Diebold Nixdorf Inc (DBD) 2005 Q4 法說會逐字稿

Good day everyone, welcome to this Diebold Incorporated fourth quarter 2005 financial results conference call. Today's conference is being recorded. At this time for opening remark 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. Good morning, everyone and thank you for joining us for Diebold's fourth quarter conference call. Providing remarks today are, Thomas Swidarski, President and CEO and Kevin Krakora Vice President and CFO. Just a few notes before we get started on today's call. The replay of this conference call will be available later today from our website, and as a reminder some comments may be considered forward-looking statements. As a precaution we refer to the more detailed information that has been filed with the SEC. Now, with our opening remarks, I'll turn it over to Tom Swidarski.

Thanks, John. Good morning, everyone thanks you for being a part of our call. Since being appointed CEO in December, I have met with many customers and employees around the world. Our brand remains strong and we have solid customer relationships on which to build. I have heard from literally thousands of our employees in dozens of countries via e-mail. Their passion, sense of purpose and result to improve our business is very strong.

I also believe the five key priorities for improvement that I identified as COO back in October, provide the right direction to the corporation. They are, improved customer satisfaction and loyalty. Two, improve product and service quality. Three, improve supply chain responsiveness. Four, improve margins and rebuild profitability. And five, improve internal communications and teamwork. Over the past six weeks I have identified several areas within the business related to these priorities that need more attention. My first priority is to bring more customer focus to the business in general. In the nine years I have been here, I have found the culture of customer service within Diebold is extremely strong. My intent is to emphasize our strength in this area moving forward.

However, we need to align our manufacturing footprint, customer lead time, quality processes and costs with our customer needs and expectations. If we successfully execute on this renewed customer focus, we will have a more competitive value proposition, which will lead to improved profitability. With that said there are several internal steps we are taking in the near-term that are aimed at driving cost improvements. We have devised a multiyear profit improvement plan that encompasses significant cost reductions as well as improved pricing discipline. This plan entailed eliminating more than $100 million from our cost structure within three years. Elements of this plan include streamlining our critical processes, significantly improving our order to cash cycle, and optimizing our supply chain and manufacturing footprint. These elements require organizational changes and increased near-term investment to achieve a three-year cost reduction targets. We have already made some organizational changes to address these areas.

We have combined procurement, manufacturing engineering and production operations in single group, focused specifically on improving our global supply chain and shortening customer lead times. These organizational changes are designed to drive accountability to hit our cost reduction targets. And we have broken this down to the individual responsible for each specific element of our cost reduction plan, and as I mentioned in order to generate our target savings, we will have to step up some of our near- term investments in our manufacturing infrastructure, DRP system implementation and by adding additional resources in procurement, development and other areas.

In regard to sales, we rolled out a new compensation structure on January 1 in North America, that ties sales commission to a more disciplined approach to discounting at the individual sales representative level. While it's too early to see results on the sales compensation change, it is understood and supported by our sales teams. We initiated modest service contract price increases during the fourth quarter to help offset increased fuel and other costs. In service, early signs show customers accepting our total value proposition for 2006 and beyond. On the development front, innovation and development are a corner stone at Diebold and I recognize the need to continue to leverage that expertise. Moving forward, we need to better anticipate our customer needs and focus our R&D efforts accordingly. We have combined our development organization with our global service operation to bring our product engineering processes closer to our customers. With a goal of providing a complete product and service solution, better tailored to customer needs. In addition, we are driving more value out of our R&D dollars by investing in existing development resources in lower cost regions. As an example, we have invested more than 30 million in India to build our engineering and development resources.

We also recently announced plans to close our R&D facility in Abraya, Italy, those and other future actions will drive greater accountability across the organization, and bring a stronger focus on the customer experience resulting in a greater value proposition to our customers. On the metrics front, I have initiated a major task force to gather, analyze and act on business metrics. My intent is to look at more than just the end results but at the internal measures that help us understand how well the Company is doing and more importantly what the leading indicators say about the future financial performance. In addition to financially performance, key areas within our operation we're looking at to monitor and drive aggressive improvement include, service performance including, call rates, response time, fix it right the first time, sales performance, especially order entry and forecasting accuracy, manufacturing performance, PPM, on-time delivery, product costs, and also on product development, regarding productivity and innovation. We are also applying similar metrics to customer loyalty to determine how well we are meeting expectations. By looking at these individually and collectively we get a much better understanding of where our issues lie.

