Diebold Nixdorf Inc (DBD) 2010 Q4 法說會逐字稿

Good day, everyone. Welcome to Diebold Incorporated fourth quarter and 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. Please go ahead, sir.

Thank you, Cecelia. Good morning and thank you for joining us for Diebold's fourth-quarter conference call. Joining me today are Tom Swidarski, President an CEO, and Brad Richardson, Executive Vice President and CFO. Just a few notes before we get started. In addition to the earnings release, we've provided a supplementary presentation on the investor page of our website. Tom and Brad will be walking through this presentation as part of their comments today and we encourage you to follow along.

Before we discuss our fourth-quarter results, as with past calls, it's important to note that we have restructuring, impairment charges and non-routine income expense in our financials. We believe that excluding these items gives an indication of the Company's baseline operational performance. As a result, many of the remarks this morning will focus on non-GAAP financial information. For a reconciliation of our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation. In addition, all results of operations reported today, including prior periods, exclude discontinued operations. Finally, 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 actual results. As a precaution, please refer 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 Tom.

Thanks, John. Good morning, everyone. Thank you for joining our call today. As you see in our release this morning, revenue, earnings and cash flow all improved during the quarter. While there are a number of atypical items outlined in our release that we will explain during the call, from my point of view there are 5 key takeaways. First, the global financial self-service market is showing signs of recovery. I'm seeing a continued and significant ramp up in orders in North America, particularly in the regional bank space. Second, we have re-evaluated our strategy in EMEA and put plans in place to restructure the business to better focus on our core markets in the region, this will be a top priority for us in 2011.

Third, we have remediated our two remaining material weaknesses in our financial control environment. Fourth, we continue to generate a significant amount of cash flow and are confident in our ability to continue that trend moving forward. Finally, given this confidence in the market recovery our Board of Directors has authorized the Company to repurchase up to 4 million of its shares. We intend to execute this plan in 2011.

In terms of our performance during the quarter, we saw a number of positive trends. For example, global orders increased 7% in the period, excluding Brazil with a voting equipment order and a large ATM order from Bradesco created a very difficult comparison to the prior-year period. This growth in orders position us well as we look to 2011. We also report a lower tax rate as we benefited from positive income mix and an improved outlook in Brazil, and we successfully completed a number of tax planning projects.

Across our organization, Diebold associates had many impressive achievements in 2010. We secured significant new customer wins, broadened our solution set and our accolades for excellence in manufacturing, service and innovative solutions. The results of their contributions has enabled us to move toward our vision of becoming a true services Company. Let me share with you a few milestones we hit in 2010.

We now have 10,000 associates, more than 60% of our employee base who are directly involved in service and services within the Company. This is the fourth consecutive year in which the majority of our overall revenue is made up of service, most of which is recurring in nature. Technical service metrics improved in every category including response time and fix it right the first time rates. The number of ATMs under integrated services contract in the US more than doubled in 2010 and now represents nearly 3,000 sites. We have approximately 300,000 ATMs under service contract around the world. So I'm very proud of the accomplishments our associates were able to achieve during the year.

While we continue to make progress from an operational standpoint in the quarter, we also had a number of items that significantly impacted our GAAP earnings. These include a non-cash goodwill impairment charge in EMEA, new developments in our FCPA investigation and settlement and fees related to a previously disclosed class action employment lawsuit. Brad will provide detail around the FCPA investigation as part of his remarks, but let me spend a few moments discussing our planned actions in EMEA.

From an operational perspective, revenue in EMEA was up 3% for the quarter while orders were down 12%. As I mentioned during the previous calls, Europe remains our most difficult market in terms of our ability to compete profitably. Given our most recent challenges there, we're announcing a full impairment in our EMEA business unit. To improve our course moving forward, we are taking a thorough comprehensive look at all elements of our operation. In addition, we are reengineering our infrastructure to free up more resources for core markets in a region where we can compete most effectively.

We are looking at our manufacturing, supply chain, logistics and administration functions. Our objective is to reduce inventory, drive further efficiencies through our supply chain and manufacturing processes and expand our shared services model to reduce administrative costs. And by focusing these efforts on key markets, we believe we'll be able to deliver more profitable revenue and better position ourselves for a stronger future in the region. This work will essentially take much of the year to accomplish. While Europe has never been a large market for us, it is and will continue to be strategically important as we consider the increasingly global nature of our customer base. With the right focus and business model in place, we will improve our global competitiveness and achieve sustainable profitability in the region. This is a top priority in 2011.

By contrast, we are extremely encouraged by recent developments in our North American business. While revenue increased 4% during the quarter, financial self-service orders grew 26% in the region. Most encouraging is the increase in orders took place primarily in the regional banks segment, where we enjoy a significant competitive advantage. In the fourth quarter alone, shipments of deposit automated equipped ATMs to US regional banks more than doubled. We're also gaining traction from the large accounts and credit unions outside the top three financial institutions. We now have over 400 ATM customers in the US that have deployed deposit automation. We expect this trend to continue as more institutions are rolling out this technology to maintain their competitive position and reduce their operating expenses.

