Diebold Nixdorf Inc (DBD) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Diebold Incorporated fourth quarter 2013 financial results conference call. At this time for opening remarks and introductions, I'd like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Sir, you may begin.

Thank you, Kathy. Good morning, and thank you for joining us today for Diebold's fourth quarter conference call. Joining me today are Andy Mattes, President and CEO, and Chris Chapman, Vice President, Global Finance and interim Principal Financial Officer.

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. Andy and Chris will be walking through this presentation as part of their comments today, and we encourage you to follow along. As with past calls, it's important to note that we are excluding certain restructuring charges, non-routine income and expenses, and impairment charges from our non-GAAP financial results. 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. Now with opening remarks, I'll turn it over to Andy.

Thanks, John. Good morning, everyone, and thank you for joining the call today as we discuss our fourth quarter and full year results. Our ongoing business improvement and cost reduction efforts continue to build momentum in the quarter. We remain focused on our four core pillars, cost, cash, talent, and growth, and driving a culture grounded in accountability and delivering on our commitments. The progress we've made so far is encouraging. However, we still have a lot of heavy lifting in front of us as we work through the crawl phase of our crawl, walk, run approach to our turnaround efforts. Our people recognize we're playing a game of inches, and we're mining those inches in every corner of our operation.

There are several items I will be covering today, first, the key takeaways from our results; second, a regional update; third, an update on our Diebold 2.0 turnaround strategy; and finally, our outlook for 2014. Before we get started, I'm pleased to say our Board of Directors has elected to maintain our quarterly dividend at its current level. We are confident in our ability to generate the cash necessary to maintain a strong dividend while in the midst of a major transformation effort. Chris will share more information behind our working capital performance later on the call.

Now, let's discuss the key takeaways from our results. As we have been communicating, we are a cost and cash play in the crawl stage of our turnaround in 2013 and 2014. During the second half of 2013, we continued to execute on these important areas. First, operating profits came in near the higher end of our expectations. Second, we finished well within the full year revenue and EPS guidance we provided in early August, even with the higher than expected full year non-GAAP effective tax rate. Third, we improved total gross margin by approximately 150 basis points in the second half of 2013, compared to the prior-year period. As we have previously discussed, we continue to focus on growing and improving our service business to more than offset the margin pressure we're seeing on the product side. Finally, I'm proud of our global team and would like to recognize them for driving significant improvements in working capital which enabled us to generate strong free cash flow in the second half of the year. Our employees across the globe stepped up to the plate and did a remarkable job to drive these improvements.

Now let's talk about some trends we're seeing in our market. I will primarily focus my commentary around orders, while Chris will provide more color around revenue and profitability. Total orders for both product and services for the fourth quarter grew 10%, or 12% on a constant currency basis. For the full year, product and services orders grew 4%, or 6% on constant currency. In North America, total product and service orders grew during the quarter 7%, and security orders in North America were up 1%, with growth in electronic security largely offset by a decline in physical security. Total financial service orders for product and services were up 10%.

Let's take a look at where this increased demand is coming from. The deposit automation and branch transformation continue to gain momentum throughout the financial service market in North America. For example, you might have seen the recent featured article in American Banker on Fifth Third's branch transformation strategy. In support of this strategy, we just announced that Fifth Third Bank is the first customer to roll out our mixed media deposit automation solution. Another recent example is First Citizen National Bank in Tennessee, where we are helping our customer implement a branch transformation strategy that includes deposit automation and leading edge in-lobby teller technology within the branch. We also announced an agreement with Vantage West Credit Union to transform the financial institution into a tellerless branch using a variety of branch transformation technology. In addition, we continue to see a lot of interest related to Windows 7 upgrades and our sales opportunity pipeline has noticeably increased.

Looking at our electronic security business, we continue to see order growth in both the commercial and financial spaces which was largely offset by continued declines in our legacy physical security business. We ended the year with more than 60 new commercial industry customers and closed some key wins within the financial space related to security monitoring which is in line with our strategy to expand our recurring revenue base. Also, our web-based security management platform, SecureStat, which we demonstrated at our Investor Day in New York, has quickly gained traction in the industry. To date, we have approximately 200 customers and 10,000 sites utilizing this software-as-a-service solution.

In EMEA, orders for the fourth quarter grew 15%, or 13% on a constant currency basis. The movement towards branch transformation is also having a positive impact in the EMEA market and has provided us with a renewed opportunity to expand our presence there. This is reflected in our financial results, with both orders and revenue up double digits for both the full year and the quarter. One example we announced during the quarter was a partnership with UniCredit in Italy to add cash recycling capabilities to the bank's ATM fleet with a three-year hardware and maintenance services agreement.

