Diebold Nixdorf Inc (DBD) 2014 Q4 法說會逐字稿

Good day, everyone. Welcome to Diebold, Incorporated fourth-quarter 2014 financial results conference call.

(Operator Instructions)

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

Thank you, Tanisha. Good morning and thank you for joining us today for Diebold's fourth-quarter and year-end conference call. Joining me today are Andy Mattes, President and Chief Executive Officer, and Chris Chapman, Senior Vice President and Chief 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.

Before we discuss our results, as with past calls it's importance to note that we are excluding certain restructuring charges and non-routine expenses from our non-GAAP financials. We believe that excluding these items gives us 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 GAAP to non-GAAP financials please refer to the supplemental material at the end of the presentation.

Also 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.

A replay of this conference call will be available later today from our website. For those listening to the replay, please keep in mind that the information discussed is only current as of today and subsequent events may render the information in the replay out of date.

Now with opening remarks, let me turn the call over to Andy.

Thanks, John. Good morning and welcome. Thank you for joining the call today as we discuss our results for the fourth quarter and full year.

Let me begin by saying we are pleased to report another strong operational performance. Our full-year 2014 results demonstrate that our Company is continuing to execute our transformation strategy and our work is paying off.

A couple of key highlights for the year include: Growing our bottom line at a healthy multiple of our top line. Total revenue for the year was up 7%. Gross profit was up 16%. Operating profit grew by more than 30%. This represents more than four times the revenue growth on a percentage basis.

The revenue growth was broad based with all three of our segments, FSS, security and Brazil other, growing in the year. Excluding the impact of currency, revenue increased 9%.

Margins improved across the board with total gross margins expanding 190 basis points compared with the prior year. Product margins expanded 140 basis points coming in just above 20%, and we were able to grow service margins by 300 basis points resulting in a 30% gross margin.

Also, we were able to significantly exceed our free cash flow guidance for the year. This was a record cash collection quarter for Diebold as the entire organization focused on this effort. We are proud of the teams' work to ensure we more than met our target. Our free cash flow of $125 million represents over 100% of net operating profit after taxes for the year.

Non-GAAP EPS for the year was $1.73, which was within our range of expectations.

Throughout 2014 the Company was still in the crawl phase of our transformation. There were a number of challenges we needed to overcome and items to address, which impacted earnings results. As we transition to the walk phase in the second half of 2015, our expectation is that most of these sort of things should be behind us.

Looking quickly at the fourth-quarter result, solid revenue growth and margin performance helped us finish the year strong and positions us well heading into 2015. We are also encouraged that our product backlog increased 3% on a constant-currency basis compared with the prior year. Looking at our core FSS and security businesses, excluding Brazil other, backlog is up 23% year over year demonstrating that our core business is strong and growing.

Overall, we are pleased with the operational performance we delivered in 2014. We have stabilized the Company, improved core operations and are starting to build the foundation for future growth by executing our transformation strategy. As our employee base around the globe can attest, it has been and will be a lot of hard work going forward. However, with the euro and real experiencing additional pressure since our analyst day in December, we believe it is prudent to reflect these factors in our 2015 guidance.

Chris will provide more color on this later in the call, but let me emphasize this is solely for FX purposes and our expectation is that our core business will continue to grow on a constant currency basis. We are working hard to offset these headwinds with our ongoing cost reduction actions, which is one of the reasons why we made the announcement in mid January that we are combining operations in Latin America and Brazil.

Now, let's talk about our regional order performance on slide 8. In the quarter, we were encouraged to see double-digit order growth in Asia-Pacific, EMEA, and Latin America. In North America, total orders declined in the mid single-digit range for the quarter, and we were down slightly for the year.

However, within that number, services and software continue to grow as we gain more traction with our managed services and branch automation offerings. The focus in North America is on improving operational efficiencies, moving up the value chain, and gaining market share in emerging solutions.

With that in mind, we recently attracted a new sales leader to North America, Tom Signorello, who has successful track record of driving services and software growth in technology driven industries. His experience will help us accelerate our transformation.

Total security orders were down low-single digits in the quarter due to our physical security business. Electronic security ended the year up double digits as we once again grew in the quarter. We were able to add over 70 new commercial logos in 2014, surpassing the 60 new logos we added in 2013. Going all the way back to 2012, electronic security has shown order growth in essentially every consecutive quarter.

