Diebold Nixdorf Inc (DBD) 2005 Q3 法說會逐字稿

Good day, everyone. Welcome to the Diebold Inc. third quarter 2005 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 Corporate Communications and Investor Relations, Mr. John Kristoff. Please, go ahead, sir.

Thank you, Cindy. Good morning, everyone, and thank you for joining us for Diebold's third quarter conference call. We will break somewhat from our usual format today in order to provide additional details on the factors contributing to our lower third quarter financial results and our plan for improvement moving forward.

First, we'll hear from Wally O'Dell, Chairman and Chief Executive Officer. Wally will provide a high-level overview of the quarter and review the recent organizational changes that have taken place. Next, Kevin Krakora, our Vice President and Chief Financial Officer will review the financials in more detail. Finally, Thomas Swidarski, our new President and Chief Operating Officer will share his initial assessment of our operations and discuss some of our high level initiatives to move the Company forward. Also available with us today and able to answer questions is Dave Bucci, Senior Vice President of our Customer Solutions Group . We have a lot of material to cover this morning and we hope to get to everyone's questions, time permitting. If, however, we're unable to get to your question or if you have additional questions, as always, feel free to contact me directly after the call.

Just a few notes before we get started on today's call. The replay of this conference call will be available today at 1:00 p.m. on our website, as well as via telephone replay at (719)457-0820. The pass code is 227045.

Also as a reminder, some of the comments today maybe considered forward-looking statements. As a precaution we refer you to the more detailed information that has been filed with the Securities and Exchange Commission.

And now, with opening remarks, I'll turn it over to Wally.

Thank you John. Good morning everyone. Thanks for being part of our call today.

During the last few weeks, we have annalized the factors contributing to our lower third quarter earnings and have taken certain actions and identified key initiatives that will help us achieve long-term improvement.

First, we have appointed two strong leaders to key roles within the Company. Thomas Swidarski was appointed President and Chief Operating Officer and Kevin Krakora was named Vice President and Chief Financial Officer. Tom has held several senior level operational, marketing, strategy and business development positions within Diebold since joining the Company in 1996. Prior to that, he spent more than 20 years in senior management roles within the banking industry, focusing on marketing, product management, retail bank profitability, branding, and retail distribution. Kevin has served as Diebold's Corporate Controller since joining the Company in 2001 from Teltek where he was Chief Financial Officer. His other previous experience includes a number of senior level financial positions with Alumax, Emerson Electric and Price Waterhouse.

After carefully evaluating the areas on which we must focus, the Board of Directors and I strongly believe that this organizational structure provides us the best opportunity to significantly improve our performance. We also believe it was critical that we proceed to fill these key leadership roles with people that understand the complexities of our business and know our customers' needs.

Now turning to the quarter. While we achieved the high end of our revised guidance, I'm clearly disappointed with our overall results, particularly, our operational performance. Our total revenue from continuing operations in the third quarter increased 2.7% on a GAAP basis and 0.1% on a fixed exchange rate basis to $622.3 million. Excluding the previously announced restructuring charges and manufacturing start up costs and other one-time costs, third quarter earnings-per-share were $0.30 down from $0.67 in the prior year period. Total financial self-service revenue decreased 1.6% or 4.9% on a fixed exchange rate basis. Financial self-service revenue was significantly impacted by disappointing revenue performance in North America as an upgrade in replacement activity has been slower than expected particularly within the more profitable regional bank segment. This was partially offset by strong growth in Brazil and Latin America.

Asia-Pacific financial self-service revenue also decreased during the quarter coming off record second quarter sales. We expect more normal growth in this region during the fourth quarter and a great year in Asia-Pacific overall. AMEA self-service revenue was down slightly, due primarily to timing issues. We are encouraged by the strong double-digit financial self-service order growth that we achieved -- have achieved for the second consecutive quarter in this region as acceptance of Opteva continues to ramp up. Security revenue grew 9.4% during the quarter or 8.7% on a fixed exchange rate basis. Growth in this business was hampered slightly by some softness in the North American bank segment. We will continue our growth strategy of globalizing this business, as well as increasing penetration in a new market segment.