Moving to Asia-Pacific, orders are down 26% for the quarter, or 23% on a constant currency basis. Volume during the quarter was down due to a cost comparison for the prior-year period when we received several large orders from India. However, on a full year basis, orders grew 4%, or 6% on constant currency basis, as we continue to see steady growth in this emerging market region. In Latin America, we had a mixed year. Total orders for the fourth quarter were down 15% compared to the prior-year period. However, we ended the year with improved backlog which positions us well for growth in 2014. We're beginning to see more interest in our electronic security offerings in this region. For example, one of the deals that we recently announced is a contract to design and implement a complex video system to monitor the ship traffic traversing the Panama Canal. In Brazil, orders for the quarter more than doubled on a constant currency basis which includes a large order in the lottery business. Excluding this deal, orders were up 16% on constant currency.

Looking at our total business for the year, we grew international revenue as a percentage of our total which now represents 52% of total revenue. This growth will continue to put near-term pressure on our product margins. However, in the long term, we're building a high margin service base with recurring revenue in these areas as they mature. We continued our trend of revenue growth in services and software. We also progressed on our path to higher service gross margin as we continue to expand into higher value-add services.

Now I will provide a brief update on our Diebold 2.0 turnaround strategy and a few key initiatives as it relates to the eight-point program we previously outlined. First, as it relates to establishing a competitive cost structure, during the second half of the year, we increased our savings target to $150 million in gross savings and $75 million of net savings over three years. In 2013, we delivered the first $60 million of gross savings, of which about $30 million benefited the bottom line. The improvements can be seen particularly in SG&A and service gross margin. Moving forward, we will continue to monitor the pace of our reinvestments to insure we achieve our $20 million to $25 million net savings target for 2014. Second, in driving improved free cash flow, we had strong cash generation in the quarter which enabled us to finish the year with a $3 million improvement from 2012. This ended our annual decline in free cash flow since 2009.

Third, in regards to improving sales effectiveness, we have aligned the goals and objectives of our salesforce worldwide. Specifically, we have simplified our sales compensation structure from around 80 distinct local plans down to just 10 to help drive greater efficiency and alignment across our global sales organization. Finally, as we look to instill a winning culture grounded in execution, we've been keenly focused on change management within the Company. We spend a great deal of time communicating with our people to share the urgency behind change, holding many town hall meetings around the world and hosting a global leader meeting at headquarters to cascade our turnaround strategy across multiple layers of the Company and generate excitement and momentum around Diebold 2.0. From a compensation perspective, we have instituted a pay-for-performance bonus program to virtually all 6,000 employees in North America in lieu of standard merit increases. The strategy here is to better align personal rewards with Company performance measures and provide employees the opportunity to earn more than they would have with a typical merit increase. In addition, the Board has approved a turnaround performance share grant for about 80 of our top global managers. This aligns our turnaround objectives with a higher equity ownership philosophy amongst our global leadership team.

Before I move on to our outlook for 2014, let me provide a quick update on the key leadership positions we're filling. Last month, we announced that Octavio Marquez joined our Company to lead the Latin America operation. Octavio brings to us a solid track record of success throughout his career at several high-tech companies, most recently at EMC and has demonstrated the ability to launch and sustain growth in the technology sector in the Latin America market. He's a tremendous addition to our global leadership team. On Tuesday, we announced another outstanding addition to our leadership team with the appointment of Neil Emerson, who will lead our Asia-Pac operations. Neil's background in profitably growing professional services, most recently with the TMF Group, and technology companies throughout his career in Asia, including HP and IBM, will make him extremely beneficial to Diebold's transformation efforts moving forward. Regarding our search for a new CFO, we have identified several strong candidates and are making steady progress. We're focused on finding the right person for this role and will communicate the status of the search process to you as we move forward.

Moving on to our outlook for 2014, we are reaffirming our full year guidance for both revenue and earnings. Chris will share more details on this front later on the call. In conclusion, we got our transformation efforts off to a good start in the second half of 2013 and delivered on the expectations that we set. There's no question that a tremendous amount of work is ahead of us as we move from crawl to walk and finally the run phase of our transformation. Moving forward, we will continue our focus on controlling costs, generating more cash, and attracting, retaining, and energizing top talent to generate long-term, profitable growth. We will continue to adhere to the motto, we say what we'll do, and we'll do what we say. With that, I'll turn the call over to Chris.

Thanks, Andy, and good morning, everyone. First, I will walk you through our fourth quarter financial performance and provide a brief explanation behind changes to our segment reporting structure. I will then update you on the legal and compliance front, discuss our 2014 revenue, earnings, and free cash flow outlook, and talk about the strategy behind our dividend.