Looking at Asia-Pacific, total orders increased 12% for the quarter and were up 9% on a full-year basis. In the quarter, notable strength in China and India were catalysts for growth. Looking at India specifically, I want to highlight some of the milestones we achieved in the market during the past year.

First, we invested in our manufacturing facility to accommodate the increase in demand we have seen in the market. As a result, unit production increased nearly 40% year over year, and we now have over 50,000 ATMs installed across the country. Also, our service offerings our key differentiator, which allowed us to significantly increase machines under contract in a managed services business. India represented an attractive growth market for Diebold, and we are encouraged by the opportunities we see to continue to expand our footprint.

Turning to EMEA, total orders were up 20% for both the fourth quarter and the full year. Growth in the quarter was driven primarily by strong order activity in Switzerland and in the UK. This is a strong testament to the success of our targeted account strategy in the region that we have highlighted throughout the year. We have been able to make inroads with new customers and are growing our share of the market.

In Latin America, total orders for the quarter were up approximately 10%, primarily driven by growth in Columbia, Chile, and Ecuador. On a full-year basis, total orders were up 9% with notable strength seen in Mexico.

Growth for the year was fueled by branch automation efforts with local bank and the increased adoption of cash recycling technology. We also made inroads to the Chilean ATM market this year where we were able to secure roughly a 10% share in 2014. Banks in Latin America our gravitating toward our innovative solutions. There is a clear shift towards branch automation, software and services.

Also, we are encouraged by the strong demand for our recently launched 5500 series in this regions. We have expanded our market leadership in Latin America and we are confident the operational changes in the region we announced last month will help accelerate our momentum.

In Brazil, total orders reflect the lumpy nature of the Brazil other business. However, when looking at the core FSS business in Brazil for the quarter, orders grew 35% compared with prior-year period reflecting growth across multiple accounts.

Turning to slide 9, we continue to make progress towards becoming a more services-led software-enabled Company. For example, we grew value added services revenue double digits for the year with a number of notable wins, such as our recent win with the Belgian Post. Amongst other things, this helped expand our service gross margins by 300 basis points to 30%.

Also, as Alan Kerr, our new Head of Software, communicated during analyst day, we will put more emphasis on our software business in 2015. As the year progresses, we will be providing more details around our strategy and execution in this area.

Moving to slide 10, let's discuss our Diebold 2.0 turnaround strategy and a few key initiatives regarding our eight point program. When rolled out, the program, over a year ago, we emphasized that much of our progress would come in form of qualitative business improvements rather than strictly measured through our near-term financial statements.

Along those lines we are bringing more innovative solutions to the market place. During the quarter, we launched a cardless transaction solution with Banque Internationale in Luxembourg that allows customers to remotely program and withdraw cash using their smartphones. We think there is a large potential for this technology in our developed markets, and opportunities in emerging markets will follow.

Another innovative solution we recently announced is our antimicrobial touch screen that was developed in partnership with Corning Incorporated. The Corning Gorilla Glass inhibits the growth of bacteria on its surface, which is important for touch-screen ATMs, especially in high-traffic areas like airports since they are a universally shared device.

Also, we are gaining more traction in the market following the launch of our next-generation ATMs. For example, Regions Bank signed an agreement in the quarter for our next-generation terminals to be deployed across their footprint in 2015. In addition, we are making inroads with new logos such as Flagstar Bank and WesBanco, both in North America, each of which purchased our next-generation ATMs to replace competitive units.

Taken in concert with the other innovation we introduced earlier in the year, such as our responsive banking concept, ActivEdge secure card reader and the world's greenest ATM, we believe our collaborative approach to innovation is reinforcing our position as a trusted partner in the FSS space. In regards to establishing a competitive cost structure and generating long-term profitable growth, our cost savings initiative and subsequent reinvestments are tracking in line with our expectations.

As we outlined previously, the fourth quarter represented the peak level of our transformation reinvestments. These reinvestments will remain elevated in the first half of 2015, and then gradually decrease in the second half of the year as we expect to complete our back-office transformation and upgrade to Oracle 12. These are key milestones in our transition from crawl to walk.

