Diebold Nixdorf Inc (DBD) 2006 Q2 法說會逐字稿

Good day everyone and welcome to the Diebold Incorporated Second Quarter 2006 Financial Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Corporate Communications and Investor Relations, Mr. John Kristoff. Please go ahead sir.

Thank you, Dustin. Good morning everyone and thank you for joining us for Diebold second quarter conference. Providing remarks today are Tom Swidarski, President and Chief Executive Officer; and Kevin Krakora, Executive Vice President and Chief Financial Officer.

Just a few notes before we get started. The replay of this conference call will be available later today from our website. And as a reminder some of the comments today maybe considered forward-looking statements. As a precaution, we refer you to the more detailed information that has been filed with the SEC. And now with opening remarks, I will turn it over to President and CEO, Tom Swidarski.

Thanks John. Good morning everyone and thank you for participating in our call this morning. As we reflect on a mid year results, I am encouraged by the significant progress we have made in meeting our customers' needs to improve quality and service responsiveness. While we are still early in the process, our top priority remains returning the company to long-term profitable growth. I am very confident in the abilities of our management team and associates around the world to accomplish what we have set out to do during the past several months. We remain on target to meet our multi-year profit improvement goals as well as our 2006 earnings guidance, which we are confirming for the full year.

As we reported in April and during our investment community conference in May, we have a number of key initiatives underway and I plan to continue reporting on our progress in these areas. One major step we have taken during the quarter was to reorganize our global IT operation. We took control of implementation and support of our global ERP system as well as other IT related functions. This decision ended our previous IT outsourcing agreement with a third-party provider. I am pleased to report that as part of this transition 76 of the 77 associates who were offered the opportunity to transfer back to Diebold accepted.

In addition, we are adding new Oracle skilled associates to compliment existing talent. As a result, the transition has been exceptionally smooth, I am very impressed with a level of energy and creativity these associates have brought to Diebold, which has already resulted in several examples of positive improvement. In addition, we have engaged Genpact, a global IT services organization headquarter in Delhi, India to assist us in a number of key areas. They are providing project management in Oracle skills for our most critical near term projects and are part of our long-term strategy and planning team. We have also structured a new agreement with Oracle Corporation, which gives us dedicated resources customized to our environment and requirements. This includes small Oracle support teams on-site at Diebold focused on fixing the most critical systems issues.

As a top priority we have made significant progress with the ERP implementation in Europe and we are on track to stabilize the system by end of this year. Despite the short-term impact on SG&A, we will continue to commit the necessary resources to stabilize our ERP system and resume implementation in other regions of the world, beginning early in 2007. Our goal is to complete global implementation by the end of 2008.

Another key initiative is realigning our global manufacturing operations. This process, including the consultation around the planned closure of the facility in Cassis, France has proved challenging. Production at this facility is significantly lower than expected having dropped to just two to three units per day, or about 5% of our prior production volume. This has resulted in higher levels of exports to Europe from our plants in North America and Asia.

We have contingency plans in place to meet the high customer demand for Opteva in Europe, as well as maintain customer delivery needs despite the higher than anticipated costs. As this situation continues, our manufacturing and supply chain cost will remain higher than usual. While we are fully engaged in completing this realignment as quickly as possible, it has become more likely that it may not be completed until 2007.

However, I am pleased to report the planned production facility in Hungary is progressing well on its schedule to be operating by the fourth quarter 2006. While this global manufacturing and supply chain realignment continues to present significant near-term challenges, it is necessary to efficiently meet customer demand, restore the competitiveness of our operation, and achieve our long-term profitability goals.

We also continue to make progress in our multiyear profit improvement plan that encompasses a $100 million reduction in our cost structure by 2008. We have completed a number of projects, contracted with new suppliers, and continue to qualify and prioritize many cost saving opportunities. While we are investing significant resources in this effort, I am pleased with the savings we have achieved to date offset some of the required investment in tools, technology, and people, positioning us to meet our goal to be net neutral by year-end.

During the last conference call, I outlined our plans to have key metrics dashboard in place during the third quarter. We have initial dashboard up in running with about 20 key metrics, each expandable to provide data several levels down. As we will refine and implement this tool, it will provide valuable insight into the operations and allow our management team to ask the right questions. We have begun integrating these metrics into our monthly business review process. As we move forward, this will provide greater visibility into the business and able us to make better decisions faster.

Now turning briefly to our business segments, I will begin with financial self service. Our business in Europe remains strong, as evidenced by customer demand for Opteva [Nasilus] throughout the region. While Asia-Pacific revenue growth was light during the quarter, due to the inherent lumpiness in that region, I am encouraged by the double-digit order growth during the quarter and we expect to achieve high single-digit revenue growth for the full year.

In North America we are beginning to see positive signs as the market is slowly improving. We have made significant investments in training, streamlined organizational structure, and added regional expertise to provide better focus in area such as deposit automation, software, and security.