Perhaps the most significant area for us right now is improving our order to cash process. We need to reduce the length of time it takes to get a customer order enter it into the system, manufacturer, ship, install, collect, and ensure that the customer is satisfied. I believe that by attacking some of the biggest problem areas we can reduce our lead time by 30% over the next 12 months. I also believe there's another 30% that is available beyond that, and we will go after it as well during the next three years as part of our multiyear performance improvement plan. Although these are just some of the metrics we have immediately identified this gives you an idea of the type of measurements we will be using to monitor and drive aggressive improvement and help us show our accountability across the organization moving forward.

Next, from a segment review standpoint, I believe the financial self-service business continues to offer significant long-term potential for Diebold. First, financial institutions are investing in their retail and self-service networks for strategic, competitive, and performance reasons. And second our offerings are differentiated in terms of their feature functionality, lower cost of ownership and our superior service capabilities. In the larger more mature banking markets including the United States and western Europe we'll have the opportunity to capitalize on upgrade and replacement business as the trend towards deposit automation including, check imaging and envelope free currency acceptance solutions builds in 2007, and 2008. We are already seeing examples of early deployments where banks are establishing the infrastructure to support the deposit automation. For example, J.P. Morgan chase announced it is deploying more than 1300 Optiva machines including, a pilot of our deposit automation technology at its operations center in Columbus Ohio. Also, SunCoast Schools Federal Credit Union became the first financial institution to deploy our full deposit automation solution, when it launched an extended pilot on Optiva ATM's this past November. However, in the short-term we expect continued short-term weakness overall in U.S. bank regional market. In faster growing emerging markets, such as China, India, Russia and Brazil, financial institutions are expanding the networks as they strive to better capture, serve and compete for customers and improve their efficiency and productivity. Case in point, Bank of China. Widely regarded as one of the country's most successful banks, as announced plans to transfer 40% of his traditional teletransactions to it's self-service delivery channel by 2008. We are proud that the bank selected us for the first time as one of it's major ATM suppliers, purchasing more than 600 Optiva ATM's, as well as our ageless software and related services. The breadth and depth of our services offering continue to provide a competitive advantage for Diebold.

Going forward we're focused on capitalizing on the trend toward integrated services in which customers entrust us with the monitoring, maintenance, operation and some cases ownership of the self-service networks. In fact, in Brazil we have a strong and profitable business model for outsourcing. We are taking those best practices and leveraging those across our other geographies. Moving to security, this is an exciting area with very appealing growth prospects. Through a combination of organic growth and our strategic acquisitions we are capitalizing on our strong presence in financial self service outside the United States to increase our service offerings to our financial customers. We are positioned well in our integrated security offerings, as we expand further into retail, government and commercial sectors. Over the next 3 years, as we move forward, to a more favorable mix of integrated services, we will work to improve operating margins by 50% to 9% or better, which compares to around 6% today.

Successful security providers are now being defined by their ability to blend traditional security knowledge and business practice with emerging technology. In our history in the security business an extended security capabilities we are a thought leader in the industry. I believe we have the right leadership in place to grow this business to it's fullest potential.

Finally, our Diebold election system subsidiary turned in a very strong quarter from a revenue and profit perspective. Many states and jurisdictions continue to see the benefits of electronic voting as evidenced in the way our equipment performed in the November 2005 election. Particularly in Ohio, where 41 counties successfully used our touch-screen voting machines equipped with a voter verifiable paper audit trail for the very first time. In summary, we will continue to evaluate our management structure, current lines of business, and planned investments into new businesses to ensure they are strategically aligned with the future direction of our company. We will also streamline our ERP software implementation to provide greater visibility into our operations and help us to better manage our supply chain. In closing, while we have a lot of work to do we have many, many strengths. Strength that we can build on in 2006 and beyond.

