Diebold Nixdorf Inc (DBD) 2008 Q2 法說會逐字稿

Good day everyone, welcome to the Diebold Inc. preliminary financial results conference call. This conference is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

Thank you Celon. Good morning everyone, thank you for joining us for Debold's second quarter conference call. Joining me today are Tom Swidarski, President and CEO and Kevin Kyakora, Executive Vice President and CFO. The purpose of today's call is to provide an update on our filing status, bring you up to date on our key operating initiatives and discuss the preliminary financial results we released this morning. A replay of this conference call will be available later today from our website. And, as a reminder, some of the comments today may be considered forward looking statements, internal and/or external factors could significantly impact results and as a precaution we refer you to the more detailed risk factors that have previously been filed with the SEC. And now, with opening remarks, I'll turn it over to CEO, Tom Swidarski.

Thanks, John. Good morning, everyone. I'm pleased to finally be able to share details with you on the significant progress we've made over the past 15 months. On the strategic initiatives we defined at the beginning of 2006. We are very excited to be in a position to provide this information. It's been a long road to get to this point and there is still much work to be done to get current on our financials. I would like to take this moment to recognize the Diebold associates involved in this effort as they spent an enormous amount of time and late hours working to get us to this point. I an confident they will continue this extraordinary work until our financials are current. I would also like to thank all our global associates who have remained focused during a challenging period. Through it all our people have been doing what they do best, serving our customers and improving our business. It is are their discipline that has enabled us to report the impressive results we are able to share with you today.

When this leadership team was first put in place at the beginning of 2006, we knew we had to drive a number of fundamental changes to get Diebold back on track toward achieving a significant improvement and profitability. Among the most impressive of these needs was a top to bottom reassessment of the company's manufacturing and supply chain infrastructure, as well as the re-evaluation of Diebold's true value proposition.. This resulted in a multi-year effort to dramatically change our approach to manufacturing. We also intensified our efforts to provide higher level services that helped address some of our customers most difficult operating challenges. This comes at a time when our customers are focusing more than ever before on their core business needs.

In Brazil our customers have chosen to outsource technical components of their retail banking operations for a number of years. As a result a large portion of Diebold's revenue in Brazil is derived from integrated services, including transaction processing network monitoring, currency management, software distribution, security and maintenance. This trust has enabled us to win several of the largest ATM awards in history. We are successfully growing this business model in other geographies as well. In Latin America, in the United States we have secured multi-year outsourcing agreements with a growing number of customers in the regional bank and credit union space.

This early success is already having an impact on our service, revenue growth and margin improvement. Growing and investing in this business is a top priority for us as we continue to evolve our services capabilities in the coming years. This will lead to a more sustainable and profitable business model for us and in turn deliver an exceptional level of value for our customers and shareholders alike. As I said earlier, these are the kinds of strategic efforts in which our associates have been intensely focus and we are beginning to see the results. We also continue to invest in order to bring high value and innovative product solutions to our customers. In the self service business deposit automation is becoming a key growth component. We have established ourselves as a global leader in the deposit automation market. In fact through the first half of 2008 approximately one out of every two (inaudible) of full function ATM delivered was equipped with deposit automation technology.

Additionally we have long been recognized as the leader in check imaging. Our single check, (inaudible) check solutions continue to out perform the competition in terms of up time and reliability, resulting in higher consumer satisfaction and lower operating costs. Our ability to deliver hardware, software and services that uniquely meet our customer's full deposit animation needs has been one of our top priorities for several years. We look forward to introducing additional innovations into positive animation to our customers that will continue to. uniquely position Diebold in the industry.

Earlier this year we were proud to announce Diebold was chosen as the exclusive ATM provider in key Olympic facilities by the Bank of China, which is the official banking partner of the 2008 summer Olympic games. The ATMs,which are located in the Olympic and media villages will provide operation prompt in three languages on the screens to allow the global athletes and spectators to access convenient financial services. Given the positive performance our products and services solutions have delivered in the marketplace, I am confident that we are taking the right approach to deliver sustainable growth and improved profitability. To that end we have increased our total revenue guidance to 8 to 10% for 2008 while raising financial self service revenue guidance to 9 to 10%.

As we continue to reposition Diebold as the leader in delivering higher value solutions and services we are also transforming our cost structure to support this strategy. On this front we have undertaken a number of initiatives to help make our operations more efficient while reducing costs. These include global manufacturing realignment, consolidating the company's supply chain and distribution network, and initiating a product optimization program to better meet customer needs. First, we are progressing with our global manufacturing realignment plan to reduce Opteva production down to two primarily plants. This morning we announced our intent to close the Newark, Ohio, manufacturing facilities which produces physical security products. We'll move all this production to our plant in Lexington, North Carolina. We will also continue to produce the U.S. centric drive up and deposit automation units in Lexington. Less complex cash dispenser Opteva product lines will be removed from Lexington to our existing plant in China and Hungary. Our customers can be assured that the Opteva production will be handled by two very capable, well-established plants.