Election systems revenue was in line with previous guidance for the quarter but we have revived full year revenue expectations upward due to additional order in Ohio, Maryland, Utah and Georgia.

Looking towards the fourth quarter, we expect revenue to increase 10 to 13% on a fixed exchange rate basis, driven largely by the increased revenue in election systems and the Brazilian lottery business. Currency effect is expected to be approximately 1.3% favorable versus the prior year period. Financial self-service revenue is expected to be essentially flat on a fixed exchange rate basis while expect security revenue to grow 7 to 9%. Election systems revenue is expected to be 60 to $65 million while the Brazilian lottery business is expected to generate between 20 and $22 million. Based on these assumptions we expect earnings-per-share to be in the range of 63 to $0.73, excluding restructuring and special items. This $0.10 quarterly earnings-per-share range also takes into account a large order in China that is expected to revenue in the fourth quarter but is dependent on the customer's readiness to receive the equipment. For the year, we're planning on consolidated fixed rate growth of 6 to 8% with an additional 2% from currency. We expect financial self-service fixed rate revenue growth of 1 to 2%. We expect the security business to grow 14 to 15% on a fixed exchange rate basis and the election systems business to generate between 128 and $133 million in revenue and Brazilian lottery systems revenue of 20 to 22 million.

We remain encouraged by the continued order growth for Opteva and I have a high level of confidence in the progress our new senior leadership will make as we move forward; however, we continue to face a challenging pricing environment, as well as unfavorable revenue mix as the lower margin international segment within financial self-service grows at a faster rate than North America. In addition, we face significant manufacturing and supply chain inefficiencies that will likely take several quarters to fully address. As a result, we are maintaining current full year earnings-per-share guidance of $1.90 to $2 per share, excluding restructuring and special items. This compares to earnings-per-share of $2.53 last year.

As we have previously discussed, we have a number of initiatives underway aimed at improving our cost structure moving forward, including restructuring which will result in charges of approximately $0.30 for the year. These initiatives include additional realignment of our manufacturing structure, significant improvements in our supply chain and further consolidation of Research and Development efforts. Thomas Swidarski will provide a high level overview of some of these initiatives later in the call. In addition, we continue to focus on strategic pricing management and believe we can create value by taking a more disciplined approach to global pricing and discounting. We have implemented several small target price increases and have also recently strengthened our control of price discounting. In addition, we have finalized a plan that directly links sales compensation with gross margin beginning in 2006.

In conclusion, we're faced with significant near term challenges. We remain confident in the strength of our brand and in our competitive position in the markets we serve. We have a strong portfolio of businesses and growing markets and continue to generate top line revenue and significant free cash flow. I'm confident that with our new leadership in place and our intense focus on reducing our cost structure while driving global pricing discipline, we will achieve significant improvement in our financial performance.

Now I would like to turn the meeting over to Kevin.

Thanks, Wally, and good morning everyone.

The third quarter was especially challenging and, as Wally commented, we're all disappointed with the overall results. Third quarter total revenue was 622.3 million, up 2.7% from the third quarter of 2004 and diluted earnings per share were $0.37. Included in these earnings-per-share was an $0.18 gain from the sale of our Campus Card business, restructuring charges of $0.07 and manufacturing start up and other one time costs of $0.04. Excluding these items, earnings-per-share would have been $0.30 for the quarter. While the $0.30 earnings-per-share were at the high end of our revised guidance provided on September 21, these results were substantially lower than the Company's original expectations provided on July 27.

So first let me address the Company's third quarter shortfall versus the original expectations from July 27. Third quarter revenue was approximately 67 million lower and earnings-per-share were approximately $0.35 lower. The third quarter revenue and earnings-per-share miss versus the original expectations was due to four factors. First, lower than expected demand, market demand and customer installation delays which accounted for approximately 37 million of revenue miss and approximately $0.15 of diluted earnings-per-share miss. Second, operational related issues which resulted in approximately 18 million of lower revenue and approximately $0.13 of lower earnings-per-share. Third, hurricane Katrina which resulted in 12 million in reduced revenue; included in this 12 million miss was 10 million in delayed voting equipment delivers. This revenue miss also adversely effected earnings-per-share by approximately $0.03. And fourth, an increase in the anticipated annual effective tax rate which increased from 32% to approximately 34% and adversely effected earnings-per-share by approximately $0.03 versus the Company's previous expectations.