In closing, I'd like to express my sincere gratitude to our associates around the world. I deeply appreciate their hard work, passion and commitment. Together, we will work hard to meet and exceed customer expectations, which will enable us to take this company forward and realize it's full potential, and now I'd like to turn this call over to Kevin.

Thanks, Tom. And good morning, everyone. Clearly, 2005 was a difficult year. Tom and I have been working closely together to identify and address key financial and operational issues needed to improve the business over the long-term. I believe that we began to make some progress during the fourth quarter to bring more stability to the business. We improved our forecasting processes, and made changes to our financial organization to further strengthen the financial controls and processes we have in place. We finished the fourth quarter with net income of 14.6 million, compared to net income of 62.8 million in the fourth quarter of 2004. Diluted earnings per share were $0.21, compared to $0.87 per share in the fourth quarter of 2004. The fourth quarter results included restructuring charges of $0.20 per share, resulting from plant restructuring associated volunteer early retirement and other severance cost. In addition we established a $0.10 share reserves against deferred tax assets primarily associated with our European operations and reserved $0.14 per share related to an approximately 32 million in Diebold election systems trade receivables from two counties. Excluding the impact of these item, diluted earnings per share in the fourth quarter would have been $0.65 within our previous guidance of $0.63 to $0.73 per share.

As indicated in our release. Late last night we became aware of a possible issue regarding the allocation of election system revenues in the fourth quarter of 2005. We have not yet had adequate time to review this issue and consequently the financial results reported in this release do not reflect any possible adjustment that may be necessary. We are now studying this matter. In the event we conclude that an adjustment revenues is necessary the effect on revenues is preliminary estimated to be in the range of 2 to $10 million. Obviously, any revenue adjustment out of the fourth quarter 2005 would be recognized in later periods.

Turning to total orders, our order growth continues to be encouraging total financial self-service and security orders for the quarter were up in the mid-single digit range from the prior period was an an exceptional strong period. Financial self-service orders were down in the low single digits range, while security orders increased in the low double-digit range. Total financial self-service and security revenue grew at 2.6% on a constant currency bases from a very strong fourth quarter in 2004 with total financial self-service revenues down slightly and total security up 12.4%. Product gross margin was 26.4%, down from 29.8% in the fourth quarter of 2004, but a sequential improvement from the 24.9% in the third quarter 2005. Service gross margin was 19.8%, down from 25.8% in the fourth quarter of 2004, and down sequentially from the 21.4% in the third quarter, 2005. Deterioration of fourth quarter 2005, versus the fourth quarter 2004 was due to lower pricing levels, which accounted for a little over half of the [deterioration] with the remainder do to higher product maintenance, fuel, and pension costs. The sequential deterioration was due in part to a higher mix of installation revenue, which carries a lower service gross margin. In the quarter operating expenses, as a percent of sales was 18%, compared with 15.2% in the fourth quarter of 2004.

Included, however, in the fourth quarter, 2005 operating expenses were 14.4 million in restructuring charges, and a 15.5 million charge to reserve against 32 million in Diebold election system trade receivables. Excluding the items operating expense as a percent of sales would have been 14.3%. I am personally most disappointed with your free cash flow performance during the quarter and for the year. Free cash flow for the quarter was 62.4 million, well below our performance in the prior period and 82 million below our expectations for the year. The primary reason for this disappointing result versus our expectations was specifically related to the collection of trade receivables. Our collection expectations were based on a targeted day sales outstanding or DSO of 59 days. Our actual DSO experience was 66 days. A single day of DSO deterioration results in approximately 10 million less in cash collections. This 7-day miss resulted in 70 million of lower cash flow. About one-half of this shortfall occurred in our [AMEA] business. Where we have experienced invoicing delays in the fourth quarter as a result of problems associated with our ERPM implementations. It's important emphasis this miss in [AMEA] was not a collection problem but rather a delay in the processing of invoices. In fact, much of these delayed billings were collected in January. The majority of the remaining miss resulted from our Diebold election system business. We had anticipated collecting a $32 million receivable during the quarter which still remains outstanding.