In addition, we have a significant competitive advantage with our deposit automation solutions in three primary areas. First, our deposit module design provides a significantly higher level of reliability. Data from our customers indicates Diebold ATMs are 20% to 30% more reliable than the competition. Secondly, we offer faster transaction speeds. Diebold's rapid processing allows two items to be processed at once and each module to run at its optimal speed. Consumer research has consistently shown that availability and speed are the two most important elements of customer satisfaction at deposit-enabled ATMs, and we have a clear advantage in both these areas. With our rapid processing feature we can accept 30 bank notes and 10 checks in less than 60 seconds. By contrast, one of our competitors claims their module can accept five bank notes and two checks in the same amount of time.

Finally, configuration flexibility is very important to our customers, particularly in the regional and community bank space. Our technology offers unparalleled flexibility, including bulk note, bulk check, single note, single check, or any combination thereof at a variety of competitive prices. No other competitor offers this level of flexibility as we clearly understand the business needs in the regional bank space.

In addition to superior technology, we also continue to lead the industry in direct service and support and we remain the only Company in our space that offers a complete outsourcing solution through our integrated services business model, which continues to grow at an impressive rate. During the last call I mentioned that we expect the total value of new integrated services contracts secured during the year to surpass $100 million. I'm pleased to report that the value of these new contracts actually exceeded $150 million, more than doubling from 2009.

We're also making significant progress in the area of software. Over the past several years, we've progressed from being this -- from this being perceived as a weakness in the Company to competing and winning against the biggest names in the software industry. A recent example is our agreement with the Banc of America. We're updating their ATM management system which manages more than 17,000 ATMs with our industry leading availability management solution, OpteView Resolve. This solution allows financial institutions to shift the way they manage ATM operations and helps increase terminal availability and reliability through their network. It also provides financial institutions with the opportunity to manage their networks more effectively through proactive intelligent reporting and decision support analytics, which is extremely valuable in today's on demand environment. BofA is the first financial solution to deploy OpteView Resolve. This key win is indicative of strong capabilities we have developed in the software and services space and will continue to fuel our momentum in these areas in the future. In summary, we're excited about the resurgence of the North America market and I've never been more confident in our competitive position.

Let's now take a look at the security business. During the quarter this segment returned to modest growth driven primarily by the improved environment in the financial market. Our expectations are for continued gradual improvement as we look to 2011. We're excited about the opportunity of the enterprise security space particularly as we continue to win major projects with key government, commercial, critical infrastructure and retail entities. Most recently a US federal law enforcement agency has started to include us in bidding for security replacement projects for many of its field offices. This includes video, access control and alarm intrusion. We won three of these projects in the fourth quarter and are looking at many more field opportunities that come. This agency recognizes our growing capabilities and we're optimistic about our opportunity to win projects for its larger regional facilities and integrating all their security systems together into one platform. Our expertise in this area is growing exemplified by the project we won last year to secure Tower 4 and the entire transportation hub beneath the World Trade Center. And as our credibility grows, so will our opportunities in the enterprise security market.

As such, a key priority for us in 2011 will be to leverage these successes and capture greater share of enterprise security opportunities in the financial market, as banks look to improve their security infrastructure and drive operational efficiencies. In addition, we will continue to look for opportunities to grow the business by pursuing strategic acquisitions. Our discussion with Henry Brothers late last year is an example of the types of acquisitions that we believe will be a great fit for our growing security business.

In Latin America and Brazil, business remains strong with revenue up 11% in the region, excluding elections and lottery. As we disclosed late last December, during the fourth quarter we secured an order from a TSE in Brazil for additional voting terminals to be delivered during the second half of 2011. The projected revenue associated with the additional terminals is $70 million to $75 million. This additional order is further testament to our considerable depth of knowledge and technical resources in Brazil. Also, our core business -- our core self-service business continues to perform exceptionally well. In 2010, we shipped our 100,000th ATM into the Brazilian market and increased profitability in our core markets -- our core operations there combined with the continually improved outlook for the business resulting in a tax benefit during the quarter. This underscores the very strong position we have in Brazil and our positive outlook over the next several years.

Outside of Brazil, several countries in Latin America are performing well. Mexico, Columbia and Central America have been major contributors as we continue to maintain the leading market position throughout Latin America. A major success in the region that we announced during the quarter was from Columbia, is Banco Davivienda, selected Diebold's integrated services for an ATM outsourcing agreement. This seven-year outsourcing contract will help improve the productivity of the bank's ATM network and provide advanced technology and innovation to its customers. We are very excited to see opportunities like this within Latin America and look forward to leveraging integrated services to help other financial institutions in the region, increase their operational efficiencies and strengthen their security.

Now looking at Asia Pacific, as we anticipated, we finished the year strong with double-digit increase in both revenue and orders for the fourth quarter. For the full year, revenue was adversely impacted by the previously announced accounting adjustment, but it's important to note we finished the year with record backlog and remain optimistic regarding growth prospects in the region for 2011. While we have seen some increase in competitive pressures during the past few quarters primarily from local players, we remain focused on continuing to reduce our overall cost structure and increasing our service offerings. And due to the importance of Asia and the tremendous growth opportunities the region provides, we are creating the same world class competency there as we have built in North America and Brazil. This is how we will maintain our competitive advantage in the region.