Now I would like to focus my comments on the Company's performance versus the third quarter of 2004. Total orders for products and services were essentially flat, excluding the election systems business. Financial self-service orders were also flat with strong order growth in AMEA offset by a decline in North America. Global demand for Opteva remains strong with third quarter orders of 154 million, an increase of 40% from third quarter of 2004 and a 17% increase from the second quarter of 2005. Security orders grew in the low single digits. Orders in election systems increased significantly with large orders from Ohio, Utah, Mississippi and Georgia. Total revenue in the third quarter increased 16.1 million or 0.1% on a fixed exchange rate basis. Financial self-service revenues were down 6.9 million or 4.9% on a fixed exchange rate basis. A decrease in financial self-service revenue was principally in the North American market. Security revenue in the third quarter was 167.7 million, up 14.4 million or 8.7% on a fixed exchange rate basis. Election systems revenue increased by 5.3 million or 15.3% on a fixed exchange rate basis.

Product gross margins in the quarter was 24.9%, down from 30.9% in the prior year. The erosion in product gross margin was due in part to restructuring charges and incremental special costs in the current quarter along with lower pricing levels and unfavorable mix. In addition, supply chain inefficiencies and higher energy coasts also contributed to the product margin miss. Service gross margins decreased by 3.6 percentage points in the quarter, moving from 25.0% in 2004 to 21.4% in 2005. The erosion in service gross margins was due to restructuring and special charges incurred in the current quarter, along with lower pricing levels and higher product maintenance, fuel and pension costs. Operating expenses as a percent of revenue was 18.8% versus an unusually low 15.7 in 2004. The higher percent of expense to revenue was due in part to restructuring and incremental special charges, higher IT expense and professional fees, and higher operating expenses from recent acquisitions. As a result of reduced gross profit margins and higher operating expense levels, operating profit was 4.3% of revenue, down from 12.2 in the third quarter of 2004.

As I already noted, the estimated annual effective tax rate for 2005 was increased from 32 to approximately 34% which resulted in a third quarter overall effective tax rate of 37.8%. This revised effective tax rate adversely impacted per share by approximately $0.03. Net income was 2.2% of revenue compared to 7.8 in the third quarter of 2004.

The Company's net debt was 221.8 million at September 30, 2005 compared to net debt of 210.9 million at September 30, 2004. The approximate 11 million increase in net debt for the year was due to the positive impact of 159 million of free cash flow plus 29 million in proceeds from the sale of the Campus Card business, offset by 82 million in share repurchases, 57 million in dividend payments, 31 million invested in acquisitions, 2 million in foreign exchange impact, and 27 million invested in other assets.

In the third quarter, free cash use increased by 67 million. The increase in free cash use was principally due to 34 million in lower net income from continuing operations and higher networking capital levels. Free cash use for the 9 months ended September 30, 2005 increased by 13 million. This increase was due to 47 million in lower net income from continuing operations offset by improved working capital levels. Today, sales outstanding was 78 days at September 30, 2005, a five day improvement from the 83 days of September 30, 2004. Inventory turns decreased slightly from 4.9 turns at September 30, 2004 to 4.8 turns at September 30, 2005.

In the third quarter, the Company repurchased 585,000 shares of its Common Stock. Subsequent to the end of the third quarter, the Company has repurchased an additional 800,000 shares in October, bringing it's total share repurchase today 2,534,000 for 2005, leaving us with approximately 1.2 million shares remaining on the existing share repurchase authorization. Since the Company announced revised guidance on September 21, the Company has repurchased 1 million shares of Common Stock.

Wally has already summarized the outlook for the fourth quarter in full year and I have just a couple additional comments. Depreciation and amortization expense in the fourth quarter is expected to be approximately 18 to 20 million with an effective tax rate of approximately 34%. Pension expense is also expected to increase by approximately $0.01 per share in the fourth quarter of 2005, as compared to the fourth quarter of 2004. For the full year 2005, free cash flow is expected to be between 135 and 165 million, versus the earlier guidance of 185 to 225 million. The reason for the reduction in cash flow guidance is the reduced earnings expectations for 2005.

