Diebold Nixdorf Inc (DBD) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Diebold first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS] 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. Good morning everyone, and thank you for joining us for Diebold's first quarter conference call. Providing remarks today are Tom Swidarski, President and Chief Executive Offer, and Kevin Krakora Vice President and Chief Financial Officer. Just a few notes before we get started on today's call. The replay of this conference call will be available later today via our Website at www.diebold.com. And as a reminder, some of the comments today may be 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 President and CEO Tom Swidarski.

Thanks John. Good morning everyone and thank you for participating our call this morning. Before I begin, I wanted to thank all of the Diebold associates across the globe for their continued enthusiasm as we embark on changing the Company. As I continue my direct dialogue with associates at all levels of the organization, I remain encouraged with the knowledge and passion throughout the organization, as well as our associates' willingness to share their thoughts directly with me. It is invaluable to get an unfiltered view inside the organization as we work together in putting the Company back on track toward long-term profitable growth.

As I reported in January, we have a number of key initiatives underway to return the Company to long-term profitability. I'm very pleased with the progress we've made in these areas and I'll continue to report on that progress quarterly. One major step was taken during the quarter in to announce plans to optimize our manufacturing capacity, including a restructuring of our production operations in 2006. A major component of this initiative is to establish a new ATM manufacturing plant in Eastern Europe.

We have identified Budapest, Hungary as the likely location for this facility and plan to have it up and running by the fourth quarter 2006. We're excited about the continued growth in Eastern Europe and the possibilities of having a manufacturing presence much closer to our customers in that region. In addition, this plan allows us to gain greater efficiencies in our supply chain and shorten customer lead times by being closer to our base of suppliers in Central and in Eastern Europe.

Additionally, we have notified affected associates and the related Work Council, as required by French labor law, that we plan to close our existing plant located in Cassis, France. We have contingency plans in place to limit any potential disruption to customer deliveries during this transition. While this change could cause an increase in our short-term costs and certain logistical areas as we deliver on customer expectations, it is a necessary step toward rebuilding long-term profitability in this region. With this initiative in place, we're satisfied with our manufacturing capabilities.

During the past quarter, we've also made progress on our multiyear profit improvement plan that encompasses a $100 million reduction in the Company's cost structure by 2008. We have summarized these savings into three primary categories. Direct material purchases with anticipated savings of 25 million. Indirect purchases with anticipated savings of 50 million. And manufacturing expenses and process improvement with anticipated savings of 25 million. We believe we can achieve approximately 35 million of these savings in 2007, with the remaining 65 million in 2008.

To support this initiative, we have already made a number of strategic investments in internal and external resources in the procurement and logistics area. For example, we have signed an agreement with Ariba to assist us with strategic sourcing and help drive us towards a savings goal in the procurement area. Also during the past quarter, we significantly strengthened our internal procurement organization by recruiting a number of top professionals in the field of supply chain management to drive this initiative. In addition, we have contracted with Vector SCM, the leading global logistics consulting firm, to help us streamline the flow of product from suppliers, through manufacturing, to our end customers. While the short-term investments we're making in this area are significant, they are critical to help us achieve our cost structure improvement targets.

As we discussed in the last conference call, we are also focused on making significant improvements in our ERP implementation. As a result, we are re-evaluating our global IT outsourcing strategy. Under the current strategy, developed nearly four years ago, an outside consultant company provides various IT related services to Diebold. Including deploying and implementing a global ERP system across the Company. We have made significant process in determining the proper course of action moving forward. And we expect to finalize those plans during the second quarter.

I also mentioned in the January call, some of the metrics we would be using to gauge the performance of our business. I wanted to report our progress on this front. Our senior level management team is finalizing the key leading indicators that will help us manage our business by focusing on the customer, operations, financial, and employee development areas. Within these broad categories, there are many data points we're reviewing within our service, sales, supply chain, manufacturing, and product development organizations on a regular basis.

We're currently building the system and have identified the software platform that will help us track these leading indicators. Our next step is to present the final dashboard to our Board of Directors in June. And have the full system up and running during the fourth quarter. In the interim, a number of major components of the dashboard are already in place. One of those critical components is our order to cash process. Our goal for the year is to reduce lead time by 30%. Although it is early on, we have seen some initial progress toward this goal, since we combined our procurement and manufacturing organizations under [Georgia Mays].

Another key component we are tracking is the performance of Opteva in the field. I'm pleased to report that Opteva is now achieving a level of performance, which is not only outperforming our legacy product in the United States, but is also exceeding manufacturing and engineering specifications. We're looking to leverage lessons learned in the United States to other regions as we continue to improve performance levels globally.