As we look at 2011, I remain very optimistic about growth in the North American market and our ability to capture significant portions of the deposit automation opportunity. Likewise, I feel very good about our competitive position in Latin America and Brazil. In Asia Pacific, while our growth prospects remain strong, we must continue to find ways to keep costs in line with emerging competitive pressures. Finally, as I mentioned, we are working hard on a plan to return EMEA to an acceptable level of profitability and I'm confident in our ability to do so.

Taking all this into consideration, we anticipate 3% to 6% top line growth in 2011. As we mentioned on the previous call, there are a number of factors to take into consideration from an earnings standpoint. Brad will review these in detail as part of his comments, but we anticipate non-GAAP EPS in the range of $2 to $2.20 per share.

As I wrap up my comments this morning, it's important to acknowledge that we certainly had our share of challenges in the recent past, which frankly, has been as frustrating for me as I'm sure its been for you. While I understand it's -- it can be difficult to get a clear picture of the Company in light of some of these complex issues, we understand the challenges we're facing and we're doing the right things to get these issues behind us. Most importantly I want to stress that the underpinnings of our Company remain very strong and are getting stronger. The global financial self-service market showing signs of recovery in key geographies. We also continue to generate very strong cash flow and are confident in our ability to continue that trend moving forward. And our Board of Directors has enough confidence in our position to authorize the Company repurchase up to 4 million shares. Our fundamental business is solid. The markets we serve are beginning to rebound in the economic downturn and I believe that we have the right people and solutions in place to capitalize on the opportunities that stand before us. With that I'll turn the call over to Brad.

Thanks, Tom, and good morning, everyone. There are a number of key topics I'll discuss this morning. As Tom alluded, we have a lot of moving parts in the quarter that we will discuss later in my remarks, but like many of you, I view the ability to generate sustainable free cash flow as the vital measure of a Company's strength and stability, ultimately providing the capacity to invest in growth and return monies to shareholders. Given our continued strong performance in that area, I'm confident in our future prospects and our ability to deliver shareholder value. And our Board of Directors confidence is reflected in their recent authorization to increase our share repurchase program to 4 million shares. Barring any developments on the acquisition front or dramatic changes in the business environment, we intend to execute on the full authorization in 2011. We've made aggressive efforts to change our culture and drive decision making focused on improving our return on capital employed providing me with the confidence that our free cash flow generation is sustainable.

Before we move into the quarterly financial results, let me spend a few moments updating you on our progress on our financial remediation efforts and our ongoing FCPA review, then I'll spend some time on the impairment and EMEA. Turning to slide 15, I am very pleased to report that we have followed through on our commitment to remediate our remaining two material weaknesses by year end as we made significant improvements in our financial control environment. The remediation has been tested and confirmed by our internal audit team as well as our external auditors. I am confident we have taken the right steps to not only address our current material weaknesses but to elevate our financial control environment to best-in-class levels.

Now to slide 16. As you are aware, for the past several months, we've been conducting a review of our global FCPA compliance. At this point, we have essentially concluded our review in EMEA and are in the midst of working our way through Asia Pacific and have begun our initial review in Latin America. At the conclusion of the Latin America process, the global FCPA review will be complete. While we can't predict with any level of certainty when we will conclude this review, my expectation is it will be completed by year end.

As it relates to our review in Asia Pacific, we noted in our press release that we identified certain transactions by our operations there which may potentially implicate the FCPA. Our assessment indicates the transactions in question do not materially impact or alter our financial statements.

You will also note that cost associated with the FCPA review increased substantially in the fourth quarter. This is a result of our internal review progressing to more complex operations located in broader geographies as well as complying with requests from regulators. We've decided to exclude these costs from our non-GAAP operating results to provide a better overall understanding of our underlying operational performance. We will continue our commitment to transparency and full disclosure as our review progresses. We will also continue to embrace the highest principles of values and ethics in our relentless work in sustaining a sound control and compliance environment.

Regarding the impairment we announced in EMEA, as Tom mentioned we are writing off all of the goodwill in our EMEA operations which was primarily related to our acquisition there in the year 2000. We have experienced ongoing operational challenges in Europe over the past several quarters. Recently, due to the potential FCPA issues there, we have had to rethink our distributor relationships throughout the region which has negatively impact our ability to effectively compete in the near term. As part of the goodwill testing process we conduct annually, we have reduced our multi-year earnings outlook for the EMEA business unit resulting in a non-cash goodwill impairment charge of approximately $169 million pre-tax during the quarter. But as Tom covered in his comments, we have very specific plans we will be executing this year to drive significant improvement in our long-term performance in Europe.

This is a strategically important market for us, and while we are not a dominant player overall, we compete quite effectively in certain markets within the region. Our overall objective is to concentrate more resources in the areas of Europe that hold the highest potential and where we feel we can compete most effectively. We are undertaking a multi-point plan to get the EMEA business to a 15% return on capital employed within three years. This plan primarily involves driving further efficiencies through our supply chain and manufacturing processes, lowering overall administrative cost by further leveraging our existing shared service center in Leeds, England and focusing more resources in core markets where we can build up our existing base to become a stronger competitor. While it will take much of 2011 to fully implement these changes, I am personally involved in the execution of a number of these initiatives and I fully expect to return EMEA to profitability in 2012.