We have also installed more discipline in our approach to pricing and have committed additional resources and tools in the regional bank segment to improve the productivity and effectiveness of our sales and service associates in that region. Based on the feedback I received during the regional operational reviews we recently conducted, as well as the modest revenue growth we achieved in North America during the quarter, I am confident these investments are beginning to payoff. Likewise, we are beginning to see some results from the investments we have made in our service business in North America.

We are seeing improvements across the board in service performance and response time, and this is reflected in an improvement in our customer survey results. This improved performance, coupled with a continued service contract pricing discipline, has resulted in a sequential improvement in service gross margin. I expect steady improvement throughout the reminder of the year.

In Europe, while service margins did improve sequentially, they remain well below our expectations. We are focused on this issue as Chuck Ducey again was in Europe last week to continue evaluating our organizational structure and various operational issues. Our European service management team is implementing changes to reduce costs, drive consistent performance across countries, and deliver better results from that region.

Now turning into security. This business remains a critical part of our corporate growth strategy, and we continue to invest significant resources in this area. Growth opportunities in our traditional, financial and retail markets remains strong as customers upgrade and replace security and delivery system. In our newer market segments, we continue to invest and expand. For example, during the quarter we opened a government security office in Washington, D.C., with a dedicated team aimed at generating more opportunities at the federal level.

Our efforts to expand infrastructure, improved operational efficiency, managed pricing, and developing effective focused organization are ongoing. These efforts combine with a positive trend we are seeing in product margins give me confidence, we are on track to make our long term profitability targets within our growing security business.

Election systems turned in another solid quarter. As a number of states and jurisdictions continue to implement electronic volume technology in preparation for upcoming elections. From a strategic growth perspective we made a number of small acquisitions during the quarter. Most notably, we expanded our presence in the government security market with the acquisition of Actcom, a leader in identification and enterprise security. We will continue our strategy of filling out our service organization and achieving greater scale and key security segments, particularly within international markets to targeted acquisitions and continued organic growth.

Looking to the remainder of the year, we will focus on executing on all our major initiatives. We need to have manufacturing up in running in Eastern Europe in the fourth quarter, achieve ERP stabilization in Europe by year-end, continues to improve service gross margins, and further evaluate our lines of business and organizational structure to ensure we are strategically aligned with our long-term goals.

In conclusion, as I review our progress to the first half of the year, not everything has gone exactly according to plan. Some initiatives have proven more challenging than expected, while others have gone exceptionally well. But overall, I am very pleased with where we are at this early stage in our recovery plan.

I continue to meet regularly with customers, suppliers, and associates globally to better understand the issues and chart our progress as we move forward. We have a highly competent adaptable management team, a reenergize and focused associate base and a clear roadmap to improve our business. As a result, I remain confident in our ability to achieve long-term profitable growth.

Now I will turn it over to Kevin.

Thanks Tom and the morning everyone. Reviewing our year to date progress, certain areas within the business remain challenging. However, as Tom alluded to you in his comments, we have made great strides in our initiatives to improve quality, service responsiveness, and customer satisfaction. These improvements are key to reestablishing the long-term success of the company.

In addition, during the second quarter, we continue to be an active purchaser of our stock. In Q2 we purchased approximately 1.9 million shares of our stock, which now leaves 1.3 million shares remaining under our existing board authorization.

Moving to our results, we finish the second quarter with net income of $17.2 million compared to net income of $32 million in the prior year period. Diluted earnings per share were $0.26 compared to $0.45 per share in the second quarter of 2005. The second quarter results included restructuring charges of $0.10 per share, primarily resulting from the termination of the IT outsourcing agreement. Excluding the impact of these charges, diluted earnings per share would have been $0.36.

Total product and service orders for financial self-service and security were down in the low single digit range on a constant currency basis. And while financial self-service orders were down, security orders increased in the low double-digit range. Total revenue for the quarter was up 17.4%, with security revenue up 15.1% over the prior year period. The election systems and lottery systems revenues were up approximately 28 million and 14 million respectively.

Financial self-service revenue was up 9.4% led by an increase in EMEA of 24.4% as customer demand for Opteva Agilis solution remained strong throughout the region. Product gross margin was 28% compared to 27.6% in the second quarter 2005. However, excluding restructuring charges from both periods, product gross margin would have been 28.3% in the second quarter of 2006 and 29.4% in the second quarter of 2005. This decline was due to a higher mix of revenue from the lower margin security and international financial self-service businesses, as well as lower than expected production volume in Europe that resulted in higher supply chain cost.

Service gross margin was 19.7% compared to 23.4% in the second quarter of 2005. Excluding restructuring and special charges in both periods, service gross margins would have been 19.9% compared to 23.7% in the second quarter of 2005.

While the margin declined quarter over quarter on a sequential basis, service gross margins increased moving from 18.4 in the first quarter to 19.9 in the second quarter, again both excluding restructuring charges. This improvement is the result of productivity gains and improved performance and stabilized service pricing. Service margins are in area of key concern, and our finance teams have been working closely with Chuck Ducey and the service operations management team to help deliver the necessary improvements.