Now, turning briefly to our business segments. I'll begin with financial self-service. I am pleased with the growth we've achieved in the Europe, Middle East, and Africa region during the quarter. While Eastern Europe has traditionally been a high-growth area for us, I'm encouraged by the level of growth we're now seeing in areas of Western Europe.

Demand in Asia-Pacific also remains strong. While as expected, North America was down during the quarter. As we've now reorganized, the U.S. regional business into four distinct areas, we are focused on specific metrics for each region. We are not satisfied with our results. And I expect to see improving performance as we have dedicated more specialized resources to better serve our customers. We are beginning to see increased activity in deposit automation implementation within North America.

While we have shipped more than 5,000 check imaging modules since the inception of the technology in 1991, we have shipped more than 500 in the past six months alone. Other aspects of deposit automation in the U.S. market include bulk note acceptance and cash recycling, which is seeing wide acceptance in cash-intensive regions such as China. In fact, over the past five years we have shipped more than 2,000 bulk note acceptance modules and 4,000 cash recycling terminals globally. This gives me a level of confidence that we will see activity continue to build in this area, as this technology makes its way into the U.S. market in 2007 and 2008.

Now, onto the security business. It remains strong with continued growth in the U.S. bank segment, as well as the government, commercial, and retail areas. The fundamental need for enterprise-wide security continues to evolve grow, which compliments the competencies and skills we currently possess and will further develop. We continue to invest in the security businesses through acquisitions and additional resources in high-growth segments. For example, we recently opened an office in Washington, D.C. and added resources to better serve the government segment.

Our election business turned in a very solid quarter, as a number of states took possession of election systems equipment in preparation for the upcoming election year. Before turning it over to Kevin, I would like to leave you with some on thoughts on milestones we'll be using to measure our progress for the remainder of 2006. During the second quarter, we will chart the course we are taking on our ERP implementation and begin taking some actions in line with that strategy. We also expect to have our internal metric systems and dashboards up and running during the third quarter.

This will provide us with much greater insight into the leading indicators to measure performance of the business and enable us to take corrective actions much more quickly. As I mentioned earlier, we also expect to have our Eastern European manufacturing operations up and running by the fourth quarter, which is critical to meet the growing demand in the region, as well as rebuilding the profitability in our European business operations.

I expect to see continued progress in gross margin improvement throughout the year, as we make further progress on our major initiatives. Finally, I'm continuing to focus on the Company's lines of business and organizational structure. As we will make changes in key areas that I believe will positively effect our overall performance.

In closing, while I'm encouraged with the positive steps we have made to date, we are in the very early stages of positioning in the Company for long-term profitable growth. I'm confident that our approach will address the key priorities for the Company moving forward; to improve customer loyalty, improve product and service quality, improve supply chain responsiveness, improve profitability, and improve communications and teamwork. And with that, I'll turn it over to Kevin.

Thanks, Tom. And good morning, everyone. I'm encouraged by the progress we've made in the first quarter. We took many decisive actions during the quarter and I believe the Company is focused on addressing the fundamentals of the business that will drive shareholder value moving forward. In addition to the actions Tom discussed, our efforts to secure long-term fixed rate financing were successfully completed on March 2, 2006. We secured $300 million of long-term fixed rate financing, at an attractive interest rate of just below 5.4%.

Also during the first quarter, we repurchased approximately 1.3 million shares of our common stock under the Company's share repurchase plan. There are still 3.1 million additional shares that may be repurchased under this plan. We finished the first quarter with net income of 12.7 million, compared to net income of 27.9 million in the first quarter of 2005.

Diluted earnings per share were $0.18, compared to $0.38 per share in the first quarter of 2005. The first quarter results included restructuring charges of $0.04 per share, resulting primarily from realignment of research and development facilities from Western Europe to other regions. Excluding the impact of restructuring charges, diluted earnings per share in the first quarter would have been $0.22 per share.

Turning to total orders, our order growth in the first quarter 2006 continues to be encouraging. Financial self-service orders were up in the low double digit range. With solid growth in EMEA and Asia-Pacific. As anticipated, these increases were partially offset by order declines in the high single-digit range in North America, as demand remains relatively soft in the segment. Security orders increased in the low double-digit range.

