Diebold Nixdorf Inc (DBD) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Diebold Incorporated second-quarter result conference call. Today's call -- at this time, for opening remarks and introductions, I would like to turn to the call over to the Vice President and Chief Communications Officer Mr. John Kristoff.

Thank you, Tim. Thank you for joining us for Diebold's second quarter conference call. Joining me are Tom Swidarski, President and CEO and Brad Richardson, Executive Vice President and CFO. Just a few notes before we get started. In addition to the earnings release, we have 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 results, as with past calls, it's important to note we have restructuring, impairment charges and nonroutine income and expenses in our financials. We believe that excluding these items gives an indication of the Company's baseline operational performance. As a result, many on the remarks this morning will be focused 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 as have previously been filed with the SEC. And now with opening remarks, I'll turn it over to Tom.

Thanks, John. Good morning, everyone. Thanks for joining our call today. We're pleased to report a solid second quarter with better-than-expected results in several key areas of the Company. Growth continues in North America, particularly in the US regional bank space, driven by strong demand for deposit automation and new technology needed to meet pending regulatory and industry compliance standards. We also drove operational progress in EMEA during the quarter and are on track to reach a break-even run rate in the region by year-end. In addition, during the quarter, some revenue came in earlier than anticipated, helping to reduce the heavy second half of our forecast.

Increased order activity in North America continues to drive the business on a macro level. In fact, our financial self-service product order backlog in North America is up 75% from last year and is now comparable to levels we had prior to the financial downturn. Importantly, much of this growth is occurring in the regional bank space where financial self service product orders grew 180% in the quarter. This is an increase from the growth in product orders we experienced in the first quarter of this year and fourth quarter of last year which were up 90% and 150%, respectively, illustrating the continued momentum in this segment. Given this continued strength in our North America financial self-service business, we have increased confidence in our outlook for the remainder of the year. Let's now take a closer look at our financial results in North America. During the quarter, total revenue increased 5% while overall product and service orders grew about 14% in the region. Looking at just product orders for financial self service in this region, we saw an increase of around 80%.

Demand for deposit automation, the need to meet new ADA requirements early next year, and ongoing PCI compliance, once again, fueled momentum in the regional space during the quarter. These demands are creating a level of complexity that is driving more institutions to adopt an integrated services approach. This enables them to meet regulatory requirements and offer their customers the latest technology without investing a great deal of capital. This environment has resulted in another record quarter for our integrated services business. The Company signed new IF contracts during the quarter valued at more than $75 million, representing a three-fold increase over the prior year period.

One such example we announced during the quarter was with First National Bank of Pennsylvania, where we are providing a variety of products and technological upgrades through integrated services. The bank chose Diebold to help expand its consumer banking options and enhance security by replacing 150 ATMs with Opteva and upgrading an additional 100 ATMs, adding deposit automation to nearly 1/3 of the bank's fleet. Another US regional customer to sign an Integrated Services Agreement with us during the quarter was Teachers Credit Union. We are helping TCU implement new technologies and services, including ATM upgrades for deposit automation, monitoring and security that will enhance the credit union's operational efficiencies and improve convenience for its members.

We now have more than 500 customers in the United States that are leveraging our deposit automation technology. In summary, we're very optimistic regarding the state of the North American financial self-service market and our strong competitive position. As our large backlog in North America begins to convert to revenue, we expect a significant uptick in operating profit for the second half of 2011. Our brand is the strongest and we have an unmatched service capability. As such, North America will serve as a primary catalyst for earnings growth in the second half of the year. Now, looking at our security business -- revenue was down 1% during the quarter while orders fell 2%. These results are disappointing as we were expecting to see a greater rate of recovery this year, particularly in the bank branch space. It's now clear that the security market for branches will remain distressed into 2012.

As a result, we have reduced our full-year revenue outlook for the security business. However, we continue to make operational progress, particularly from a cost perspective and are raising our profile outside the financial market in enterprise security. For example, last week we announced we are managing the integration of a complex security software system for the new World Trade Center site in New York. This is in addition to the other work we're doing in terms of securing a construction site and Tower 4 at the World Trade Center.

Diebold's Integration efforts will connect an array of systems to the security command center via single interface, giving operators unified control and views of the entire site. Diebold will integrate security among 11 locations, including 5 high-rise buildings, the World Trade Center transportation hub, the National September 11, Memorial, and several other critical infrastructure facilities. We have executed well on our diversification strategies as we gained positive traction in the enterprise security area with high-profile integration projects such as these.

However, creating overall top-line growth in this segment continues to be a challenge as the bank branch market for security remains weak. To illustrate this point -- while our enterprise security revenue grew more than 20% during the quarter, our overall security revenue decreased slightly. To generate top-line growth in the security business moving forward, we've begun a number of strategic initiatives and supporting organizational changes. Our goal is to better leverage our enterprise security expertise in the financial market. Historically, our focus on financials have been on the branch with an emphasis on product sales.