Also, as I previously mentioned, we recently announced efforts to streamline our operations by combining our Brazil and Latin America businesses. We have been on a solid growth trajectory in Latin America. I am confident that Octavio Marquez and his leadership team across the region will help us unlock more opportunities to drive growth, improve efficiencies, and reduce costs.

In conclusion, we delivered strong operating results throughout the year, creating a solid springboard for us going forward. We made meaningful progress against each of the four pillars of our transformation, cost, cash, talent and growth, to build the foundation required to take the Company forward.

Throughout 2014 our focus was to deliver consistent execution and one of our main objectives is to carry that discipline into 2015 and beyond. Similar to many other technology companies though, 2015 is starting out with more volatility than many of us would have anticipated due to severe currency fluctuations. Having said that, we remain focused on improving business excellence and delivering bottom-line growth each and every year.

With that, I'll turn the call over to Chris for more details on our financial performance.

Thanks, Andy. Good morning, everyone. I will start off by walking through our fourth-quarter and full-year financial performance and then provide an update on our 2015 revenue, earnings, and free cash flow outlook.

Starting on slide 15, total revenue for the quarter increased 6% on a GAAP basis and approximately 10% in constant currency, seeing increases in all regions. Our financial self service business was the primary driver of growth in the quarter, up approximately 9% in constant currency due to strong performance in North America. The Brazil other business was also a strong contributer to total revenue growth.

Looking at full-year 2014, total revenue increased approximately 7% or 9% adjusted for currency. We are pleased with the progress we have made in our past and currency growth across the majority of our businesses illustrating solid demand in our core markets.

North America revenue was essentially flat with a 15% year-over-year growth in electronic security. This was offset by a slight decline in FSS, which was impacted by our restructuring activities in the first half of the year and improved as the year progressed.

Latin America was down slightly, but as Andy highlighted, we are pleased with the strong quarter activity and momentum we've seen in that region. Brazil had solid growth at 34%, or 46% on a constant-currency basis, driven primarily by the Brazil other business. EMEA and Asia-Pacific showed solid growth over the prior year up 16% and 4% respectively on a GAAP basis. Adjusting for currency, growth for the full year was 21% in EMEA and 8% in Asia-Pacific.

I will provide more details shortly, but as we've seen the currency translation impact increased as 2014 progressed and those headwinds have materialized further as we've entered 2015.

As we move to slide 16, financial self service revenue for the quarter was up approximately 5% on a GAAP basis with increases in North America and Asia-Pacific, partially offset by decreases in EMEA and Brazil to do currency. On a constant-currency basis revenue grew 9%, with all regions reporting growth in the quarter versus the same period in the prior year.

North America experience strong double-digit growth due to increases in Canada and our regional account business. In Brazil, we had approximately 5% growth, adjusting for currency, driven by the delivery of orders we have highlighted on previous calls.

For the full year, financial self service revenue increased 4% on a constant-currency basis. The increase is primarily attributable to the growth in EMEA and Asia-Pacific partially offset with decreased volume in Brazil in North America national accounts due to a tough comp with 2013.

Total revenue on slide 17 for the quarter was down approximately 2% compared with the prior-year period. The increase of approximately 6% in electronic security was offset by a 14% decline in our physical security business. Looking at the full-year results, our security revenue increased approximately 2% with growth of 13% in electronic security partially offset by a 14% decline in physical security. The electronic security business now represents approximately two-thirds of our total security revenue.

Looking at slide 18, Brazil other in the fourth quarter was up $25 million mostly driven by delivery on the lottery project. For the full year, Brazil other increased approximately $150 million over the prior year with the increase driven by lottery and IT related equipment.

On slide 19, total gross margin for the quarter improved 110 basis points to 25.8%. This was driven by an improvement in product gross margin, which increased 440 basis points to 21.4%. The increase was primarily the result of favorable geographic mix tied to higher volume in North America.

In addition, Latin America was also a strong contributer as we benefited from certain contractual provisions in Venezuela that settled in the quarter, which were partially offset by non-controlling interest. For the full year, our product gross margin finished at 20.1%.

Service gross margin for the quarter was 30.3%, a slight decrease from the prior year. As I noted last quarter, some of our reinvestments are being charged to service cost of sales as we focus on improving our systems and infrastructure to support our growth and transformation efforts. For the full year, service gross margins increased 300 basis points finishing at 30% reflecting the benefit of our cost improvement focused and transformation efforts.