Now to review our financial results. Turning to slide 16, total revenue for the quarter was down 3%, or 2% on a constant currency basis as a result of lower volume in North America and Latin America. The lower volume in North America is a result of the regional business having leveled off earlier this year. In Latin America, the decline was due to the timing of large installation projects across the region though we are encouraged by the strong year-end backlog. The currency impact was mainly driven by a weakening of the Brazilian real.

Taking a look at the full year 2013, total revenue decreased 4.5%, or 3% on a constant currency basis due to reduced volumes in our North America business segment. This stems from the tough comparison with the strong 2012, driven by ADA PCI upgrade activity. Asia-Pacific and EMEA both showed solid growth over prior-year, up 12% and 11%, respectively, which includes an approximate 1.5% currency impact in both regions. Brazil's full year revenue was down 8% driven by the weakening real and customer postponed implementation schedules for several large orders. On a constant currency basis, Brazil would have been up 2% over prior-year. Latin America was down 6%, largely due to the timing of several ongoing projects throughout the region.

As we move to slide 17, financial self-service revenue was essentially flat for the quarter, or up 2% on a constant currency basis with declines in North America, largely offset by increases in EMEA and Brazil. For the full year, financial self-service revenue decreased 4% which includes a negative currency impact of 2%. The decline is primarily attributable to the North America regional business, partially offset with increased volume in our North America national accounts, Asia-Pacific, and EMEA businesses. Security revenue as depicted on slide 18, was down 6.5% compared with the prior-year period with a 14% decline in physical security related to our North America business. Electronic security was essentially flat, with continued improvement in North America offset by some installation delays in Latin America. Looking at the full year results, our security revenue was down 1% with physical security down 7%, offset by an improvement of electronic security of 5%.

On slide 19, gross margin for the quarter improved 2.1 percentage points to 24.7%. This was driven by a solid improvement in service gross margin which increased 7.3 percentage points to 31.2%. This improvement reflects the benefit of our service transformation efforts across the globe. In addition, the fourth quarter benefits from seasonally higher installation volume. Product gross margin decreased 4.1 percentage points to 17%. This was driven by customer mix differences in the US business and from a higher mix of Asia-Pacific and Brazil volume which typically carry lower product margins. We remain focused on our cost actions and driving additional efficiencies to show sustainable improvements in total gross margin.

Moving on to slide 20, total operating expense decreased $5.3 million compared with the fourth quarter 2012 as our cost savings efforts continue to take hold. Operating expense as a percentage of revenue was flat at approximately 18% on lower volume. Turning to slide 21, non-GAAP operating margin in the fourth quarter increased 2.1 percentage points to 7%, versus the same period in 2012. We are encouraged with the initial improvements we've made to our cost structure, but we still have a lot of work in front of us.

Now I would like to highlight the changes we are making to our segment reporting starting with our 2013 10-K. Historically, we have reported the Company's segments as Diebold North America and Diebold International, with the further break down of the international revenue by Asia-Pacific, EMEA, and Latin America including Brazil. In line with changes in our internal management reporting structure, moving forward we will be reporting our revenue and regional operating profit in the following five segments as shown on slide 22, North America, Asia Pacific, EMEA, Latin America, and Brazil. The global functions not included in these segments such as corporate, global development, information technology, and procurement functions will be reported as a separate single line item. These changes are in line with our current management structure, and we feel will provide greater visibility to our regional performance. The Company will continue to report revenue by product line, including financial self-service, security, and election and lottery systems.

EPS on a GAAP basis was a $0.65 loss during the quarter. This includes restructuring charges of $0.36 related to the voluntary early retirement program, and a non-routine and amortization expense of $0.72, the majority of which is attributable to pension accounting primarily associated with the voluntary early retirement plan. In addition, we had an impairment charge of $0.02 and the impact of the deferred tax expense on foreign cash repatriation of $0.12. The combination of these factors brings us to $0.57 earnings per share on a non-GAAP basis for the fourth quarter.

Our full year non-GAAP effective tax rate, excluding the Brazil valuation allowance booked in the second quarter of 2013, was approximately 33% which exceeded our previous guidance of 28% to 30%. The higher tax rate is primarily the result of the Company's final mix of income across the various tax jurisdictions and one-off discrete tax items including the release of evaluation allowance in the Company's Swiss entity, partially offset by the establishment of a valuation allowance in the Company's Italian entity. Moving on to cash flow on slide 24, I'm very pleased with the efforts made throughout the Company to drive significant improvements in our free cash flow during the quarter, with a special thanks to our teams lead by George Mayes for the continued focus on our working capital initiatives. The results in the quarter exceeded our internal expectations and reflect an improvement of $23 million versus the same period last year. Looking at slide 25, our full year free cash flow improved $3 million over prior-year and was more than enough to cover our annual dividend pay out, despite several large one-time payments. We are encouraged that we've been able to stabilize our annual free cash flow, given the trend in recent years.