Total revenue for the quarter was up 16.5% over first quarter 2005, led by security products and service revenue, which was up 21.5%. Additionally, election systems and lottery systems revenues were up nearly 25 million and 19 million respectively. Within financial self-service revenue, EMEA showed a strong increase of 50% and Asia-Pacific was up 9.6%, partially offset by a decline of 6.8% in the Americas. During the quarter, the net positive currency impact was approximately 10.7 million or 2% verses the comparable period in the prior year.

Product gross margin was 28.8%, compared to 28.9% in the first quarter of 2005. However, excluding restructuring charges from both periods, product gross margin would have been 29.1% in the first quarter of 2006 and 31.7% in the first quarter of 2005. A higher mix of revenue from lower margin security and international financial self-service businesses, coupled with unfavorable financial self-service sales mix within North America, adversely affected product gross margin.

This effect was partially offset by cost improvements and pricing discipline, which resulted in the sequential improvement of product gross margins from 25.8% in the fourth quarter of 2005 to 29.1% in the current quarter. Both excluding restructuring charges. Service gross margin was 18.3%, down from 23.7% in the first quarter of 2005.

Excluding restructuring charges for both periods, service gross margin would have been 18.4% in the current quarter, compared to 23.8% in the first quarter of 2005. This decline in overall service gross margin was a result of a significant margin decline in EMEA, the addition of service acquisitions that currently operate the low current gross margin levels and increased service costs. Service gross margin in the first quarter of 2006 also declined from the fourth quarter of 2005.

As we refocus our cost reduction and service restructuring efforts in EMEA and bring our recent acquisitions up to expected levels of profitability, we anticipate service gross margins will improve moving forward. In the first quarter, operating expenses as a percent of sales was 19.5%, compared with 18% in the first quarter of 2005. Quarter over quarter, operating expenses were higher because of approximately 3 million more restructuring expenses, primarily related, again, to the previously discuss consolidation of the global research and development center. As well as higher IT costs, increased intangible amortization expense related to recent acquisitions, the impact from expensing stock options in 2006 and higher legal expenses.

Free cash flow for the quarter was 42.5 million, compared with 58.4 million in the first quarter of 2005. The decrease was primarily due to reduced net income of 15.2 million. Day sales outstanding, or DSO, were 86 days at March 31, 2006, compared to 83 days at March 31, 2005. The three day increase was due principally to slower collections in Asia-Pacific and a slight decline in DSO in North America.

All other international business units showed significant improvement from the first quarter 2005. Net data at March 31 2006 was 287.5 million, compared with 45.6 million at March 31, 2005. The increase in net data over the last 12 months was principally due to free cash flow of approximately 38 million, offset by share repurchases of about 190 million, dividends of 58 million and acquisitions of 37 million.

In 2006, we are now expecting revenue growth of 2% to 4% with financial self-service revenue essentially flat and security revenue up 9% to 12%. In addition, we anticipate election systems revenue between 125 and 140 million. And Brazilian lottery revenue of 30 to 35 million. As a result of anticipated charges from the Cassis restructuring, we have increased our full-year restructuring charges from the $0.12 previously announced to $0.50 to $0.55 per share for 2006.

Consequently, we are now expecting GAAP EPS for 2006 in the range for $1.18 to $1.28 per share. Excluding these restructuring actions, EPS is expected to be in the range of $1.68 to $1.83 per share. This guidance includes approximately $0.06 per share of stock option expense.

Also as a result of the cash portion of the restructuring actions in Cassis, free cash flow guidance for the year has been reduced by 30 million, which is now in the range of $140 to $170 million. While we are working to complete the restructuring actions related to the planned closure of Cassis in 2006 and our 2006 guidance reflects this impact; there is a possibility that these actions and some or all of the related charges could be extended into 2007.

In closing, I would like to reiterate that we have a strong balance sheet that provides us with the financial resources necessary to make the changes required to support the long-term success of the Company. With that, I'll turn the call over to John.

Thank you, Kevin. Let's go ahead and open it up for questions at this point.

[OPERATOR INSTRUCTIONS] Our first question will come from Reik Read at Robert Baird & Company.

A little bit on just what happened in North America ATM market maybe from a share perspective? Do you feel like you were hanging on to share, losing it? and if you were losing it, what were the key factors? And Tom, if you could talk a little about your thoughts in terms of trying to improve profitability verses market share?