With that, I'll turn the call over to Thomas Swidarski for his comments.

Thanks, Kevin, and good morning, everyone.

During my short tenure as President and COO, I have taken the opportunity to interview and talk to countless Diebold associates and have also spoken to dozens of customers. From this experience, I have learned three important facts. Number one, our associates are very committed to our customers. Number two, Diebold's customers want us to succeed. And three, it's time to focus on our future.

As such we have a tremendous opportunity in front of us. Our culture is strong and resilient and at core, the Company remains sound. We have a strong brand within the financial communities in the United States as well as around the world. We have great relationships on which to build and our service organization provides stability to the earnings stream and a competitive advantage in the marketplace. Also, keep in mind the financial self-service market remains very positive. We expect the global financial self-service market to grow over the next three years as we have the opportunity to expand the market size so our service and services offerings. Also Opteva is preferred as reflected in the strong growth in orders.

Regarding the security business. We are well-positioned in key markets. We have the ability to leverage the recent acquisitions which take us into the government, retail and high-end commercial space. They also bring additional competencies to the Company. Dennis is providing strong leadership to this business unit and I feel we're well positioned and have begun to take the necessary steps too improve our security margins in 2006.

Overall, our key leaders and entire management team are committed to putting Diebold on the right path moving forward. We've done a lot of work in the past several weeks to address the issues that have affected our business and we certainly have a lot of work ahead of us. I would like to spend a few minutes discussing some of the key priorities we have identified that need to be improved upon to get Diebold back on path for success, the kind of path we've grown to expect of ourselves during the course of our history.

I would like to address four areas requiring my immediate attention. One, improving customer loyalty. Two, stream-lining quality assurance processes. Three, rebuilding our product and service margins. Four, improving manufacturing responsiveness.

Here's what is being done. The global financial self-service organization was formed to help address these key issues by combing various parts of the organization -- marketing, development, manufacturing, procurement. There will be an internal and external search for a leader of this organization and we hope to have it filled within the next few months.

While we consider a leader for this business unit, we are busy addressing these four areas. First, on a customer loyalty front, we are focusing our Company's culture around building customer loyalty. This helps us identify strengths and areas for improvement and serves as a spring-board for building value across the organization. We are making structural changes within our sales organization in North America to dedicate more resources to the regional bank market effective January 1, 2006. Not only will we be fully aligned to strengthen our relationship with regional customers, but we will focus on retooling our solutions to provide more vertical account penetration. We will invest in expert resources to differentiate ourselves with our regional customers in areas such as integrated services, deposit automation, security, and branch transformation, areas in with regional customers could use some guidance and thought leadership. We are also moving some of our larger regional accounts up to the national level. Our national teams are structured to service more multifaceted customers and as such, we have selected some key customers and moved them to the national structure to provide them with the attention and focus they deserve.

Next, we are focussed on stream-lining the quality assurance processes. To assure quality, we're currently incurring too much expense to stage products before they reach the customers. New methodologies are being introduced to test the entire system, not just independent components. We'll be utilizing more field-based controlled deployment sites and many of the quality improvement suggestions are coming directly from the customer surveys. This closed-loop process will also force discipline into every stage of our process, improving the customer experience. We have also begun various initiatives to rebuild product and service margins. Price management and margin improvement initiatives are underway to our recently created price management function. In addition, product and service cost reduction initiatives are underway through weekly council meetings focussed on removing costs from the Opteva product, to improve design, sourcing, serviceability and manufactureability. We also have sales initiatives underway to help on the margin front as well. There will be incentive plan changes aligning compensation with both revenue growth and gross margin targets for both self-service and security products and services. These changes are being reviewed and will be rolled out in January.

The fourth major initiative is improving manufacturing responsiveness. We're evaluating plant restructuring to improve production efficiency. We're also focussed on improving sales forecasting. A cross-functional team is involved in improving the process and the system. This will benefit manufacturing, the supply chain and improve customer delivery experiences. We're also automating various steps to improve financial forecasting accuracy going forward. Manufacturing and supply chain management will be demonstrating improvements over the next few quarters as we're addressing global supply chain gaps that have hampered our performance and we are establishing aggressive targets for 2006 productivity improvements, supply chain cost reduction, and vendor management.