Operating expenses as a percent of sales were 18.9% for the quarter, compared with 16.8% in the prior year period. Quarter over quarter, operating expenses were higher due to increased IT costs, increased intangible amortization expenses related to acquisitions, the impact of expensing stock options in 2006 and higher legal expenses.

In addition, our full year effective tax rate increased from 35% to 35.8%, which resulted in a second quarter effective tax rate of 36.4%. The increase in our effective tax rate was driven primarily by lower expected earnings in EMEA due mainly to lower manufacturing volume in EMEA and higher unfavorable absorption. While I am not please with our current effective tax rate, we have been actively evaluating our global operational structure in an effort to reduce our long-term effective tax rate. We are currently taking steps in this area, which may result in a positive impact to our effective tax rate as early as this year.

Free cash flow for the quarter increased by $25.4 million, moving from free cash use to 24.2 million in the second quarter of 2005, to 1.2 million of free cash flow in the second quarter of 2006. This improvement was largely due to an increase in other current liabilities and improved trades receivable collections, which were partially offset by a lower net income.

I am personally engaged in the efforts to reduce the time required to collect our trade receivables. I conduct regular review sessions at the company level to monitor our progress in this area. DSO was 76 days at June 30th 2006, compared to 74 days at June 30th 2005. DSO in North America improvement how ever this improvement was offset by slower collections in international operations, primarily in Asia Pacific.

Turning to net debt, at June 30th 2006 was 425.8 million compared with 142.2 million at June 30th 2005. The increase in our net cash was primarily driven by strong share repurchases which totaled 214.2 million in the last 12 months. Over that time, approximately 5.3 million shares have been repurchased, resulting in net reduction in fully diluted shares outstanding by approximately 6%. Our net debt capitalization ratio at the end of the second quarter was 28%, which remains at well below our comfort zone of 30% to 35%.

Moving to our full year outlook we are now expecting total revenue growth of 4 to 7% with financial self service revenue growth up to 0 to 3% and security revenue up 12 to 15%. In addition, we anticipate election systems revenue between 145 and 150 million, and pursing in lottery revenue of 35 to 40 million.

We are expecting GAAP EPS for 2006 in the range of $1.11 to $1.21. Our full-year restructuring charges are anticipated to be $0.57 to $0.62 per share. While the full-year restructuring guidance still includes $0.38 to $0.43 of charges related to the plain enclosure of the production facilities[inaudible - microphone inaudible] some or all of these charges could extend into 2007. Excluding restructuring charges, EPS is expected to be in the range of $1.68 to $1.83.

Free cash flow guidance for the year is in the range of 133 to 163 million, which includes 30 million of anticipated cash charges associated with restructuring. This cash free flow guidance was reduced by $7 million from our first quarter guidance due to the previously announced charges related to the termination of our IT outsourcing agreement.

In closing, the company remains focused under key business initiatives necessary to deliver our long term possibility goals. Well much work still remains on these initiatives, I am pleased in the progress I'm seeing day-to-day. With that, I will turn the call back over to John.

Thank you, Kevin. Dustin, let's take our first question, please.

Thank you sir. [Operator Instructions].

We will take our first question from Reik Read with Robert W. Baird.

Strength that you saw there, it looked like you know, quite a bit of the strength came in North America. And I guess it's a little surprising given what seems to be.

Reik, let me interrupt here for one second, we didn't hear the beginning of your question.

Sorry, let me start over. With respect to the ATM market, it seems the North American market was fairly strong, and I guess it's a little surprising that your results were so strong in that area because it seems like the ATM market has been weakening, and you guys had been, as you said, focused more on profits than share. So, can you comment on what you're seeing and why the results were so strong in the ATM segment, particularly in North America?

Braid, This is Tom.

Hi, Tom.

In terms of North America, I think a couple of issues. One is for us, the regional bank market is the area that we had been concerned about over the past you know, several quarters. So, maybe I will make my comments first in terms of that segment. As I comment we have been spending a lot of time helping to create some demand in some of these areas, whether it be deposit automation or software, that more complex than just a simple ATM as we go with in the past.

And I think we're beginning to see the beginning of the fruits of that labor. And we spent a lot of time looking at those organizations. We have had some significant operational review with each region, and feel like that with the branch activity growth that has been occurring in their regional bank market, that it's looking a little more positive than we have seen in the prior three quarters.

So, with that I think we're seeing the beginnings of some slow improvement there. We are also still very focused in terms of the pricing discipline. We want to be focused and not in terms of a growing share, but very much in terms of the quality of the orders and the quality of the business. So, we beginning to see that paying off in that space.

Can you guys talk about what - what was the order rate excluding that large Brazilian order? If, you go back a year ago, if you take that out?

I don't know. I can do some of the math and get it for you.

Okay, that would be great.