Sure. I think, maybe I'll start with that. That the desire from my perspective is improving profitability. In the United States, if you look across the whole landscape at the regional business, there are about 13,000 institutions that are -- have more than say 20 million in assets. There's several thousand below that level that we deal with through a telephonic type of sales approach. So of that 13,000, we do business right now with over 7,000 or 7,500 or 8,000 of those institutions. so our goal here is to provide, as I've indicated by the four specific regions, more dedicated resources into each of those areas in the United States so that we drive a higher value proposition. And in doing so, I think we drive higher profitability.

I believe overall, that we are taking the right steps and scrutinizing that business in the manner that we should. We're looking at territory analysis. We're looking at how many accounts each of them have. And it's my desire to bring additional training and resources and a higher level of sophistication to the individual sales arena and supporting them with specialists to drive a higher value proposition and in turn improve profitability. So, I think we're on the right step here in North America to accomplish that.

Can you talk a little bit about the attempts that maybe you've made with driving that additional value in terms of raising pricing and how successful you've been there?

Okay. Yes, and from a pricing standpoint, if you think about on the service and the product side. Service is a -- it takes 12 months, it takes effect over a 12-month period. So, even if you increase pricing on the service side and you're able to get something to hold, it takes 12 months over the course of that year. It's 1/12 the way the annuity of those contracts flow. So my feeling relative to pricing is we are in fact taking the right steps, we're doing a better job both on the product and service side. I believe we have really positioned ourself nicely to, from a value proposition standpoint, to equate the value of what we're providing to a reasonable cost associated with that. And again, we're putting that discipline in place, I'm seeing the results of that. And I think in subsequent quarters, you'll see improvement that is a direct byproduct of this.

And can you also, then, talk about the sales compensation change that you guys have made? And talk a little bit about are you getting the behavior and the results that you want? Has there been additional turnover? and how does this kind of map in with the things that you're trying to do within each of these four regions?

Okay, a couple of things in that front. First of all, I'm not sure if I had mentioned previously or not, but in addition to making the change from a compensation standpoint, so that someone has a measure of both revenue growth along with profitability, we have also put in place or begun a sales certification process. And I think that's equally important. We are increasing the level of training and the expectation that we have for the Diebold sales organization. So, that process is underway as well. So that someone will have to make sure they have the right skills along with the right knowledge to be out there representing Diebold.

To help folks in that regard and help support the drive of the value proposition, in each of the four regions, we have now in place three specialists; one specialist on deposit animation, one specialist on security, and one specialist on software. And those specialist s are used in customer engagements to help us communicate the value of proposition to the customers as well as help educate our own sales organization. It's through the byproduct of calling on a customer with an expert within the region that helps really lift the expectation and the results that I expect to drive from each region of the United State.

We're also taking a look at the leaders of each of those regions to make sure we have the right team in place. I feel pretty good about that, and we have a review session where we're going to have each region coming in and spending a day with us. Going through their opportunities, going through the territory analysis and going through their top performers. And at that time, we'll have a better handle on which performers -- or which sales folks we don't think are the ones that are going to really live up to our expectation.

And if I could ask one question on the ERP side of things. You had suggested that you now have a pretty good idea what the proper course of action is. Can you talk a little bit about what that might be? And then can you also comment on how good your information is out of ERP today and where you would like it to get to? And what I'm wondering is, with the benchmarking and dashboard capability that you're talking about here with business metrics, how easily is that obtainable without -- with the ERP system that you have today? And then how difficult is it to implement some of these improvement initiatives that you have without a full ERP system up and running?

Well, here was our approach on the dashboard. I felt like I needed to have a dashboard and I needed to have metrics that the senior management team bought into. So, that someone in Asia or someone in Europe knew what the correct metrics were and the ones we're going to be looking at and how they would manage our business more effectively. So, what we've begun to do is we've set up, basically, a separate system that is being fed by all of these different existing systems that are in place. So, regardless of the ERP system, we are going to have this dashboard and metrics that we're going to manage the business by up and running in the third quarter. So, we're well down that path. And while it may be a little more difficult to get all of the information or it's not as seamless, or not as smooth and easy. The point is, we need to manage the business, and we haven't had that in the past. We now will have that, regardless what phase we're in from an ERP standpoint.

Okay, great. That's helpful, thank you.

You're welcome.

We'll next go to Kartik Mehta at Midwest Research.

Hi, good morning.

Good morning.

Tom, a question on the transition for Europe manufacturing. How will you make sure that there isn't any disruption in product or service as you move from France to Eastern Europe from a manufacturing standpoint?