Also, actual fourth quarter sales in the Diebold election systems business occurred later in the quarter than originally expected, which prevented timely collection during the quarter Net debt at December 31, 2005 was 241.9 million compared to 87.3 million at December 31, 2004. Disappointing free cash flow during the year coupled with substantial share repurchases totaling 138.2 million were the primary reason for the increase in our debt level. We in the process of securing fixed rate long-term financing in the range of 225 to 275 million. We are taking this action in light of favorable long-term financing rates. This additional financing will provide the necessary funding for opportunities such as share repurchase. With regard to share repurchases in 2005, we purchased, we repurchased 3.3 million shares of our common stock. We are authorized to repurchase up to an additional 4.5 million shares under existing board authorizations.

Despite the progress we made in addressing our operational issues during the past year, significant work remains in 2006. We believe 2006 will be a year of transition and investment as we take the necessary steps to return Diebold to acceptable levels of profitability. In 2006, we expect revenue growth to be flat to up slightly with financial self-service revenue flat and security revenue up 6 to 8%. In addition, we anticipate election system revenues between 100 and $125 million and Brazilian lottery revenues between 30 and $35 million. We expect depreciation and amortization expense between 85 and 90 million. We expect capital expenditures to be relatively flat from a year-to-year basis. Our preliminary estimate for our 2006 tax rate is between 34 and 36%. In addition, we expect the impact of expensing stock options under the new accounting guidance will be $0.07 per share in 2006. We have identified $0.12 per share in restructuring actions in 2006, related primarily to the consolidation of global R&D facilities and other planned service consolidation. Given these factors, we are expecting GAAP EPS guidance in the range of 156 to 171 per share.

Excluding the $0.12 of identified restructuring actions, and the $0.07 of stock option expense, we expect EPS for 2006 in the range of $1.75 to $1.90. However, further restructuring actions in 2006, which have yet been identified could reach or exceed the restructuring charges of $0.37 per share that occurred in 2005. The management team is working to identify and execute on these actions as early in the year as possible. With that I would like to turn the call back over to John.

Thank you. We will take our first question now please.

Thank you. [OPERATORS INSTRUCTIONS] We'll go first to Kartik Mehta with FTN Midwest Research.

Hi, good morning.

Morning.

Tom, a question for you, a big picture question, your thoughts on use of capital especially in light of the new debt that you are going to get, the 225 to 275 million, is that the result of you see potential acquisition opportunities that could make certain parts of the business stronger, or is this just a matter of leverages the balance sheet because there's an opportunity to buy back shares?

Kartik, I think it's a combination of both of those. I think we want to be leverage the balance sheet. We think, if there's an opportunity and it's prudent in terms of buying back shares, we are going to do that. By the same token, there are businesses that we think are very nice and complementary to us from a strategic standpoint in certain spaces and we want the ability to get that done. What I don't want to do in the short-term is distract us from our immediate focus, and we want to keep very focused on our core business, getting it healthy and right and as we do that I think opportunities will come our way.

There's been a lot of discussion about ATM pricing and who is being aggressive and who is not being aggressive. I just wanted to get your thoughts on, A, do you believe ATM pricing-- are people being aggressive and irrational or is this just a market where you are seeing competitors wanting to win market share.

Okay. I think first of all, the environment we operate in as do a lot of companies, is you are finding that the customer base themselves are putting a lot of pressure from a pricing stand point so customers through sophisticated through procurement organizations are beginning to exert more pressure on the business at large. Secondly, from our standard point, we absolutely are laser focused in terms of a pricing initiative and instilling and installing capabilities to allow us to deal in that arena very effectively and when I say that I mean we are going to stress very, very hard our value propositions to the customer. We think in certain case's there's a premium place to be paid for the services we can deliver and we expect to have the ability to extract that in the marketplace, and if that means we have to focus more on profitability going forward and less on share gain, we're going to right the portfolio with those parameters in mind.

One last question, Tom, just the receivable out of California on the election side of the business is that, are you saying that's a delay, and you are making that reserve because you haven't collected it so for long, or are there other issues with that?

No that's clearly a situation where it's been out there long enough, we think it's financially prudent, I was expecting this collected this year, just so you know, it's in someones goals next year to collect it. So I still have every expectation that in '06 according to that contract that it honored, the customer has indicated that, but since it's been out there that long just financially prudent to take this step.