The facility in China opened more than 12 years ago. And, our Hungary plant has been fully operational since 2006. Together these operations have manufactured approximately 60,000 Opteva ATMs. The company anticipates the product transition employer reductions in the Newark area will begin in October, 2008, and the facility will be closed in the first quarter of 2009. The job eliminations associated with this planned closing will be included in a global work force reduction target previously announced on February 6, 2008. These types of plans are always difficult as people who have been with Diebold for a number of years were adversely affected. However, to remain competitive in a cost driven global marketplace it is critical we make these tough decisions to consolidate our production activities wherever possible.

In anticipation of the reduction of manufacturing capacity the company will continue to maintain higher levels of inventory in the near term to ensure smooth transition to meet customer delivery time.. We will provide further details regarding our ongoing manufacturing alignment effort as these actions progress. Also we have made a good deal of progress to rationalize and optimize our warehouse network in the United States. We are currently in the process of reducing our U.S. warehouse infrastructure from 89 facilities down to three strategically located regional distribution and final customization facilities. This process, which we anticipate will be completed in the fourth quarter, is aimed at reducing customer lead time while simultaneously reducing required inventory levels. Additionally the company has just completed on an Opteva product optimization program in North America. This initiative will reduce our ATM product configuration complexity by more than 90%.

While the number of unique product configurations will be greatly reduced we will retain the most popular features and functions in the more standardized packages. It is a major step toward the company's goal to transition from build to order manufacturing to a just in time pool system with a global capacity for post production customization. Overall I am pleased with the steps we've taken to improve our manufacturing supply chain and product distribution processes. Looking at our market. Considering the challenging environment in the financial industry, I am very encouraged by the consistent demand customers have expressed for our solution. In the United States, financial institutions are facing unprecedented challenges. However, we continue to experience solid demand for financial self service solutions from the national bank segment.

As I mentioned earlier this is partly driven by increased demand for deposit automation. We expect this trend to continue as these customers strive to improve the retail banking operation which remain an important profit center for many financial institutions. I am pleased with the improvements we have delivered in our service operation as our efforts to provide higher value services continue to gain traction. These capabilities remain one of our key differentiators in the marketplace. Services are critical to our ability to improve profitability and strengthen our leadership position in the financial industry. Looking at second quarter orders, we saw solid growth in every geographic region. Orders were particularly strong in Asia Pacific and the America's as the company received large orders in China and Brazil. In the securities space revenue was essentially flat. As you know, our security business remains significantly U.S. centric with high exposure to banking. Top line growth was adversely affected by reduced construction of new bank branches in the U.S.

In addition, our security growth was affected by a general slow down in retail store openings. Regarding the U.S. elections market. Our strategy for the premier election subsidiary remains unchanged. While we fully support this business, we continue to aggressively pursue strategic alternatives to ownership of this company. Given the overall strength in our revenue growth and the improvement in profitability, we have demonstrated to date we remain confident that we will meet or exceed our operating profit margins of approximately 7% in 2008, excluding restructuring and nonroutine items. This positions us well to achieve our operating margin goals of 9% in 2009 and 10% in 2010 excluding any possible restructuring or nonroutine items In closing, Diebold momentum is driven by an intense customer focus and a very strong brand franchise, particularly in the global financial industry. This reflects the passion and dedication of our employees who continually strive to deliver innovative solutions to meet our customer's most challenging needs.

By continued progress we have demonstrated in our operational improvement initiative, clearly demonstrates our ability to significantly grow shareholder value in the near term. We continue the hard work of transforming our company and improving our business. We continue to drive and capture opportunities in our markets around the world. Most importantly, we continue our focus on delivering shareholder value while helping our customers drive greater profitability and efficiency in their businesses. I feel very privileged and proud to lead this company and am confident we have the right team, working on the right priorities and it is filled with the proper discipline to successfully execute on our long-term strategies. Now I'll turn it over to Kevin.

Thanks, Tom and good morning, everyone. I would like to spend a few minutes to summarize progress we have made in our efforts to become current with our financial filings. Then I'll provide an update on our financial performance and our progress on key initiatives. First as CFO I find it extremely regrettable that we have had to go for so long without providing detailed financial information to our investors and analysts. Throughout this time, my top priority has been to get the company current with our financial filings as soon as possible. And, we are fast approaching that point. We realize; however, the importance of getting information into the hands of our investors as quickly as possible, which is why we are providing preliminary, unaudited financial results today.

Before continuing, I'd like to recognize the extraordinary efforts of our finance team as well as the efforts of our external auditors, KPMG, and our other outside consultants who have all worked diligently to get us to this point in the process. Our plan is to bring our financial filings current in September, 2008. This will involve filing 10-Qs for the second and third quarters of 2007, the 10-K for 2007 and 10-Qs for the first and second quarter of 2008. This process will involve continued, extensive collaboration with our external auditors and our other outside consultants. We also have been involved in discussions with (inaudible) 10 division of the SEC regarding the appropriate restatement and disclosure requirements. Those discussions have been proceeding well. We have also continued our discussions with representatives of the New York Stock Exchange, and I'm confident that we will continue to comply with their listing requirements.