Overall, the organization is pulling together and I'm confident in my ability to lead and make decisions. We've been slow in various areas in the past and those areas are being addressed. We are providing an integrated approach to improving margins, developing shared goals and aligning priorities to be more responsive to market needs, developing a comprehensive approach to improve quality and customer satisfaction. and developing business-focussed leadership.

In summary, my background working in the banking industry is an asset in understanding the key issues in planning for the future. I'm fully committed to taking the steps necessary to improve our performance. We are focussed on the customer, quality, responsiveness and margin improvement. And lastly, we have an entire organization that wants to improve and is willing to change. We will get Diebold back on track.

Thank you and I'll turn the call back over to John.

Thanks, Tom. We'll open it up for questions now.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Reik Read from Robert W. Baird.

Good morning. Can you guys provide a little more detail on the pricing and you talked about putting controls in place? Can you talk about what those controls are and how they'll be rolled out? And then, Wally, I think in your comments you also mentioned you've put through selective price increases. Can you talk a little about what those are and what the reaction has been in the marketplace?

Thank you, Reik. It's a little early on the reaction, but I'll answer your questions sort of in reverse order. The price increases I referred to were on our service contracts, service calls, time and material calls, trip charges, the new contracts that go out now for next year's revenue in billing. And I would say on average they've been in the 3 to 5% range.

As far as the controls and discipline, we just found that it's really important to make sure that the procedures being followed for discounting -- in the past that hasn't necessarily been followed that closely. People were able to -- that they give in on price easier than we would like and we've really stepped that up and I think that will make quite a bit of difference. Tom or Dave?

I would echo what Wally says. We put a discount authorization in place where we're able to have better visibility to the discounting that's taking place with the excalation up to my level to make sure I have complete visibility on big deals and ensuring that we're getting the right value for the products that we're delivering to the marketplace. So it's more disciplined in the process and more adherent to the process.

And, Reik, one more thing, you know with all the things happening in the economy and the world and with inflation with various cost factors, we're trying to do a better job of making sure our customers recognize that that's a legitimate request. They know it is and we're trying to deal with it and trying to make it stick.

And is this something that's been implemented effective immediately in terms of the procedures that have been put in place and the compensation and other things will follow?

The procedures for discounts are fully in place. The service contract actions have already been taken and as far as the compensation tied to profitability, we basically have that done but it effects January 1, 2006 and beyond.

Okay. And then, in your remarks, Wally, you also mentioned with respect to security, soft North America bank market. Can you give us a little color on what is happening there and is that softness that you think will also continue to negatively impact the ATM business over the course of the next couple of quarters?

Yes, Reik, as you know, we missed revenue in the third quarter and we've pulled down our revenue guidance slightly in the fourth quarter. Almost all of that is U.S.-based and it sums in product and service, both in financial self-service and security. And the market is definitely softer than we thought it was going to be three months ago. You know, that's been confirmed by others who have also reduced their revenue expectations in this space and so, in total, as Kevin said, we took the revenue down 67 million in the third quarter, we took our guidance down about 33 million in the fourth. So for a net reduction year over year of about $100 million most all of which is U.S.-based and it's mostly regional banking and it effects both financial self-service as well as security.

And last question from me. Thomas, part of your remarks you talked a little bit about adding salesman to the regional bank area. Is this a space where you have seen some increased competition given you had such a good strong hold on that market? Is there competition that is entering the market and is that going to on a longer term basis change the profitability view of that market?