Turning to slide 26, the organization's focused efforts resulted in a DSO improvement of 18 days in the quarter and 3 days for the year. Looking at slide 27, inventory turns improved to 5.9, also showing solid improvement over both prior quarter and year. Additionally, we experienced higher early and prepayment activity from our customers. This is reflected in our deferred revenue and accounts receivable balances, resulting in approximately $30 million of benefit in full year free cash flow results. We will continue to bring additional discipline and focus across our global teams to improve our cash generation activities.

Net debt on slide 28 for the period was $50.8 million, a $29.3 million increase from the prior-year period. The net debt-to-capital ratio increased 3 percentage points to 5%. As we discussed during the previous earnings calls, we've executed on our strategy to repatriate approximately $275 million cash from our international operations which was used to pay down debt. Turning to slide 29, as previously disclosed the Company has reached agreement with the DOJ and the SEC on the terms of a settlement regarding FCPA, including combined payments to the US government of approximately $48 million which were made in the fourth quarter. Additionally, as previously disclosed, we will have an independent compliance monitor for a minimum period of 18 months, and are in the process of working with the government agencies to identify the compliance monitor. We feel we have made considerable improvements to our compliance program and will continue to implement enhancements as the need is identified.

As previously disclosed, one of our Brazilian subsidiaries was notified in the third quarter of 2012 of a tax assessment of $133 million regarding certain Brazilian federal indirect taxes for 2008 and 2009. We continue to feel strongly about our legal position relative to this assessment and are committed to remediating our indirect tax [mature] weakness in our internal controls. Looking at slide 30, we are re-confirming our revenue guidance, expecting it to be up in the low-single digits, and we are maintaining non-GAAP EPS guidance of $1.65 to $1.85. We expect restructuring charges, non-routine expenses, and amortization to be in the $0.30 to $0.40 range, and our full year non-GAAP effective tax rate to be approximately 30%. We are encouraged by the strong increase in year-end backlog. However, the significant portion of that increase sits in regions with high currency risk which could weigh on our earnings growth. In terms of our earnings expectations on a seasonal basis, we expect first half earnings to substantially improve off a relatively easy comparison to the prior year, and driven by the benefit of our cost initiatives. Having said that, the year will still follow our normal seasonality and be weighted more heavily towards the second half. Additionally, as we previously discussed, we will be ramping up our reinvestment in the business as the savings are realized. In regards to our free cash flow outlook for 2014 on slide 31, we are forecasting free cash flow for the year of $80 million to $100 million. This includes an approximate $35 million increase in our capital expenditures as we make strategic reinvestments in our business.

Next, I would like to provide an update on our dividend strategy. As we have consistently communicated, we are committed to maintaining a strong dividend as part of our investment thesis. As Andy indicated, our Board of Directors declared a first quarter cash dividend of $0.2875 per share on all common shares which maintains an annual dividend of $1.15 per share. We are confident in our ability to generate more than enough cash to support our dividend and reinvest in the business. Our long-term target pay out ratio is approximately 35% of non-GAAP after-tax earnings, and we are confident in our ability to maintain our dividend and grow into this pay out ratio over time.

In closing, we continue to have a lot of work in front of us as Diebold transforms itself into a world class services-lead, software enabled Company. We are committed to continuous improvements to maintain and strengthen our control environment, while operationally reducing our costs, and improving our working capital efficiencies. We continue to strengthen our capacity to reinvest and position the Company for future growth. With that, I'll turn the call back to John.

Thanks, Chris. Kathy, we'd like to take our first question at this time.

(Operator Instructions)

Gil Luria, Wedbush.

Thank you. On a regional basis it looks like you've been making a lot of progress in EMEA. In that region, you had double-digit growth. Your competitors were flat to down in that region, and you doubled your profitability. Do you think there's more improvement that you can have in that region?

Gil, we're very proud of the EMEA team. We're very encouraged by the opportunity. Branch transformation relevels the playing field and gives Diebold a great opportunity to go through doors that previously weren't open to us. We continue to be excited about EMEA, and we continue to invest in that geography.

Then, in terms of Brazil, what are your expectations for some of the big orders you've talked about in the past rolling out this year? How big is the lottery business going to be this year?