Its about $25 million order. Well, Reik, probably the other thing that I would comment, for the group at large, that in this year we have a large outsourcing agreement, and we have been working on in the Canadian market.

So, the whole Canadian movement there in terms of our involvement there is a very large project, we had talked about previously and, again, we're seeing the benefits of that this year as well. So, I think the regional bank market in the Canadian market are two strong movers this year.

Okay, and then just one other question on the ERP side of things. Can you just, give us a little bit of a sense, kind of, what you're saying when you're looking -- what is meant by stabilization? And, what are some of the key problems and remedies that you are still going through?

Okay. I will start, and, Kevin, you have been jumped in his request. That we talked either last call or the call before in terms of the first of all that, the billing engine problems we were having. Well, that billing engine issue is a significant issue because it implications in terms of the operations, and DSOs, etcetera.

We have got when I talked about some specific resources here from Oracle and bringing in skilled labor focused on that we will bringing some experts here to - to stabilize that, we have seen some modest improvements there. My expectation by year-end, we get that to running to the level it should be.

Likewise, this other functionality like that - that whether it be performance, response time, up time, that within the system that we're starting to see some real improvement on as we are focusing the Oracle resources on. Kevin, do you have anything?

The only thing I can add Reik is that I was in the EMEA in UK a couple of weeks ago, to specifically look at. The impact of response time in other areas first hand, and we have seen meaningful improvements in the response time of the system itself, that is how fast transactions are processed, how fast the screens changed.

We continued to be challenged on billing as Tom said, and are working diligently to deal with that and the interim have had to introduce a number of temporary employees, if you will, to help manually, deal with that until its remedied.

Is the ERP situation more of the what you suggested Kevin well its having to throw a lot of resources added to make sure you gain the information or their areas where you just simply not getting information at this point that you would like to have.

It is a little more on the latter. We're just we are not been able to fully utilize the system to get the information that we need to do everything we need to run the business.

Okay. Great Guys, thanks very much

Thank you. Your next question comes from Matt Summerville from KeyBanc.

Good morning. Couple of question. Kevin how, what you think your potential tax rate could be for this year, if we, the item that you are working on end up panning out.

Matt it is a bit too early for me to be able to quantify that. We have been working on a number of things for the last, you know, 6 to 8 months, and our long-term goal is to try to get our tax rate down to more historic levels, by that I mean, to lower to - lower to 30% range rather than the 35 and 40% range, that we saw in the last year and so far this year. But, it is -- at this point it is too early for me to be able to reflect what we think in any of our guidance or in our effective tax rate for the year.

Okay, and then you also quantify what your - I guess excess spending was in France relative to may be what - what you would had hoped, I guess what kind of cushion do you have still have left in that respect and better than your guidance?

In the second quarter we estimate that, in excess of $2 million was the expense that we had to absorb relative to the these lower levels of production. And what we are anticipating going forward is unless those circumstances change quickly, that we would see like expenditure levels in Q3 and Q4 of this year.

Is there anything that could happen that it sounds like you have recast your thought process there little bit in terms of these expenses, is there anything that could happen that you would get another jump in that expense, or you kind of maxed out?

This reflects the fact that we basically have two to three units of volume coming out of there a week. So, I think --

A day.

A day, I am sorry. So, that pretty much hits the, as much the bottom we can.

Yes, Matt this is Tom, I mean if the next step is you know, as we continue to work through the work councils in the court system, if they would go on strike we would actually see some relief. From the standpoint, we would not be incurring some expenses we are today, but this is almost like the -- it can't worse than two units a day.

Okay. And then Tom you talked about the regional banks out of the market in the U.S. Can you talk about, what you're seeing with the big national banks as well in the same context?

Yes. Okay. I think on both fronts, when we talk about North America, I feel very confident in terms of our ability to how we are positioned there and the way we bring out solution to market the both the regionals and the strategic accounts, they could made some good progress in both areas. Kevin and I have sat through extensive reviews of those accounts, and I think we're well-positioned.

I think, I like the level of talent and resources we have allocated to it and I would expect that you know, we continue to hold our own and get more our fair share at both these levels.

What are you hearing from the big banks relating to check 21 implementation. Are you hearing anything with respect to the second half of '06, or are you still more early '07?

You know, I think - I think across the board its more '07, '08, you know, '09 time frame. I think we are going to continue to see and we are involved in extensively and many pilots and lots small roll outs. But, I don't see anything significant moving until the '07,'08 timeframe, and you know, for a lot of these folks that are testing out the technology, the implementation process, capability, the Service delivery, those if the host of that as well as getting the customer getting educated in terms of how to use this new deposit automation technology associated with. Check 21, so, I need all of these factors suggested that market is poised, but I would see as a 2007, 2008 occurrence.

What have you seen in terms of pricing in terms of pricing outside the U.S.?