So is that included in the cash flow guidance you gave? Or would that just be an additional incremental 32 million.

That, Kartik this is Kevin, that's some of the reason there's a range there in that guidance, but in the low end it is not anticipated collecting. In the high end we're anticipating getting it.

Thank you very much.

We'll go next to Matt Summerville with KeyBanc.

I have got several questions. First as far as that $100 million is is there any way that you can identify or put some level of-- some numbers around the major buckets? I think you hit on three things-- three things streamlining critical processes, optimizing supply chain manufacturing, how much is each one of those buckets represent? And then, I guess, on the pricing side, when will you be able to more effectively gauge the changes that you made internally are in fact working, and then what are you plans outside the U.S. to implement similar changes?

Okay. Matt this is Tom, let me first start with the question on the 100 million. I don't have the correct buckets with the exact dollars in them right now, but in essence the if I look at the indirect and direct spend categories, we have significant activities going on there and have identified significant dollars from a savings standpoint, and that category, if I can kind of relate them to each other, is by far the biggest area of opportunity we have. The process improvements and compliance the process, I think is a reasonable number but it's nowhere near the size of controlling the direct and indirect spend in areas that make sense and really the other area is in terms of value-added engineering and looking at taking costs from the Optiva platform and be able to transfer that into profitability, and I think in the next call we'll be able to give you some better dimension in terms of the size and scope of each of those, as well as how we're going communicate how we're tracking along to that 100 million over the next three years.

That kind of gets to my next question is there anything you can say today in terms of how much of that 100 million you expect to capture in '06 versus '07. As this ball gets rolling how, at least preliminary you think that's going to play out? And then what has to happen from an execution standpoint to you and I know we're early on in this process for you to complete this program?

Okay.

Earlier than 3 years.

Okay. Fair question. The way I would look at this is that, we are just beginning this process, so when I look at it over three years, I'd say the first half of the year we're getting ourselves organized, focused and just beginning the dialogue, we may see some minor benefit in the second half of this year, but then, really, next year, next year it really begins to kick in and then obviously though third year I think we realized significant benefits. The other thing I wanted to point out there is as we talk about getting ourselves organized, let me describe that. I have identified George Mays as really the Vice President and Leader of the entire activity. George is right now in the process of adding resources and adding tools and technology for us to be able to monitor and measure progress going forward. One of the issues you have is I want to be able to report and provide metrics that make sense. We don't have the tools in place to be able to do that. So as we have, as we add the resource, add the tools, I view that activity taking place over the next three to four months, which really takes us into the second half of the year where we start realizing some of the initial benefits there.

Two last quick questions. How long is it going to take to fix though ERP issue and can you talk about the size and scope of that problem by geography if it is in fact, more than just in Europe, and then Kevin what would you like to accomplish in 2006 in terms of repurchase? Is your goal to get through all of that 4.5, is the goal to be similar to what you did in 2005, where you did the 3.3?

Let me take your repurchase question. We want to continue to be opportunistic buyers. We think at our current pricing levels that provides good value for us, and we obviously are going to be in the market in buying at those levels and continuing to do that will depend on how we're trading and where we're at, but the expectation is that we're going to be buyers at that level and we'll continue to be opportunistic. With regard to the other question I think it's important to note with the ERP implementation, the issues we have strategically rolled that out by geography. AMEA was really the first geography where we look at what we call a full systems roll out. And that was done in order to vat all of the problems that we would expect and so we we wanted to contain any problems that occurred to a geography, AMEA was selected because they had the weakest systems to begin with, so it was need to address there. So the issues we're facing there are contained there and the efforts that we're doing forward to are rectify those situations before we do further deployments across other business units.

Okay. Thank you.

We'll go next to Reik Read with Robert Baird.

By, good morning. Just a follow up on the ERP question. When you guys talk about streamlining the implementation process, what exactly does that mean now that you have started that process started in Europe? How do you accelerate it and what is the timetable for getting it in though remaining geographies?

