately a penny per share in the second quarter of 2005 as compared to the second quarter of 2004. And expectations for the full year 2005 include double-digit revenue growth of 10 to 13% on a fixed exchange rate basis, being led by strong growth in financial self-service and security. Currency impact is expected to be approximately 1% positive versus prior year, and amortization is expected to be approximately 75 to $80 million with an effective tax rate of approximately 32%.

The pension expense is expected to be $0.03 per share higher in 2005, moving from $0.05 per share expense in 2004 to $0.08 of expense per share in 2005.

Research and development will be approximately 2.5%, a parameter (ph) similar to the prior year. As Wally noted, EPS will be in the range of $2.80 to $2.93, including restructuring charges of $0.09 to $0.12 per share. This would represent a 15 to 19% increase in EPS over 2004, excluding the impact of the restructuring charge.

As Wally indicated, on the cash flow guidance, we now expect free cash flow to be in the range of $210 million to $250 million for the year, and earlier in the quarter we increase the dividend for the 52nd year in a row by approximately 11% to $0.82 per share. And with that, I'll turn it back to John to open it up for questions.

We're ready to take our first question.

(Operator Instructions). Reik Read, Robert W. Baird.

Can you guys just, with Europe, just give an overview on the status of the certifications?

This is Wally, Reik. Things have improved nicely day by day, quarter by quarter, to the point by the end of June there will be nothing to talk about.

And Wally, last quarter, you guys had basically said by the end of March you thought all of the key ones would be completed. Is that pretty much the case?

That's still the case, yes.

Okay. And then with the restructuring now completed, is the plan over there at full utilization, or can you give us a status update there?

First of all, it's a fairly small plant, and secondly, it's been restructured, so the number of people working there -- that's all complete. The installing of the Opteva lines is -- they are now in, and the production has started to ramp up. So I would say during the second quarter we'll ramp up to full-scale manufacturing and the level loaded from there on.

And that would be done -- I'm sorry, by the end of the quarter?

Yes.

Okay. And then can you just take a minute and talk a little bit about the environment in Europe? You know, it had been under price pressure; is that still the case, or what are you seeing over there?

Well, I don't think we need to limit it to Europe. Price pressures are severe in product and in service and in many industries, I think, are all experiencing that. So that's the environment were in, and that's the environment we're going to stay in.

And with Opteva, has that reached -- really in the U.S. and then maybe later in Europe, a level of critical mass where that's starting to offset that price pressure both in the product and the service?

I think we always underestimate how negative price is on a P&L. Certainly, we're getting the benefits of Opteva, and as the mix of Opteva continues to grow, that's one positive offsetting factor that has really helped us, and that's the reason why we're able to hold OP margin. So, we're getting that benefit, but each year the percent is changing. Like I think last year, Opteva was about half of our orders and about 40% of our revenue, and in the first quarter, it was 70% of our orders and over 50% of our revenue. And that will continue to ramp up and it will continue to help us. And that's one of offsetting factors to the negative price problem.

Kartik Mehta, FTN Midwest Research.

A question on the security business. You had another really strong securities quarter. I was wondering if you could talk a little bit about where the growth is coming from? Is a lot of this growth coming from nonfinancial customers, and is it the success there that is leading to the strong growth?

A couple of things. Before someone asks, the internal portion of that was high single digits, not the 19 that you're seeing there. And it's coming -- it's -- first of all, it's a domestic growth result. In other words, this is mainly a domestic business. And it's coming in both financial institutions as well as in the diversification that we've talked about. And we're getting good cross-synergies between the acquisitions and our core business.

If you look at gross margins from product, and I know you talked about it a little bit previously, about why the OP margins are holding. Would you anticipate gross margins to kind of stabilize here or move upward as we see more and more Opteva production and as EMEA gets better?

And what gets better?

EMEA -- Europe gets (multiple speakers)

Well, the plan that we have in front of you for the year is the whole or slightly increased OP, excluding restructuring charges. And that would have a small degradation in GP in it. And that's what we think we can accomplish at this point. It will be really interesting to see how the environment changes out there. But we have good solutions and we're very competitive and we have been holding operating profit margin, and it's because of all the positive things we're doing.

And just a last question on voting. Maybe could you give an update as to where we stand on the receivable votes from California, and I know there's been some movement here in Ohio in terms of what counties can and cannot buy both from optical scan and touchscreen. Can you just give an update on those (multiple speakers)?