Gil, from a lottery perspective right now, we're looking at approximately $40 million to $50 million in 2014. With regards to the rollout of the large tenders, what we've talked about in the past we had some delays there. We are expecting in the first half of the year and throughout 2014 that we're going to start to roll through the large tender. We're still finalizing some certifications on the second one, and so expect those to start rolling out more in the third and fourth quarter of this year, maybe some of it even pushing into 2015.

Got it. Thank you very much.

Matt Summerville, KeyBanc.

Good morning. Chris, you mentioned backlog. Can you give us a backlog number year-end 2013 versus year-end 2012, and then the mix of backlog you would term in locales with a bit riskier FX situations?

At a high level, I don't have the exact number in front of me here, Matt, but we're looking at approximately (inaudible) million increase over prior-year, and our year-end backlog in 2013 of approximately $720 million. In terms of the overall mix, as I noted a majority of the growth that we've seen there is really coming from some of our international markets. I would characterize the mix as 50/50, maybe a little bit heavier weighted to the international on the overall backlog.

Then, I just wanted to dig a little bit deeper into granularity on your orders in North America. To make it more comparable, can you guys provide a product only order number, and then talk about a little bit more specificity behind what you're seeing in national banks versus regionals, and what your outlook is that you've embedded into your 2014 guidance there?

Matt, the product only growth in North America was 28% in the last quarter. We are cautiously optimistic about the US business going forward. Deposit automation, branch transformation, Windows 7 upgrades, the order books are starting to fill up. The sales pipeline is ramping up very nicely, and it's going to pan out pretty much like what we told you in New York. We believe that this is going to be a second half 2014 order play that will probably be a 2015 revenue play. Just think about Windows 7. There's not a hard, must, do it by the 8 date. It's really a soft bleeding into the upgrade. You've got EMV upgrades coming at the tail of it. All the financial institutions are starting to get their arms around it, and we're seeing more activity in the market.

I guess to put a finer point on that, do you expect your small bank revenue in North America to grow in 2014? What rate would be reasonable expectation behind that? Thanks.

That's the point I was trying to make. I expect our smaller bank orders to grow in 2014. Whether and how fast it will revenue, that's still to be seen. The revenue is probably going to be more flattish, and we probably will enter 2015 with a higher smaller regional bank backlog than we have before.

Thank you.

Paul Coster, JP Morgan.

Thank you for taking my questions. My first relates to Europe. Diebold was big in Europe. Then, it withdrew in large parts, and now it feels like you are rebuilding. Can you talk to us about where you stand strategically in Europe? Then the related question is how does branch transformation in Europe differ, if at all, from that in North America?

Happy to do so, Paul. Let me start with the last part of your question. The biggest difference, and probably the biggest geographic driver in Europe for brand transformation, is the UK at this point in time. If you think about it, the UK market did not have the unnatural spike that we had in the US with the ADA compliance. Hence, the installed base is actually pretty old in the UK, and all the financial institutions are now looking at a normal upgrade cycle, looking at new technology. Needless to say, if that's what you're doing right now, you definitely want to pressure test branch transformation and take advantage of the latest technology as you optimize your banking model which is exactly what's going on in the UK. Given that this is new technology, the doors have reopened and we are in with four of the five major banks in the UK that we did not have any footprint in before.

If you take that and then say what's Diebold's strategy to EMEA, our strategy for the last years has been and will continue to go forward to be more account-centric than country-centric. When we ran a country-centric model the OpEx and the ramp-up costs got out of kilter. When you do it account by account, you can be smarter about it. You can throttle forward when you see the orders coming in. You can throttle back if you run into some headwinds, so we're continuing to invest in our corporate account strategy in Europe. You've seen our recent wins in Spain with large companies like BBVA that underpinned this strategy. We also continued to build momentum in the MEA part of EMEA, especially in the Middle East, and we'll continue to invest in that geography.

That makes sense. The other question I've got is the service margins have improved, as you've turned that into a business, I guess, but can they be improved from here? Structurally, it's a lot easier when you start mixing in a lot of software, but service in isolation, what needs to happen for the margins to continue to move north in that area?

I think you nailed it. We are starting to manage service as a business, and we're getting out of it being a pure delivery model into a business model. There are many levers that we can pull when you think about it. One, and the most powerful, is that we're thinking about it as a global business and not a country-centric model. In the old days, Diebold had dispatch managers, inventory, service managers in every country. Workforce planning was done on a country level. We've pulled all of that up into a regional level, and we continue to pull it up to a global level. You then add the IT investments that we are doing on the other side which enables you to run dispatch from offshore, lower cost geographies for other parts in the world. You combine that with the fact that we've upgraded our complete fleet in the US with GPS systems so the dispatchers can be smarter. We actually use technology to get our technicians on site, sooner and faster. We take the efforts we're doing on the inventory side as we're able to reduce the inventory levels in the truck as we upgrade our products that will have more enhanced services capabilities.