Now turning to our financial results. While we clearly had an exceptional second quarter it is important to note that the results we reported today, build on a strong first quarter as well. The initiatives we first began in 2006 and have continued to derive during the past two years are gaining momentum. This is reflected in the improved profitability that we are now delivering. Despite the well publicized challenges facing the financial industry, we continue to experience solid top line growth with financial self service revenue up 15.1% in the second quarter of 2008. This was driven by strong global demand with particular strength from China as many customers accelerated their 2008 purchasing decisions in advance of the Beijing Olympics. Typically those purchase decisions would normally occur in the back half of the year. In addition, Latin America and the national bank segment in the U.S. have remained strong. As a result of these developments, as well as solid order growth, particularly in Brazil, we are raising our 2008 revenue guidance and financial self service to 9 to 10% growth from the previous expectations of 5 to 6%.

Total security revenue; however, decreased by .4 percentage points due to lower revenue in Asia and Europe as the company exited from unprofitable businesses. In addition security revenue growth in U.S. was weak as new bank branch construction and retail store openings continue to decline. Currency exchange represented slightly less than half of the total revenue growth during the second quarter of 2008. Total gross margin for the quarter was 25.1% compared to 23.5% in the second quarter of 2007. These results included restructuring charges of $8.3 million in the second quarter of '08 compared to $2.9 million in the second quarter of '07. Product gross margin was 26.9% in the quarter compared to 27.4% in the second quarter 2007. This included restructuring charges of $4.4 million in the quarter versus $2.9 million in the second quarter of 2007. The decrease in product gross margins was primarily the result of higher restructuring charges.

In addition increases in commodity costs, the higher mix of revenue from lower margin market segments and some pricing pressure in Asia Pacific and Europe offset the savings from our ongoing cost reduction program. I should also note the pricing environment has remained stable for us in the Americas where we continue to practice pricing discipline and we enjoy the largest share of the market. Service gross margin in the second quarter was 23.6% compared to 20.2% in the prior period. This included restructuring charges of $3.9 million in the quarter compared with no restructuring charges in the second quarter of 2007. Despite the increased restructuring charges, there was substantial year-over-year improvement in our service margin. This game was driven by improved product quality, higher international margins as a result of our prior restructuring actions and gains in productivity and efficiency, as we. continue to implement the latest productivity tools across our global service organization. It is important to note that service margins also improved in the United States despite the negative impact of significantly higher fuel costs. Given how rapidly fuel costs have risen the company has only been able to recover a small portion of the higher fuel costs through pricing actions to date.

Operating profit margins for the quarter was 5.9% compared to 4% in the prior year period. Excluding restructuring charges of $12.3 million and $8.5 million of nonroutine expenses, associated primarily with the view of accounting items and ongoing government investigations, operating profit margins for the second quarter would have been 8.6%. This would compare to 4.5% in the prior period, comparably adjusted. This significant improvement reflects the benefits of the gross margin improvement we just discussed, as well as actions to substantially reduce the company's operating expenses as a percent of revenues. Approximately 75% of the previously announced head count reductions have occurred to date, resulting in a decrease to our ongoing cost structure. On a year to date basis, operating profit margin was 4.7% in 2008, versus 2.9% in 2007. Again, excluding restruction charges and nonroutine expenses, our operating profit margin would have been 6.9% in the first half of 2008 compared to 4.7% in a comparable period in 2007.

This gives me great confidence we will meet or exceed our operating profit margin target of 7% for 2008 and positions us well to meet our operating margin targets of 9% in 2009 and 10% in 2010. Again these targets exclude restructuring and nonroutine expenses. Also, as I have mentioned earlier, this improvement in operating profit margin is a direct result of our strategic initiatives and cost reduction programs gaining traction. Turning now to cash, our net cash performance in the first half of 2008 was disappointing. Cash provided by operating activities decreased by $54 million, moving from approximately $54 million on June 30, 2007 to a cash use of $200,000 at June 30, 2008. This decrease was the result of the following items: first, higher accounts receivable levels. Day sales outstanding, or DSO, was 60 days at June 30, 2008 compared to 64 days at June 30, 2007. An improvement of four days. But despite this year-over-year improvement, in the first half of 2008, DSO deteriorated nine days with each day of DSO equating to approximately $10 million in cash. This compare to the first six months of 2007 when DSO deteriorated by just two days.

This DSO deterioration in the first half of 2008 was due in part to a change in revenue flow from China which, as I mentioned before, has before become more front end loaded in 2008, due to the Olympics. Our experience with banks in China is that they tend to pay slower. The second item affecting cash flow has been higher inventory levels. Our inventory turns have moved from 3.8 turns at June 30, '07 to 3.7 turns at June 30, '08. Inventory levels have increased as a result of expected higher third quarter sales. We anticipate that inventory levels will remain higher in the near term as we shift and reduce manufacturing capacity, and consolidate our U.S. warehousing infrastructure. Finally, the third item affecting cash flow has been the increased cash spend for the previously mentioned nonroutine expenses. As a result of these items affecting cash from operating activities and slightly lower capital spend levels, free cash flow on the first half of 2008 decreased $51 million compared with the first half of 2007.