Okay the -- well, and maybe I'll broaden that and answer the issue of -- we just this morning, as you know, made the announcement regarding our intent and our plans for the Cassis facility. So, we were just meeting with the local and regional government. We met with the Labor Department, we met with the mayor. We also had a meeting this morning with the Cassis Work Council and then also with the shop floor associates. And as I understand it and I'm sure I'll learn more throughout the day and in the coming weeks, but there are several meetings now set up over the coming weeks and months.

But I think the good news that I wanted to communicate was, based on a call we had this morning, was that everyone we've talked to as we've entered into this difficult kind of communication has been very positive and very professional. So, it's my intention that we're going to resolve this fair and we're going to have a resolution that is meaningful, both -- for both sides of the fence. And every indication we've gotten from the Work Council has been that there is a desire to negotiate a fair social plan.

So, the intention here is that we would continue to use the existing facility if people didn't walk out. People continue to. We had the set of meetings but they went back to work. They're going to be coming to work tomorrow. So, as it stand today, we'll continue to operate the facility and work amicably with the Work Council and local government to make sure that this is done properly.

By the same token, we have always used other facilities to help meet the demand of the European arena. So, the facility in China may have been producing 10% to 15% of the total shipments that went into Europe. Last year we did maybe 12,000 or 13,000 ATM units into Europe. The Cassis facility did about half of those, I think, 6,000. I think the U.S. facility may have done 3,000 or 4,000, and we did 2,000 out of Shanghai. Those are round about figures.

So should things change in terms of the amicable working relationship or something happen, I think we have strong contingency plans in place because we've been forced to do that anyhow. And then on a separate track, we're going to be working in terms of making sure that from a an Eastern European standpoint, that we anticipate being able to do something in Hungary. And we've got a lot of work to do there but it's our desire to have something up and running in the fourth quarter. And we will begin in earnest on that path today.

Tom, in that same token, EMEA revenues were much better than expected. What do you tribute the success to EMEA with? And would you anticipate that success continuing?

A couple things. First of all, in terms of EMEA, we've been working hard to get the right team in place. And there have been some changes made over the last 12 months in terms of leadership in Italy and a couple of other regions, we transitioned in France, as well. So I think when I look at the entire team or the leadership team in EMEA, I think we have the best team we've ever had in EMEA to begin with.

The second thing is, we finally have our product, hardware and software platform in position to compete. Our legacy product from the U.S. in terms of the IX, as well as the legacy product from [Bouen's Electronics] really didn't compete effectively in that marketplace. So, we now have the hardware and software capabilities coupled with growing capabilities in professional services. And we've got those all working in our favor.

I think the last thing is, we've always had a pretty solid service organization in place. And we're taking some steps to really improve margins in that regard in the second, third, and fourth quarter of this year. So, we're now in a position to be able to compete effectively -- or much more effectively in Germany, now that we've gone through some certification there that we weren't able to get accomplished for the past 18 months.

We're also in the position of being able to work with the French and the Italian banks to a much better extent that we have before. And I feel good about the -- again, the training and leadership we've put in place. We've got a long way to go there, but I think this is the beginning of what begins to be a very successful EMEA operation.

And one final question, Tom. You talked a lot about the pricing discipline and what you've done with sales. If you look over the last six months, has that new pricing discipline cost you revenue? And would you say it's revenue that you didn't want anyways?

I would say it invariably cost you revenue, yes. And I think on the front end of this it's a positive tradeoff for us to establish the disciplines and review process. So when I look at our overall revenue growth, again, the revenue growth is strong.

The only area that we need to make sure we have good visibility to is, if we decide to turn down an opportunity that the right people are turning it down. So as such, the process that we review and go through to take a look at, , what service pricing should be or what a product pricing should be in response to an RFP; I'm much -- we're much better positioned to have the appropriate folks making that decision than we've ever have in the past. So, I think in the long haul, we're going to be much better off going down this path.

And on the front end, sometimes there may be an opportunity that we arbitrarily, or we have priced a little bit higher than would have have in the past and may have lost something. But I'm okay living with that right now in establishing that discipline. And I think in combination with the change we're making for the sales organization in terms of it's not just revenue but it's also profitability, we're opening their eyes up into selling value and recognizing that they need to lift their game, as well.

So how would you characterize pricing currently?

I would say that it's a very stable environment and I think it's going to continue to stabilize and -- all around the world.

Thank you very much, Tom.

You're welcome.

And we'll go next to Matt Summerville at Keybanc.

Couple questions on the service margins. Tom, can you talk more about what exactly happened in EMEA and what you're doing to fix it?