We are very bullish about the opportunities we have in services and software. The more we progress on our transformation, the more global we are, the more tools we can introduce, the more standardized our approaches, we can increase the margins, and that's the important part, keep the customer satisfaction and keep our first time fix rate at the levels where they are because the quality of Diebold service is one of the key differentiates. We want to use that as a springboard, not only for margin expansion, but also for revenue expansion.

Okay, thank you.

Matt Lipton, Autonomous Research.

Hi, guys. Thanks for taking my question. Nice results here. On the same topic of margin, I'm curious of the $75 million of the cost take out that going to flow to the bottom line. How should we think about mix based on all of the things you were just describing, Andy, between savings on the gross margin front versus savings on total OpEx and operating margin?

Matt, this is Chris. How I would think about that again, it's split about 50/50. You'll see about half of that coming through the gross margin side, the other half through op expense. I would say that a majority of our reinvestments that you're going to see from the development side, from the IT, from additional investments in our people and sales organization are going to come through more on the op expense side. You're going to see a little bit of that in a distribution impact that won't be linear as we have more of the reinvestments that come back through our op expense.

Great. I think I noticed on slide 30 that the tax rate in the guidance went up from 28% to 30% from where you guided in Analyst Day. Are you feeling more confident in operating margin, and the cost take out for 2014, or should we think about the midpoint being lower a touch on the fact that the tax rate's higher?

I would say yes to your first question. We are feeling more confident about that. With regards specifically to the 30% tax rate, we're looking at a current full year mix of income across the various tax jurisdictions. Also given our change in assertion from a ABP 23 standpoint on cash repatriation efforts, we are seeing a little bit of headwinds on that where the tax rate is probably up another percent or two there as well. It's a combination of those factors that we've now taken into account in that 30% range we've provided.

Great. Just last one for me, Andy or Chris, whoever wants to answer this, on deposit automation, we've seen lots of different stats out there as far as number of ATMs, whether it's in North America or globally, that already have the technology. But when you think about the deposit automation at banks you're talking about today specifically those that don't require envelopes, or it can be multi currency check like you were talking about, how much of a runway do we have there versus just the old deposit automation that was sticking an envelope into an ATM? Thanks.

There's a lot of runway on that one. To give you an example, we've just upgraded one large Canadian company to deposit automation. It's actually the first in the whole country to introduce the technology, so I'd say you'll see just about all the financial institutions in North America, and in other countries where there is still a high usage of checks, going down that route. That will continue to be a volume driver for the next years. Let me try to frame it up for you. It's probably three-quarters of the install base in the United States that still does not have this technology.

That's helpful. Thank you.

(Operator Instructions)

Kartik Mehta, Northcoast Research.

Good morning. Andy, a question on the VERP for you. It seems as though one of the biggest assets Diebold has is its service organizations. As the VERP gets implemented, how are you making certain that your service levels don't drop and that that asset doesn't fall in the eyes of your customers?

Kartik, that is the main to-do that we have, and we monitor this very carefully. You then superimpose two other things. Not only did we do the VERP, but more importantly, we've streamlined the management structure in our service operations, especially in the US which means we had to rewire, if you want to use that term, every one of our service technicians to different management codes in the system, given the fact that our IT systems aren't fully upgraded yet. We're monitoring this very, very carefully, but here's the good news. I look at these stats every week. Did we see a blip? Yes. Was it significant? No. Interesting enough, we've surveyed our customers after we had taken out the 700 FTEs last year, and customer satisfaction index went up after we had reduced the workforce. Our people on the ground are doing an extraordinarily great job of making sure that customer satisfaction is keeping up and that we go into the new line up in a smooth and transparent way for our clients.

Then Chris, for cash flow expectations for 2014, you indicated $35 million more in CapEx. Are there any other one-time expenses that you'd anticipate in that guidance you gave?

Kartik, yes, when you look at 2014, it's still not what I would consider a normal year for us. On a go-forward basis, we'll say as we get more to the latter stages of our turnaround here, I would expect that approximately 80% to 90% of our after-tax earnings to flow through as cash flow. If you look at some of the big items that we still have in 2014, I talked about the additional $35 million from an investment standpoint in the CapEx. We also have the VERP action that concluded at the end of 2013. We have approximately $25 million in pay out for that that's going to be coming. We have an approximate other as we outlined in the guidance, $0.30 to $0.40 worth of additional restructuring non-routine actions. We saw actions out in front of us that we're going to have to pay for in 2014, call that approximately $25 million as well, and not necessarily non-routine given we've had it both years. But we're also looking at probably another $10 million or so of cash tax that we're going to have to pay out on our repatriation efforts in 2014. You look at a couple of those large items, and that weighs a little bit on the overall number. But I would say the $80 million to $100 million that we're giving, that's all-in, inclusive of all activities that we see in front of us in 2014.