Net debt increased by $34.8 million to $372.9 million on June 30, 2008 compared to $338 million June 30, 2007, the good news is that our net debt to total cap ratio remains in the low to 20% range and we continue to have ample debt capacity to fund all of our initiatives. Turning to our full year outlook for 2008, we have raised our total revenue growth expectations to 8 to 10%, the financial self service revenue expected to grow 9 to 10% and security revenue growth expected to be 1 to 3%. Elections revenue is expected to be 120 to $130 million, with just over half that coming from Brazil. Finally, Brazilian lottery revenue is expected to be 10 to $13 million. Our full year 2008 GAAP EPS is expected to be in the range of $1.37 to $1.47. Restructuring charges are expected to be between $0.45 and $0.56 and nonroutine expenses are expected to be between $0.28 and $0.32. Finally we have incurred a $0.05 impairment charge in the first quarter of 2008. Excluding these items, non-GAAP EPS for 2008 is expected to be in the range of $2.25 to $2.30.

In closing I would like to reiterate the following points. One, we expect to be current with our SEC filings in September. Two, the company's $100 million ongoing cost reduction program goals for 2008 will be met, and the next $100 million cost reduction program is underway. Three, we expect to meet or exceed our 7% operating margin target for 2008 and remain well position to achieve our targets of 9% in 2009 and 10% in 2010. Four, we have solid top line revenue growth and have demonstrated significantly improved profitability and Five, our competitive position in the financial self service and security markets remain strong. While I'm pleased with our overall performance to date, we realize there is much left to do and deliver. And we remain intently focused on continuing to execute against our plan. Now let's turn the call back over to John.

Thanks, Kevin. Celon, we'll open it up for questions now.

(OPERATOR INSTRUCTIONS). We'll have our first question from Kartik Mehta with FTN Midwest..

Good morning. Tom, I wanted to get your thoughts on what you thought market share has been over the last 12 months. Especially considering some of the changes that are taking place. And how that's impacted your ability to maintain your market share.

Okay. I think, Kartik, I will just kind of talk about various geographies. Certainly in the Americas feel like we are in very strong position up and down the Americas. I think it's demonstrated in the results we presented today from the financial self service side. Brazil is just in a very unique position of which we want to move some of the other countries to, because of their trust that they have built up over the years in the movement toward outsourcing. we are in a very (inaudible) operation with many of the Brazilian operations. We have received one of the biggest ATM orders in history and, of course, 10,000 from [Kasha].. There are several other significant orders throughout that entire region. So we are take that and leveraging that across-the-board. I feel very confident with how we are positioned in the national bank here in the United States. Feel good in terms of the -- where we stand with the regional bank market as well.

I was very concerned coming into the year, with the financial crisis in terms of it's impact, specifically the U.S. but I think the first half of the year feel good about the spend the banks still have dedicated to the automation front and we seem to be well position today take full advantage of that and continue to position ourselves well there in growth share. If you look at the Asia region, obviously we had a very successful beginning of 2008 in China. Exceedingly well positioned in that market, and, continue to face stiff competition there from a lot of the Japanese providers. But, we've really grown our infrastructure there and we are going to be more dependent upon the Shanghai facility for worldwide building out of the Opteva line from a cash dispense standpoint. Other parts of Asia Pacific, India, one significant order there with a major bank. Seeing improvement in Australia and in Thailand. There is certainly a lot of other regions throughout China that we want to penetrate and move into, but those. would be the areas of our strength.

I think from a market share standpoint, feel very good in terms of us being in a position to continue to grow in that region. Europe continues to be probably our most challenging market. Certainly Western Europe we are not nearly as well positioned, but we've begun to make some inroads now that we have the right technology in that marketplace for deposit automation. We have also made some strategic decisions to move out of certain countries where we didn't think we are as well positioned and would take us too long to get there. So, while that may hamper revenue growth in parts of Europe I think it will really bolster our profitability. And then in Eastern Europe, Kartik, I think that we are situated very well and continue to invest in that region. So, overall, I'm pleased with the results that we have experienced from-- in 2007 - 2008 in terms of self service, feel very well positioned with the actions we're taking. And, in some cases, trading off really lowering revenue by getting out of certain areas or certain countries or certain subsets within countries where I was uncomfortable with the trajectory of margins and profitability and trade that off for intense focus in areas that we can really improve.

Hey, Tom, early in the conference call you indicated that some of the orders from China had moved into the first half because of the Olympics. I'm wondering what your thought is for that in terms of second half of '08 and 2009. Could you see, at least if I understand, 2000-- the second half of '08 you might see a slow down because you picked it up in the first half. Could that go into 2009 could this market start slowing as the Olympics are going to be over?

No, Kartik, we don't-- that's not the kind of conversations we are having with the banks right now. Certainly the second half of the year with the Olympics and all the major orders having moved up, it may impact the timing of various things in 2009 but I don't see the growth rate in the trajectory of what we have seen in China slowing down at all. They are still well, well below what you would say, the industry norms and number of ATMs per million people, the population continues to move into a significant middle class. We are seeing a lot of banks below the top tier and second tier getting interested. So, as such, the buildout in China continues and I think that march will continue for many years to come.