Now to review our financial results turning to slide 17, total revenue was $791 million, up 9% from the fourth quarter of 2009, with less than 1% positive impact from currency. For the quarter, product revenue increased 20% with an increase in financial self-service product revenues in every geographic region. Service revenue was essentially flat in the fourth quarter as declines in EMEA offset growth in other regions. For the full year, revenue was up 4% from 2009 with product and service revenue growth of 7% and 1% respectively. Revenue from the Brazil elections order served as the key driver behind the increase. Full-year revenue includes a net positive currency impact of 3%.

Looking at our financial self-service business on slide 18, fourth quarter revenue was $595 million, up 8% from the fourth quarter 2009. We saw growth across all geographic regions with double-digit increases in Asia Pacific and Latin America. For the full year, financial self-service revenue was down $23 million, or 1%. This includes negative currency impact of 3%. We were late getting into the recession and lagged coming out of it but as the chart shows, we're clearly seeing an increase in the rate of recovery in our markets.

In the security business on slide 19, fourth quarter revenue increased $8 million, or 5% from the same period in the previous year. This was due primarily to increased activity in the US banking segment as large banks in particular increased security upgrades and branch renovations. This represents the first quarter-over-quarter security revenue increase we have seen in the past 10 quarters and is representative of the overall recovery of the financial market in North America.

Looking at slide 20, the total gross margin for the fourth quarter decreased 1.1 percentage points from the fourth quarter 2009. For the full year, however, the gross margin increased 1.1 percentage points. The increase was primarily driven by improved profitability in North America and Brazil. Product gross margin for the quarter was down 1.6 percentage points. Growth in Asia Pacific combined with lower profitability in EMEA resulted in a greater mix of lower margin revenue during the quarter. Product margin grew 40 basis points for the full year. In service, the gross margin decreased 30 basis points during the fourth quarter but grew 1.9 percentage points for the full year. This growth was driven by significant improvements in profitability in Asia Pacific and North America.

Moving now to non-GAAP operating expense as highlighted on slide 21, in the fourth quarter operating expense as a percentage of revenue decreased 40 basis points from the comparable period in 2009. Full-year operating expense as a percentage of revenue was 18.7%, an increase of 50 basis points from 2009. This increase was primarily the result of higher costs surrounding healthcare and employee-related benefits, selling expense and professional fees related to a potential acquisition and financial remediation activities.

We recognize we need to improve our operating expense position to put us at an acceptable spend level and drive improved earnings. Since 2006, we have realized much success with our Smart Business cost reduction efforts and we will continue this initiative moving forward. On slide 22, for the first $200 million goal in savings, the efforts were largely focused on cost of goods sold. However, at Diebold, more than half our spend is related to operating expense. During the following three years, we will shift the focus of the next phase of the program Smart Business 300 from COGS to OpEx. SB 300 will differ from the previous efforts in that it will involve smaller, more complex cost savings projects. This will be an important initiative as we work to contain expenses that are within our control. In addition, earlier I mentioned the efforts underway to reduce our operating expense in EMEA. We are also moving to a global shared service model to drive greater efficiencies in our overall administrative cost over the next two years.

Now turning to slide 23, non-GAAP operating margin in the quarter decreased to 5.7% from 6.3% in the fourth quarter 2009. Operating profit margins for the full year 2010 was 6.9% compared to 6.2% in 2009. The increase in the full-year operating profit is attributable to the significant increase in Brazil elections revenue which carries very low operating expense.

Turning to the EPS reconciliation table on slide 24, as you can see on the chart, non-GAAP EPS moved from $0.29 per share in the fourth quarter 2009 to $0.73 in the current quarter. Full-year non-GAAP EPS moved from $1.65 per share in the full year 2009 to $2.33 per share in 2010. Our non-GAAP tax rate moved considerably from 30.5% in 2009 to 17.3% in 2010.

You will recall we had previously estimated our 2010 full-year tax rate to be approximately 28%. On slide 25, there were four primary factors that lead to lower than anticipated tax rate for the year. First, improved operating results in Brazil combined with a more favorable outlook for our core business in that country enabled us to release a prior reserve on deferred tax assets. Second, we had previously taken a conservative position on a couple of uncertain tax issues internationally that have since been settled in our favor. As a result, we were able reverse the prior reserves associated with these specific tax items. Third, through planning, we were able to generate a tax benefit from the previously disclosed sale of the Company's direct operations in Argentina. And finally, positive income mix combined with the reinstatement of the US R&D credit and other items contributed to the remainder of the lower tax rate.

Turning to slide 26, free cash flow for the full year was $222 million compared with free cash flow of $253 million in 2009. When looking at the elements comprising our 2010 full-year free cash flow, cash earnings were $239 million, refundable income taxes were $74 million, changes in working capital was a negative $1 million as our working capital initiatives largely offset the additional working capital required to support business growth. Other items were negative $14 million, settlement payment to the SEC was $25 million and capital expenditure outlays were $51 million. We anticipate 2011 free cash flow will exceed $150 million. In addition to our dividend, we expect that share repurchases will be a primary use of cash in 2011. We also continue to look for opportunities to grow our security and service businesses through synergistic acquisitions.

Looking at slides 27 and 28, we continue to focus on managing our working capital. Day sales outstanding increased from the prior year by 2 days to 38. The increase was primarily attributable to the $50 million in early accounts receivable payments the Company received during the fourth quarter of 2009. However, I am pleased with our DSO performance and I am confident in our ability to maintain DSO near these levels moving forward. Inventory turns increased by 0.1 turns during the quarter versus the prior year.