Moving on to slide 20, total operating expense for the quarter was 19.3% of revenue compared with 17.7% in the prior-year period. As we've previously highlighted, we are making investments in our transformation, including IT, back office and R&D, which combined with higher selling expense from increased volume, contributed to the year-over-year increase. In addition, we recorded a $2.1 million impairment related to certain operating leases in India.

Turning to slide 21, as we've previously communicated, we've already realized our planned $25 million in net savings for the year in the third quarter. As expected, our gross savings in reinvestments, both of which were approximately $15 million, offset one another in the quarter.

Turning to slide 22, non-GAAP operating margin in the fourth quarter decreased 50 basis points to 6.5%. For the year, non-GAAP operating margin increased 110 basis points to 6% as we balanced our reinvestments, while improving our underlying operational performance. We will continue to take a measured approach to our reinvestments to ensure that our cost savings are dropping through to the bottom line.

Looking at operating profit by segment on slide 23, Latin America, Brazil, and North America all improved from the fourth quarter of 2013. North America was up slightly versus the prior year, as we start to overlap our cost reduction actions. Asia-Pacific was down slightly impacted by the previously mentioned impairment in India. The decrease in EMEA is attributable to a difficult comparison to the fourth quarter of 2013, which represented approximately half of the region's profit for that year.

The increase in Latin America is primarily tied to the contractual provisions in Venezuela, I mentioned earlier. Improvements in Brazil were driven by delivery of previously highlighted orders. The change in the global and corporate line reflects the business reinvestments we have been highlighting on the call.

EPS, on a non-GAAP basis, was $0.48 for the quarter. This excludes restructuring charges of $0.05, legal, indemnification and professional fees of $0.03, as well as a $0.06 per share benefit related to the reversal of a provision for Brazil indirect taxes. For the year, non-GAAP EPS was $1.73, which was within our guidance range for the year.

As Andy outlined, we were able to absorb a number of one-off items throughout the year and still deliver solid operational results, including most recently the impairment in India and the foreign exchange loss, which were approximately $0.04 during the quarter. This compared to the $1.36 per share non-GAAP EPS in 2013, excluding the Brazil valuation allowance impact.

The non-GAAP effective tax rate came in at 32.7% compared with the approximate 32% guidance we previously provided.

Moving on to free cash flow on slide 25, we were encouraged by full-year free cash flow $125 million, which increased $37 million from the same period last year. Strong collection and prepay activity across all geographies resulted in free cash flow exceeding our prior expectations.

Improving free cash flow has been a focus for all Diebold employees around the globe, and we are encouraged that we've been able to stabilize and now grow our annual free cash flow over the last two years. We will continue to bring additional discipline and focus to further improve our cash generation capabilities.

Looking at slides 26 and 27, DSO remained unchanged at 42 days compared with the prior-year period while inventory turns decreased slightly year over year.

Net debt on slide 28 for the period was $47 million, a slight decrease from the prior-year period resulting in a net debt to capital ratio of 5%.

I now want to take a moment to update you on a few additional items. As outlined on the last call, we remediated our material weakness related to controls over Brazil indirect taxes and communication. In addition, we have now also remediated our remaining material weakness in India related to a system adoption and account reconciliation processes. The Company is continuing to strengthen it's control environment with investments in our systems, processes and people.

Next, we remain committed to our dividend, which our Board recently approved to maintain at $0.2875 for the first quarter. At current prices this represents an approximate 3.5% dividend yield on an annual basis. Our goal remains to grow into a 35% dividend payout ratio over the long term. We are currently generating more than enough free cash flow to cover the dividend and our transformation investments.

Looking at our outlook on slide 29, we are adjusting our full-year 2015 projections to reflect recent currency movements. When we initially outlined our guidance in December, we projected an approximate 2% headwind. Based on current market exchange data, we are now anticipating an approximate 5% currency headwind primarily attributable to the movement in the euro and the real.

Therefore, we are adjusting our total revenue projections to be down approximately 5% to 6% for the year. As a result, we are adjusting our non-GAAP EPS to be in the range of $1.80 to $2 per share.