As new branch construction is expected to be flat in the next several years, we're shifting our focus to enterprise solutions which are more oriented towards services. As security systems have become increasingly complex, financial institutions are showing more interest in outsourcing this area of their operations, particularly as it relates to monitoring, services, and software. To support this strategy we've made some significant changes in our US Financial Sales Organization.

We moved some our top enterprise security systems experts over to the financial group as specialists to support our sales efforts to financial institutions. In addition, we've created an integrated services business for security, modeled after our successful IS efforts on the ATM side. I have a lot of confidence in the leadership we have in place to direct this effort and our team's ability to deliver. This is evidenced by the $450 million in ATM integrated services total contract value that we've generated over the past 5 years.

Given the lengthy sales cycle inherent with the IS business, we anticipate seeing some initial top-line impact from these efforts in mid-2012. In addition to the shift in sales focus, we're pursuing other means to effectively grow the security business for the long term, including increased activity on the M&A front. Now moving to EMEA -- revenue increased significantly during the quarter, up more than 30%, as some large deals in Africa and Eastern Europe had a positive impact. Orders for products and services were down 3% in the period. This decrease is largely due to timing as orders in EMEA were up 42% in the first quarter and 16% year-to-date.

Despite current economic concerns in Western Europe, the overall market seems to be fairly stable, with France and Italy having turned in solid results for us. As a whole Africa, the Middle East and Eastern European markets continue to show some growth. In Russia, we've made some gradual progress in rebuilding our sales and service operations in wake of the FCPA review. During the second quarter, we appointed a new General Manager for Russia with an extensive background in a Global IT industry. This is a critical first step towards reestablishing our presence in that market and provides us with the leadership that will be necessary to succeed and grow over the long-term.

During the quarter, we also made progress in our reengineering initiatives in the region. We continue to consolidate and centralize administrative work in our European-shared services center. We also ended some distributor relationships in several noncritical markets and we continue to drive improvement in our supply chain and manufacturing. Overall, we have identified $8 million in cost reductions that will be realized in 2011. As a result, while we lost more than $10 million in EMEA in the first quarter, our losses in the second quarter were trimmed by over 50% sequentially.

This put us on track to hit our target of a break-even run rate in EMEA as we exit the year. Obviously our first priority is stabilizing EMEA business in the near term. However, we will continue to build our services infrastructure throughout the region and invest in key growth markets to improver our competitive position over the long term. In Latin America and Brazil, orders and revenues both declined about 30% during the quarter. Excluding elections systems and lottery sales, however, orders and revenue declined 15% and 7%, respectively. As we previously discussed, our business in Latin America and Brazil is particularly back-end loaded in 2011, driven by concentration of large orders.

In Brazil, we received 1 of these expected orders during the quarter. In July, we received 3 addition sizable orders in the region. We now have orders for several thousand ATMs in hand. As a result, we have greater confidence in our forecast for the remainder of the year. We were also recently named best information technology company in our industry segment by XMA magazine. This is the fourth time Diebold Brazil has been realized as the best IT company in Brazil. Last month in Sao Paulo, I attended the 2011 CIAB conference, which is the most important financial and information technology trade-show in Brazil and one of the largest in the world.

While at CIAB, I spent time with senior executives from Tech Bank, Itau, and Banco Santander -- the latter, a customer with expanding global reach. What all three seek in a partner is an organization with a passion for solving customer problems and a proven track record of delivering innovative solutions that address emerging needs. This is at the heart of what Diebold does and gives me confidence that the capabilities of our Brazilian operation both from a technology and services perspective will allow us to lead the market and continue to grow in Brazil's move forward to the future. The market for the rest of Latin America also remains very active. During the quarter, we won major deals in Mexico, Colombia, Venezuela, and also made solid inroads in Peru, a country in which we're currently underpenetrated.

Services growth in this region has also been particularly strong. Now, looking at Asia Pacific -- revenue increased 6% during the quarter while orders for products and services jumped 18%. We exceeded our Asia order entry forecast for the quarter as we were awarded one of the large anticipated orders from China. And some business in India and Southeast Asia was awarded to us earlier than anticipated. In fact, our order backlog for the region is up nearly 50% from the prior year, near an all-time high. Given our strong second-quarter order entry and backlog, I remain confident in our ability to deliver for the full year in the region.

As I mentioned, India was particularly strong for us in the quarter as we continue to grow our presence in that key market. In May, we announced an agreement with State Bank of India to install 1700 ATMs. These units are specifically designed for India to optimize power consumption and the total cost of ownership. Deposit automation will be enabled by of our Opteva 328 cash recycling ATM which is a high capacity cash deposit and recycling terminal with a compact footprint. In addition, our growing outsourcing business in India continues to gain momentum as we sign multi-year managed services contracts for nearly 10,000 ATMs during the quarter. Diebold is a leader in managed ATM services in India with nearly 40% share of the country's outsourced ATM market.