Well, again, to further follow up on what I have said earlier, some of the issues that we face with the actual implementation were obviously some modules that we had to customize weren't performing the way we had hoped, and we in streamlining them have to devise a solution, customize it, make sure that we make the correct solutions, implement them and then replicate that as we implemented across our geographies. So the streamlining, I think, that we're talking about is to make sure that we have got the necessary resources to make the enhancements that are required in order for this thing to function as it was designed to function.

This is Tom. This is another area where I would view that as we take a look at 2006, I view 2006 as these areas that we want to invest in correct to make sure we're establishing the correct foundation to build upon going forward, and at this point, I don't have enough visibility to the entire ERP situation. I know it's certainly sitting in the European operation right now, but after we're done with this call, I'm actually on my way over to Europe to meet with our associates as well as some customers, but the good news from my perspective is it's contained I'll get a firsthand view of it, and on the next call we'll be able to put dimension around it, but when we talk about our guidance for 2006, we have got all of the issues that we I have we're going to invest in and address built in.

And Tom, just to follow up on that, it sounds like what you are saying you have kind to got to understand what is happening in Europe before you can figure out the rest of the implementation plan and the time frame or the more specificate time frames?

Yes, there are a number of folks that know far more about this than I do. This wasn't necessarily one of the top areas on my list, but given the impact it has on closing the business and collecting and the cash flow implications it now is a very important issue for me to get my arms around, so I think I'll be able to do that as I go visit the European operation this week, and then also with your folks back here so that by the next call we're have some real good direction on that.

And then with respect to the investments that you guys are planning to make here, can you give us a little bit more understanding of what the priority is in terms of where the first set of investment dollars are going to go to? And how much you are talking about in terms of these investments?

I would say that the first area that you should think about is really our focus on order to cash process. Which really focuses on the entire supply chain immaterial focuses on procurement expertise and subsequent areas around that so part of that is think this terms of individual capability and skill sets and upgrading that and having the right individuals there, think of it in terms of the technologies and tools we need to be able to monitor and measure that effectively, so that I know, and I can communicate to you how well we're doing and what corrective action needs to take place. As well as think about overall metrics in making sure we have metrics in place to help us to look-forward in terms of predictive indicators, rather than lagging indicators, that's really the first area that I think about in terms of our priority for investments in 2006.

And can you give us a sense, Tom, of what the initial investment would be maybe as we look into just the 2006 time frame.

Well, I think in terms of just people, tools and technology, is the way I would frame that.

And can you put an magnitude on that in terms of dollars?

No, I can't right now. Certainly as we frame these up and in the first quarter here, again, the benefits we'll think about here toward the second half of the year and also into the following year, so it's going to take our time to get that together, but again, I would reflect back that this issue is reflected in the guidance we have provided, that I know it's going to take some investment to improve and bolster these systems. I don't know the exact numbers, yet, but it's reflected in the guidance that we have for '06.

Okay. And last question, you talked about being able to optimize the manufacturing footprint, can you talk about what is optimal and how long you think it takes to get there?

I would say that we did a release this morning, I don't know if you saw it or not. But we did a release regarding selling our manufacturing facility in Sumpter, South Carolina and what that was was we reached an agreement to sell our Sumpter manufacturing plant to Porters, who is a current supplier, and I would use that as a guideline to say we're aggressively looking at our footprint to make sure we have got the right cost structure in place to compete going forward, and we going to be analyzing each one of those and I can't comment on any individual one, but I think that's an area, again, we're going to be aggressive on.

Does, I assume that we're going to see more moves like that and does it suggest that the European footprint needs to be in some lower-cost areas and can you talk about how long it takes for you guys to that get that footprint the way you want it.

Yes, I guess I can't really address that, all I can tell you is I think you have seen the first step forward in this area, and our focus on supply chain and manufacturing foot print and how important I think it is to the overall structure, so that's where I have to leave it.

Okay. Great. Thanks much.

We'll go next to Michael O'Hussey with[bust TA and Rogers].

Good morning, a couple of questions. You mention in your release, Kevin this is you speaking, that we'll be taking the steps necessary to return Diebold to acceptable levels of profitability in 2007 and beyond. What constitutes an acceptable level of profitability and how did you determine that?