Turning next to the liquidity and net debt slide on slide 29, we finished the year in a net investment position of $35.1 million at December 31, 2010, compared to a net debt position of $65 million at the end of December-- at the end of 2009. As I mentioned in the past, most of our cash exists outside the US, and we continue to evaluate the most tax efficient ways to access that cash. In 2010, we repurchased a total of 803,449 shares. As I mentioned earlier in my comments, our Board of Directors has increased our share repurchase authorization to a total of 4 million shares. Barring any developments on the acquisition front or dramatic changes in the business environment, again, we intend to execute on the full authorization in 2011.

Turning to our full-year outlook for 2011 on slide 30, we expect revenue to increase 3% to 6%. Our expectation is that financial self-service revenue will increase 5% to 8% while we expect security revenue will increase 4% to 7%. Finally, we expect Brazilian election systems and lottery revenue of $90 million to $100 million. We expect our full-year 2011 non-GAAP EPS to be in the range of $2 to $2.20 per share.

Within this guidance we have several moving parts and assumptions as highlighted on slide 31. First, we are expecting solid core revenue growth as the financial market continues its recovery. Additionally, we are seeing a significantly improved environment in the regional bank space which we expect will have a positive impact on profitability mix. As I mentioned earlier, our Smart Business 300 cost savings initiative is underway. We expect the savings from this initiative to more than offset headwinds from price erosion and commodity cost increases providing $0.08 to $0.12 per share. However, there are a number of items that will offset the growth in savings and benefits we anticipate.

First, while we are very pleased with the additional election orders we received in Brazil during the fourth quarter, revenue from that business will be significantly lower than it was in 2010. This will result in a reduction of $0.16 to $0.18 per share. Next, we expect to return to a more normalized tax rate of approximately 28%, a negative impact of approximately $0.30 per share in 2011. Finally, the other category is expected to be a drag of $0.04 to $0.05 on EPS. This includes higher pension and other employee-related expenses, partially offset by an EPS benefit from our share repurchase program.

In conclusion, we are encouraged by the momentum we are seeing as our key markets continue to emerge from the global recession. Our liquidity remains strong and gives us the flexibility to reinvest in support of strategic growth opportunities and we are effectively working through various plans and processes to address our business in Europe and global FCPA compliance. We understand the nature of the issues we're working through and are confident we have the plans and accountability in place to drive return on capital in alignment with delivering shareholder value. With that, I'll turn the call back to John.

Thanks, Brad. Cecelia, let's open it up for our first question, please.

Thank you.

(Operator Instructions).

We'll go first to Kartik Mehta of Northcoast Research.

Good morning. Tom, in your prepared remarks you talked about Europe and you talked about focusing on the core market. I'm wondering if you could maybe elaborate on that? How many markets in Europe you would consider core?

Yes, Kartik, I think the place we look at is where the global banks are resident, so there are global banks have a big impact on what happens in a number of markets outside of EMEA that are important to us. So, if you look at Spain, for instance, you've got 2 major players there that have a big impact in Latin America and our operations there, thus to us that's very strategic and core. And, as we start looking at some of the outlying countries where we're more dependent upon distributers, I think we'll be evaluating those more closely from a profitability standpoint. So, that's how I think you should look at kind of the EMEA marketplace.

So, Tom, as far as Europe is concerned, do you think this is a market share issue at all or is it just a profitability issue, in your estimation?

Well, it's all about profitability from our standpoint, so revenue for the sake of revenue, we discussed that a while ago, wasn't our objective here. So, some of it comes to-- from a profitability standpoint, there's a number of factors that lead into those decision points but at the end of the day, if we can't have a profitable operation, we need to reevaluate what we're doing and how we're doing it, which is what we're doing in the EMEA space.

And, then, as you look at just Asia, your expectations for Asia going into 2011, would you expect that market to be again somewhere in the 7% to 10% growth or would you expect that to be a little bit lower?

I think a little bit lower for us in 2011. We obviously are working through the issues with the FCPA which distracts you a little bit as you go through that country by country, region by region. And, while we feel like we're in a very good position there, we think a little bit lower than this year is kind of the sites we've set for AP.

And, then, just last question, Tom. You talked about share repurchase and hopefully executing that in 2011. Obviously, the only thing that would hamper that would be, I imagine the acquisition of size and I'm wondering if there's anything right now that you're looking at that would prevent you from repurchasing all the shares?

Kartik, I would say that, as we outlined in the prepared remarks probably the two areas of most importance to us from an acquisition standpoint that might be of the kind of size, would be on the security front and also in the services space, whether it's traditional service or other services. I can't point to anything at this time but we certainly are very focused in those spaces.

Thank you very much.

You're welcome.

Our next question comes from Paul Coster of JPMorgan.

Yes, thank you, good morning. Your FSS business, you're looking for it to grow at about single-digit growth year on year and, yet, you saw a 26% increase in orders. Can you just sort of help us reconcile that? I realize that some of it's to do with Europe, but how quickly do orders translate into revenues and are they very lumpy?