I'll comment and maybe, Dave, if you want to add anything to it. I think what we see there is a lot of opportunity. The reason we need some additional help in that area is increased focus with -- as people are making deposit automation decisions, the selling cycle is going to increase. We're adding complexity and taking costs out of the banking structure itself. No longer are we just talking about an ATM through the wall or in a drive-up environment, we're now talking about effecting the operational aspects of how a small bank runs their business or a large bank, for that matter. So in a sense, the selling cycle is going to be a little bit longer. The sophistication that's required is greater and we need more focus on fewer accounts to be able to accomplish that. We have a great reputation with regional banks. We know there is great value there because we can provide not only the ATM, the self-service solution, we can help solve their security needs, as well, but it's taking longer and more time so as such, I think there is great value in us spending additional human capital focussed on the regional market and as such, we're making those -- the changes I mentioned. Dave? Do you have anything?

I would echo what Tom says. There is strong competition in that regional market, our focus right now is the complexity of the solution is increasing. The need to put more specialization, to help our customers think through these decisions is really the thing that's driving there. While we had strong growth in previous years due to adherence to triple DES and some replacements on that, I think the need now is to grow that market and bring more complex and broader solutions to that customer segment which is going to require more resources from us and more focus from us in that space.

Great. Thank you for the comments.

Thank you, Reik.

Our next question will come from Kartik Mehta from Midwest Research.

Good morning. Question for you, Tom, in your opening remarks one of the things I was interested in is maybe a little bit more color on how you will improve forecasting or if you believe that's an area that needs improvement and what you could do about that?

Okay. I don't think we have all the answers yet but I have sat through two pretty intense meetings relative to forecasting that -- The value is improving our operational performance. Forecasting has an influence all the way from the supply chain to manufacturing and ultimately, as we measure customer satisfaction and loyalty. Because of the framework that we've had in the past, I think we were lacking certain disciplines there and it was not connected always to the financial forecast. We found some holes in what was done. The second thing that we found in reviewing this is there are certain aspects that we can automate. Because so much of the business is tied to the branch environment which almost like a construction environment, it becomes a little more complex than just forecasting an ATM. A lot of these ATMs in the regionals are tied to a whole project. Dates that are in the system that can help to increase the visibility and the accuracy of the forecast from an automated standpoint can be pulled and plugged into the forecasting. We're in a process of working through that. We have, I think, a pretty strong team looking at that that's going to make recommendations. We've already taken some, I think, immediate steps to help shore that up, but I expect that over the next several quarters we'll continue to improve in that space.

I listened to your comments on manufacturing and I wanted yours and Wally's opinion on as you look at the manufacturing of ATMs, do you believe there is a need for a plant in each geography or is this a business that can be somewhat consolidated and maybe the manufacturing doesn't need to be in every geography?

Kartik, this is Wally. I believe that due to the custom nature of the product and the delivery times that a plant in each region is the right approach. The size of each plant and where you locate it and how you supply chain it I think is what makes all the difference. As you know we've been increasing our Asia plant dramatically over the last few years and down-sizing somewhat in the U.S. and Europe. Because certainly right now the Asia plants have the best cost points. But those things can change and so with the delivery flexibility and being able to respond to whatever happens on the currency side, I think you need a footprint in each place and then you need to manage it well.

I know in your press release you indicated it's too early to give 2006 guidance. But what I was hoping was can you maybe provide some color as to what the base number should be in 2005 that you're looking at to grow from? With all the restructuring charges and stuff, I was trying to see what you in your mind believe that the base number first of all to grow from.

First of all, I would take our operating earnings and I would project operating earnings off of that and the number that we have out there for this year is $1.90 to $2.00. And you know I expect reasonably good markets next year. We have a lot of work to do. We did not give guidance at this point for a couple reasons. One, it's been a little more uncertain world and the market dynamics that moved around a little bit; and number two, we have new leaders in place that I want to have a chance to get their feet under them and develop an operating forecast that they believe in and we are in the process of doing that now. And as we said in the release we'll either have some guidance in our January earnings release or sooner, if we're ready sooner.

Based on your comments Wally would you still believe that -- in the past you have said you believe this Company could grow a revenue of 8 to 10% and you could probably leverage that to around 12 or 13% EPS. Based on what's happened, as you see the markets, is that still a fairly decent number to look at?

