Diebold Nixdorf Inc (DBD) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to Diebold Incorporated fourth-quarter year-end 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 Vice President and Chief Communications Officer, Mr John Kristoff.

Thank you, Bill. Good morning, everyone, and thank you for joining us for Diebold fourth quarter and 2008 year-end conference call. Joining me today are Tom Swidarski, President and CEO and Kevin Krakora, Executive President and CFO.

Just a few notes before we get started. We adopted a slightly different format for our earnings releases and conference calls moving forward. In addition to the earnings release, we've provided a supplementary presentation on the investor page of our web site. Tom and Kevin will be walking through the presentation as part of their opening comments today. We encourage you to follow along and find value in the new enhanced format. We have Included non-GAPP financial measures throughout the presentation this morning.

Specifically, I refer you to slide 30 through 42, which provide our rational for the use of non-GAAP measures, as well as complete GAAP to non-GAAP reconciliations. Also, replay of this conference call will be available later today from our web site. Finally, as a reminder, some of the comments today may be considered forward-looking statements. Internal and or external factors can impact actual results. And as a precaution, we refer you to the more detailed risk factor that have previously been filed with the SEC. Now, with opening remarks, I'll turn it over to Tom.

Thanks, John. Good morning, everyone. 2008 presented a unique set of challenges for Diebold. While I'm very satisfied with the results we have achieved , I'm sure the most pressing question on everyone's mind is 2009. As you can see in our release , our outlook for 2009 has wider ranges than we typically provide. It is a reflection of historic uncertainty that exists in the global economic market. Particularly, in the financial industry. Both Kevin and I will provide more detail on the assumptions for 2009, as we progress through this morning's call. But before we do that, let me first comment on 2008. We achieved some remarkable results during the year, despite operating in a tumultuous environment, our remaining focus on the priorities we have established in 2006.

Thanks to the stellar efforts of associates worldwide, we accomplished much during the course of the year. Specifically, we ended the year with strong balance sheet and cash flow, liquidity was a key focus for us through 2008 and continues to be a key asset as we enter 2009. We established a leadership position in China. Also, ATM's were exclusively deployed by the Bank of China during the Beijing Olympics. We grew presence in key emerging markets, Brazil, Russia, India and China. United states we continued to gain market acceptance with integrated services portfolio and for the second consecutive year, we were named as one of the world's top 100 outsourcing service providers by the International Association of Outsourcing Professionals ranging well ahead of our nearest industry competitor.

We increased shipments of deposit automation solutions by 50% from 2007. We expanded our solution set with a launch of our bulk check deposit capability and we also introduced an innovative new bulk cash acceptor, which we rolled out this year, We gained traction if the government securities space. Our new multi-year contract with the United States Postal Service is a prime example and we made a number of significant operational improvements in 2008. As shown on slide 5, in November, we met our goal to eliminate $100 million in cost from our cost structure. We initiated Company wide efforts to find smatter ways of doing business that would simultaneously reduce costs, improve quality of our products and services and increase customer satisfaction.

Associates who worked on the initiatives did a tremendous job of thinking in more innovative ways. They did more than just squeeze cost out of the old process, they identified best practices that were new to Diebold and implemented them successfully. As a result of the success of this initiative in 2008, we expanded the effort to eliminate an additional $100 million of cost out of the Company by the end of 2011. Key to the next 100 million, we expanded our relationship with Minlo, our logistics partner in the supply chain area. They assisted us in reducing our finished goods warehousing footprint from 89 company operated facilities down to three Menlo operated logistics centers. One center located in Greensboro, North Carolina is a flexible delayed product configuration facility serving market in North America and Latin America. This helps us improve lead times to customers while reducing costs.

We also improved manufacturing footprint. We have 85% of our production in low-cost geographies. By increasing production in low-cost geographies, we are also manufacturing our ATM products closer to our key customers in growth regions in Asia and eastern Europe. In addition, we consolidated security manufacturing facility in Ohio, with existing facility in North Carolina. To further streamline our operations, we expanded our vendor managed inventory system. We continue to leverage our relationship with Arriba implementing best practices and direct indirect procurement processes.

Finally, our relationship with key suppliers have matured in the point where they are now on site actively collaborating with engineering and design team on new product development initiatives. Additionally, we continued to eliminate ways and productivity through the global service operations. Service remains a key strategic focus for me, as we further differentiate ourselves from competitors. The improvements we made enabled us to reduce response time and improve overall up time. For all the strategic initiatives, we not only delivered significantly improved profitability for our shareholders, we are also improving our already strong customer loyalty rating. Which rose an additional 20% year-over-year. Another key strategy for Diebold has been expanding our recurring services business.

In 2008, total contract value for your integrated services and outsourcing business grew more than 55 million in the United States alone. Clearly, financial institutions are moving quickly to reduce their cost structure, and focus on core business of retail banking. This creates more opportunities for us to expands our integrated services business. This recurring revenue stream when combined with our traditional reoccurring maintenance contracts represents half than the total revenue. Improving ability to execute on strategic initiatives, combined with our recurring service revenue stream positions Diebold to continue to deliver sustainable long-term value.