Well, we have been doing some work obviously in that space, and we believe on an overall basis the type of margins that we experienced in 2004, where we finish with an operating margin around 11.5% to be margins that we can reasonably get back to. What that translates into is probably looking at 12 to 12.5% financial self-service margins and probably 9% security margins. Our expectation, obviously is that that isn't something we're going to get to in 2006, but that's clearly something that becomes achievable in 2007, 2008 type of time frame.

What about return on capital metrics?

Our goal, obviously is to be looking at 15% with the results we have, I think we're more in the 12% type of percent range, but we start delivering on these and doing the kind of cash, bringing our DSO down we'll see the return on capital back where we need it to be.

Okay. The discussion on the conference call on a lot of the questions have focused very much on what you are doing in terms of cost and operational efficiencies, but it's also clear that you continue to have a real revenue problem. Particularly, in the north American ATM market, and especially in the regional bank market. Can you talk about what is going on with that business, the trends you are seeing in terms of demand, why it continues to be so disappointing and what you are doing address it?

I'll let Tom take the question, but the one thing we need to be very aware of is that we had an awfully strong 2004 comparison in that space with a ton of EMV upgrades and triple desks, and that's really hurting the comparison year-over-year.

I would say going forward, when you think about financial self-service around the world, the United States is a mature market. Having said that, there are significant opportunities in the United States, and our franchise relative to the reasonable bank market is significant. But, again, we're going invest this year and in upgrading the sales activities of what is going on. We're putting specialists out in the field. The thing we have learned from our pilot in terms of the movement of deposit automation which including imaging technology and bulk node accept very heavy-duty modules it is not only impacts the branch, but it impacts the back-office operation. So to get to that point, we need have capabilities in our sales organization and specialists there to help walk a bank through the ROI model there. So I when I think about the opportunities there, again, I think we invest in 2006 within the sales organization in the United States, get our folks certified as we do put them through the training required, and these are long sales cycles associated with that so while we're continue to move ATM, and sell those, I think though big movement occurred in 2007 and 2008, when the business model for deposit automation takes off, check 21, all of the infrastructure being built, likewise we're investing in our infrastructure to have the capabilities out there to deliver.

This is a technology, it might be fair to say that was ahead of it's time. Customers just weren't ready for it.

Yes, I would say so. By the same token we have to lead the market there so we have to be out there we the technology, demonstrating it and selling it. It's not the same as taking an order for an ATM, we're now selling and creating a demand for this capability. It fits in with where the bank is going, but they need the imaging in their back office in line first, and then they start looking at their touch points of the branch and the ATM so we're seeing the pilots and I think we'll continue to work on pilots, throughout much of this year, and I think you're going to start seeing rollouts the latter part of the year into '07 and '08.

Okay. One last quick one. I'm surprised at the very conservative guidance for security revenue growth for the coming year, 6 to 8%, coming off a double-digit 2005 and orders in the fourth quarter that were also in the double-digits, can you explain that for me?

Yes. I think the first area is when you look at those your over year comparisons, we made, I don't know three or four important acquisitions throughout the course of the year, so when you look at those acquisitions, and layering those in, they immediately give you, a quick pop, that you know, I think is reflected in those numbers. For me the important aspect of these acquisitions isn't immediate revenue growth, it's the improvements I think they can bring to our bottom line and our profit improvement with the security business, so again, we're taking the first part of 2006, viewing these acquisitions, meeting closely with them to from the leadership of the security group to make sure we're taking the necessary steps to get us into the other areas where security is required and high end commercial and government and retail, and being prepared to improve those margins significantly going forward. Again, if I need to sacrifice revenues share for profitability, we're going trade that off and provide that discipline and parameter in 2006.

Okay. Thank you.

We'll go back to Matt Summerville with KeyBanc.

I'm sorry, Tom, I may have missed it if you said it, it was one of my multi-part question but as far as pricing discipline, outside the U.S. are you looking at implementing similar things to what you have done here in North America, and then two can you comment on what underpins the guidance in your voting business. What the major components of that are? And actually I guess why you're looking for a year-over-year decline.