Well, I think you've kind of stretched the numbers that we've said a little bit. Nothing has really changed in the global market dynamics. We continue to do well in the market. When the year is done we will have gained share again. I wouldn't change my model, Kartik, but I would be a little cautious as this new team comes into place as we face interesting issues in the U.S. market given what the economy might do, but if you're thinking three year time frames ,we're still on the same page and Tom, who is new in his role is not new with the Company and I know that he believes the kind of numbers we have been talking about all along because he's been part of the team since before I even arrived here six years ago.

One last question. Tom, I was listening to your comments on the regional bank area. Listening to the comments, are you putting more emphasis on that area because you believe there might have been market share loss issues or, is it just that the product you're trying to sell is more complex and you believe you may be need a different type sales approach?

It is definitely a result of the increased focus that's going to require the time frame for selling into that market given the complexity of what we're selling takes longer and as such we have a good franchise there in that regional bank market. We think it's one of our most profitable markets in the world. They value the solutions we bring them because we help them solve banking issues and as a result of that value, we see that we can -- they value the service we provide, they value the products we provide. As such we're going to be retooling and refocusing in that area because it's such an important segment for us and we don't want to distract those folks from handling too many accounts. We need -- we're looking at the territory analysis and going to revise that in '06.

Thank you very much, gentlemen.

We'll take our next question from Matt Summerville at KeyBanc.

Good morning. I have several questions. First, Wally, your most recent comment there, focusing on share gains. I guess I would like you to comment as to whether that goal has been a distraction. You talk about beginning market share year-over-year. You do realize the amount of profitability you've sacrificed to get there. I guess what I want to ask is does it make sense to have that level of focus going forward?

Thank you, Matt. Interestingly, while we've been gaining share every year for the last six years until this year, we did not have a decline in our operating profit margins and financial self-service. This year we definitely have some issues due to cost factors and pricing and we certainly have shifted emphasis more to price than to share but we have only a very small amount of share gain this year and of course it really comes from the fact there are many markets that traditionally we weren't serving at all. As we -- We're trying to serve each customer in each market or each significant customer and that gives us a opportunity to pick up our international share because if you remember five years ago, we were almost nowhere internationally.

Okay, so is it reasonable for me to think you're going to have a much more balanced approach between focus on net incremental market share gain versus profitability?

Absolutely reasonable on your part to do that. The share issue is not a big problem but our margin and our pricing is. And we're going to work very, very hard on pricing and on cost, to correct margin issues in this business.

Okay. Follow-up on pricing. I was curious, you mentioned what controls you have in place now. Can you kind of go backwards in time through the control process as it maybe stood historically to kind of got you where you are today? I thought with certain sized orders, it either was up to you or the former CFO to basically sign that dotted line and I'm curious as to whether or not you got to see those things or if they got lost somewhere?

Well, we did on the very, very large quotes, we did get involved. So you know, if a customer wanted to buy a thousand or two units on a big bid, it definitely bubbled all the way up here. Interestingly, that's not the problem space. The problem with our margins this year would be that general price declines without good cost reductions coming through have really hurt us and that's much smaller orders at much smaller customers, people just moving forward on business as usual, doing what it took to get the order and we think that in many cases that probably stopped normal price increases in the market from occurring and we're going to do a lot better job in that space now.

Okay. I want to talk a bit about AMEA. I think you mentioned you had order growth in Q2 that was nicely into the double-digits. It sounds like that trend has continued in Q3. I guess, typically, when you see orders go up, you see revenues go up. On a fixed rate basis, I think you were down 3%. I was hoping you could reconcile that. Are you getting these orders and you're not able to ship?

Our backlog is up a lot. But we had good double-digit growth in quarter two and we'll have good in quarter four in Europe. Our order trends are really solid. Our backlog is way up and that should help us as we move forward.

I guess the part of my question -- I mean, are you having issues in trans-shipping and if you're still having manufacturing difficulties or problems are persisting there does this make a strong case to admit keeping that plant was perhaps a wrong strategic decision and it makes sense to do something else at this point?

Our delivery issues, Matt, are not confined to a particular plant. Not at all. As we have said to you in the release and the pre-announcement and in this call, supply chain issues and -- the flexibility in our plant is not what we would have liked it to be in any of our plants and if it were better, we would have had better revenue in the third. So what you have seen is pretty good orders, backlog growth and not very good revenue in quarter three. And when we talk to you about supply chain and how our forecasting has affected our responsiveness, that's what we're talking about. And as we remove those bottlenecks, we should see better revenue performance.