Due to the importance of Asia Pacific and the tremendous growth opportunities the region provides, I'm pleased with the significant strides we've made in establishing our services business. We remain committed to focusing on our services offering and disciplined cost management, which we believe will be the key to our continued success in Asia. From an operational perspective, we continue to execute towards the goals we established in our SmartBusiness 300 initiative. Also, the Japan supply chain issue we reported last quarter has been resolved and the financial impact for the year has been largely mitigated. This involved a great deal of work from a dedicated team of professionals in our procurement organization. Having managed through this successfully reduces some risk from our forecast as we look to the remainder of 2011.

Given the early-than-anticipated second-quarter revenue we generated as well as our growing order backlog and financial self service, we gained more confidence in our outlook and are reaffirming our prior guidance of $2.00 to $2.20 per share. So to summarize, we feel good about the opportunities out there in the markets we serve, and I feel we have the right foundation to build upon. Around the world, Diebold has proven every day that we have exactly what it takes to execute on our business and expand our customer relationships. Our expanding offering and services, coupled with innovative, reliable technology, and our ability to consistently deliver on our commitments to customers gives me confidence that we'll meet our strategic objectives. With that, I'll turn the call over to Brad.

Thanks, Tom, and Good morning, everyone. Before we get into the financials, I will provide an update on our progress in EMEA restructuring, our compliance efforts, and the second half seasonality of our forecast, which has changed slightly. Regarding our restructuring efforts in EMEA, we are executing on our plans across the region. As Tom indicated, we have identified $8 million in cost reductions that will be realized in 2011. This will be accomplished through core-country rationalization, lower manufacturing and logistics costs, and improved administrative efficiencies through leveraging our shared services infrastructure. In addition, we have identified other actions during the quarter that will result in further savings in 2012.

As a result, we are raising our restructuring estimates for the full year. We are confident that the actions we are taking are beginning to produce visible results. As Tom also mentioned, we were able to reduce our losses in the region by half in the second quarter compared with the first quarter. In fact, we showed a slight profit for the month of June on strong year-over-year revenue growth. We have a long ways to go before we are consistently profitable in EMEA on a month-to-months basis. However, I am encouraged by the early results we have generated and even more confident we will achieve our target of reaching a break-even run rate by year-end. In regards to our compliance efforts during the quarter, our global FCPA Compliance Review remains on schedule with no material development since our previous earnings call. We still expect the FCPA review will be completed by year-end.

FCPA-related costs for the quarter were approximately $4 million, down from $6 million in the first quarter of 2011 and the fourth quarter of 2010. Also on the compliance front, during the quarter, we brought on board a Chief Compliance Officer as part of our efforts to ensure our program is highly effective, according to industry best practices, and global government standards. Regarding the seasonality of our 2011 forecast -- on slide 16 -- as we previously indicated, there are several factors that have led to a very heavy second half of the year from an earnings perspective. However, some business closed earlier than originally forecasted during the quarter, which has reduced some of the back-end loaded nature of our forecast.

We had previously expected 75% of earnings to come in the second half of the year. Now, we expect approximately 2/3 of our 2011 EPS to occur in the second half of the year with more profit coming in the fourth quarter than the third quarter. The change in faith between the first half and second half is important as it reduces some of the risk associated with our previous forecast. Now, to review our financial results for the quarter. Turning to slide 7 -- total revenue was essentially flat from the second quarter of 2010 with 5% positive impact from currency. Product revenue declined 8.5% while service revenue increased 6.2%. The decrease in product revenue is primarily the result of lower election and lottery systems revenue in Brazil, which is expected to revenue in the third and fourth quarters of this year, compared with the second and third quarters in 2010. Excluding Brazil elections and lottery, product revenue would have increased 6%.

Looking at our financial self service business on slide 18 -- second quarter revenue increased 9% from the second quarter of 2010. Growth was primarily driven by strength in North America and EMEA. In the security business on slide 19, second-quarter revenue declined 1% from the same period in the previous year. Growth in services revenue was more than offset by a drop in product-related revenue. As Tom mentioned, the market for bank branch security equipment has not recovered as we had anticipated, which is negatively impacting our product revenue. However, service revenue continues to grow, driven by the enterprise securities segment, which grew by more than 20% during the quarter.

Looking at slide 20 -- the total gross margin for the second quarter was down 0.8 percentage points compared with the second quarter 2010. Both product and service gross margins were also down by 0.8 percentage points for the quarter. Product margin improvement in North America was offset by decreases in the international operations led by EMEA. The decrease in service gross margin is primarily due to a difficult comparison to the prior-year period when we benefited from a vehicle fleet rebate and some other items during the quarter that resulted in a higher-than-normal service gross margin. In addition, we expect increased fuel costs to be a headwind for the remainder of the year. As a reminder, every $0.10 movement in the retail price of gasoline in the US increases our annual expense by approximately $700,000. Despite these headwinds, we still anticipate a slight improvement in the service growth margin for the year.