Yes. The service margin decline obviously is something that we've looked very closely at. And the way I would look at this, Matt, is I think from a long-term standpoint, we think this is -- we should be able to deliver margins in a 22% range. Okay? So if I back our sales from that and say; "we were at 18.4", I think you're going to see sequential improvement throughout the course of this year, heading toward the 22% range. And I have a good deal of confident we're going to get there.

In the EMEA region in particular, given what we just announced with the Cassis facility, a part of this had to do with us spending an awful lot of time preparing ourselves for what we did this morning. And I think as part of that, we pulled a lot of resources in and took our eye off the ball from a European standpoint from the service side. In the meantime, Chuck [Ducci] who in his role in terms of Head of Global Service Operations, he has just come back from Europe at a meeting there, where we're taking a look at adopting the best practices there. We're also evaluating service, management at each country level. And we think there's a number of opportunities in front of us to improve that operation both from an efficiency standpoint, a work load standpoint, and a work flow standpoint. So, I'm confident that you're going to see improved margins on the service side going forward. And I'm confident we're going to improve those in EMEA over the course of the next three quarters.

So, the margin degradation in service, you're confident that there's nothing here related to any sort of quality issue?

No, I think what we -- no, I think what we ended up doing in various locations is added resource to try and address the issues that we had in terms of specific performance. The good news here for us is the performance in Opteva. As I mentioned in the United States, we have not only outperformed legacy for the first time but we also have surpassed the engineering specs. So, those lessons learned are going to be applied in Europe so we don't have to relearn those. We did add resources from a service standpoint on the -- to focus on customer satisfaction issues that were taking too long to resolve. But all of that comes out and yields us improvement going forward sequentially.

So the up time on the machines are not the issue?

No.

Okay. As far as the new comp structure you have in the U.S., can you talk about what other actions are being contemplated outside of North America?

Yes, it's -- and the reason we talked about the United States, because we installed that program in January of this year. In other regions of the world, we're on various systems. So we have certain capabilities. The ideal goal -- our goal would be next year, everyone is on a similar system or a similar comp structure as the United States. In various regions of the world today, every country manager has profitability targets and revenue targets. As we break that down into individual -- sales individuals, we still are not able to get every salesman with both a profitability and a revenue target. And it would be my goal next year we have that. So right now, in some regions of the world, that's at a country manager level. Other regions of the world that's maybe a regional manager level. And it's our goal to drill that all the way down to an individual salesperson.

Okay. As far as just to get back on the topic of sales discipline, how do you feel about the quality of your order book walking into the second quarter verses walking into Q1?

Kevin, do you want to comment on that?

I think as we look at it it's very strong. And we're especially in a situation with good order backlog as we look at our needs for Q2. And it's probably been as strong as I've seen it in the last couple of years.

Maybe another way of me asking it. Your Q1 order -- or what you would have shipped in Q1 would have been impacted by the legacy compensation structure. And what I'm asking, in Q2, you feel that that order book, I'm not necessarily talking about number of units, but from a quality standpoint is better than what you walked into the new year with?

Yes, and I think that's a reflection of a very focused effort with the sales organization and the sales team. And positioning ourselves appropriately in accounts. And I think we're going to start seeing the benefits of that.

Okay, and how much will this plant in Hungary cost? And what's your outlook for CapEx this year? And how long does it take to ramp up a plant like that?

Our outlook for CapEx, we've talked about being between $50 and $60 million, and that hasn't changed. But the investment that we're looking relative to Hungary is relatively modest. We've looked at leasing the facility and such. And so the capital outlay we're looking at is between $1 and $2 million.

Okay. And then Kevin, just two housekeeping items. Your outlook for the tax rate for the full year, should we be using 35? And then you have a little over 3 million shares still authorized to purchase. What level of confidence do you have that you get through that this year?

Well, first for the tax rate, we've talked between 34 and 36. And I think 35 is a reasonable rate to use for modeling. And the second question, again, we purchased 1.3 million. And my expectations is certainly as prices stay where they are that we continue to be buyers. And my expectation would be that we get through that availability this year.

Great. Thanks a lot.

We'll now go to Ted Wheeler at Buckingham Research.

Hi, good morning.

Good morning.

I wondered if I could get a little more detail on the service margin issue, particularly in Europe? You mentioned it should get better. Could you just, I don't know, try to quantify or, or segment, maybe the issues, is it revenue mix? Is it man hours to deliver service? Has pricing degraded? Or have costs escalated? What among those issues are you thinking you can improve here quickly?