Yes, we can probably use a separate four-hour phone call on this. But the news since the last meeting has been very, very positive. The federal progress we've made on the printer and the touchscreen system with printer is excellent. We're providing the printer and getting the certification in California that will allow us to work that receivable down over the balance of the year, as we previously discussed. And then, of course, the big news has been that Ohio now seems likely to move forward with many more touchscreens and we are certified with Ohio, so we should definitely benefit from that. And that will turn our inventory of touchscreens, which we had put in place for Ohio, into cash over the balance of the year.

Matt Summerville, KeyBanc Capital Markets.

I have a couple of questions. First, let's talk about steel and fuel. I mean, if I look at steel prices, in general, they've come down, roughly from peak levels in the third quarter, 20%. And obviously, I'm looking at various indices which you may or may not look at. I know you buy special grades. But the bottom line -- steel price have come down. Is that not enough to offset $0.02 of fuel? And then secondly, was your original fuel assumption that fuel costs would be flat anyway when we ended the year with oil north of 50?

I'm not sure I can deal with all those questions right here. But the steel pricing, first of all, has -- first you have to buy it, then it has to go through your inventory, then it has to go into your product, then it has to come out. And the P&L timing of that is different than what you're reading about spot market pricing. And I would say that it's fair to say that steel in 2005, in our current expectations, is very similar to steel in our previous expectations. As far as fuel, we're sensitive to fuel costs, and they are significantly more by a couple million dollars in our current forecast than they were three months ago. And it's the run-up that occurred in the early part of the quarter that's now reflected.

Okay. Let's talk -- Greg, first you mentioned in your discussion share repurchases in the last 12 months. I just wanted a recap of activity in the first quarter, if I could.

Actually, no activity in the first quarter, Matt.

And then what would be -- do you have, in general, plans for the balance of the year in terms of what you would like to do with buyback, and maybe just update what you have left on the authorization?

Yes, we have some plans on the share buyback, as we've talked about. Price sometimes (ph) modified stock buybacks throughout the year. We have about 1.770 million left on the board authorization. That's shares. Though I would certainly expect us to be utilizing a chunk of that this year.

And then two questions on your -- first, could you guys talk a little bit about, first of all, I think it's in the second quarter you expect double-digit revenue growth -- and I assume that's fixed-rate -- in the EMEA region. Can you talk about what you're seeing in terms of order activity between Eastern Europe and Western Europe in that context?

I don't want talk about individual countries and customers, but our orders in the past quarter in Europe were very good for all of the areas that you discussed, and our backlog for Europe is quite strong now. And that's why I was willing to say double-digit fixed-rate growth in EMEA in revenue in quarter 2, and that's a dramatic change than anything you've seen from us in the last nine quarters.

Sure. And then, just recap -- you did the $0.07 worth of restructuring in Q1, so you're going to do one to two in Q2, which means that you probably have some leftovers for Q3. Can you talk about why -- and again, I'm under the impression that this was supposed to be wrapped up by the end of June. So, first, why has this been extended? And then second, why do you anticipate -- and I know we're only talking about a couple of pennies; I'm just trying to get a feel for what's going on here -- why is the actual expense going to be higher, and what do you have left to do?

Well, we gave the details that we wanted to give, which was $0.01 to $0.02 in the quarter, which would make it 8 or 9 at the end of quarter two. As far as the remaining amount, that would be in quarters 3 and 4. We haven't laid out which quarters that's in. Business is a little tougher than we previously may have thought. We've got price pressures and fuel issues. We thought it would be reasonable to do a little more. And we also think it's reasonable to just continue doing step-by-step restructuring and looking at things and making sure that all the costs are as best that they can be. And so we've stepped that up by one penny.

And then last question, just either Greg or Wally. On free cash flow, can you talk about what delineates the low end from the high end there, that $40 million?

Well, there's a big range in Ohio voting. And the Ohio voting, of course, if it goes forward quickly and with us, would help that cash flow. The variability of our earnings forecast would also go into the variability of our cash forecast.

Okay, that makes sense. And you know what, since you mentioned voting, I'm going to ask one more question. In your new voting guidance for the full year, how much now are you looking at from the state of Ohio, Wally?

Tom?

Matt, this is Tom. I'm just going to jump in on that. In the new forecast, Ohio is in the range of 50 to 60 million.

And it was 40 to 50, right?

Yes.

(Operator Instructions). Charlie Brady, Hibernia Southcoast Capital.

Can you give us a little more detail regarding the higher tax rate and the settlement of this tax issue? What's the background on that?

We're always reviewing open state tax files. And one of the states was resolved, and it was, I think, $300,000 of prior -- way prior-year period issue. And as far as the 32% rate, when we keep revising and looking at our forecast carefully, the profit by country moves around a little bit. And we just -- it's always an estimate, and we think a 32 is a better estimate than the old 31.5.