When you provided your long-term operating margin guidance, did you already consider into effect the second $100 million cost reductions that you announced today?

Yeah. Yeah. We certainly had that very much in the forefront. I feel a lot more confident about it sitting here today than maybe I did when we first laid these out. But the first $100 million will be delivered this year. We've got our sights set on the next $100 million of which we think $70 million will come out through, I think the middle of 2010 kind of time frame. And we have identified those projects. So obviously when you look back three years ago, while you have it in mind, you don't have all the specific projects. The next $70 million we have teed up very nicely. So have a lot more confidence level in terms of achieving that. Plus we've built the capabilities with the tools, technology, and the right people in the supply chain to be able to execute against that and we begin to unfold some of those strategies today.

And then, last question, Tom. You talked a little bit about pricing pressure in Asia and Europe and I was wondering, is that local companies, is that multi-national companies? Where are you seeing most of the pricing pressure from?

Prince-- would you repeat that again?

I apologize, Tom. I said in the conference call at least in the press release you talked about pricing pressure in Asia and Europe. I was wondering if that was more local companies, providing pricing pressure to you or if that was multi-national companies? Or where you are really seeing the pricing pressure from?

I think certain regions like-- for instance in India and certainly you see pricing pressure as a by product of the way that market unfolded. There are certain things we are doing to try to mitigate that in terms of moving to much more of a services model there. In China, you have Japanese players that are moving aggressively into the market. You have a local player there. You see a lot of competition coming into a big market like China and then in parts of Eastern Europe where there is a lot of growth and action taking place. Certainly the big financial services provider used strategic sourcing and work in that regard. But generally, I would say that the pricing pressure, while always a difficult area to navigate, I haven't seen it get worse. And, in some cases I have seen it stabilize. So, I feel better about it today maybe than I did six months ago.

Thank you, so much.

We'll go next to Matt Summerville with Key Banc.

Morning. You guys can hear me all right, correct?

Yes, Matt.

Okay. I think in one of your prepared remarks, Tom, you mentioned that roughly half of the ATMs you are shipping now in the US are equipped with deposit automation. Do you have that statistic for 2006 and 2007? I'm just kind of looking for progression there.

Yeah. I do not have that at my finger tips. I know we can get that information and get it to you. Certainly it was nowhere near the 50% level that we experienced this year. Part of that, Matt, I think was the result of the shift from more business from the large nationals than from the regionals. As such, that is a by product of it. We can go back and try to pull that out, but I don't have that at my finger tips.

And Matt, this is John. Just a point of clarification. That was half of the full function machines were shipped. Obviously, (inaudible) the sponsors wouldn't have deposit automation on that.

Right, okay. Tom, Can you talk about-- you mentioned big banks versus regionals? How you feel year to date overall spend is among those two specific groups of customers?

Okay, I would say year to date spend, the nationals continue to aggressively roll-out technology. And I think on all fronts and us participating in automation, relative to self service and the whole movement from branch to service continues and that's going to continue for several years for a lot of these folks. I think with the financial crisis many of them have faced, it has impacted more the securities side of the business, in that some of those projects have been delayed and pushed out a little bit. But the movement, relative to automation for the retail bank environment, continues very aggressively.

At the beginning of the year we were concerned in terms of whether we would start seeing some delays or pushout. We are seeing that a little more on the security side than I am on the self service for nationals. So feel very good in terms of how we are positioned with every single major player in the United States of the top 20 to 50 banks. If I get below that level historically, we have been exceedingly strong in the regional bank market, we continue to enjoy a very good relationship in that regard. We have seen a lot of smaller banks actually delay some things. So at the regional bank market, we don't have the same level of continued commitment. We have what I would say would be probably stronger than we expected coming into the year with the regional banks. But again, the same kind of phenomena.

What we have seen is a little bit of slow down in delay in terms of branch buildout. We had folks coming in the year looking at five branches. Now they only did one or two. As such we get impacted by both self service and security on that front, but security takes the bigger brunt of the slow down on many of those. But I'm pleased with where the regional banks are. And the other thing we've been very focused on is really the margin improvement and making sure that as we are working, and in these arrangements, that we are providing a full-- or more full some type of solution and as such being able to inch margins up a little bit as we work with them and that is really part of overall strategy, not just with deposit (inaudible) really in terms of outsourcing we've seen a lot growth-- that we're seeing some growth and it's evidenced in some of the service margins that the services we are providing we are able to really improve margins and better position ourselves with them long-term.

Just on the order in revenue growth front, I guess between the different geographies, can you get any more granular in terms of the numbers there year-over-year percent changes? ATM revenue was up this Amea this in Asia-Pac versus the Americas.

Are you able too do that? And then also with respect to operating margins. If we assume I'm using the 8.6%, which is the cleaner number, how would ATM profitability look versus the company average as well as security.

And then, how's the profit performance been in the election systems business?