So, Paul, good question. I want to reflect back, when I mentioned the growth, the 26%, that's on the product side, so, obviously, we have a very large service operation and services operation as well. And, when you kind of mix it together and take a look at kind of the impact we see in the EMEA region that impacts us, Asia being down a little bit compared to this year, that's where we come to the 5% to 8%.

Okay, and can you just talk a little bit about the timeline for orders to translate into revenues and the -- is it 100% close rate on the order book?

Well, two things I would mention there. First of all, it takes generally the neighborhood of around six months, four to six months. The second thing I would say is more of our orders move into the integrated services space, a lot of that has to do with these contracts. The one I mentioned in Columbia was seven years, so, it's actually spread out over seven years. We doubled the size of the integrated services business in 2010 from 2009. That is spread mostly out over a five year period, so what that does is lengthen the amount of time it takes to take the order and recognize it from a revenue standpoint. But, general rule of thumb, in the neighborhood of six months but a lot of these services are stretching out over multi-years, which is good in the outlying years, it's recurring revenue. In the up years, you don't get all the revenue you would have in a traditional business contract.

Tom, are you seeing any impact from sort of the so-called age of austerity in terms of its impact on security projects with State, local and Federal Government agencies?

No. From our standpoint in Asia, we do very little on the security front, so it's a very small piece of the overall business in Asia, unlike in the United States.

Domestically, there's no impact from budget constraints?

No. As a matter of fact, we're seeing ourselves now with gaining some credibility with winning Tower 4 and winning the transportation hub, which we're, I think, the biggest contract let 1 single site it's over $30 million in order entry from those contracts, that we've got ourselves in a good position to bid on other significant complex projects. Again, for us, it's two things. One is it's not just the size of the project, it's can we generate recurring revenue? And number two, it's the embedded profitability that we think we can yield from those. So, we work very hard at both those pieces and we'll continue to use those as a guiding principle as we have more opportunities in that space.

Okay, got it. Last question. Brad, it looks like you've done a fantastic job on cash collections, cash cycle. It sounded like, from your prepared remarks, that working capital eventually turns DSOs are unlikely to get much better from here but you think you can hold these levels, is that a fair statement?

Yes, Paul. I think that's a fair statement on the DSOs. Certainly, there's more work to be done on the inventory. You saw we made some progress this year but there's more work to do there. We've got specific projects underway. And, then, you'll probably also, Paul, if you look at the balance sheet, you'll see what we've done on the DPO, or the payables, which I'm very, very pleased with the progress that we've made there and certainly there's more opportunities there. But, as we go forward, certainly as the business continues to grow, all the progress that we make on the metrics will be somewhat negated by simply the growth in the working capital to require to support the business growth.

Got it. Thank you very much.

And, our next question comes from Matt Summerville of KeyBanc.

First, I apologize if you guys gave this out. ATM orders were down 12% in total year-over-year. If you back out Bradesco, or that big deal you got from Bradesco, what would that number have been?

We were let's see, I think we were up 7%, if you back out total global orders. Total global orders came [Inaudible].

Okay.

Specifically, Matt, we don't have that broken out.

Okay.

I'll have to get back to you on that one.

Yes, we'll get back to you on that to make sure we got it the right number.

It would be similar though. It's going to be in that 7% range, but I'll get you the specific number after the call.

That's perfect. That's the number I was looking for, I just missed it in your prepared remarks. As we think about 4Q 2010 versus 4Q 2009, I just want to make sure I-- we appreciate the magnitude, I think, of challenges you guys are facing in Europe right now. I mean, I have a hard time seeing-- you guys did $45 million in non-GAAP operating profit versus a similar number last year yet your revenue was up $60 million, $70 million. Help me close the loop on how unprofitable Europe is or why you didn't get operating leverage in the quarter on that incremental revenue.

Okay, so, if you look back at 2009, we opened up operations in Turkey, we'll use that as an example. So, right out of the gate, the profitability in that country and that region no where approximated what we would get in other regions of the world. So, while we got revenue there, we still don't have our service operations running at the level we do everywhere else. So, we don't get the leverage out of the orders we have within the region. Second, I would say across the board because of Russia and Eastern Europe, that it's taken us an awful lot of work in that region. We have a ways to go, so the business we have through distributors in the Russia, the Eastern Europe which were pretty profitable, we didn't have within the mix this past year. So, I'd say it's profitability, overall. Second, places like Turkey and other business we won was at very low margin. And, third, our service operation isn't performing at the level we are everywhere else in the world. And, Brad, I don't know if there's anything else you'd comment.

Matt, let me just give you a one kind of other piece of information that, again, I think would help you kind of understand the importance of the priority that Tom laid out which is Europe represents about 10% of our revenue but nevertheless, it is a key priority in order to address the overall profitability. And, just simply getting kind of Europe up to call it comparable levels of operating profit for other businesses adds about 70 basis points to the overall Company's operating profit margin. So, you can see how much leverage we have by getting that business significantly repositioned in 2011.

Just one-- appreciate the additional color, Brad, just one follow up to that. Since Diebold made those acquisitions in EMEA, I believe it was in April of 2000, has that business ever achieved a mid-teens return on capital employed? And, then, I guess, to that point, Brad, what's Diebold doing differently this time around?

Well, I think in answer to your question, I think it's fair to say that there was a period kind of in the 2007/2008 period where we were getting up to an acceptable level of profitability. But, I think full cycle, Matt, we haven't achieved the overall return on capital objectives from that acquisition, as now reflected in our financial results with the impairment.