Now, to review our performance in the business segment, I will be begin with financial self service in the Americas, which is slide number ten. In the financial self service market demand for solutions remain relatively stable. Looking at the Americas activity in the national accounts, United States remain solid during the quarter. This was driven by continued steady deployment of deposit automation technology. Diebold remains well positioned with the national bank segment. In fact, of the top five US bank ATM deployers, which represent approximately 55,000 ATM's, Diebold has more than 50% share of their installed base. Demand in the regional accounts in the United States, however, continue to weaken during the quarter. These banks remain conservative with capital deployment in this recessionary environment.

In Brazil and Latin America, the demand environment remain strong. We continue to maintain a strong leadership position in Brazil. In 2008, we were awarded every major order, including two of the largest ATM orders in history with Bank of Brazil and Casha. Our exceptional service organization and large integrated service business in the region enables us to maintain the competitive advantage moving forward. In EMEA while revenue does from the quarter end year, our profit in the region improved substantially. Our strategy there remains to aggressively focus on growth regions in eastern Europe. We have seen weakening recently, particular in in Russia, where oil prices fallen and credit tightens. In western Europe, our strategy remains to selectively pursue profitable business. As part of the strategy, we made great strides in right sizing infrastructure and realigning distribution model in certain countries.

For example, we adopted a different distribution model in Germany, and closed our direct German operations. We believe that by taking this approach, in Europe, we can establish a profitable sustainable business on more manageable scale. Turning to Asia Pacific, revenue decreased significantly in the fourth quarter. As previously discussed, this was a result of a large order in china which revenued in the third quarter rather that the fourth. For the full year, however, sales in Asia Pacific were up nearly 20% with particularly a robust growth in China, where we continue to expand our leadership position. We also made progress during our service business in the region. For example, China, India and Thailand collectively grew their service businesses, more than 25% during the year. In addition, by focusing on growing integrated services business our operation in India transformed from several years of operating losses in to a profit center in 2008.

Security revenue during the quarter was down 13%, and down 5% for the full year. This business remains US centric with high exposure to banking. Top line growth continues to be adversely affected by reduced construction of new bank branches. In addition, we experienced delays in large customer projects, due to recent consolidation. This is particularly impacted the physical security and facility business. Similarly, the environment for retail security was also weak and major retailers scaled back spending given the difficult economy.

We made great strides in the government space this year in terms of building credibility. This culminated in a major contract with the United States Postal Service that was awarded to Diebold last year. Diebold is one of a few security integrators with a service infrastructure and technological to under take such an extensive project to design and deliver and IP -- an integrated IP video securities solution. This agreement helped establish Diebold as a credible player in the governments space, which will be important as we pursue other large opportunities for 2009.

We made similar progress in the commercial security business, where we continued to experience solid growth, in the business to business segment. Successes underscore how we elevated our presence and security capabilities beyond financial services into new markets. As we move forward, we intend to build on this success. We are for example in the early phase of introducing an energy management solution that can control and monitor heating, ventilation, air-conditioning and lighting for our customers. This is another value added service to help relieve our customers of the every-day challenges they face in managing facilities and reducing costs and increasing environmental efficiency.

Despite the recent revenue challenges facing the security business, we managed to improve profitability. We have accomplished this through cost reduction initiatives and concentrating sales efforts on high value, high margin opportunities and re-evaluating unprofitable segments. For example, our retail security business was able to realize higher margin, despite reduced revenue in 2008. In a case of our Emea based security operations, we are not able to achieve acceptable level of profitability. Therefore, recently made the decision to close those operations entirely.

In summary, when looking at our total business, we made many strides throughout the course of the year. The global economic downturn, which began to accelerate during the fourth quarter, clearly affected the market in which we operate. Looking ahead, the global economy will almost certainly remain extremely challenging throughout 2009. The financial industry is under pressure to decrease cost and gain efficiency in this climate. As a result, we see long-term opportunities to assist customers in transforming their businesses. However, the near term out look here remains uncertain.

Given the uncertainty, in the volatility that currently exists in the financial industry, we are taking a number of additional short-term cost saving actions. These actions include the deferral of executive merit pay increases, a substantial reduction in the Company's 2009 401-K match, a significant reduction in advertising expenses, and a Company wide initiative to reduce travel.

Finally, in 2008, we reduced global work force by 800 positions, or 5%. As 2009 progresses, we are continue to evaluate head count levels and take additional actions if necessary. While we are concerned about the negative global economic environment we are facing, Diebold is a unique position to deliver value. The solutions we provide enable customers to reduce costs improve efficiency. Additionally, more than half of our revenue comes from services. Much of which is recurring in nature. Finally, we put in place the infrastructure, culture and processes strive continuous improvement across our business. As we move forward, we will continue to enhance and diversify offerings, realize synergies where sensible and make prudent and financial business decisions. To conclude, I'm proud of the significant progress we made during the past year to improve profitability and enhance competitive position while facing a multitude of challenges.