Okay, let me tr-- I think I caught the three areas you want to discuss. Let me make sure I have those right, Matt. If we miss one, you can redirect me. First, had to do with I think order in revenue growth by region?

Yes.

I think I'll give you some color relative to region. I certainly don't have percentages in that regard. As a result of what's occurred in Asia Pacific, if I can start in that region, certainly we had significant, significant growth year-over-year as a result of the -- of what happened with the China. China is such a big driver's for us, relative to th entire region and while we have a lot of other nice operations, China is just such a major influence and because we were in a position to win significant orders across-the-board with the Asia Pacific Chinese operations that, really fueled a lot of significant growth. So the second half of the year, we won't have the big orders from the Chinese banks in the third and fourth quarter. And while we'll continue to do some smaller roll outs, it just almost flipped the year on us. That is why the first half of the year Asia Pacific is up in such a significant manner.

If you then move to Europe I would say year-over-year with Europe as we always find ourselves, Europe is our slowest or least -- had the least amount of growth year-over-year. Part of that have has to do with us making some strategic decisions in selected markets. But part of it also has to do with our competitive position there, while we continue to work and strengthen it, it is the area you know where we fight the most and probably have the least to show from it, simply because we don't have all the infrastructure in Western Europe as our major competitors to and in Western Europe they have been able to enjoy significant growth in those markets and we get a very small piece of that. Eastern Europe-- feel very good about year-over-year growth, and feel very good about the prospects going forward and think we have made good investments there we are going to continue to invest in Eastern Europe. And, our facility in Hungary helps us with the Eastern European marketplace and we are going to be more dependent on Hungary as we go forward. Overall Amea remains still an area of intense focus because we have a lot more work to do.

If you take the Americas at large I mentioned North America to you in terms of the nationals and the regionals. And I'll maybe mention about Latin America and Brazil. Brazil is just a solid performer and it will continue to escalate through the remainder of this year because of the significant orders that we will be fulfilling and executing against the remainder of the year. Latin America also is a very strong year-over-year kind of growth story. And, if you summarize the whole world, I know I didn't break it down by each country. but you almost have to look at each country and each region. But, if you summarize it overall you would have to say significant growth across-the-board outside of Amea.

And them my last question was relative operating margin performance of the two main businesses and I just basically want to know whether vote asking making money this year versus last.

I'll let Kevin talk. I'm going to take a drink of water, please.

When you look at financial self service and security, both are seeing improvement in margins. Our core business operating profit margins in both those spaces are improving. We are being affected a bit as we have talked about in the financial self service piece by the fact that we are doing a bit more-- sizable bit more with the national bank group than we did with -- in the past. And that mix is hurting us a little bit. We are certainly seeing the benefits coming through from a cost reduction plans in both those spaces.

When you look at the voting space it is really a story of two things. Voting-- about half that guidance we talked about is going to be Brazil, but none of that has occurred yet and only about $2 million of that year-to-date. When we look at the premiere voting business, it has remained just marginally profitable, kind of at a break even point, which is where it's been in 2007 and where we are looking for it to be in 2008 as well.

Matt, the only thing I would add is the other way we look at it really is in terms of service versus product. And I think for me that is one area where we really began investing heavily in 2006. Because we thought much like you hear us talk about in manufacturing and improvements of supply chain, A lot of that benefits the service business because of so many parts and the infrastructure there. So, we are starting to see the benefit of that movement along with really one of the key growth initiatives for us is really in terms of moving into services and we are doing that both on the security side as well as the self service side.

We think much like monitoring today we have a monitoring center in the United States, monitors in 50,000 locations. For us as we continue to add sites there, it is very good margin business for us. So we are very focused on the movement to services. I think we are positioned to continue to grow that over the next few years. Plus those are longer term contracts and tend to be sticky. That provides a good value proposition for the customer and gives us a really solid, steady recurrent revenue stream.

Okay, just a couple more questions. I want to talk about the head count reductions. Is any -- I guess what is the total anticipated head count reduction you are looking at right now? How much of that is complete, did you say?

Yeah. It's 800. Is the number we had communicated I think in February. We communicated we are 75% of the way there and have very good visibility to get there the remainder of this year. Some of that timing has to do with certain parts of the world and we also made an announcement relative to our Newark facility.

You mentioned transitioning. Well I guess the closure of Newark. How does -- what does the timing look like for the transition of production for the stuff you are moving out of Lexington? Is that the back half of 2008? You are done with that? Or is that kind of also 1 Q '09?

Matt, if I understand your question right was-- or let me answer it this way. Newark we have a pretty solid timetable in moving everything down by this year we'll begin that process here in the next several weeks. But moving everything down into Lexington. So physical security now will come out of Lexington, North Carolina versus Newark, Ohio. Relative to Opteva and moving that into the cash dispense kind of lines in certain parts of the full function into Hungary and also into Shanghai will be occurring this year as well. So the goal would be, to have 80 to 90% of this all complete by the end of this year. And our expectation would be, we begin the new year ready to go with our new, revised manufacturing facility, along with reducing the warehouses here in the United States which will take place over the last six months of this year. My goal is we come into next year with a new footprint, optimized, ready to go.