First of all in terms of pricing, absolutely in terms of pricing disciplines outside the United States, it's a little more challenging environment in that we end up with multiple systems and look through multiple databases to get to the same end point but that's not going to detour us in terms of focusing on that, we have had kickoff meetings with the leadership in each od the regions of the World and they understand the disciplines we're putting in place. It will help us be a better organization as we think about pricing and react to specific deals, and again, as I have told our folks running each of the regions they have a responsibility to leverage and take advantage of these tools to become more profitable at a divisional level and if we need to walk away at this certain point we're going to walk away to get a better portfolio of profitable relationships. The second part of your question had to do with the election parts of the business. Matt, I'm not sure I can answer that in terms of right out of the gate. All I know is that this year we had a very important selling cycle that we were involved with. Next year, there may be some folks that are in fact moving, but, again, I think what we're putting out front there at this point is, I think what we're putting out in front of you is the reality that we only have a half a year to deal with, the second half of the year folks with running elections, so I really want to focus on the customers, make those election goes right, and I think as such it's prudent to say we're not going hit that same level in '06.

Okay. And then just in terms of the your guidance relative to where you came in, 192 or 3 on an operating basis this year. Can you do a walk down to 175 to 190, in terms of how you came up with that number and kind of discuss your level of conservatism relative to what Diebold's guidance has been in the past.

Well I think, I'm not sure I can do a specific walk-down for you at this point, but what I think I'm here to indicate is the 175 to 190 is our guidance that we're going to adhere to and hold. While we invest and while we address all of the issues that need to be addressed within the operational areas, and so as we invest in procurement that's built in there as we invest in what it takes to make sure think ERP system is running appropriately, that's built in here. I'm opening over the course of the year we find ourselves more confident in terms of what the Euro is going deliver, but coming out of the gate I think it's prudent for us to put something out there that I'm 100% were going to deliver and not have to adjust throughout the course of the year, and if we make other changes much like we did with the Sumpter facility, if we make other changes there, there's disruption we need to think about about, and we have to deal with that. When in the Sumpter case while it's part of restructure, there's also disruption to the operations for month, and if question do making aggressive steps and other areas, you know, I need to plan for that. So those would be the mayor categories in my mind that frame this up.

All right. That makes a lot of sense. Then if you look at margins by each business in 2006, would you expect security to be up, voting to be similar in the ATM business to be down a little bit because of those things that you just mentioned.

I believe that's directionally correct.

I agree with that. Okay. Yes.

Okay. That's all I have. Thanks.

Thank you.

We'll go back to Reik Read with Robert bare.

Can you guys just on the election business, now that these receivables are less of an issue than they have been, is this an inflection point where you would review whether that business really still belongs at Diebold and can you talk a little bit about why it would, and then can you also address the profitability like you did with the security business where it is today and where you expect to get it.

Okay. I think in the release you saw some very favorable change relative to the profitability of the election business, we have good management running the organization. We're very customer focussed in terms of making sure that the elections run smoothly, and dealing with all of the complications and nuances of that business. As I kind of got myself comfortable or am trying to get myself comfortable with all of the issue we're dealing with, I have not had a lot of time to look at all of the portfolios of this particular issue, given that we're really focused on the supply chain and the manufacturing footprint, et cetera, but, yes, this is something we'll be reviewing and making sure that it makes some sense from us from a focus standpoint and we're able to deliver upon customer expectations, so I would say that pretty much goes across the board. All of the businesses we're in, we're going to be reviewing and looking at it. We're going to decide where our management talent can take the Company and get the greatest return for the shareholders. We think all of these businesses whether it be self-service, security or elections all have some very good value and very good prospects going forward. And we have to decide in 2006 where we're going invest, and where we're going pair, and then what our portfolio looks like going forward in '07 and '08. I can tell you things like outsourcing and things like managed services, and our service infrastructure are things that we're looking to leverage.

Great. Thank you, Tom.

There are no further questions at this time. Mr. Kristoff I would like to turn the conference back over to you for any additional or closing remarks.

Thank you. And thank you all for joining us today. Before I sign off here today I would like to mention our upcoming investment community conference which will be held the May 17 and 18, in Boston. We hope you'll be able to join us and we will have more details available on our website in the coming months. And as always have you have any further questions please feel free to ring me directly. Thank you again for joining us.

Thank you everyone that does conclude today's conference. You may now disconnect.