Looking at it on a constant-currency basis, we are maintaining our guidance for each of our businesses. This would translate to FSS growth of 4% to 6% adjusted for currency. As a management team, we remain committed to delivering on our turnaround strategy and are actively rolling out cost mitigation plans across the Company to help address the impact of currency.

In terms of our earnings expectations on a seasonal basis, Diebold will follow our normal seasonality and be weighted more heavily towards the second half. As we previously discussed, our reinvestments will remain elevated in the first half of 2015 and then gradually decrease through the second half of the year and into 2016.

We are maintaining our free cash flow outlook for the year of approximately $120 million, which includes an approximate $5 million increase in capital expenditures and a $15 million voluntary contribution to our North America pension plans. We also continue to expect full-year non-GAAP effective tax rate to be approximately 30%.

Overall, we are focused on consistent execution, consistently execute our Diebold 2.0 turnaround strategy. We remain steadfast in our focus on continuous improvement. During the past year, we have strengthened our control environment while reducing our operational costs and improving our working capital efficiencies.

As you can see, the Company is beginning to demonstrate tangible results from our turnaround efforts and we will continue to lay the foundation for long-term earnings growth.

With that, I will open up the call for questions.

(Operator Instructions)

Matthew Lipton, Autonomous Research

I wanted to start with the product sales. You mentioned North America mix helping product gross margin. I wanted to ask you more broadly about this trend you saw in ATM hardware demand in the quarter? Based on other reporters and yourself, it seems the market could be firming a bit from product sales. So, where is the demand coming from? Do you think it could be -- is it lumpy or is it sustainable through 2015? Thanks.

The drive for financial institutions to increase efficiency, is creating some momentum in the market. Market researchers have the market grow at 4% to 5% over the next years. We see that manifesting itself. The encouraging thing, if I take a look at the full-year 2014 for us in North America, was that the regional banks are starting to get more active. Their branch automation is becoming topical in all size of financial institutions. It's way too early to say the market is rebounding at a rapid pace, but I do believe that the overall market conditions are starting to look better, especially in North America.

So, Andy, would you say then that it just seems the conversations are moving more broadly with smaller financial institutions, whereas in previous quarters it's been concentrated just at the largest institutions? Is that fair?

That is a very fair statement. The branch automation is a phenomena that we see across the board, and we have conversations with banks, large and small. If I take a look at our wins, if I take a look at our pipeline, it's very encouraging to see that the regionals as well as the local bank, the credit unions are starting to embrace this technology.

That's great. Chris, one for you on the FX. I think the incremental change in revenue and earnings -- the earnings guidance move would imply a 5% FX headwind. I don't think you that mismatched. So is it just how you moved the number? Really we should be thinking about the incremental change in FX as both 3% on the top line and on the bottom line? Thanks.

I think you thinking about it correct, Matt. If you look at the top line impact versus the previous outlook we provided back in December, you're looking at about additional $90 million move. The fallout of that, obviously, is coming from these geographies, and the fallout rate on that's probably around a 9%, 10% drop rate, as we have more of our costs, obviously, sitting in US dollar-denominated locations. So, you've got to apply a little bit higher, I would say, drop rate from a margin standpoint, when you think about it from a modeling standpoint.

Gil Luria, Wedbush Securities

In Asia, did you call out specifically China? How is the Chinese market progressing? Is it still broken out carefully between the different Western providers and the Chinese incumbent? Or is the Chinese incumbent getting more favorable treatment now from the Chinese banks?

I think the answers to both of your questions is yes. There is a clear bias in China in the very large banks in the Tier 1 banks towards local suppliers. By the same token, there is a vast opportunity in Tier 2 and Tire 3 banks, which traditionally have been the strong suit of Diebold, and we are being successful in those type of account. That was also the reason why we had a strong Q4 in China.

I know we just started 2015, but when I look at 2016 the consensus estimates and I compare that with what you said on your recent analyst day, you talked about going slightly above the markets, so maybe low to mid single digits and growing earnings 2 to 3 times that. That sounds like low double digits, but it looks like consensus estimates for 2016 are for almost 30% growth. Is there anything unusual about 2016 that can explain that difference, or are you sticking with the midterm guidance you provided on the analyst day?