As we look ahead, 2009 is 150th anniversary of Diebold. We possess many strengths refined during our 150 years in business. Our people, our brand, our strong balance sheet and liquidity and more importantly, our ability to deliver innovative solutions to customers. All of these attributes will guide us through the tough environment. all businesses will be facing in 2009. I would like to express my thanks to all the Diebold associates and appreciate for the terrific job that they do every single day. With that, I will turn the call over

Thanks, Tom. Good morning, everyone. While 2008 certainly presented a unique set of challenges for us, I'm very pleased with the solid performance that we achieved throughout the year. In the full year 2008, we achieved significant improvement and profitability and earnings per share and delivered exceptionally strong cash flow. I feel improvements confirm that the Company's leadership team and highly engaged work force are focused on the right operating and financial initiatives to reach our long-term financial goals.

Before we review the financial information, it's important to note, we have a significant amount of restructuring charges, non-routine expenses and impairment charges in our financial results. We believe that excluding those items provides a indication of the Company's baseline performance. As a result, many of my remarks will include nonfinancial information. Let's turn to the financial results.

First, I would like to refer you to slide 16, which focuses on the fourth quarter and full year revenue highlights. Total revenue decreased by 57 million or 6% in the fourth quarter, which included negative currency impact of 5%. For the full year 2008, revenue increased 223 million or 8%, which included net positive currency impact of 2%. Looking at our financial self service business on slide 17. Revenue decreased by 34 million or 5% in the fourth quarter. Reason for this decrease was reduced revenue, quarter over quarter in China. As we communicated prior quarters, our typical seasonality was affected by purchases in China, which came earlier in 2008, rather than concentrated in the fourth quarter.

If we were to exclude the impact of china, total financial self service revenue in the fourth quarter would have increased 1%. For the year, financial self service revenue grew 169 million or 8%, as we had particularly strong growth in Brazil and Asia Pacific. Now turning to slide 18, our fourth quarter security revenue decreased by 31 million or 13%, majority of this decrease occurred in the banking segment, which saw declines in new branch construction and delays in facility renovations. For the full year, security revenue decreased 37 million or 5%. Again, the weakness in the banking segment accounted for much of the year-over-year decrease.

In addition we experienced reduced spending by our major customers in the retail markets. Government and commercial security businesses in total were up slightly from the full year. Finally, election system revenue grew by 91 million for the year, with more than two-thirds of this increase coming from elections system revenue in Brazil. Turning next to non-GAAP total gross margins, refer you to slide 19. In the fourth quarter, 2008 gross margin was 24.5%, down slightly from the 24.6% in Q4 2007. Gross margins in 2008 was 24.6%, decline of 1.1 percentage points from Q4 2007. Decrease is due to a premier election inventory write down of 13 million, in the fourth quarter of 2008, 4 million write down in the fourth quarter 2007. Service gross margins in the fourth quarter 2008 improved by point 9 percentage points, from 23.5%, in Q4 07, to 24.4% in Q4 08. This improvement was primarily due to productivity and efficiency gains realized in North America, and in EMEA. Full year 2008 gross margin was 25.9%, improvement of 1.8 percentage points. In that time, product gross margins improved by 0.7 percentage points, moving from 27%, to 27.7%, in 2008.

Highly profited Brazilian voting business was a major factor in driving this improvement. Excluding the business, product gross margins would have been 27.1%. Just slightly higher than the prior year. Benefits realized from cost savings plan were partially offset by unfavorable sales mix within North America, higher commodity costs and price erosion in certain international markets. Full year service margins improved dramatically moving from 21.3% in 07, to 24.1% in 08. This improvement reflects savings from cost reduction initiatives, productivity and efficiency gains and improved product quality.

These gains came despite significant year-over-year increases in fuel costs, and represented improvement well in excess to 22% target we established for service margins back in 2006. Moving now to non-GAAP operating expense, highlighted on slide 20, Q4 2008 operating expense as a percent of revenue 17.8%, compared with 16.1%, in the comparable period of 2007. Operating expenses in the fourth quarter increased by 4.3 million, or 3% from the prior period. While in control of the absolute dollar spent in operating expense, drop in revenue quarter over quarter throw the increase in operating expense as a percent of revenue.

Full year 2008 operating expense as a percent of revenue was 17.4%, improvement of 0.5 percentage points from 2007. Operating expenses in 2008, increased by 24 million or 5% compared with 2007. Increase was partially result of the impact from currency exchange, and higher legal expenses. In addition, the full year 2007 included a $10.1 million recovery of a previously reserved premier elections receivable. Finally higher accruals for performance pay and cost of living increases were more than offset by savings from our cost reduction initiatives. Now, if you would refer to slide 21, non-GAAP operating profit margin in the fourth quarter 2008 was 6.8%, compared to 8.5% in the fourth quarter 2007. This decrease due to unfavorable leveraging of operating expenses as a percent of revenue. Operating profit margin for the full year 2008 was 8.4% compared to 6.2%, in 2007.