Yes, I'll start and Kevin if you want to add anything, you certainly can. I think the way I would position this is, in the United States we've had a very large robust service organization for many, many years. And are able to very easily tweak efficiencies and drive that throughout this organization. In Europe, we began our European operations and if you think about it, it was almost -- it's a country by country operation. So what we're in the process of doing is starting to manage Europe -- or we'll begin to manage Europe from a standpoint of driving service throughout the whole region rather than every country driving specific service within its country.

And while you have service managers in each country, best practices have not been shared and enforced throughout the whole region as they need to be. So, I view this as a lot of efficiency issues, manpower planning issues, and a lot of the disciplines that we put in place in North America that we can take to EMEA. That's why I'm confident, based on the meetings we've recently had there, that there are many of these programs that we can put in place and we need to have the discipline to enforce them and make them happen. But we know exactly which areas in the operation that there are issues that we need to address. We know it by country. And now we're going about addressing those.

So, I feel good in terms of being able to confidently say we're going to be improving our service margin, specifically in EMEA where we have the worst performance.

Would this then be improvement in productivity of people as the service is performed? Or would it be picking up price anomalies where you need to raise prices to have things properly -- have proper margin?

Yes, it's a combination of both, but it's much more, I would say efficiency and operational excellence that we don't have today.

Okay, great. That's helpful, thanks.

We'll now go to Mark [Lanyan] at Morningstar.

My questions have already been answered, thank you.

We'll go to Todd Peters with American Century.

Good morning, thank you for taking me question. A couple ones here. On the capital spending you said 50 to 60 million?

Correct.

And depreciation is that still running about 75 to 80?

Maybe a little bit more for that but yes.

Then on the service margin issues, I understand the issue going on here in Europe. And part of the degradation was due to your acquisition. So given the 23.5 to 18.5 year over year change, how much of that was due to the acquisition verses the year issue?

Kevin, let me try and frame it up and then you can try and address that. I think that take a look at the acquisitions we're talking about that may not come to mind immediately, but we made several security acquisitions last year and those were all in the United States. We had an acquisition in Bountiful, Utah, which was TFE. It's a government-oriented business. We had one in Antar-Com, which is located in upstate New York, which is a high-end commercial. And then there was a fire acquisition, NCI.

So over the last year or 18 months, those acquisitions, which are all service business have now come into play here. So, when you take a look at that, I would say approximately 25% of this degradation is associated with that business. We think we'll be making improvements in that business as we've folded to in. And on a going forward basis, be able to bring those up to a much more acceptable level. I think the other part of your question was -- you had acquisitions -- was it?

He had asked to quantify it, which you did. Which we thought was between 20% and 25%.

Yes, so the acquisition was a 0.25 of the margin in the year over year decline on services?

Yes.

And that was solely in the security business and we're not talking ATM.

Yes, the only thing that just occurred that has an impact on us this year, is we made an acquisition, Genpass, you'll recall in the last month or so.

Right.

The margins on that coming out of the gate are not going to be where we would expect margins to be. However, over the course of three to six months from now, we think we're going to be in very good shape there. It's just a matter of timing and contractually working through the issues over the next two quarters before we get that to the level we're going to like. We think that's a very good business, we just have to be careful in terms of how we transition and take advantage of the synergies there.

One last question, on the DSO, it was 86 days in the quarter verses 83 a year ago. And I think in Q4 it was at 66 days. And part of that was due to that election system business in California. Have you recovered that yet?

Well the 66 days had -- the comparison was not affected by California. California obviously, we ended up providing for that reserve at the end of the year for that exposure. And we have not yet collected on California. Part of the issue, though was some invoicing out of Europe that had caused some delay.

Right.

And that situation has dramatically improved in the first quarter.

So looking out over the next quarter or two, where do you see your DSO turning to? Where is DSO in North America?

DSO in North America, frankly is around 60 to 63 days.

Okay. And you're comfortable with those levels?

Yes. Yes. There's minor improvements that can occur in there but the majority of our effort right now is more in the international area.

Okay. Thanks that's all I have.

And we'll go to Don Palmer at Goldman Sachs.

Good morning Tom, Kevin, my questions have been answered, thank you.

Thank you, we have a follow-up from Reik Reid at Robert Baird.

Could you guys just comment with all of the actions that are going on right now, do you think within both the -- how would you characterize within the ATM and security business seasonality? Will it be normal or will there be some aberrations there as we look out into this year?

Reik, this Tom, I wouldn't see anything unusual occuring this year from seasonality standpoint.

Okay. Great. Thank you.