Gil, the guidance we provided during analyst day still holds, but I think, obviously, the environment given the exchange rate volatility has changed a little bit. When you're looking at it on a constant-currency basis, the outlook we provided for 2016 still holds true. But obviously, the world change a little bit with a significant drop we've seen in a few of these currencies, so that's obviously going to impact, just from a translation impact, some of the top-line, bottom-line numbers.

Paul Coster, JPMorgan

A little bit picky on the 2015 guidance. It looks like the GAAP EPS numbers have been reduced relative to prior guidance $0.15 to $0.20, but the pro forma by only $0.10, and it looks like there's a change to restructuring charges in non routine. Is that foreign exchange related or is there something else happening there in the adjustments?

No, the change in the restructuring charge is a non-routine expense, not really as much related to currency. Big piece there is we're increasing our restructuring plan in the first half of the year, so we estimate that to be more in the $0.05 to $0.07 range. It was probably around $0.01 to $0.03 in the previous guide. That's the biggest piece of the change there. A slight increase in some of our legal and indemnification costs as well, but the big component is related to our restructuring charges increasing.

One of your competitors has talked about bookings not being a very good lead indicator of business in North American financial services business anymore. Is that something you concur with? Echoing the prior questions, we see a lot of activity in branch automation, branch transformation, which does not seem to at least be reflected in bookings activity, so is there some kind of disconnect there?

Those are two questions, Paul. Let me start with the latter. There is definitely way more activity, way more conversations in the market then what has manifested in orders for all players at this point time. The encouraging point here is the conversations are happening and they're being up. As I said earlier, they are picking up, especially also in the regional space.

Now from the way you measure the market, bookings are a good indicator for a hardware business. The more we look into becoming a services-led software-enabled Company, you want to start looking at recurring monthly revenue. You want to look at TCVs. Because in many cases, especially on the software side, if you go down a SAAS model, as well as in the managed services side, if you have three- or five-year commitments, the revenue will show up pro rata versus the deal, which of course is a big deal, but it would not be reflected in the booking numbers.

I think collectively as an industry, we are looking to find KPIs that will give you and everybody else a better indication of where the puck is going. We'll be adding additional KPIs to our conversations once we're through with our noodling process, and most important also, once we have the global IT infrastructure to provide this data in a consistent fashion.

Joe Radigan, KeyBanc

I want to first touch on OpEx. SG&A was about 15.6% of sales in 2013 adjusted for some of the restructuring charges. It jumped up to 16.3% this year with some of the reinvestments you're making, which it sounds like that's going to moderate as we go through this year. Longer term, as you get leverage from the work you're doing now, what do you think is a reasonable target for SG&A? Then maybe part two there, does the RD&E component of OpEx stay at around 3% of revenue or does that go up given your new product pipeline and what you have in development?

I'll address the letter first. With regards to the R&D, we would expect that to probably stay at current levels for the foreseeable future and maybe level off a little bit, now, as we obviously continue to drive our cloud renovation process. With regards to the SG&A, while not giving a forward-looking number specifically, the expectation is we're going to continue to leverage and see that come down as we exit 2015 and go into 2016 and the reinvestments started tail off. Obviously, we will be looking to leverage that as we move forward.

On the branch automation, or branch transformation, how competitive is the environment there, particularly in the small and regional bank space? Given that it's a new product set with some new technology, how are your customers treating it? Is it typically a bake-off, where they're evaluating multiple options, or is it more of a consultative sale where it's being driven more by the legacy relationship? What I'm getting at, is this a door opener for potential share shift among your customer base? How is that process going in the early stages here?

This a great question. This is clearly a conservative sale. This is not about a product; this is about process. This is about TCO. This is about customer experience. This is about omni channel. In many cases, our customers, especially in the regional bank space, they approach us and asked us for experiences from around the globe, from projects that have been done somewhere else, lessons learned. Very much a higher-level sell, very much a consultative approach, and we're leveraging all the relationships that we have. We actually consider those relationships a big asset going forward as we are jointly plotting a course into uncharted territory with out customers.

Lastly, Andy. You've made some recent changes around your leadership team in several of the regions. Can you talk about what drove that? Are you comfortable now with the team that you have in place at this point?

We've had really good success bringing top leadership into the Company. We've brought a lot of great athletes to Diebold. We've been working very hard and are working very hard to turn all these athletes into a great all-star team. The results so far are very encouraging. Where ever we brought a new regional leader in, you can see positive momentum in the numbers. You can see that in Latin. You can see that in Asia-Pacific. You can see that in EMEA. We expect this trend to continue as we upgrade leadership across the organization.