Moving now to non-GAAP operating expense -- as highlighted on slide 21-- in the second quarter operating expense as a percentage of revenue was 20.4%. Sequentially, however, OpEx decreased 0.6 percentage points from the first quarter. And we expect OpEx for the second half of the year to be in the mid-17% range as we anticipate significantly higher revenue toward the end of the year. Now, turning to slide 22 -- non-GAAP operating margin in the second quarter was 5.6%. We expect full-year operating margin to be around 7%. Turning to the EPS reconciliation table on slide 23 -- the non-GAAP EPS moved from $0.53 per share in the second quarter of 2010 to $0.44 per share in the current quarter. Our non-GAAP tax rate declined from 28.7% in the prior period to 25% in the current quarter. We still expect our full-year tax rate to be approximately 28%.

Turning to slide 24 -- free cash use for the quarter was $22.6 million compared with free cash flow of $22.9 million in the second quarter 2010. Negative cash flow versus the prior-year period is primarily the result of two factors. First, we had approximately $70 million in tax refunds in the second quarter of 2010. Second, as Tom mentioned, we're at near-record backlog levels in North America, creating a build-up in inventory to meet delivery schedules for the second half of the year. As we look at the full year, we anticipate normal seasonality with strong free cash flow later in the year. I remain comfortable that free cash flow will be around $150 million for the full year, supported by significantly higher second-half earnings, inventory drawdown, and the normal pattern of accelerated collection towards the end of the year.

In addition to our dividend, we expect share repurchases to be the primary use of cash in 2011. During the second quarter, we repurchased 1.1 million shares, leaving 2.4 million shares on the current Board authorization. We still intend to execute on the remaining share repurchase authorization in 2011, barring any dramatic changes in the business environment or acquisition activities. As Tom mentioned, we are building a pipeline of potential acquisition targets focused on our current core lines of business. Looking at slides 25 and 26, DSO decreased -- excuse me -- increased from the prior year by 4 days while inventory turns remain the same. The increase in DSO is primarily the result of timing of revenue late in the quarter. Working capital remains a top priority and we anticipate normal seasonal improvements by year-end.

As a reminder, each day is worth about $5 million in cash flow. Turning next to liquidity and net debt on slide 27 -- net debt was $149.7 million, a decrease of $44 million from June 30, 2010. Our net debt-to-capital ratio was 14% at June 30, 2011, compared to 16% in the prior period. We have made substantive reductions in our net debt since 2007, while at the same time returning more than $350 million to shareholders in the form of dividends and share repurchases. Based on our projections for free cash flow, we anticipate being in a slight net debt position at year-end. Also during the quarter, we announced we entered into a $500 million credit facility agreement with certain credit relationship banks. This facility replaces a previous facility of approximately the same amount, which was scheduled to expire in October 2012. The renewal improves existing covenant and includes an all-in reduction in borrowing costs of 150 basis points, which represents an annual savings of approximately $5 million at current debt levels.

In addition, the unsecured credit facility is for a term of 5 years and expires June 2016. Our strong track record of consistent cash flow enabled us to significantly reduce our borrowing costs and improve the length of the term of the facility. In terms of the outlook for 2011 -- on slide 28 -- we expect revenue to increase 3% to 5% while financial self service revenue increasing 6% to 9% and security revenue flat to down 3%. Given our continued aggressive plans in EMEA, we have increased our anticipated restructuring charges for 2011 to be in the range of $0.31 to $0.35 per share. We are maintaining our full year non-GAAP EPS guidance in the range of $2.00 to $2.20 per share. In conclusion, we are extremely encouraged by the momentum we're seeing in the key North America market, particularly in the regional bank space.

Our bank's balance sheet remains strong and we are seeing operational improvements in Europe and are aggressively addressing our business challenges there. Also, the earlier-than-anticipated business we closed during the second quarter gives us increased confidence in our forecast for the remainder of 2011. In the intermediate term, we remain focused on driving operational improvements and executing strategies in our core businesses to drive return on capital employed to our stated goal of 15%. We have a great level of confidence in our global team and our ability to deliver value for all of our stakeholders. With that, I'll turn it back to John.

Thanks, Brad. Tim, we're ready to open it up for questions now. We'd just ask each caller to try to limit yourself to two questions initially and then get back in queue so that we have an opportunity to get through everyone's questions.

(Operator Instructions)

We'll go first to Matt Summerville with KeyBanc.

Morning. A couple of questions -- First -- I think you maybe mentioned this, but I want to make sure I understand -- the small bank order book -- the regional bank order book in North America you have now compares to the prior peak, how, Tom?

In terms of the regional orders we're basically back to where we were prior to the -- what you'd call the financial or economic crisis for us -- so on the self service side, it's improved dramatically as you can see by the percentage increases over the last 3 quarters and sequentially as well.