In the United States if I expert there from prices stand point, I think its - its more stable than the last call. Outside the United States its overall pricing is becoming more stable. But, certain regions of the world that it doesn't appear to be rational yet, but I think from last call, I see improvement across the board.

Again, we're dealing with not only you know, people think of it from a competitive standpoint, but also from the expectations of the customers as well, in terms of the impact that they have pricing.

Got you. And one last question, I will get back in queue. Kevin you have 1.3 million shares left on the authorization, your run-rate of repurchases obviously are greater than that. Are you going to go back to the board and get another 4 million shares?

We do have a board meeting in August 17, then we will be going back, asking for additional shares. But, the amount is not been decided, I am not sure exactly what we will request. Or what the board will ultimately grand.

Okay. Thank you.

We will go next to Ted Wheeler at Buckingham Research.

Yes. Hi, Good morning everyone.

Good morning.

Couple of questions on the order rates and the commentary of our regional banks and perhaps just a little bit ahead of your concerns, just seems a little bit at variance with the guidance for the financial market where you are talking about a you have the 0 to 3% gain. That implies a decline I think in revenue in the second half, and this one am I missing something or I wanted to just add some color to that. In fact growth in the first half and you seem to be talking little bit more optimistically.

I think a couple of things, first is that, we have to look at the comparison versus 2005, and in 2005 we're seeing a lot of movement and -- taking some orders ahead, and some more revenue occurring in Q3.

In earlier in Q4 I think - I mean in 2006 we are seeing is a acceleration of our installations and getting more of that revenue ended by quarter. And, frankly, as we talked about before, we have the biggest comparison drop is the large Brazilian order that affects the comparison growth from quarter-over-quarter, and that was one non-recurring large quarter with the back in Brazil.

Okay. Thanks. Just on the tax rate, kind of going on - going at that again was a or is a tax rate reduction part of the guidance that you have been contemplating all years. This is a kind of an initiative has been working for and is perhaps going to be sooner or rather than you thought?

I think the comments really are an un-forecasted spike from 35% to 35.8%, which we were a little bit upset with that, but again more to do with some global revenue and global operating profit mix. We had not been happy with our tax rate as we communicated for a while and have been working hard on that. We think we're making some progress in that area, and our goal has always been to obviously to drive that as low as we can, and at least to get back to the kind of historic levels that we have had.

We see opportunity to do that, but these are long-term options, none of them are at a point, where I can say that we can definitely reflect that in our guidance or in our statutory reflective rate for the year. So, we are making progress, and again, as we alluded to, if we get some of this stuff done faster, and been currently expect that we could see some of that benefit happening in 2005. But again, its too early to count on that and we aren't reflecting that in our guidance.

Okay. So, basically 35.8 for the range you put up, so far.

35.8 was exactly is, what we're expecting.

And just, I guess one last question. You talked about the North American orders looking a little bit better. I guess maybe you have answer the question earlier, but I - I do know may go at it again, just be over color on North American orders improving as to sort of what you think drivers are? Is it, your customers opening more branches, is it mix changes, is it upgrading, just kind of curious on that?

The North American orders are actually slightly down, as Tom talked about earlier. Yes, we are benefiting on revenue and orders from our Canadian business. And, when you look at the actual order rates within North America specifically, U.S.- centric orders, those are down for us. And, that is what we have been anticipating and, so, that is an exceptionally new news. And, so, That reflects -- reflected in our guidance, now just patients for the remainder of the year.

I guess talked toward an indication of orders that are seem to be improving, may be unless make sure that.

The I think, what we want to make sure we communicate it, I think what we are indicating is I believe that the quality of our orders are improving, and by that I mean one of the issues we faced last year was certainly in the fourth quarter was the earning performance. The other company as well as you know, what these things are priced.

Well, this is disciplines we have put in place, I think the quality of the orders looks better and, so we're feeling good about that. and we're also seeing you know, a lot of good conversation, you know, We just mentioned deposit automation well that's not necessarily 2006 phenomena, but, we see those types of conversations occurring in the potential in 2007 as it is building toward that. I think that as a positive outlook in North America that we have not seen up to this point.

Great, that is very helpful. Thank you.

We will take our next question from Kartik Mehta at FTN Midwest.

Good morning Tom.

Good morning.

And Kevin.

Good morning.

Hey question for you on Cassis, will Cassis continue to manufacture once you have the Hungary plant up in running, or is that a plant you just have to kind of keep it open, because the rules are in place France.

Kartik its Kevin, we will, we are required to continue to produce volumes there until we reach an agreement with the work counsel and as you know that process is underway. So, regardless of Cassis is getting up in the fourth quarter at Hungary if we haven't reach the agreement with the work counsel on that point in time, we will continue to manufacture in Cassis as well.

Kartik as we began the year, you know, we made the announcement that this was the path we were taking and the thought was we would like to get this completely addressed in 2006. Obviously, you know, as you can see with what's occurred in the facility we have incurred some increased expense because of production volume, have an export and move things around, it's impacted inventory, it's impacted us from every sense of the word.