So is it -- suffice to say then that you still agree that keeping the French plant was the right decision for Diebold?

I just don't think I want to revisit that issue at this time, Matt.

Okay. One last question on free cash flow. I was wondering maybe, Kevin, if you could comment on what is going on with the receivables you anticipate to collect out of the voting business and how that plays into your new free cash flow guidance for the year.

We have an expectation that we're going to be collecting some of the our California receivables in the fourth quarter and we're looking -- our free cash flow model, when we built this -- at the 185 to -- up was based on an assumption that we would be looking at DSOs under 60 days and we continue to look for that to come through and we're looking for slight improvements on our inventory turns based on last year's levels and given those expectations, we would meet our guidance. And again, the real thing that pulled down our guidance was simply our income from continuing operations, the reduction in our forecast, which was roughly about $50 million.

Nothing has changed with the anticipated timetable of collecting these receivables?

Not at all and the other thing that is very good news is that the new revenue is being collected very much on a timely basis including the revenue from Ohio that is already being collected.

Alright. Great. Thanks, guys. I'll get back in queue.

We'll take our next question from Doug Rudisch from Brookside Capital.

Hi. Just a quick follow-up on Kartik's question. Not asking sort of what the EPS baseline should be to think about next year, but how do you think about the target operating margin for the business and what sort of operating margin are you attempting to restructure to get back to? What do you think is the right margin your Company should earn?

Well, Doug, this year we're obviously not going to be there but --

This is a longer term question.

We've had financial self-service operating margins -- operating profit margins for product and service combined north of 14 and we would like to get back up there. Our security margins -- operating profit margins have been more like 6 or 7. We ought to be able to get those up to 10, given the market position we have there. And voting which has gone from red to black this year, still isn't at the level of operating profit that we think is reasonable and given more balance mix of voting orders between large projects and add ons and things, 9 to 10% operating profit is reasonable. And if you do the math, that will get you 10 to 11%, maybe even a little higher operating profit margin.

And that's a goal from a restructuring and pricing action point of view to drive the business model back there?

Well, definitely the goal is to improve margins. When we look at the restructuring actions we're taking, we're trying to take all the actions that make sense to improve the business.

Thank you.

We'll take our next question from Michael [O'Hussey] from [Luftka] and Rogers.

I'm just following up on the discussion of customer demand particularly with the regional banks. Are they -- are your customers telling you anything about their business conditions that would be a possible explanation for why they might be putting off purchases? For instance, pressure on their own profitability?

Michael, I think that we could of just have done a lot better job of forecasting this is the first thing. We had good growth in the regional business year after year after year and last year there was a lot of extra demand because of triple DES or just replacement activity associated with triple DES compliance and we did not properly recognize that in our whole forecasting process. We were late and slow on that. The market has slowed down somewhat overall. I think one of the issues is that regional banks don't feel a real compelling need to do anything urgently and so that's created a little soft spot here, but as we move forward and particularly with the easier comparisons we're going to have moving forward, comparing the numbers we're delivering now, this should look a lot better. Tom or Dave?

I would just ad a couple pieces of color to Wally's comment. There is some flexibility in the yield curve for those customers. So I think that's having some impact and as the pricing for real estate gets a little higher in the hot markets where our customers want to branch, it makes branching profitability get a little more difficult. I think there is some slow down there, some greater look at their business and look at their expansion requirements before they start to move. I do see some softness in that market right now as those things continue to impact their ongoing operations.

Secondly then, in your release you say that operational issues resulted in both incremental expense and lower revenue during the quarter. This is the $18 million figure. Yet you're list of the operational issues all sound like their on the cost side of things. Can you explain to me what these operational issues are, specifically, how they translated into a $18 million revenue shortfall?

Sure. Delays in getting things built and shipped is basically what we're talking about there.

Okay.

Michael, thank you, and John?

Okay. Thank you for calling in today and as always, if you have any follow-up questions, please feel free to call me directly. Cindy?

Thank you. That does conclude today's conference. You may disconnect at this time.