Okay. So going forward, the higher tax rate for the remainder of the year is not a result of this tax settlement. It's just a result of your looking at the jurisdictions where revenue is coming from -- (multiple speakers)?

Well, they are both elements. But the larger piece would be the location of the profits by country. However, when we think long longer-term about this Company in tax rates, I believe that over time that rate should go down.

Okay. And the next question, on the -- getting the DSOs down by a pretty good amount in the quarter. Looking forward, what's the opportunity to drive that down even more or just to keep it at the same level?

First of all, the March quarter end is always a fairly high number for us compared to other quarters. So you should see a seasonal improvement. We set a goal of for ourselves of 60. We have not been able to achieve that. But we should be in the 60s at various times later this year.

Yes, I don't think there's any question, Charlie, at the end of the year, we'll be through that 60 mark. And as Wally said, you'll continue to see that go down by quarter.

That's the first digit of a 6 -- I didn't mean six-zero at year end though, did it, Greg?

Six-zero.

Six-zero, Greg. Greg is laying it out there for you. Six-zero. That's Greg's number. (laughter)

Just on the -- I don't know if you mentioned this. On the voting for California and the state of Illinois, and I guess to a much lesser extent, the state of Utah, has there been any update on -- those are, for California and Illinois, probably $100 million-plus opportunities, Utah being maybe 25, 30 million. Any update on where those states are these days, on looking at getting new machines and when the order cycle might pick up for them? I'm guessing '06 probably.

Tom Swidarski is here. He will answer that question.

Let me first start with Utah, because that one probably has the most clarity. They have gone through a pretty extensive process; we're there again this week going to various public demonstrations with them. They are down to two firms, ourselves and ES&S. They have not determined whether they are, in fact, going with optical scan or touchscreen. So that's a variable. And the second variable is in the timing of the decision. They've communicated what the timing of the decision probably will be, in the June/July time frame, which would then lead us to believe that sometime in the fourth quarter, they'd actually want to receive their equipment in Utah. So that's a statewide kind of self-contained entity unto itself. It's an all or nothing.

Have they made a decision, if they go optical scan, that they want a paper trail, similar to what's going on in Ohio now?

Of course.

Sorry?

You meant touchscreen?

Yes, the touchscreen.

Okay. In Ohio, it's the law. In the state of Utah, we're encouraging them to certainly strongly consider the paper trail, since we think we have a strategic advantage there and a competitive advantage. But it is not the law. So, as you might imagine, there is a fair amount of debate going on in Utah, as there is everywhere else. But, regardless of which solution they go with, we've positioned ourselves very nicely there. But again, we have to announce (ph) that we have a competitor in that regard. In the state of Illinois, there is a lot of small ancillary players out there with all the various jurisdictions, and then there is Chicago. Chicago really hasn't given us any clarity in terms of what they're doing there. They've winnowed the competitors down to four. We're still in the mix there. And then in the state of California, things are -- things continue to progress very nicely for us.

Would you say that on an order basis, Illinois and California are probably an '06 type of event?

Yes. I mean, it's a race -- the interactions we've done with Chicago, they're trying to get the city and the county to jointly go together so they can make a combined purchase, and there, as you might imagine, they've got some issues amongst themselves to sort out before they can really get to the table with -- here's the path that they're going to pursue.

Sanil Daptardar (ph), Bramwell Capital Management.

Could you break down the 109 million in Opteva orders between Americas, Europe and Asia-Pac?

I don't think we've been disclosing that type of information. But, in general, the product has been very well adopted around the world, with approximately 70% of the orders in North America, as well as 70% of the orders internationally in the quarter being Opteva.

I think what we said was in the quarter, a little bit more than 50% was in the U.S.

Out of the 109 million, how much is reflected in the first quarter, or is it reflected in the rest of the year? Has there been any orders reflected in the first-quarter numbers?

I'm not sure what that means.

Have you supplied also 109 -- has that been reflected in sales in terms of the first-quarter revenues?

Well, we've been receiving Opteva orders for two years and our shipments are now mostly Opteva. And certainly we expect to ship hundreds of millions of dollars of Opteva product this year. We shipped over $100 billion of Opteva in the first quarter.

Going onto the Election Systems, apart from the state of Ohio, are you working with any other state and assuming any kind of certifications from them for the products?