The fact that we are on track with Hungary is promising regardless of what we end up doing Cassis or not, its - we are not going to alter our course, it's the right course to take, and if we have to, you know, if it takes an extra two months, we are going to live with it, we are going to live with the expense, because, you know, we are much better off today sitting where we are at the fact that we have entered into this process than not, and having it staring - the inefficiency staring us in the face.

So, we got to live through it, I wish I could give you specific dates, but in dealing with this situation and going to the court systems, the word counsel, we continue to face and jump over hurdles, I feel good about the progress we have made and it gets to this book three and book four. And in the next couple of months we should get a lot of visibility to that, and probably by the next call I think we will have a more definitive quarter in which we think this thing will be actually happening.

So, Tom, does the guidance right now reflect the potential additional cost because you have Hungary running and Cassis up in running, I am assuming as you have already taken that into account and if anything happens that can improve your position that's just better.

Yes. Right now, you know, the guidance reflects, you know, Hungary and the cost associated with that along with the cost associated with Cassis at a higher level than originally planned. So, we are overcoming that with other, you know, other things we do, within the operations to improve the business.

And then you increased your guidance for self-service from what was it originally a flat revenue growth it looks like 0% to 3%. Is that the strength from your Canada outsourcing business or is there other places such as Europe that's also helping that?

Well certainly Europe is - Canada and Europe were two probably the biggest drivers of that. We have been experiencing some strong order growth and revenue growth in Europe, both in eastern part of the European operation as well as Western. So, I would say those two are probably the biggest drivers of year over year variance.

And Kevin just a financial question. I was looking at the income statement, it seems like the other expense the minority interest line increased compared to last quarter from I think $4 million to $10 million, can you may be just provide some breakdown on that or what might have been in there to have that increase to happen.

Well, the biggest part of that is our increased interest expense, which is obviously, if you look at our net debt position now it's significantly higher and that reflects the share repurchases that we have done. So, the larger piece of that would be our interest expense increasing.

Thanks a lot.

Okay.

We will take our next question from Kathy Steinbrecher at Wedbush.

Good morning. Most of my questions have been answered, but I wanted to dive in a little bit more on the revenue side and the guidance that you have provided. It looks as though for example on the Brazilian revenue that for the next few quarters, I think you are at around $33 million now, so you are looking in at maybe another $7 million for the next two quarters and that seems pretty low.

I don't know exactly, the numbers don't see familiar, but I can tell you that the Brazilian revenues for Q3 and Q4 will be lower, but that's reflective of the fact that a lot of the lottery business happened in the first two quarters as well as the voting business that they picked up and did. So, we definitely are looking at lower revenue levels in Q3 and Q4, but I will have to go into detail to know exactly the numbers.

Okay. And, I guess, I know we touched on this earlier, but again on the revenue side, I wasn't real clear, it seems as though the revenue you have generated in the first and second quarter on both the ATM and security, it does seem like there would have to be material downturn in revenue in order to achieve your full year numbers. Can you just go over that in a little bit more detail.

I think part of that is the answers that you have hearing concerned with Cassis some of the expenses that we are looking at incrementally there. But, I am sorry, revenue.

Revenue, yes?

I am sorry.

That's okay.

I was anticipating another question.

Well, I will ask you that one too.

Again, I think when we look at Q3 and Q4, we are looking at revenue relative to the prior year, we have good comparables. Our biggest grow is coming out of EMEA, but we are not looking that in North America and again Brazil, pieces that are driving those expectations lower as we do the comparison for the Q3 and Q4. And Asia Pacific as well, we have more of the our stronger China revenue coming in for the middle Q2 and Q3 then in Q4, which has been reflected in that - those assumption as well.

Okay. And then looking at the restructuring cost that you have, the guidance that you have provided. So, it seems as though if they task this plan rolled over to '07 first quarter, can you give any guidance on what that range might be in the first quarter less than $0.10.

Well, I think in the guidance we talk about the restructuring being 57 to 62 for the year, $0.38 to $0.43 of that is Cassis. So, the math would be simply to take the 38 to 43 away from our full year to see the impact of - if Cassis actually moved into 2007 and a related cash flow impact of that would be roughly $30 million, again which would move from 2006 to 2007.

Okay. And then just one last question on that. What was your expectation that you might have now, you said that the production is pretty low. Originally, you had talked about in the prior quarter that you had provided bonuses and incentives to the employees to keep production and quality up, and I would think that that was included in your guidance - your restructuring charges. So, what was that expectation originally?

First, we didn't provide any bonuses or incentives to keep production up for these workers. But, our original assumption was somewhere around 20 to 30 units a day, which would have been, you know, 50% less than the normal production at that facility and as we talked about that, we are now about 2 to 3 units a day. So, substantially lower than what we anticipated.

Okay. All right, thank you.

We will go next to any [Andy Keller], Excalibur Research.