As we indicated earlier, 2008 financial results benefited from highly profitable gross Brazilian voting business, excluding this business the operating profit margin in 2008 would have been 7.8%, a 1.6 percentage point improvement over the prior year. This improvement in operating profit margin was the result of higher gross margins, especially in our service business, coupled with the positive leveraging of operating expenses.

Turning to the EPS reconciliation slide, non-GAAP EPS from continuing operations in the fourth quarter 2008 was $0.40 per share compared to $0.67 per share in the fourth quarter 2007. Full year EPS from continuing operations was $2.69 per share compared to $1.70 for the full year 2007, improvement of 58%. Earnings per share from continuing operations for both fourth quarter and the full year of 2008 benefited from a lower effective tax rate. The effective tax rate in 2008 on income from continuing operations on a non-GAAP basis was approximately 22%, compared to approximately 28%, on a similar non-GAAP earnings in 2007.

In the fourth quarter 2008, the Company closed its EMEA based securities operations. Given the material part of this business, the Company was required to separately categorize the financial results from these operations on it's P&L as a single line item titled loss from discontinued operations net of tax. Loss was 13 million in 2008 compared to 5.4 million in 2007, included in 2008 loss was a non-cash asset impairment charge of $16.7 million. Turning next to cash net cash flow on slide 23, I was extremely pleased with the fourth quarter and full year cash flow performance. Free cash flow improved by 90.5 million or 87%, moving from 103 million in Q4 2007, to 194 million, in Q4 2008. We define free cash flow as net cash from operating activities less capital expenditures.

Full year 2008 free cash flow was 223 million, more than double the 107 million in 2007. This represent a record level of free cash flow and was realized despite significant cash payments for nonstructuring non-routine expenses in 2008. Looking at the next two slides on working capital metrics. Day sales or DSO improved by six days, moving from 51 days at December 31, 2007, down to 45 days at December 31, 2008. DSO of 45 days is exceptional. Especially, when you compare to it the recent history when the Company's DSO was routinely higher than 60 days. Improvements realized over the last two years reflect globally coordinated efforts across a number of departments and divisions within the Company to streamline and shorten total order to cash process. Inventory turns improved from 4.2 turns at December 31, 2007 to 4.4 turns at December 31, 2008.

I am disappointed with the lack of significant process with inventory turns. We anticipate greater improvement moving forward with completion of the global plant realignment and warehouse consolidation effort. Turning to liquidity and net debt, net debt at December 31, 2008 was 254 million, decrease of 70 million from the year ago. Net debt to capital ratio 21% at December 31, 2008 compared to 23% at December 31, 2007. Given the current uncertainty in the credit markets and heightened importance of liquidity, I am pleased that we are able to maintain such a strong balance sheet.

Significant reduction in the equity market values created both earnings in cash flow pressure on many company sponsored pension plans. As a result, I would like to spend a brief minute reviewing the status of our pension plans. As highlighted on slide 27, the positive news is that our pension plans will not significantly affect profitability or cash flow in 2009. After completing our review with our actuaries, we have determined that our 2009 pension expense will be approximately $6 million, compares with 3.3 million expense in 2008, 8.2 million in 2007. In addition, we anticipate cash contributions of 12 to 14 million in 2009, compared with contributions of 6.8 million in 08 and 11.3 million in 07.

Turning to our full year outlook for 2009, as Tom mentioned, we expect 2009 to be extremely challenging year. We are facing a difficult market environment, which we expect will continue to disproportionately affect spending and profitable regional banking segment. We have also encountered currency head winds, especially from a weakened euro. Finally, we have particularly difficult revenue and profit comparisons without the repeating Brazilian election systems business. As a consequence, we expect full year revenue to decline 2% to 10% with currency head winds of nearly 5%. Expectation is that financial self service revenue will decline 1% to 7%, while we expect security revenue to be in the range of negative 8% to positive 3%.

Finally, we expect elections systems revenue of 70 to 80 million with no anticipated elections revenue from Brazil, and a lottery systems revenue five to $10 million. Expect our full year 2009 GAAP EPS to be in the range of $2.07 to $2.36 per share. Restructuring charges and (Inaudible) expense are expected to be nominal and in total a range between $0.03 and $0.04. Excluding the items non-GAAP EPS is expected to be in the range of $2.10 to $2.40 per share. Within this guidance, we have several moving parts and assumptions as I highlighted on slide 29. As I mentioned previously, profitable Brazilian elections business in 2008 does not repeat in 2009. This represents a negative impact of $0.30 per share, expecting an affective tax rate of 28%, which is higher than 2008 due primarily to expected changes in the geographic mix of income. This higher tax rate will negatively affect EPS in 2009 by $0.13 on the low range and $0.16 on the higher range.

Given current exchange rates and the recent strength of the dollar against the euro and ria, in particular, we anticipate a negative EPS impact of approximately $0.13 year-over-year. We expect additional benefits if 2009 from our cost savings initiatives depending on volume, we anticipate a positive EPS impact of $0.34 to $0.43 per share from the savings. Also, we anticipate continued adverse revenue mix shift. Particularly within North America, where we seen a more significant shift in demand from higher margin regional accounts to the lower margin national accounts. Guidance assumes this trend will intensify in 2009. The impact in shift in revenue could negatively affect earnings by $0.26 to $0.39 per share.