This is Tom again. Yes. In fact (ph), we were down in Florida. There is a hierarchy and a schedule, and obviously you go through the federal level and then you go to -- have to go to each state. So since we already have equipment in approximately 30 states, and they are basically changing these standards, you have to go back through each and every state. So we have a whole game plan laid out for the remainder of the year. Obviously, the states where we have opportunity, like in Ohio, it's number one on our list, and other ones where there is very little opportunity are way down on the list. So we have a very scheduled, detailed project plan for certification, both at the federal and the state levels.

Going back to your last question, I might have misspoke. We shipped well over $100 million of ATMs in the first quarter, and over half of that was Opteva.

Okay, going back onto the Opteva business, in fact, I was wondering, you had mentioned about the product price pressures. Are you facing price pressures in the Opteva line, or it is a legacy line (ph)?

It's like oxygen. We're facing price pressure every day, in every way, in everything we do. It's part of the environment.

It's on both product lines, so legacy and Opteva line, then?

Of course.

Jim Rosenberger (ph), Bernstein Investment Research.

I'm trying to understand the guidance a little bit more. If we look at the low end of the range for the second quarter, and we assume, let's say, $0.02 for restructuring, and that implies possibly 62 versus 60, with the low end of the revenue being plus-10%. Now, that seems to suggest to me that there is a possibility of margins deterioration in the second quarter. But the guidance for the year, then, implies there should be some acceleration in margin going on in the second half of the year. Can you kind of explain that dynamic to me?

Sure. The first-quarter margins and the year margins are holding. The second-quarter numbers that we're giving you have a range to them. There is a lot of mix issues in terms of voting. In the prior year, if you check the rate, it was one of our higher margin quarters. It was 12 compared to last year's overall 11.6. It had a Brazil voting order in it, which was quite profitable -- Brazil voting revenue in it, which was quite profitable. And so, that's the explanation behind the numbers you're calculating.

Okay. And then you added another line item here with the Brazil lottery. Is that in the voting system, or is that going to be a separate line item? Where does that show up?

Well, it obviously doesn't show up at all in any orders or revenue yet, because it's a future possible revenue. We probably will put in a line called voting and other, but we would clearly call it out. If it happened to be big enough to have its own category, we could start that. But we'll always make sure that everyone understands what's in that number. We don't quite have an order yet. There was a public announcement that we had won this bid, which is why we covered it in this release. There's still negotiations going on in contract and things, which should get it resolved in May. The timing of the revenue is not yet clear. It could be -- maybe there won't be a contract at all, although we expect there will be one. But at the rate this is progressing, it's a very small amount of revenue in 2005. But we wanted to make sure everybody understood that, and that's why we put it in here.

It's just a one-time deal? It's not an ongoing revenue stream?

Well, it could be something significant significantly more than that, and we'll keep you advised. The possibility is 50 to $90 million in revenue over some multiyear period, which would include some product and some ongoing installation and services. That's a 2006-and-beyond conversation that we will have later in the year if we get this all nailed down.

Adrian Pell (ph), DZ Bank.

A couple of questions, if I may. First of all, I'm just trying to get sort of a feeling for the European market. You said that orders were very good in the financial self-service industry. Is that more related to new product lines that you have, meaning that you could potentially gain market share very quickly? Or do you feel that your customers in total are willing to spend more money into new technology?

Well, I wouldn't call it a rapidly increasing market. But what happened here is we needed to get Opteva certified in Europe to have an excellent offering to sell, and as we've been going through that process, and we're not there yet, we haven't done particularly well there. And now that we've gotten the product launched, the plant resized, the product introduced into the plant and the customer certifications done, we should have good year-over-year comparisons. And that's what we're now going to start seeing.

And you also said when -- I got that correctly -- that orders in Asia are slowing down somewhat. Is that a trend that we're going to face in the next couple of quarters, or is that just the short-term?

I don't believe that anyone has said that orders in Asia were slowing down.

Okay, then I got it wrong. Sorry. When we were talking about the price pressure, could you give us a quantification for that on a quarter per year basis?

Yes, we've said this on many occasions and we've done some work to look at the history. The negative price trend in this industry in all countries for all periods seems to be 4 to 5% per year.

Matt Summerville, KeyBanc Capital Markets.

A couple of questions. Just first, one clarification on this lottery thing. Is this going to be its own segment or reported somewhere when it hits, just so we can plan a little bit for the future here, Wally?

Matt, we're still seeking advice on that. Let us know how you would like us to report it. If it's $10 million and it comes and goes, we'll probably stick it in voting and other. If it becomes something significant, if you want another line for it, we'd be more than happy to do it. But we don't even have an order yet.