Yes, thanks very much. Thomas, couple of questions regarding your revenue. How do you guys streamlining this daily process to reduce ordering now, because order inaccuracies allow your customers to have a better buying experience.

I am sorry Andy, would you, I didn't quite get that question.

Need to talk about how you are streamlining the selling process to reduce order inaccuracies so now your customers can want to do more business with Diebold have a better buying experience in Diebold in overall understand the transaction?

Okay, I think a couple of things. First of all, we do a lot of customer surveying, so we get information back real time online with specific customers. If there are specific issues, for instance, whether it would be ordering or serve associate or a sales associate we get that information in and actually we are able to act on it very directly that institution.

So, we have a very clear line of sight in terms of the improvement required if so and fills that the customer survey data and customers are pretty good about it. The other thing we have implemented is we have done event-based surveying as well, meaning that after a service call after an event that occurred, well we're are out working on say branch equipment or something in a branch locations. We go back in survey to see how we did, the level of courtesy, as well as our responsiveness, and get feedback there.

Our responsiveness on the service side is very important for us for a lot of the regional banks in terms of being able to get their confidence to the level of ordering additional equipment.

So, in terms of the streamlining of the process, we have an organization in place with, you know, in terms of how they enter those orders that we are pretty comfortable with. The visibility we are getting now has to do more with the expectations we have created with the regional bank teams. We have the head of that group its in on a monthly basis giving us an update by region.

We also did regional reviews with each of the Vice President of sales and service in the four regions of the United States. So, we are getting much better insight and intelligence relative to how we are performing and required improvements within each region within the United States.

I guess, what I mean is, regarding your Oracle system, how are you guys, how allow your customers not to configure and price your products better?

Well, actually the ERP, the Oracle implementation really hasn't impacted the US at all. The place we begin and where we, you know, encountered some issues was in Europe, which is why we have not necessarily rolled that out. So, the folks in the United States was continue to use the existing systems in place, and you know, depending on the size of the account, each has dealt with slightly different.

Some of the very small accounts are dealt over the phone and we are able to take the order in electronically and get it through the system, some of the largest accounts they help to enter the order and then some of ones in between are handled differently, but that's an existing system that has been in place for quite a while.

Are you guys planning to reduce DSO's over the next year, I understand that's still a challenge, what you guys are going to do?

I think the opportunity - if we look at DSO's the places that we have been dealing with the most problems are international, and in this quarter really is Asia-Pacific with some large banks. So, we anticipate seeing the full collection coming in Q3. I think the opportunity to improve DSO is again with getting the billing engine right relative to our Oracle platform, and that will allow us to get the invoicing out quicker able to be do it cheaper because we will be able to take the manual people out, and it will enable us to do it more accurately, it will allow us to enhance the collection experience as well.

In our case we put a lot more focus on this effort. At the last business review meeting, we know there are five countries that are causing the issues some of the result of system performance, some of the result of customers that we are working through specific issues on. But, you know, we have got a lot of focus on this area, and I would expect us to continue to drive improvement. But the United States, DSOs has continued to improve really over the last several years due to very good efforts.

And final question. As CEO of Diebold what would you say is the number one challenge you face going to 2007, and how would you plan to tackle that head-on.

Well, I think the issue we have outlined previously is really continuing with major initiatives. It's the smart business 100, its identifying and being able to eliminate a $100 million in the cost structure. It's completing Cassis and European implementation. So, it's a matter of executing on those three areas, which we got in focus, we got the resources against it. So, it's a matter of sheer executing in my opinion, we have identified the issues.

Thank you very. Good luck gentlemen.

Okay.

We will take our next question from John Emerich at Ironworks Capital.

Thanks. Couple and related questions if I could ask them separately. The first is, the other expense in minority interest, could you break it up between interest expense and minority interest for the quarter?

I don't have the things in my figure tips I can absolutely get that information to you offline and clearly when we do our Q filings we also provide line item detailed by, you know, four different segment. So, I can...

Okay. What is the cash flow statement item increased in certain other assets on the cash flow statement down in the investing section and why is it up kind of two-fold from last year?

Hold on a minute while I pull up the cash flow statement.

$25.7 million year to date below the spares expenditures number.

Yes, I see the number. Again, I apologize, but I have got a lot of detail that I could go through to have that, as you can see, it is 25 versus 14 last year and with falling below that line are in investing activity, the way we described certain of our other asset accounts, what falls below that line are select accounts and I know that one of the impact is - its been impacting is its cumulative translation adjustments from the currency change especially with Brazil. So, that's a part of it, but again I can get the details, you know, exactly where it is and communicate that back for John for you.

Okay. And the other one was the charges $9.5 million in the quarter. think I was able to get out that $1.6 million of it was in cogs, 1.1 in products and 0.5 in services. Is the entire remaining portion of it in SG&A or part of it is R&D, I am just trying to figure out.

Are you talking about the restructuring charges?

Yes, sir.