So if we look at it where your product gross margins backing out the items a little over 25 -- where they're at in the second quarter as you get into the sweeter spot in that backlog, do you think your product gross margins have room to move back to where they were pre- the financial crisis? How are you thinking about your backlog in the margin upside from here?

Yes So, Matt, I think if we just compare North America to North America, I'd say we're going to feel pretty confident in terms of where they move back to. When you mix in the rest of the world, particularly the Asia pricing issues -- where we're at in EMEA -- while we may see some increase in product gross margins, I believe it's going to be muted as a result of regions outside the US, and particularly with the Asian influence from a pricing standing point. Given that Asia -- as you saw from our orders and from the revenue continues to grows -- that mixes in and impacts that number.

Just one final question and I'll get back in queue. You talked about the incremental cost savings that you expected from your efforts in EMEA at $8 million or total cost savings at $8 million realized in 2011. Based on all the actions you're taking then, how much would that tee up to be incrementally realized in 2012?

I believe we'll be in a much better position, you know, the next couple of quarters, to give you some better direction on that. We have some aggressive plans in EMEA that we're executing against. We feel about how we're moving down that path. But until we actually realize those and measure that accurately, I think we'll wait to give some direction on that. I want more confidence in our ability to deliver it and it more confidence in our ability to steer you correctly.

Thanks, Tom.

You're welcome.

We'll go next to Gill Luria with Wedbush Securities.

Yes, Good morning. So it sound like we're at the end of July and I'm given the timeframes between your receiving orders and being about to actualize the revenue and recognize the revenue. It sounds like from your commentary you have everything you need. You've sold everything you need. You've gotten the orders you need to give you confidence for results for your guidance for the rest of the year. Now it's just a matter of executing on those orders.

Yes, Gil, I would say that's very close, but we still have work to do here in August relative for the remainder of the year. But certainly we've taken a lot of risk off the table with the size of the orders we've recognized or realized around the world. And certainly July was a very critical component of that. We were anticipating that. They have been realized. So now some of the risk becomes more of the implementation risk of -- in the November-December timeframe. We have schedules laid out. Things happen to those schedules, so I would call it more of implementation risk where as last quarter, we were saying there's a lot more risk associated with what we needed to capturing in terms of orders.

Tom, my second question is about the fit of your security business. Your ATM business is improving. It's doing very well. It's your higher-margin business. Certainly, the activity of the regional US banks is encouraging. You're going, in spite of -- what -- the portfolio assessment in you're doing in Europe. But in spite of the US regional banks doing better, the security business does not seem to be doing better. Three quarters of your business is still banks. They seem to buying ATMs, but not building a lot of branches. How do you see the long-term fit of this business as it disappoints one more year? This is not the first time. You've had turnarounds in this business in the past and why would you want to invest more capital and M&A in this business if the ATM business is really the business that's really driving the growth overall?

Yes. Fair question, Gil, and one that we've talked a lot about internally. If you look back at a macro level, the pieces of the security market -- they're very big pieces of the security market that are growing fast that we have not, necessarily, participated in the way we think we can. A lot of the wins that we've had that I mentioned -- in terms of the level of sophistication -- the World Trade Center is a nice one now because there's 5 or 6 projects we have there, order entry in the neighborhood of $30 million plus in one particular site, needing the kind of sophistication that you bring to the table as a result of what we're able to do on the ATM side.

The changes were making strategically in the security business is one with the recognition that the branch activity, right now, continues to falter. Part of that -- in the regional bank space -- is the result of the capital that they're investing on the ATM side. We've had a number of those conversations with folks. So that's one issue associated that. The second is our focus of the Organization on the security side is both important for the security business as well as the self serve business as well. A lot the activity is pulled through from a security standpoint on the ATM. So when we talk about our IS offering or moving under the IS side on the bank, what we're talking about is taking the capability that we have from the World Trade Center and bringing that back into the banks around the United States and not just focusing on the branch anymore.

Because as you can see, we've demonstrated outside the financial sector that there is a need for the kind of capabilities we have. We're bringing the expertise back into the financial sector now with a focused effort there. An individual we asked to lead that was the individual we asked to lead the IS on the ATM side. So we have pretty big confidence there. The other thing I would say -- if you look at the security business -- 60% of it today is recurring. So it has the makeup of exactly what we want. What we have not done the last 2 years successfully is pushed hard enough in the financial sector in the space that's growing, which is really enterprise IT kinds of capabilities which we've done outside of the financials. So with that, we've got a very focused effort on this and our expectations are we can actually grow this faster once we get the branch piece back to a more normal level. So that's why it's both important strategically as well as tactically.

Got it. Thank you.

We'll go next to Grant Keeny with Northcoast Research.

Good morning. You commented on the environment in India and the move to an outsource model. I was just wondering if you could provide some color on the competitive environment there and your strategy given that shift to the outsource model. They're companies you're competing -- who just provide only an outsource service or what's the competitive environment like?