Finally, it's important to note that included in the other line, net positive impact from the premier elections inventory write down in 2008 does not repeat 2009. As I mentioned earlier, our full year operating margin, excluding the profitable Brazilian elections revenue would have been 7.8%. Our 2009 EPS guidance implies lower revenue, and operating margin flat slightly up from this 2% to 7.8% level. We can achieve operating results despite lower revenue levels, unfavorable business mix and head winds in currency exchange rates. These results will be continued execution of our current savings initiatives. In addition, as Tom stated in his remarks, and as listed on slide 14, we are taking a number of short-term cost saving actions given the extraordinary economic environment.

In conclusion, while it's impossible to plan for every contingency that may occur in the climate, I can assure you we will act swiftly and decisively. We will continue to focus on reducing costs and improving business and delivering innovative solutions to customers. This gives me confidence that we continue to outpace competitors in this period of uncertainty. Now, I will turn the call back to John.

Bill, we are ready for our first question, if you would go ahead, please.

(Operator Instructions). We will take our first question from Mark, excuse me -- Matt Summerville, Keybanc.

Wondering if you could, Tom, kind of walk through what your regional expectations are, either including or excluding currency, however you want to talk about it, for the ATM business that are embedded in our minus 7 to minus 1% kind of revenue number.

Okay. Matt, I will start with that, and Kevin you can chime in as we go through. Certainly, the regional bank space is the area that we have the most scrutiny on, and we saw some significant shift as we entered in to the November, December time frame of last year. So throughout the course of 2008, we saw order entry that was fairly strong and a change towards the end of last year, which has given us uncertainty in the space, which has caused us to really try and make prudent decisions here.

In the range that we set up, we have in the regional bank space and basically that's North America, we are projecting to be at the high end down in the low double-digit range. And then, at the high -- I'm sorry -- at the low end, we would be down at a 25 plus range. For the regional accounts in the US.

Then can you you sort of walk through what your thought process is with -- I will call them the big banks here domestically?

With the big banks, it's interesting. It's almost on the other side that we saw continued strengthening in the US throughout the course of the year. We come in to the year with strong visibility and good market position there, and good confidence in terms of where we stand but in terms of the continued rollout of deposit automation which is the big driver for the major players there.

The impact of the acquisitions that are occuring that impact the timing of some of these decisions with the national city and a PNC environment. But all in all, we have good visibility, good strength there. And one of the other comments on the regional side that we seen as you get in so some of these players, acquisitions taking place there, we seen a few orders move to the right as acquisitions have taken place and postponing those. We have seen the FDIC come in on a couple of occasions and delay existing decisions. So really, where we are seeing the bulk of the impact of the uncertainty is the regional space. We feel good about the clarity and visibility and the strength of the national players.

Can you kind of walk through the other regions as well?

Certainly. Let me just finish maybe the Americas, with Brazil and Latin America. Very good position, feel very strong in terms of -- saw good order entry throughout 2008 and feel good in terms of those markets heading in to 2009. Certainly, the economic downturn may have some impact on certain regions there, but we feel very strong with the backlog and our position in those spaces that we will fair very well.

If I move to Europe. Certainly, Europe continues to be from a revenue standpoint, a challenge for us. Especially, because of the competitive position in western Europe but we really focused on profitability and improving profitability in western Europe, as well as, a good competitive position in eastern Europe and feel like we made good strides there. Best we took actions in 2008 to strengthen profitability there, put us in better stead but from a revenue standpoint, it will impact us in terms of not having the same level of revenue but much better profitability and being selective where we go.

Europe again is -- we are number three player when you look at all of Europe combined and that's the area that we are have the greatest challenges in going forward. Got an economic environment that's challenging as well. I'm cautious to the European region. Asia I feel very strong about. I feel very good in terms of what we accomplished in China over the last several years. This year was a absolute banner year. We made great progress throughout the rest of the region as well. I mentioned that there our services business grew 25%, really as a result of China, Thailand and India. India we are seeing a lot better profitability delivered as a result of the focus on integrated services. I feel like the ship is definitely strong in that region. We got some good visibility to the major markets and feel like we are well positioned.

If I would summarize, Matt, I would say the two areas of greatest concern would be the regional bank space in the US and the EMEA region.

Couple of other questions. Kevin, do you have the split between how much of the restructuring charge was in product gross margin versus service gross margin?

I do. And if you give me a minute, I can locate that real quickly for you.

I will ask another question while you are looking, Tom you highlighted, I think it was Tom in your prepared remarks, around other things you are looking to do from a cost standpoint in near term. Outside of the 800 people reduced in head count, are there material saving in other things you are talking about compensation or reducing travel, can you quantify that in some way?

Don't have that in front of me, Matt, but I would say in the range of five to 10 million. Ballpark. I can go back and find a better number. I think that's what I recall. So for us that's material.

Then how much of a 800 people or the head count reduction, how much savings did you realize in 08 and how much is left therefore to be realized in 09?