No, that's fine. Just for -- as I start to think about 2006 here. That's really all, I was curious. In the first quarter, we haven't talked at all about the Americas, Wally. I was wondering if you could provide a little commentary in terms of what you saw in the United States and Latin America, what your expectations are and maybe whether or not the U.S. perhaps got off to a slower start than what you were thinking?

All of our revenue numbers were exactly as we thought they would be in the first quarter, with the exception of Europe. Orders and revenue in North America, South America, the Americas in total, were excellent and continue to be so. And we continue to do well here. The question of whether the U.S. economy is slowing down or not and whether that's going to have some impact later, we'll all have to wait and see. But we've had a really, really good Americas run, and it continues.

And then, where do you -- can you may be characterize, and here I'm predominantly talking about the U.S. -- where a lot of the big banks are at in terms of adopting check imaging, automated cash deposit, on more of a wide-scale basis?

Well, what I see is that some banks are doing something and many banks are talking about it. And we do see some positive impact from that this year and a bigger positive impact from that next year. And Dave is sitting here. Dave, would you like to add to that?

Yes, Matt, this is Dave Bucci. I would agree with Wally. I'm seeing a lot of pilots this year. I would not expect broad rollout in deposit automation until 2006. As I think our customers understand, the consumer impact, the financial impact and the systems impact, because it's a different transaction set. So, as I said, I think we're getting good positive pilots, good positive results, and I would see much broader application for that starting in the first quarter of '06.

Sure. And actually, Dave, a quick follow-up question to that. In terms of -- I mean, at least with check imaging, it's my understanding that there's a lot of infrastructure that has to get put in to share these images behind the wall, which obviously you and the other OEMs wouldn't really participate in. My question is, how far along do you think the banks are with respect to that process?

well, I think the big guys are fairly far along and accelerating the process. I think that a lot of their focus right now is on the merchants side and on the branch side. But I think once they get those things in place, the ATM follows along very rapidly. I think there -- the whole transport mechanism is getting put in place. The archives are in place. I think the big guys are rapidly moving along the path. And as I said, I think they are ready, come the first quarter, to hook the ATM into the whole system and take that infrastructure cost out of opening envelopes.

Great. Thanks for your perspective, Dave.

Reik Read, Robert W. Baird.

Just, Wally, a quick question on the price pressure. The 4 to 5%, is that something that you are seeing incremental price pressure this year, or is that fairly much normal?

Well, I tried to answer that, Reik. I got here in '99. I have looked back to about '96, and I've looked through '99, 2000, 1, 2, 3, 4 and 5, and in every country and in every year, in every market, it seems to be around minus 4 to 5% per year, year-on-year, no letup, no change.

Okay. So this year is not a change. And then -- F(multiple speakers)

It was another down 4 or 5%, which means it's another year where you have to do about $100 million of positive things before you're back up to where you were the year before.

So when you said before that you probably would -- I know you expect the operating margin to hold. But the gross margin down a little bit year-over-year for 2005 versus '04, is that mostly fuel cost, or is there another component to that as well?

When you're looking at year-over-year, first of all, if you start with a minus 4% price, you're behind the 8-ball on every line before you start. So then you need product redesign; you need sourcing initiatives; you need cost efficiencies; you need operating leverage; you need investments in technology; you need all of those things. And if you do a really, really, really good job at the end of the year, your OP is equal percentage or maybe a little better than it was the year before. And that's the treadmill we are all on. And that's the application of technology to all of the things we do, and it's why it's important to look at the OP line, not the GP line, because operating profit -- operating expense leverage is an integral part of dealing with the issue.

And with the voting side, you had mentioned that in Ohio, you've had to give a lower price, and that impacts the margin a little bit. As that ramps up, what's the overall net impact for the margin for the Company?

Well, I'm not sure how to answer that question for you. We have said on many occasions that we expect, when the business is good in voting, to have an 8 to 9% operating profit rate, and I would hope that we could stabilize the business and achieve that. We were -- we had an operating loss last year in voting, as you saw in our year-end release. And this year, we expect to get all of that back in terms of not continuing to lose money, and if we can do better than that, that would be a good thing on a fully absorbed basis. And of course the big deal on the -- you'd say it's lower margins on Ohio, but without the lower price, we wouldn't have gotten the business, and the state would not have gone forward with touchscreen voting at all. So there's more to that question.

And gentlemen, that does conclude our question-and-answer session. I'd like to turn the call over to Mr. Kristoff for any closing comments.

Thank you for joining us today, and as always, if you have any follow-up questions, feel free to give me a ring. Thank you all.

Thank you. That does conclude the call. We do appreciate your participation. At this time, you may disconnect. Thank you.