Chris, if I add these numbers right, it's $60 million plus the $35 million additional CapEx that if you take all those out, you still get to your guidance, free cash flow guidance you gave. Is that correct?

Absolutely. Our free cash flow guidance of $80 million to $100 million is inclusive of all those items that I've just outlined.

Andy, just one last question. The CapEx increase, would you anticipate, is this a one-time CapEx increase? Or as the Company becomes more innovative and you need to invest, will the CapEx continue to increase?

I think you just answered it. One of the major elements of our eight-point turnaround program is to drive innovation in a collaborative fashion with our customers and our partners which means we will continue to invest. Now, if you ask me today will this investment be primarily CapEx or more OpEx, these things might float between the categories. But we will continue to invest in innovation because that lays the foundation for the revenue growth target that we've set ourselves internally.

Thank you very much. I really appreciate it.

Jeff Kessler, Imperial Capital.

My question is you've noted that a large percentage of your backlog are in countries that, let's just say, have higher risk, both higher risk in terms of politics but perhaps more importantly, higher risk in terms of currency. How do you deal with the currency risk, based either on hedging or planned repatriation? What do you do to try to mitigate that risk as much as possible?

Jeff, we do not try to get into hedge accounting on our P&L. Again, we look to do as much as possible I would say from a margin standpoint to focus on localization of our procured parts and really try to drive it from that standpoint. With regards to where our cash is located, there are some hedging procedures that we do to try to offset some of that potential risk.

Okay. Secondly, noticing that the physical part of your security business fell this quarter, which actually is somewhat in line with what we're seeing with some of the other large providers of access and locks and things like that in this quarter, against the flat background for electronic, what percentage of the security business as of the end of the year has electronic become relative to the whole of security?

If you're looking on a revenue mix, the scale is slightly tipped towards the electronic. I'd say it's probably in the 53% to 56% range. On the order side, there's no question. The orders growth is coming from the electronic security business. Having said that, we see an interesting phenomenon in the conversations. It's not panning out in the orders numbers yet, but once financial institutions truly think through branch transformation to the very end, and they're going to one of the later stages which is reassessing and reformatting their branch footprint, you'll actually end up with some form of a physical security opportunity because when you relocate a branch, the new branch will need a lock and safe deposit box and all that good stuff. We are observing this very carefully and making sure that when we talk branch transformation, we talk end-to-end, and we include the physical security aspects in that business.

Okay. Can you put any numbers or any time frame around the Panama Canal contract?

I honestly don't have the numbers handy right now. John can give you that in an off-line conversation.

One final question. That is you did mention earlier, and correct me if I'm wrong, that you have some opportunity with regard to the DMV upgrade, am I incorrect in hearing that?

No, I said deposit automation, not DMV.

Deposit automation, that's what I needed to know. Thank you very much.

Justin Bergner, Gabelli and Company.

Good morning, Andy. Good morning, Chris. Nice progress on the quarter. I have a few questions about this morning. First of all, with regards to electronic security, I believe you mentioned some delays in Latin America. Could you maybe quantify what the revenue growth in the electronic side might have looked like without those delays in Latin America, or perhaps what it looked like in North America?

From a full year standpoint, those delays in Latin America probably cost us about a percent and a half or so on the full year.

Great. Were those mainly concentrated in the forth quarter? Were spread out over the year?

That was mainly in the fourth quarter.

Okay. Then a second question, just to clarify on capital expenditures, your outlook slide says that capital expenditures are supposed to increase $35 million. I guess it would be off of the $35 million base in 2013, and that would get one to $70 million. That's only a slight increase from the outlook that was provided at your Investor Day, right? That's not a material change, is it?

Correct.

Great. Then third, I wanted to compliment the organization on the improvement in working capital which was pretty impressive ending the year, and I just want to get a sense as to what actions drove that. Is there room for further improvement? How I should think about that in terms of its contribution in your 2014 free cash flow guidance?

Let me start with the overall statement, and then Chris can go into the detail. The biggest change we have made last year is that we started to compensate people on free cash flow and that we've taken the whole free cash flow conversation, the whole metrics, the whole working capital metrics out of the [silence] corner of the organization and made it mainstream in the operational reviews. There was not a week that we did not review DSOs and DIOs and went down to the contract level in every one of our geographies. It just changed the way the organization started to think about it.