I would say the vast majority of the realization of that will be in 09, I don't know if it would be 25% in 08, kind of range, but I'm guessing along those lines.

Okay. Then just one last question. Then, maybe Kevin has that data point and I will get back in queue. With regards to free cash flow. Obviously, you had an excellent 2008 in terms of cash generation. What are your thoughts on what you can do in 2009, whether a similar number given the absence of cash restructuring, nonroutine stuff could in fact be in the cards for Diebold. In that context, what are your CapEx plans? And then, have you thought -- are you thinking anything differently? Especially with the stock down today about share repurchase.

Let me answer that, Matt. Before I do, the information about restructuring, 42 million of restructuring expense in 2008. 25.6 million of that was in the gross margin line. And 15.9 million of that was in the op expense line. To your question on cash flow, obviously again, exceptionally pleased with the performance in 08. While we did provide guidance for 09, our expectations are that we are going to have strong cash flow in 2009. One of the things that drove our good cash flow in 08 was the remarkable improvement in DSO, getting that down to the 45 day range. Again, our expectations as we are going into 09 is that we are kind of getting a point where any improvements there can be slight.

Looking to inventory turns it's an opportunity for continued improvement from a cash flow perspective in 09. So those two things we have to temper. The third is capital expenditures, while we sat there and talked about spending just over 50 million this year, we expect in 2009 to spend a little bit more than that, probably in the range of call it 65 to 70 million, cap expend. And some of that is going to be related to some IT investments that we can't to make in our business space. When you put all those together, my expectation is that we are going to be well north of $100 million of free cash flow if we go in to 2009.

With regard to your question on share repurchase. Clearly, at the price levels we are at, we think that we are under valued and we would love to be buying back shares. We continue to look at the environment though, and what is happening with bank lending activity and liquidity, and certainly, in the near term, we will continue to look at that, but would not be expected to do any share repurchases in the near term until we see change in the behavior of bank and bank lending.

Thanks.

We will take your next question from Gil Luria from Wedbush.

Good morning. Digging deeper in to the US market, in the national banks, when you are talking about the top three or five banks and deposit automation, are those all progressing still at the same right rate and when do you expect the roll outs to be complete.

Of the top five banks probably the top three are the ones really rolling out aggressively, and we have seen them not back off. In some cases, we have seen kind of acceleration in terms of their desire and demand. In terms of the pace with which they are installing, last year was a record year, I mentioned we saw deposit automation modules and units up 50% from the 2007 level, and so we continue to see that kind of activity this year.

In terms of where they are at in their cycle, I would say Bank of America is probably furthest along in that process and probably by the end of this year maybe coming to towards the end of it. But wells Fargo made the acquisition of Wachovia. Wachovia wasn't rolling out deposit automation that issue in terms of how that will evolve yet remains to be seen. Wells haven't rolled out in all of their footprint yet. In Chase, I would say of the three, the biggest players, -- is just has begun the process in 2008 and these are multiple year, two or three year roll out plans and expect we are going to get more visibility to that this year. I see these all continuing.

The other big players, like US Bank or PNC now, really haven't engaged in heavy activity to this point piloting types of technology in various isolated instances but I couldn't say they are in a full fledged roll out. As you go down the other major banks from there, you would have what I call people doing small pilots but not major roll outs as of right now.

Regional banks, as you speak with these banks, is the discussion around the fact they are distressed and don't have capital budgets or around the fact they are concerned about the overall economy, even though they are doing fine, they would rather not spend the capital right now.

I think it's the latter, Gil. The fact there is so much uncertainty out there, and kind of -- the environment is changing as they speak. They see you know, there is no reason to do something they could push back three months or six months or wait unless they are in the midst of something that is critical. Certainly the regional business for us is still continuing along. It's a matter of the pace, it's the matter of the movement to deposit automation, and as we see it now, there are certain institutions moved to deposit automation path. We've got credit unions, small banks, other regional banks that moved down that path and they will continue to finish that. A lot of the rest, I would call the vast majority are kind of in a wait and see mode.

The conversations that we are having with them -- even a good conversations on integrated services. We had a $15 million contract with a customer and two weeks later, they get acquired by someone else and so, that whole thing comes in to question and the timing of that comes in to question. So you're seeing a lot of that uncertainty out there, and especially as we move into the integrated services space. We made great progress in the United States. Contract volume up 55 million. A hundred new customer kind of environment, which is great for the long-term.

These are long processed decisions that go high up the food chain there because they are changing the way they operate and take costs out of their system but it requires executive approval. I seen a lot of executives being hesitant to pull the trigger on some of these. We are positioned well. We got patience in that regard because half of the revenue comes on the service side. Made improvements relative to the service margin. So we are willing to be patient and work with them in this regard because they have a lot of confidence in us. We are going to focus and grow our service margin and that is half of the revenue stream. The product side and the visibility in the regional bank space cloudy has been as cloudy as I have seen in 20 years.

So the range of outcomes that you discussed low double. Down 25% regional banks. How much were orders down in the fourth quarter in that segment?

They were down double digits.

Low double digits.

Okay, so the worse case is a severe worsening.