Okay and then just my last question. Kevin. What tax rate should we be using for 2008? And how should we think about 2009. And then when can you start buying stock back again?

To your second question, we are in a position to buy stock back again once we have filed and become current with our filings with the SEC and that would involve hopefully some time in September. And then, again, we will face some issues with a potential blackout, given we will be issuing our third quarter results timely. So it may be a situation where we are not able to get into the market and buy shares until the fourth quarter. So that's the first thing. Second, to your question about the tax rate, you should be thinking in the range of 25 to 28% relative to the rest of this year. And that would be 26 to 30 kind of percent range as we kind of look into 2009 and '10 but we would be giving better guidance as we get closer to those years at the end of this year.

Great. Thanks a lot, guys.

Thanks, Matt.

Next to Gil Luria with Wedbush.

Good morning, gentlemen. Wanted to-- You guys have made a lot of progress since 2006. It is evident by the number you are guiding to for this year. But there's been -- you have had some significant headwind. So I wanted to see if you could help us quantify some of those items that have prevented you from making even more progress. The geographic mix shift, the increase to input costs, and the voting solutions. I think you started answering on the voting solution so maybe we'll start with that. In 2006, I believe that business contributed about $0.25 of earnings. How much of the $2.25 to $2.30 for this year do you expect to come from that business?

To answer that, it was higher in 2006 has been what you just indicated. Slightly higher. When you look at what we are doing currently, you should expect it to be nothing. Or it is basic live at a break even scenario with regard to premiere elections contribution. So that's been a significant shift. Then when you talk about the geographic shift that we talked about, we have talked about in the past that when we look at our national versus our regional business you can be talking about incremental margin differences of anywhere between 5 to 10 percentage points. And as that becomes a bigger piece of the pie, it naturally creates some pressure downward.

In addition, if you look at the revenue numbers internationally, we have been growing significantly much faster than we have in the U.S. over the last three years. And clearly, from our perspective, our best margins come out of the domestic market and not international. So that creates downward pressure as well. But as we-- you saw that the second quarter results, despite those actions, we were able to hold our product margin flat, and we were able to see significant in over three percentage points gain in our service margins, which, as you know, the good thing about service margins are, a lot of that is tied to contracts. It is recurring revenue. It is stuff that becomes more predictable as we go forward. So we read those as very good developments.

In terms of the mix shift, what do you see? If your expectation for this year is 7% plus, what do you think it would have been if you had the same mix of business that you had in 2006?

It would have been much, much higher. One scenario analogy could bring is-- if you go back, all the way to 2004 and again these were unrestated numbers. So we reported a $2.53 number and that was a market where we were just hitting lights out with triple (inaudible) upgrades and the U.S. market was just on fire, you fast forward to this market where we have extreme challenges that we are facing domestically. A lot of price inflation. And despite that, we are talking about being in a $2.25 to $2.30 range. So I think that's indicative of the type of progress that's occurred by taking substantial costs out of our infrastructure and getting a reasonably stabilized pricing environment.

When you say 9% in 2009, how much would that be if the mix shift was to remain as it is now and not shift more from regional to national and from U.S. to emerging markets?

I would just be estimating. That might be a half a percentage point kind of thing. We might be talking about 9.5% in the case. Again it would depend on how much of that was national business versus regional and things like that.

That is very helpful. Then the third part that have is-- you made a comment-- this is, I think, the first time at least recently, you have seen this comment on material input of the fuel and steel. How much of an impact is that having on this year? How should we think about quantifying that in terms of the headwind from those items this year?

Well, we have disclosed the kind of every $0.10 worth of fuel translates into about $ .5a million of erosion for our lines. You can see that within the year we went from about 3 bucks all the way up to almost $4 on an average basis. That had significant headwind. We have taken actions to be responsive to that. We you know are looking at trying to pass some of those prices back in the form of fuel surcharges back to our customers. But as I commented in my prepared remarks, we haven't gotten a lot of -- we have just begun those efforts and haven't seen a lot of offset from that benefit. And than, we have seen some increases in steel and some plastics and we have had to absorb those. And those actions we continue to try to mitigate as much as we can with our cost reduction efforts.

Got it. One last question. Currency five percentage points for the quarter. Can you isolate that just for the ATMs? How much of it is 15%?

Well the 15%, it again, we talked about roughly half and it would be just under half when you talk about it from the financial service. We particularly felt it relative to the Euro and the (inaudible) in Brazil where we do a lot of business.

Great. Thank you very much.

We'll go next to Ted Wheeler. Buckingham Research.

Hi. Good morning. If you could indicate where you think the working capital metrics might normalize and kind of maybe refresh where you can think you can stabilize inventory and receivables.

Well, with regard to the DSO, even though I'm talking about receivables, DSOs outstanding, even though we are in a better position, we are at you know 60 days versus I think the 64. So we are down four days. What we are seeing to an extent is that we are reaching a point where it becomes exceedingly more difficult to get improve m. So we saw over the first six months of 2007 dramatic improvement from year end. But we started a 51 days in the beginning of 2008. So it became very difficult to get substantial improvement off that. We talked about the fact that China's revenue flow has affected that a bit. I expect to be at least equal to, if not better by year end and a DSO perspective than it was at the beginning this year.