Yes, to add to what Andy said, there was a tremendous amount of very hard work to achieve the overall results. With respect to how we look at that on a go-forward basis for additional improvement, we did achieve some solid results, and by no means are we going to rest now and stop where we're at. We did get some benefit. We've outlined that, and the DSO performance on some prepaid, pay ahead activity, but we continue to focus on that, mainly on the process side and really driving that. Again, we expect to continue to try to drive that. But I would note there's always that impact of potential regional mix and timing to some things in the year which could impact.

On the inventory side, outstanding improvement versus prior year, we've set a new year-end mark that we've seen for a number of years, and so again a lot of real hard work there. Again, we're going to continue to try to drive and maintain that inventory performance at those levels as we go forward. But again I would note the timing of how those overall balances will play out as we start to experience a little bit of growth, so again we could maintain the efficiency from a metric standpoint, but we could still see slight growth in those balances in the year as we start to grow the Company slightly.

Very good. If you're maintaining your free cash flow guidance in 2014 having enjoyed this benefit in working capital in the end of 2013, it would suggest that there's no give back at the very least?

Correct.

Okay, great. Thank you.

You could look at it, Justin, to say we have $30 million of prepayment activities that we're not modeling back in, but we're looking at additional efficiencies in our working capital to offset that and maintain over year.

Thank you. Good luck going forward.

Meghna Ladha, Susquehanna.

Yes, good morning. Thanks for taking my question. Andy, back at the Analyst day in November it appeared you were not satisfied with the current level of cost cuts at the Company. What other areas within the Company do you see additional cost take out opportunities?

Let's do this one step at a time. We told you that we're going to do $150 million. We'll do the $150 million. We're starting the work internally to identify target areas after this, and we'll gladly disclose those once we've made more progress on our $150 million.

Okay, and then Andy, if you could talk about the competitive landscape in the ATM business, not just the US but globally. Are you seeing any market share shifts?

We're in a very close knit market, so everybody of course has a biased view. We see definitely a momentum shift towards Diebold, given where we are on our customer base, so customer mix drives volume. But we also see opportunities in the services business. Let me give you the example that I've given you in New York again with the Bankia deal in Spain. As we're branching out into multi-vendor services, that opens a complete new TAM to Diebold and provides new sales opportunities for us. If you take the overall look which is why we like to talk about orders for product and services, we feel like we're picking up service market share from other parties that are out there in the market. In many cases these would also be smaller service partners that are there.

Okay, thank you. Just last question for Chris, how much cash is lying abroad that you could potentially repatriate in the future if need be?

Our expectations for 2014 are approximately, I'd say, about $60 million to $80 million that we're looking at repatriating this year.

Got it. Thank you very much.

In an efficient manner.

Thank you.

Glenn Mattson, Sidoti and Company.

Most of my questions have been answered, but one thing I was curious about was a competitor in the security space noted there was significant pricing pressure in the marketplace. Do you think that's a result of Diebold disrupting the market a little bit, or is it something you're seeing as well?

The bigger question we have in our security market is how do we increase our coverage. For instance in North America, we just added 25 salespeople because it goes back to the old paradigm, you sell more when you show up. We're focusing on coverage, on account penetration, and on close rates and win rates. Pricing has not been on the forefront of our internal conversations in that business in the last six months.

Okay, thanks. Then I guess lastly in Asia, the weaker results year-over-year, would you say that's mostly just the result of tough comps in India, or is China pretty stable? What's your take on that?

I'll let Chris do the detail on the numbers, but China is an interesting market, I think, for all Western players. Predictability in that market is somewhat limited, very tough competition. The other thing is we continuously see the trend, to a razor blade model, especially in India and that will shift the way that the numbers will flow through because the service revenue, and more important the more accretive service margins that are associated with the unit, will show up over a longer period of time. Quarterly compares could be more out of whack in that geography than anywhere else.

Okay, great.

I was just going to add we do have a small impact year-over-year from a currency standpoint, and Andy really nailed it, Glenn, from a margin standpoint. That's where we've disclosed that we saw more of our product margin pressure on the Asia side and expect that to be returned over a longer period in our service margins.

Great. Thanks, guys.

With that, ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Kristoff for any additional or closing comments.

Thank you, Kathy. I'd like to take a moment to thank everyone for joining us on the call today, and as always, if you have any follow-up questions, Jamie Finefrock or myself will be available the remainder of the week. Thanks.

With that, ladies and gentlemen. That does conclude today's conference call. We'd like to thank you again for your participation.