And we'll go to Michael Prober at Clovis Capital.

Hi, a couple of questions on the guidance. In the -- any of the acquisitions included in the revenue guidance? So or is that just a same-store kind of apple-apples comparison on the revenue side?

The guidance would reflect only the one acquisition that we did make, which was Genpass. But any possible acquisitions throughout the year wouldn't be reflected in there.

Okay. Thanks. And on the financial self-service. I missed what you said. You said sales were down 6.8% and was it a function of mixed -- you mentioned the word mixed and I didn't understand what you were talking about?

Yes the sales were not --

This is Tom. If you look at financial self-service across the globe, it was up. But in the Americas we were down 6.8%.

And that was because of why?

Well, that's result of really North America. As we were indicating before, softness in North America is a primary driver behind that. Compared to comparables from last year.

And was there anything having to do with mix? Or that was just because you lost share or your sales force was undergoing reorganization?

Our comment about mix was more towards what had happened with regard to the product margin as you compare it quarter over quarter. The fact that we have more revenue quarter over quarter coming from our security business and our international financial self-service business. Both businesses, which are slightly less profitable than our U.S. -- or the North America business, that impacted our margins.

So within U.S., financial self-service there was no mix shift?

In the U.S. there absolutely was a financial self-service mix shift. And as we looked at the first quarter of 2005, we had strong revenue relative to regionals, we saw that coming down and out into Q2 and Q3, and Q4 of last year. And Q1 hasn't shown any resurgence in that space.

Okay. And then just I missed what you said also. On the free cash flow, you took the guidance down by $30 million, why was that? Is that just extra spending on CapEx?

No, as part of our restructuring at Cassis, we were anticipating costs with that and part of those costs are cash costs. So, we were estimating somewhere around $25 to $30 million of cash cost in order to execute the restructuring there. And that if it all occurred in 2006, which is what our guidance is reflecting, would reduce our free cash flow by; we took $30 million down.

Great, thanks very much.

Thank you. And I think we have time for one more question. And that will be a follow-up from Matt Summerville at Keybanc. Thank you.

Two more questions. First, Tom, can you give a little more granularity on what you saw across the EMEA regions that drove that 60% comp? You mentioned both Western and Eastern Europe were pretty strong, but can you give a little more detail there?

Yes. A couple of countries in particular, we've -- we're well-positioned and see encouraging signs. For instance, Germany. That's an area where we've done very little revenue in the past. This is the first time I think we actually may have doubled or tripled what we have. And while they're small numbers, it's an encouraging sign to me see the opportunities present themselves. And for the German banks to select someone other than Wincor in their home market. Also in the Ukraine and Russia, those are both -- seem to be very strong markets. And we're also seeing good level of activity in Italy, as well. So those in particular, I would say are one that have been very encouraging and helped drive the results.

You talked, I think you said in the last six months you've shipped either 500 ATM's or 500 check imaging modules. And do you see that number accelerating over the next six months? And then looking out into '07, '08 is your confidence level in this next second wave of spending or whatever you want to call it in the U.S. that it's going to finally arrive? Is it the same as it was six months ago, has it gotten -- have you gotten a little more confident?

Yes and just to clarify that. What I was trying to point out was from 1991 when this -- Seibold introduced the IBM technology in the marketplace, through this year, 5,000 IDM modules were shipped to the market. I was encouraged by the fact when I look back over the last six months, we had shipped 500. Which to me gave me some source of confidence that we're starting to see the level of the deployment increasing.

And based on the banks we're talking to, based on the pilot projects going on for ourselves and everyone else in the marketplace; I am more confident than I was on the last call that in '07 and '08 we should see the resurgence or the surgence associated with deposit au nation. In some cases, it may just be check cashing module. In some cases it's the bulk note accept. In many cases a combination of those. And we're seeing the activity in both the smaller, as well as the largest banks in the United States.

Great. Thanks a lot.

You're welcome.

And gentlemen, that does conclude our question and answer session. I'd like to turn the call back over to Mr. Kristoff. Please go ahead sir.

Thanks. And thank you all once again for joining us this morning. Before we go, I would just like to mention a reminder about our upcoming investment community conference in Boston. We will be holding an evening reception on May 17. With the main presentations and breakout sessions on May 18. And we hope to see you there. If you have any follow-up questions on the call or regarding our upcoming conference in Boston, please feel to contact me directly. And with that we'll end the call.

Thank you, that does conclude the call, we do appreciate your participation, at this time you may disconnect. Thank you.