Well, what I could tell you about 1.1 million is in product, $400,000 is in products, is in service cost of sales, $8.3 million is in SG&A and the biggest piece of that is was $7 million outsourcing termination charge of 7 million. And then, R&D at $1.2 million and there is a little below the line to get us to.

What was that last $1.2? well that's part of the SG&A?

R&D. and then there was a about 100,000 and other expenses and that got us to about $11.2 million in total.

Second to last question. The share repurchases are great, you know, we assume we think the stock is value down here. How far will you take the debt to equity, or debt to total cap?

We have talked about key in my comments, that I am comfortable over debt-to-equity, our debt-to-cap ratio of about 30% to 35% and clearly, we have been an active purchaser now, and I think we have had an increase in that percentage which gets us about 28% I expect with a kind of cash flow that we are going to deliver in Q3 and Q4 that net debt-to-capital will actually come down a bit, as the year progresses. But, I think that there is clearly room for us and would be comfortable still if our net debt-to-capitals in the 30% to 35% range.

Okay. My last question was actually about - another question about net increase in certain assets. Why in your free cash flow statement, when you show your version of free cash flow why you don't take that as well I mean its bigger than CAPEX year-to-date. But I guess if you are not sure what it is?

By definition, we talk about free cash flow we are talking about cash from operations, less capital expenditures convertible so what we are trying to aim at by giving you a free cash flow number is to tell you what kind of cash are we generating after we cover capital requirements. So that is the only point in having free cash flow. And then, after that obviously, we just use the cash flow statement.

Well, I guess without understanding what that item is, it is difficult to judge whether, may be with you, I guess. Whether I would agree with your issue and take it out. But, I guess we will wait for follow-up on that item is and thanks for the call.

Sure.

And we have a follow-up question from Matt Summerville at KeyBanc.

I was just here, I was wondering if you could talk a little bit more about market trends in Western Europe and then in some of the developing regions around the continent there. Just go into more detail, we really didn't cover it on the call.

Matt, this is Tom. As you know, Western Europe is a very mature market, and that distinguish itself a lot from the Eastern European countries which are very early in the formative stages in terms of ATM deployment. Given our, you know, historical position in Europe we have been a distant third player in the European arena.

So, we have finally got into the point of having what I would call a competitive product and service offering there. We are doing a lot of work certainly in terms of the service organization to get that lined up to perform and deliver the margins that we expect.

From a product standpoint we are seeing good opportunities really across the board. Certainly in Eastern Europe it will be a focused area for us, as we move forward and as some of these countries start developing and creating networks and infrastructure there.

In Western Europe, our challenges are little bit more difficult, because there are some very entrenched players in those markets and requires sophisticated software to penetrate those markets. But the good news is, for instance in Germany and some of the other areas that we've not had a large presence, we now have a certified product, we've got a software offering through Agilis that can connect into the joint-use centers. And I would expect that we are going to continue to grow, and in the future grow more profitably in both aspects of Europe. So I am looking for Europe to continue the both the order growth and the revenue growth in the coming years.

If you look at the plus 24, was that driven predominantly then by none Western European market?

It is a combination across the board. It was healthy, you know, in both segments. Certainly in Western Europe, we do have an installed base, you know there is upgrade potential and other aspects of upgrades that you know you get the benefit of versus new deployments. But, we have also are you know, we have got some plans in place regarding Italy, France and as well as Germany and Spain to start making some further inroads.

So, we have struggled in Western Europe historically, outside of France and Germany, but areas like Belgium, you know was done exceedingly well in this other countries. In South Africa that we have done well. We are starting to establish ourselves now we have got certified product to make some inroads in Germany and some of these other countries where historically our market share has been very, very small.

And your security business, can you talk about what is really driving the financial portion or the bank related portion of that. And then how fast you see that growing looking out over the next couple of quarters? Just that specific piece?

Just a financial segment?

Yes.

Okay. You have both the combination with the financials, the physical security and electronic security product offering fits there. We have been taking some of the acquisition capabilities, for instance the high end security capabilities into some of the major players, where the major banks there, headquartered facilities that are not branch locations and take some high integrated security solutions to them. We also have some solid work that's being done in terms of working within the branch structure.

So, that we are talking only in terms of ATM but also all the security offerings there. And the security team is working very closely with the sales team to allow us to really take advantage of that.

So I think that while the acquisitions in many case do not targeted toward the financial markets, some of the skill sets that they have their allow us to go back to some of the financial providers with some higher level integrated security offerings that I think will be beneficial, and we are also seeing the regional space being strong from a security standpoint. So, I see that continuing through the end of this year to next.

Okay, great. Thank you.

And there appear to be no further questions at this time. I would like to turn the callback to Mr. Kristoff for any additional or closing comments.

Thank you Dustin, and thank you all for joining us today. Again a full replay of this conference will be available from our website later this afternoon. As always if you have any follow-up questions please feel free to call me directly.

Again, that does conclude today's conference call. Thank you for your participation.