I would say in India, India evolved -- when you look at different markets around the world -- India evolved, maybe, differently than some of the other markets from the getgo. They were very services-oriented on the very front-end. Fortunately, for us that played into our mode of operation, which is maybe less product centric more holistic services oriented. So as such -- as we established operations in India, certainly, you need a footprint with the technology and the product itself. But we began to develop the services infrastructure that we leveraged from Brazil, right out of the gate.

So it gave us some early experience there. What we've seen is the market moving more and more aggressively in that direction. I think we're well positioned and feel like we have 40% of the market and are the market leader there with some of the biggest banks in that space. You do, however, find a unique set of players there and there are some small start-ups. There are other players in this space that you wouldn't see anywhere else in the world that certainly are competitors in that arena. We feel like we'll well positioned there because of our total capability and it ties into our service operation. But we certainly have our eye on a lot of these small competitors that we find ourselves up against in some of these bids.

Okay. Thank you. Then a follow-up on a previous question -- you talked about the shift towards more of an outsource enterprise security model. I think you mentioned the change in the sales organization there. Do you expect to grow that business organically? Or are there companies out there that you can acquire to enhance that profile?

Yes. I think I'd answer that both. I think we've got the skill set. We've got name recognition with these kind of contracts we've won. Likewise, again, we're talking about specific niches where our competencies give us a competitive advantage in these spaces. So when you think back in terms of the financial sector, there's a lot of opportunity there because we haven't been in that space, really, at all. We've been in more in the bank branch space. So we're talking about taking our competencies back into the banking sector with some of the high-end enterprise IT capabilities and there are some marginal players that could add some competencies there for us. So that would be the type of thing we're looking at, along with having a broad offering of services.

So platforms that offer the capability to expand our services offering into that institution becomes important. So it's not just alarm monitoring. It now is monitoring energy management consumption kinds of things. It's now monitoring other sophisticated things that we do on the IT side, the video surveillance kind of capabilities, biometric entry in remote locations, identity management. Those are the types of sophistication that we are able to do at these high end enterprise pieces that we have not focused on in the financial. So I would say it is both capability within the verticals that we have focused on and secondly, it would also be companies that add services capability to expand what we are already offering to someone.

Thank you.

We'll take our next question from Zahid Siddique.

Hi, good morning. I have a few questions. The first one is on the debt level. I know that debt has gone up by about $50 million, roughly. What was the reason?

You're talking about the debt level from --

From I believe Q2 or Q1.

Yes. And really that's a function of the fact we had negative free cash flow in the quarter. We had our normal dividend, and then we had repurchased 1.1 million shares in the quarter. Again, we're looking at this, Zahid, more from a full-year perspective, given the back-end-loading nature of our cash flow. So as we look at the overall free cash flow for the full year of the $150 million, we look at the debt dividend that we're going to be outlaying plus continued execution on the share repurchase. Again we expect that we'll be in a slight net debt position by the end of the year. So I'd encourage you to look at the full year as oppose to just the quarter.

Okay. And then on Brazil elections, you're still expecting roughly $100 million for the rest of the year?

Yes.

Yes.

Yes, that's correct. I think the -- I think we -- 100 to 105, in essence, including lottery, but that's the category. That's right.

Okay. But then -- I guess talking about the M&A, one of your competitors is undergoing an acquisition. Currently, they're adding another leg to their business. And I wanted to get your thoughts on your end -- are you satisfied with the portfolio that you have or could you potentially also be looking to diversify?

Zahid, I think our focus is more -- would be more focused on adding capabilities to our existing businesses that we're in. That's how I would differentiate it and I'd also say ours would be more oriented towards services and the software side and the recurring revenue stream of service, services and software sides of the business. That's how I would differentiate it. I don't think we have any intention to try and put a completely different vertical within our portfolio. We're happy with where we're at. We see the opportunities we think are significant regarding the spaces we're in. We need to execute better within those spaces and take advantage of that competencies we've built. That's the direction we would take on the M&A front.

Okay. And also -- going back to the competitor -- we have heard that they have been gaining share in North America and Europe. Would that mean that you have been losing share or what's your take on that?

For me, this whole share conversation always is fraught with a lot of issues. But I would just say -- you mentioned North America -- if you look at our first North America slide, our regional space was up 183% or 180%, I think, in this quarter. We were up 90% the previous quarter, 150% the prior quarter. So those are all product level numbers. And I put those out there because I get this question all the time. And while to me, product isn't really a big indicator of share, I would have to say those numbers are significantly higher than anything I've seen from anyone else. So again, we're looking to holistic aspects of recurring revenue streams from services isn't included in those numbers. But our product numbers are much higher than anyone else's when you look at it from just a product standpoint. We report product and service together. That's why our overall numbers would look smaller. But when you pull product out, you saw that we're up 80% in product alone in North American financial self service -- huge numbers.

Sure. And just the last, real quick one -- what was the tax refund -- I think you said $20 million -- what was it from?