That is the 51 days.

Yes. So I would hope we would be able to equal that 51 days if not do a little better. With regard to inventory turns, as we go through, obviously the actions we are taking from a manufacturing standpoint and the consolidation we are looking at doing with our distribution network are all meant to be more responsive to our customers but also to drive down our inventory levels. My expectation is to see the benefit of that would be more of a 2009 event. Because we have only--- we have talked about trying to complete those actions by the end of this year.

Uh-huh.

So once we-- in the opportunity as we go forward from a cash flow perspective is really improving our inventory performance. We are only going to see marginal improvements relative to DSO. So, I think when you talk about trying to get back to a more normalized issue, that would happen. The last thing I would.out is when you talk about cash flow, obviously we are talking about all the restructuring costs to have cash associated with that. When you look at our restructuring spend, our restructuring costs are going to be almost double what they were in 2007. We have had the extraordinary nonrecurring issues with regard to this investigation. So those things, as those finish those will be cash spend things that go away and will allow us in the future to generate more positive results.

Okay. The cash flow the second half on DSO will get better and then in '09 we'll get an inventory turn improvement.

Right. That would be the plan anyway.

I guess there has been a lot of restatements. If we went back to a clean year as-- whatever that might be defined as, I would think you would emerge from all this restructuring. Maybe you can help with what kind of a percentage improvement over sort of the last time we had a normal.

This is a very atypical year. Because again a lot of restructuring spend and a lot of this extraordinary spend and quantify that I think we are talking about like $45 some million of restructuring spend and we talked about $20 plus million of nonroutine spend. That is a huge dealt that goes away once you get into normalized circumstances.. You can be talking about $67 million with cash spend there. And then you have got to think about what we can do from an inventory perspective as we go forward. In a typical year, this -- the company's business model to throw off good cash flow. We have had some extraordinary spend this year but again I would say that when we get into a typical year that goes away.

Uh-huh. And I guess one other question I had was, you have continued to really do very well on the service attach rate. And growth in Brazil. And just wondering-- with that mix opportunity still be available in the other parts of the world? Or are you, I guess, how far away are you, from that ideal model in the Americas and in Asia and in Europe?

Ted, the -- I think each of the adoption rates will be different in certainly different parts of the world. Brazil happens to be, for us, leading the market there. But we have made a very major concerted effort here in the United States and parts of Latin America and are seeing very good traction in that regard in terms of attach rate to basis and outsourcing or integrated services kinds of model. Certainly in the U.S. we have 10,000 banks. We are just talking about we have just begun to scratch the surface. So the good news for sus we have got a long way to go, but we are well positioned there and it is a skilled business. The last folks were putting on 50 ATMs or 100 ATMs and managing to monitor their network doing the transaction processing, the currency management. We're basically taking four or five various vendors down to one and basically handling all that for the institution. We are focused right now on the smaller I would say smaller, regional banks and credit unions and we are talking about institutions with maybe 20, 30, 40, 50, 60 ATM kind of networks.

As we continue to move up that scale, I think this also plays well for the major banks here. In Brazil they only have seven or ten major banks. So when one of them moves down this path you are talking 5,000 ATMs at a time. Here you are talking you know, 20, 30. The good news is we are able to take that infrastructure and technology and drop it in other parts of the world. So, we're beginning to make progress in every region of the world but I would have to say the next area that's going to continue to grow we'll see positive results from is really going to be Latin America and the US and that is because of the long established relationship there.

In other parts of the world, if I looked at China the first thing we need do is move much more to being able to service a lot more of the technology there. China grew up where they didn't use the OEMs to service their own equipment they used distributors out of the marketplace. As more influence from the global environment impacts them they are going to need higher and better capabilities on the service side and we are growing toward that goal. Each region is slightly different but I'm very optimistic for what it can mean for us in the outlying years as we continue to grow this into a significant piece of the business. And that will shift more and more of the revenue from 50-- Product 50 service to eventually move service up much higher.

In Brazil, I guess it is already much higher.

Yes, it is.

Even with the fast growth? I mean is it two-thirds? Do we get to that point?

I don't think we are quite at two-thirds. But it is, we are closing on 60%.

Uh-huh. Thanks for the color and good performance.

Thank you.

That is all the time we have for questions. I'll turn the conference back over to Mr. Kristoff for additional or closing remarks.

Thank you Celon, Just a couple of things I would like to mention before we wrap up here. First of all, Tom is scheduled to be on Power Lunch on CNBC at 12:40 eastern time if you are available tune in for that. And I would like to also mention we have created an investor presentation as well as a video annual report both of which are now available on the investor section of our website. With that I would like to thank everyone for joining us this morning. If you have any follow-up questions as always, please contact me directly. Thank you.

That concludes today's Debold conference call. you may disconnect at this time. We do appreciate your participation.