That's correct. That is correct.

Last question. Additional cost cuts -- additional cost cutting measures that you mentioned, are those part of the 12 million in 08 and 35 million in 09 on top of those programs?

Specific action actually are slightly incremental, yes. They are not part of that cost initiative savings.

Thank you.

We will take our next question from Reik Read Robert Baird and Company.

Good morning. Tom, could you maybe give us a little bit more thought on China with respect to how that might play out over the time period here in 2009. Just given the post Olympics shift and what the impact here on near term profitability, I guess the assumption would be the near term is weaker than the back half of the year -- I would assume that would have a impact on early profitability in the year.

Yes, Reik. You are absolutely right. It will have a dramatic impact. As I mentioned a couple of times, certainly, china was -- we had good success there in 2008, and in 2008 a lot of that occurred in the first and second quarter and some lead over to the third quarter, which meant the fourth quarter of last year, which typically was the biggest was by far the smallest and least profitable for us. That is going to swing back to a much more normal type of environment. We still have good visibility in China. We are making penetration into what I would call their kind of their equivalent of the regional bank or the second or third tier bank. But the major banks there certainly the movement is going to be to the latter half of the year. Plus, I wouldn't expect in 2009 to hit the same levels we did in 2008. Simply because the Olympics encouraged spending. But over the long haul, China is so big and important for us, long term. So for me, it's movement to the second half of the year verses the first half, which makes it difficult for comparison purposes and second, our revenue will probably in China may be down five to 10%.

Okay. And just going back to Europe, if I separate eastern Europe and western Europe, you guys talked about incremental weakness in eastern Europe. I assume that's what you were referring to before. Guys are getting caution with CapEx. And then in western Europe, is is a combination of it's a weak market and you are still walking away from business.

I would say in western Europe, if I can start there first. I would say that it's a weak market. There are opportunities in western Europe but it's a weak market with a lot more caution that we are seeing in that region. Again, we are not the biggest player in that space. For us, in many cases, we are walking away because we are not competitive in some of the bids.

But in eastern Europe, is a very different environment in that we are in a very competitive position. We got good presence in those markets, good service infrastructuring that compete nicely there. We seen caution here in the fourth quarter. And we will get visibility here January and February shortly, in terms of what is happening at the beginning of this year. But we are seeing the same kind of caution we are experiencing in for instance the regional banks here in the US.

And then you may have addressed this just a minute ago but I want to make sure I understand clearly. In the US with the acquisitions occuring, that is not slowing down the national banks as they kind of take a look at their branch infrastructure and maybe think about redeploying ATM's. I take what you are saying.

It has not slowed it down. What I was referring to is you got the three big banks or the three largest banks from a retail banking standpoint that have aggressive plans. The fact that Wells purchased Wachovia -- Wachovia was not a player in deposit automation means that the plans that they had are being evaluated by Wells. So that whole area in terms of how they will move forward will have more visibility to this year. And then National, Citi and PNC coming together were very good position with both of those institutions, but they have not been playing heavily in the deposit automation space as of yet.

You are saying it is a good long-term opportunity not seeing potential short-term disruption?

That's correct.

Thank you.

Next question comes from John Healy of FTN Capital Markets.

Good morning, guys. I apologize if you touched on this, but I jumped on a few minutes late. I wanted to ask about the consolidation we see here in the US amongst the banks. When you look at the the consolidation you seen, how would you rate yourself in terms of a market share standpoint. Do you believe that you are gaining share on the hardware and service side? Are you neutral or lost share, and kind of your thoughts on what this might do to future pricing when you go to the customers for servicing and technology in the future when the market comes back. How do you think you are competitive positioned?

John, let me take the two pieces. From a consolidation standpoint, certainly in the US, we feel like there is no one that can compete with us on the service side of the operation and we see that every day playing out in the field. That doesn't mean we are going to win every service opportunity. We feel very good in terms of competitive situation with the largest banks and small banks throughout the US. I expect we will be a net gainer as result of that, that's a result of the service infrastructure and the capabilities we bring to the market along with technology versus consolidation taking place.

The second question, though, the largest the bank, and the more volume the more pressure there is on pricing, absolutely. From the standpoint that is players get larger and strategic sourcing says well, we are 5000 instead of 1,000 or 1,000 instead of 500, or 500 instead of 20. You get pricing pressure there. So for us, that's why the cost actions become so important to be able to maintain the kind of margin environment. For us, the bell weather of margins really is on the service side. Our ability to maintain the service margin. Once you get the real estate then the question is can you service it in a profitable manner. That's where we have a lot of focus and focused heavily on the service space in terms of improving those margins.

Servicing business, just think about the consolidation that's taken place, and maybe consolidation that takes place in a future. From a bank branch standpoint, how do you guys feel about the level of bank branches in the US and conversations you had with banking partners. If that number starts to decline, is it 5% or 7% over the next couple of years, how do you feel about keeping the margins in that business? How quickly can that business scale up and down I guess?