I think as Tom mentioned, and certainly in our prepared remarks, we really kind of pointed to three elements of our multi-point plan that we're actioning on in 2011 and, certainly, that's around looking at our supply chain and looking at our manufacturing operations for further efficiencies. Certainly, on the administrative costs, we have a shared service center in Leeds, England that we need to fully leverage and we will fully leverage in order to drive further administrative cost out of the various countries in which we operate. And, then, third, again as Tom mentioned just a few minutes ago but to reinforce, we're really looking at a core country focus and really looking at the potential of where we have a strong base to build from and putting our resources in those specific countries versus being spread across multiple countries.

Thanks, guys.

(Operator Instructions).

We'll go next to Gil Luria of Wedbush Securities.

Good morning.

Good morning.

You already gave us a little bit of a sense for guidance for Asia for this year. Can you also help us even directionally with the guidance for the US, the rest of Americas and Europe in terms of what direction the revenues going to go?

Sure. Gil, when we think of EMEA given the kind of activities we have going on over in that region, we view that, at this point, as about flat year over year, maybe up slightly, but basically flat. If you look at the United States, you would say United States with the kind of order volume we're seeing with the kind of activity we're seeing, that would be up maybe in the neighborhood of 5% to 9%, somewhere in that range. And then Latin America and Brazil are going to be up and maybe that would be the mid-single digits, so, when you mix that together with Asia/Pacific that's where we get the financial self-service in the 5% to 8% range.

Got it. So, a lot of the growth coming from the US. And, in the US, can you characterize where we are, in terms of competition and market share? Is NCR the only one you have to share market share with for banks four through 16,000 and-- or is Wincor still a major participant there? Are you seeing of the Asian competitors become a major participant or is it really going to be you sharing the wealth with NCR where you've traditionally had that?

I think there's a couple dimensions that I would answer that along the line of and I won't presume that no one can get there. But, first thing you need to deal with in the United States is software and the software infrastructure. So, you have a lot of technology players around the world who may have terrific technology for Asia but if you don't-- if you're not able to run that in the software environment here in the United States, you can't bring that to the market no matter how good the technology is. So, I would say software is a barrier to entry for a lot of folks. Second is the service infrastructure. If you don't have the service infrastructure in the United States because of the advanced dependency on reliability and availability, it's going to be difficult for anyone to get there, and we've seen different players come in the market, concentrate maybe on one or two customers, penetrate it, customer with pricing kind of approach, but at the end of the day, if you can't spread that across 50 states into every small county and community, that's where the opportunity is.

And, for us, we've got a very high standard that we set relative to the service operation, the availability, as well as the back end system to be able to manage this. So, it's one thing to deploy technology and someone may have the greatest technology since sliced bread, but if you can't understand it on a back end, the statuses, the reliability, the availability, speed, all those factors come into consideration. So, software, service and back end systems really rollout a lot of players that may have the ability to compete in an Asia or another region.

So, in that sense, I would say that you have two players, or two significant players in the United States that have a lot of competitive advantage from all of the investments we've made over the years, and, then, with other folks trying to continue to penetrate here, we've got to work hard every day. But, the service level and requirements and the standards that we've set are very high and if you're unable to maintain those or reach those, when they come around for the second time looking at purchasing, it tends to go back to more historic norms. So, we've put a lot of effort on the service and back end services capabilities and plan on continue to differentiate ourselves there.

So, do you expect more than 50% market share and more than two-thirds percent market share in the US this year?

For Diebold?

Yes.

Over 50%.

And, then, Brad, for your guidance, a couple of moving pieces. What tax rate are you implying? Are you including the four million shares bought back in the EPS calculation? And, how much longer do you have the FCPA continuing to be a drag in your $0.30 non-GAAP adjustment?

Okay, we're assuming, Gil, 28% tax rate for all of the line items that you see in our reconciliation, so, it's 28% tax rate. Down in the, and I'm looking at slide 31, look down in the net other category. There is the assumption of call it $0.05 per share benefit from the share buyback. So, that is included in our guidance. Your last question was on the FCPA expense, and what we have assumed and, again, in our prepared remarks, is that, that spending will occur in 2011 and our expectation is if everything goes right would be to finish this up in 2011.

Great, thank you.

Our next question comes from Zahid Siddique of Gabelli & Company.

Hi, good morning. I have a couple of questions. The first one on going back to the market share, your competitor NCR on their call indicated that they actually gained market share both globally and in the US in Q4, I wanted to get your thoughts on that.

Zahid, I would just say, I mean, I just look at our growth rates and look at kind of the performance. I mean, for us, market share is a dicey subject because, for us, it's not market share for market share sake, it's market share at the right level of profitability. So, we balance both of those and because of the size of the US market and our expectations going forward, I think we have backed out of certain opportunities but we still find ourselves in a very good competitive position there at the right spot. So, I'm not too worried about where we stand from a market share standpoint. We take a look at our growth rates compared to everyone else's around the world, it looks like we've-- we're actually growing faster. But, again, you can argue that stuff all day long.