And so the tax refund was $70 million that was received in the prior year. And that was really, due to tax planning work that we did as a result of some divestment activity.

Okay. So that was second quarter of last year, so no refund this quarter?

That's correct.

Okay. Thank you so much.

We'll take our next question from Julio Quinteros with Goldman Sachs.

Hey, everyone. This is, actually, Roman Leal. I wanted to ask a little bit more on the market opportunity in India. How big do you see the addressable market there? How many ATMs do you think they are? What percentage of that is outsourced and do think this could, potentially, become as important as Brazil for you?

I think it will take awhile to get to the levels of Brazil. The market information you have relative to India is, sketchy, at best. But let's say there's about 70,000 units that are there. The difference would be in the India market today, we're focused on outsourcing and we're building our competencies there and like I indicated, we think we have about 40% of that market. It's going to grow very fast coming forward. In our business there, banks want to deploy faster than they have internal capabilities to. Plus, it's driving the outsourcing capabilities. The difference is in Brazil, we're basically not just an ATM company. We're an IT company.

So we have all sorts of other engagements in these banks that are IT centric, providing certain types of technology and even beyond the bank sphere. We'd hard-pressed here to say we could get to the level we're at in Brazil in next 5 years. Maybe, longer-term you can get there. But right now, we want to build our competencies both from a service, services-software standpoint, focused on the ATM space. And outsourcing with our capabilities there feeds into where the market is going. Not everyone is moving there, but a lot of players are. And so managing complex networks and doing that well and getting the scale we need is really what we're focused on. We've had some good progress there. I would expect that we should see continued growth over the long term in India each year for the next 5 to 10 years.

On the security business -- what makes you confident that sales restructuring and other changes you made there -- what makes you confident you're going to start seeing some topline impact in mid-2012? Is that more of a pipeline comment, or something else there? And also, I understand that the new bank branches, definitely, remain weak. But what's the natural or is there a natural upgrade cycle to current security systems that encourage banks to rethink their security systems and maybe even open the door for -- to introduce these new -- better services there?

Yes. That is almost the answer I would be playing back you relative to the importance of this space. First of all -- in terms of the organization -- we've taken the individual that help create IS space -- our IS business on the ATM side to lead our sales effort, comprehensively, on the security side. So as an individual -- Greg Steffy -- I think many of you have met him -- and he has the ability to take a complete solution and provide to the marketplace. So integrated services becomes a key aspect to this. The second piece of that is not only his leadership, but the dedicated resources that we've now put under him as well. We now have security specialists that are focusing on the space much like we do ATM specialists that can go very deep on these subjects because security is no longer a very simple topic.

It's a very complex topic and the IT capabilities are required. So as such -- what we had developed actually outside of financial, which is the reason why the World Trade Center and UN and these other big, complex facilities that need deep IT capabilities use us is the reason we're taking that organization and focusing back on financials. And as we do that, that allows us, really, to get them into the IP world, relative to security where our skills and competencies differentiate us from someone using VCRs or a simple method that they still use in many institutions today, relative to video surveillance and tapes and all sorts of things that are antiquated. But there's not an ability to migrate them. We now believe we have the ability to do that. The market is moving in that direction.

We're now putting the resource against that with right leadership and dedication. So we feel pretty good about our ability to do that. As evidenced by when we put the focus on the nonbank space, we've been able to generate the kinds of wins that are, quite frankly, taking the industry by surprise. So the whole World Trade Center now -- you've got 5 major projects that Diebold has won in that space. The most recent one -- the situational awareness one ties in 11 different facilities all from different vendors and suppliers to one location that could be monitored all through the software and capabilities that we developed in the design side. Eventually, we'll be looking to monitor and create services from that entire operation. So that's why I've got confidence in our ability to this.

Thank you.

We'll take our next question from Paul Coster with JPMorgan.

Thank you. Most of my questions have been and answered, but I want to dwell a little bit longer on this security service question and the allocation of resources. Does it mean that you are going to de-emphasize the resource that is allocated to the nonfinancial services sector and in terms of your, sort of, expectation of this demand? Being in existence in the financial sector, have you actually got a couple of wins under your belt that have given you confidence that the demand pull through is there and it's not just associated with having the right people allocated to the space?

Yes. Good question. I would say it is going to force us to -- we're taking some resource from some the nonfinancial sectors where we have not seen the profitability that we were expecting into the ATM space. So part of this has to do with growth. Part of it has to do with profitability expectations long-term. As we sat on the front end, we went in to take a look at security in a lot of these nonfinancial sectors where we're going to analyze both growth rates and our ability to deliver the kind of profitability that would be accretive to the Company. As we have looked at that and then also looked at the financial side, we have 2 customers I would say, in the top 25 in the United States where we have done significant complex IT security projects for, which has given us a lot of confidence as we've gotten in there, in terms of the opportunities because several others have come to us and asked similar-type questions.