It can scale up and down quickly. From the overall trend standpoint, the number of physical locations, that was the big question in 2000, 2001. Can you do banking or retail banking without physical locations. I think the market is spoken. No, you need physical locations. It can be a branch, a different shape of a branch, but it seems that there is going to be -- maybe the growth is only 1% or half percent a year but there is still 120,000, 100,000 type of locations, physical locations out there, which need to be renovated, which need new capabilities. And even as we were talking before I mentioned, and we demonstrated a little bit at the banking show, energy management capability in a small facility like this, there is 100,000 opportunities for us. We are doing security monitoring in the location. We are already doing service there, adding on those types of services in that facility is important to us.

The other aspect is the transformation of a branch to a sales environment, more technology, less people kind of thing . I'm not as much worried about the number of locations or whether it's going to decrease 1% or grow 1%. Seems fairly stable. For me it's a matter of adding capability and service to take cost out for a bank or bank like facility and do a servicing for that, we are seeing momentum there, the timing takes longer to accomplish that kind of contract versus selling some product. But again, I think we are patient there because we see the ability of driving service and the capability as being sticky, very long-term and good margin for

Thank you, guys.

We will take a follow up question from Matt Summerville, Keybanc

Tom, can you talk about going back to revenue guidance, down 8 to plus 3 for security? What has to happen in 09 for that security business to grow?

Two things, first of all in our space, we have four pieces of the business on a security side. Y have retail. You have government. You have what we call commercial and then, you have financial. I can take those quickly, Matt, into those four segments, it might help shed better light on this. On the retail side, we see retail being very weak and not much opportunity for too much growth in the retail space this year. We have that factored in as down in double digit range . I think that's just a realistic expectation.

On a government side, we see government actually growing and no reason why it's not going to grow, given the contract we have and given the opportunities we have in the government space. We feel good about government, feeling good about commercial, which is high end kind of enterprise wide government -- capabilities within kind of commercial environment to think of high-rise facilities and the security that goes there so we see that growing. So the big area for us and still 80% of our revenue comes in the financial sector.

When you look at the financial sector, you got two pieces. You have electronic security and physical security. Electronic security, we see is being still very solid, with a lot of opportunities. The physical and facility part of our security business is going to be down the question is how much. So that really is the biggest wild card, that's the most profitable piece of our security business but also the biggest piece as we stand today. While there are not going to be bank branch openings, safe deposit boxes, all the aspects that go in to the barrier products is going to be down. We got -- I don't have the numbers in front of me, but down double digits and could be down 30%. So we are looking at that as the one space within security that really pulls the whole thing down, but certainly for us the diversification into government, and the commercial high end enterprise type of system are going to offset that. I don't think they are offset that amount this

Okay. For that business could be down 30. Is that the type of thing that would be embedded in the guidance you have?

Yes. That's right.

Two things real quick. Tom, I don't think you mentioned early on anything about how in the context of the business performing at the level it is now and when you look out the next couple of years, how do you think about the margin goals that you shared with us before?

I feel basically -- excuse me-- in the margin goal we set, we had 7% set for 2008, that we far exceeded. Our expectation for getting to the 9% and the 10% based on modest revenue growth. I think we are calling modest five to 10% growth, which historically seems modest and reasonable given kind of the environment we had seen historically. That's the change coming in to this year.

If for instance, we would have seen six to 8% growth, we expect to hit the margin target we had out there and get close to the 9 and 10% along the path. There is other factors going on but we feel confident in our ability to get there, I think because of the uncertainty and cloudiness of the market, we are trying to fit a range that makes sense. We certainly are going to get more visibility through the year but given the conversations we had and the uncertainty, we have out there, we think this is the right place for us to be now and will adjust that accordingly. The lack of visibility into our most profitable piece of business coming into the year gives us concern as to what is realistic.

That's certainly understandable. Just my last question back to the regional banks in the US. Is there historical experience you can draw on or I guess, at what point or how long can the banks defer delay making these investments in order to stay competitive, given how fast in some instances some of the top banks here in the country are moving.

Matt, I was in banking before I joined Diebold and have been in Diebold for 12 years. I can't point to any time in my association with the financial industry where I have seen any like this or nor do I have that basis to say, well it's going to turn at this point. When I talk to a lot of the banks they are saying there are on unchartered waters.

We are trying to deal with this. Certainly, they're impacted and the environment is just very cloudy. I have not got the ability to really provide anything more specific at the type. The first quarter will be very telling for us in terms of when we take a look at order entry and how revenue actually is coming in to give us some better sense on how that is going to flow throughout the course of the year. As many bankers that I talked to and had come visit, I just -- they caution me on every turn, and such I think that's affected our ranges here.

Thanks a lot.

This is kevin. One last thing. I think you asked -- I may have misunderstood it. The restructuring numbers for products were 16 million in the year and service 9.6 million. So that's part of the 256 that impacted the sales line.

Thanks, Kevin.

Okay, Mr Kristoff, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you, Bill. I would like to thank everyone for joining us today. As always, for additional questions or comments, please, don't hesitate to reach out to me directly. Thanks again. That concludes the conference call. We do thank you for your participation. You may disconnect at this time.