Okay. My next question is on competitive dynamics, I think you touched briefly on it. Within the security particularly we are seeing companies like Brink's that are getting more involved on the actual security side, more high-end margin solutions type businesses and securities businesses. I wanted to see your view on that and how do you see that evolve and what's your response to that kind of competitive dynamics?

Yes. Zahid, I would take a careful look at what the conversation we had in the release relative to BofA. The back end intelligence of these systems and the level of sophistication there is in essence what we're building on the security side, as well. So, we see ourselves in a very advantaged situation as end customers start recognizing it's not about the price of deploying the technology, it's all about the cost of operation and the intelligence you gain from there and the analytics and the compliance and the audit. So, the back end systems that we've invested a lot from a software and services standpoint I think become really critical going forward.

We like where we're situated there. We know how to under-- we know how to manage and run recurring revenue stream businesses through our service operations and our perform resource and we like the kind of movement that's taking place there. And, as such, you've seen us win some significant contracts in 2010, as well as in the fourth quarter with some other agencies that are Federal agencies that prefer we don't use their name, but all you have to take a look at is all of the bidders that were involved in Tower 4 at the World Trade Center.

Look at the transportation hub and recognize that we got selected from the best of the best from a security standpoint. It gives us a lot of hope that as we perform and again establish credibility in this space, there's a lot of runway for us as we manage our security business more effectively going forward. Bid markets, we think profitable market and we think we've got the opportunity within select niches within that market to really drive improved profitability in the next few years.

Okay, and then on newer products, when you had the Analyst Day, I think, back in September, you talked about cash recycling in some of your ATM machines, where is that and are you selling those products in the US and Europe now?

Yes, we've had a full family that includes recycling. We've got, from a deposit automation standpoint when I talk about that, that includes top end recycling, all the way to handling checks, all the way to handling cash and then the ability to handle cash and checks within that environment. Some of the projects we won in Europe clearly were including recycling.

I would have to say you look at recycling around the world, it's at the very infancy in the Americas, the United States and Latin America and Brazil. And, while there's pilots in back offices happening relative to recycling, it took off much more in Asia and Europe because you had a lot more currency coming in as well as going out and the business model worked a little differently. But, we have a family of products that include recycling.

We think we've got exceedingly high levels of performance with that and in markets like Saudi Arabia or Belgium or places where that's a critical component, we like our competitive situation in those scenarios and we hope to bring it to the United States. And, that'll be the next growth engine, once you get through deposit automation here in the United States, recycling then was going to feed right on top of that. But, that's probably-- the real battle there is going to take place the next three to four years out.

Okay, and just finally real quick, CapEx for 2011?

Zahid, we're expecting CapEx in line with our 2010 of between $50 million and $55 million.

Thank you so much.

Our next question comes from Ted Wheeler of Buckingham Research.

Hi, good morning, everyone.

Good morning.

Wanted to just circle back a little bit on the regional bank activity that's picking up. If you look at your guidance or expectation for 2011 for the regional bank market, where would that revenue base be, in relation to where it peaked before we went down?

Yes, so, Ted, it would clearly still be below where it was back in, say, 2008 and some of the years prior to that. So, as I mentioned from a deposit automation standpoint, we're seeing a lot of activity. We have 400 plus customers I mentioned that have deposit-enabled ATMs, but the interesting thing for me is there are now 400 customers that have deposit-enabled ATMs. We have 150 that have five or more, so you're starting to see the volumes begin to roll out even in the small players that may only have 5, 10 or 20 ATMs, so we're starting to see that take place. I would expect over the next two to three years, that is going to really populate the entire United States, so I still view it because we're very centric to the regional banks as just the beginning of the rollout. I know we had the big three players lead the charge, but really the rest of the folks are at the very early stages.

I'm just trying to figure out maybe how far below 2008-- 2011 is, is it 10% below or more?

I don't know that number off hand but I'd say it's significantly-- it's still significantly below.

Okay, and how about the large bank market? Will that be pretty flat this year or how do you track that, how do you--?

Yes our-- for us, depending on how you define large banks, we have a group of about 20 that fit in there that would be the biggest banks in the US, and for us, despite the big three maybe not doing the same levels that they have in the past, we looked at them in aggregate, for us year over year they'll still be pretty strong because you've got so many other players that are now coming into the market. So, for us, that's fairly flat to maybe slightly up.

Great. Thanks very much for the color.

And, our final question is a follow up from Matt Summerville of KeyBanc.

Yes, I know you guys don't provide specific quarterly guidance, but I just-- I want to try and get a sense of how you expect seasonality, if you will, in Diebold's earnings in 2011 versus the last few years.Typically, if you go back in history, the fourth quarter used to be the strongest for Diebold, a year or two ago was the third or second, so you've had that move around a little bit is what I'm trying to say. How should we be thinking about 2011 in that regard?

Yes, Matt, I would, again, as you caveated, we don't give quarterly guidance, but I would say, again, as we look at our business, I think it is typically back end loaded third and fourth quarter will be our stronger quarters.

Thanks.

Okay and I'd like to turn the conference back over to John Kristoff for any additional or closing remarks.

Thank you, Cecelia, and thank you, everyone, for joining us this morning. As always, if you have follow-up questions, please don't hesitate to reach out to me directly or Chris Bast. Thanks again.

And, that does conclude today's conference, ladies and gentlemen. Again, we appreciate everyone's participation today.