So we see a path to actually taking over the infrastructure of one of the top 25 banks in the United States in terms of running their security infrastructure, from the command center all the way to all the technology out to all the folks in their facilities. Yes, we have a lot confidence in it. We have a few wins that are under our belt. We have a long way to go but that's why we're reallocating resources back and it's the space where we know how to climb around in a financial institution. We know where to go. We already know the IT folks. So for me, it's focused depth with the right competency to allow us to get in there to generate the kind of growth we have. And at some point, as the bank branch activities takes place, they're going to pick up again. It has not taken place now, but certainly a lot of banks have talked to us about that. But we can't wait for that. That's why we're focused a lot of taking our enterprise IT expertise back in, in the large-scale projects.

Do you see some of the quota-carrying salespeople as fungible between the integrated services business and the enterprise security business?

I would say they're fungible from the standpoint of the security-technical expertise you need works across the various industries. What is not fungible is your brand and what is not fungible is the longer -- the sales cycle. For us, being in spaces we're very comfortable with and have a reputation in allows you to move down this path very quickly and that's the goal here.

Okay. Thank you.

We'll take our next question from Matt Summerville with KeyBanc.

A couple of follow-up questions -- can you guys quantify the magnitude of -- what we'll call it -- pull forward that you think you experienced from July into June?

I don't know if I can --

No, I don't think so, Matt.

Okay. And then, Tom, to one of my earlier questions -- you talked a little bit about pricing, calling out Asia. Can you just do a quick walk around the major regions and talk about what you're seeing from a pricing standpoint?

Sure. Since you mentioned Asia, let me comment there first. Asia, certainly, from our vantage point, has the most pricing pressure on it because you have the most players there and the size of the opportunities also create pricing pressure. When I look at the other regions of the world, if you went in, say, Latin America and Brazil, I would say it's consistent than it's been -- United States has been relatively consistent. And when you look at Europe, Middle East and Africa, you'd say more less consistent. Again, the one common theme across all of this would be the big opportunities attract a lot of attention, and they have strategic procurement folks involved. Thus, by the very nature of them have more pricing pressure than you do on some of the smaller opportunities. That's why as the regional banks have begun to do activity that -- with our reputation and closeness to them -- it really gives us a nice, competitive advantage with the service infrastructure. Outside of that at the major banks across the world, it is very price competitive.

Okay. That's actually all I have. Thanks, Tom.

You're welcome.

We'll l take our next question from Michael Saloio with Sidoti & Company.

Thanks for taking my question. Could you just maybe summarize for us -- and I know you already gave some detail on this -- how many of the previously mentioned 3 orders you got during the quarter and then it seems like you have a number of other orders left so I'm trying to figure out, given the backlog seems up pretty nicely, how much more it could buoyed throughout the rest of the year with orders that are, kind of, the still outstanding.

Yes. I think Michael, when I talked about it -- first I talked about the area of Latin America and Brazil. That was one of the big ones we had talked previously. In essence, we said we had 1 significant order during this quarter and 3 additional ones in July. So that gave us visibility. In Asia, we secured 1 large order recently and feel very good in terms of that along with what we said with India and Southeast Asia activities that we feel pretty good about -- both of those regions now. So I think last time we said, boy, there's some pretty big opportunities out there, depending how they go really impacts the year. We feel very good with what we've secured and certainly, we're not stopping. Don't get me wrong. But at this point, a lot of the orders are going to be influencing 2012, not 2011.

Okay. And can you just repeat your comments about what the backlog of ATMs is in Brazil? I think you gave a number, but I missed it.

No. I don't think I did --

Or maybe Latin America.

I think I had mentioned backlog in Asia. We said was up 50%. We didn't give a number.

I thought I heard a number in Brazil.

No. We don't give specific backlog numbers. I think what we're trying to do is imply that the size of the backlog was significant both there and in North America.

Okay. Secondly -- very encouraging to see the turnaround in EMEA. Can you talk about what regions there -- I know you mentioned this in the last call -- but what regions there you are really focus on and where the growth is coming from in EMEA?

Sure. I would say that the -- it would be the Western European countries where we have a focus such as the France, the Brazil, Spain, UK. Middle east is important to us. Reestablishing ourselves in Russia is important and talked about the steps we're taking there. And then places like Belgium are particularly important to us, so we've got a very focused effort relative to those areas. When you look at the African continent, you would say, the most important area within Africa, for us, is South Africa. I mean, the rest isn't quite the focus we have as we do in South Africa. So again, our focus is reemphasizing these areas, resources moving towards these countries where we think we've got both some scale, some competency, capability, and the ability to grow our business there along with taking the -- being the disciplined approach to taking the cost out across the rest of the region.

Okay. That's all I have.

Thank you.

And at this time, there are no other questions in queue. I'll turn it back to our presenters for any closing remarks.

Thanks, Tim. Thank you, everyone, for joining us this morning. And as always, any follow-up questions should be directed to myself or Chris Bast. Thank you again.

That concludes today's conference call. We appreciate your participation.