In general, if you take a look at the mix, we've upgraded about two-thirds of the leadership team, about half of the leadership team is coming from external. We've got some noticeable internal promotions, Chris, of course, being the most prominent of them all. My senior team is starting to stabilize, which is really a good thing. Now, the challenge for us is in the task at hand, is to make sure that that talent upgrade flows through the organization, and that we get the mid level of the organization to get to the same performance levels and align them with our thought process.

That's always the hardest part in the turnaround, is to get it though every layer of the organization. I can tell you, we had a town hall with our North Canada workforce last night. If I take a look at the type of questions, the level of enthusiasm in the room today versus what it looked like when I joined the Company 18 months ago, it's night and day. While we still have a lot of work ahead of us, I am very encouraged about the progress that we've been making so far.

Kartik Mehta, Northcoast Research

Andy, I wanted to ask you a little bit about Brazil and your outlook for operating margins in 2015 for that region, and specifically the ability to improve maybe some volatility? Is that possible or are there some unique characteristics that won't allow you to do that?

The Brazilian market is a very unique market, as you know. Let's take it in different buckets. Brazil other is lumpy, will remain lumpy, and we've always said we are opportunistic about this business. We only do business that helps us to drive factory load, which is a table state that you have to have if you want to play in the FSS market in Brazil.

The FSS a business is constant traded around basically six major banks in Brazil, so their buying patterns will be cyclical and basically depending on their investment strategies. What was very encouraging was the fact that the FSS growth that we saw in Q4 were happening across multiple account and that we were able to gain share, especially also in the out-of-branch network in Brazil.

Now, talking to the volatility on the cost side, one of the things we've done in the past is we treated Brazil as an island, which is very easy to do giving all the regulatory environment that you have. Regulatory environments don't necessarily pertain to the workforce that we have employed there. If I take a look at the very solid growth that we had in Latin America, if I take a look at the highly qualified workforce we have in Brazil, you can see that it's very logical to make sure that you have a broader workforce pool and that we drive utilization of the workforce, utilization of expertise across a multitude of countries.

Octavio has done a spectacular job turning Latin America around in the first 12 month that he's been with the Company. We have very high expectations of him for the combined region.

Andy, I think in your opening remarks you mentioned some opportunities you have for managed services. I guess a two-part question there. One, is that on the ATM side or the securities side? Second, is that US or international, right now?

The answer to both of your questions is, both. The security business -- that's where the whole idea of recurring monthly revenue is way more prominent, that these deals are primarily three-year deals and you go into long-term customer relationships. Like the deal we've announced at analyst day with Sprint, for instance.

Now, if you take a look at the backing side, as we go into branch automation, as the banks are reinventing themselves, they are also exploring new business models. That's where the idea of the whole managed services comes in. The more, for instance, the more there are securities issues out there, the Win 7 upgrade, people all of a sudden realized that being always concurrent with their security on their software system is a key item. Making sure for instance that a company like ourselves guaranteed that for a bank versus your internal staff who might not be focused or might not 100% in the loop of all the latest and greatest things that are happening, is a true value proposition. Same holds true on the compliance side.

The type of conversations are increasing rapidly. Then, again, until you sign these type of contracts, it's a very lengthy conversation. Those are anywhere between 12- to 24-month sales cycles. But once you form those relationships, they are long-term relationships.

I mentioned Belgium Post. They pretty much have handed the keys of the car over to us. We do everything. We do the hardware. We do software. We do services. We do software upgrades. We do security patches. Soup to nuts. It's those types of relationships that we believe will be very important and where we see a clear market differentiator from Diebold versus all of our competitors.

Then just one last question, Chris, for you. Would you expect capital working improvements in 2015 and that being a source of cash for you guys?

My expectation is to see slight improvement. Again, as we've talked about before, we have, on the DSO side, a little bit of a geographic mix that comes through. I think continuing to perform somewhere in that 41%, 43% range is appropriate. Inventory, in my opinion, is our biggest opportunity still and we'll continue to drive improvements in that regard. I've been very pleased with the work we've had in our procurement organization on appropriately extending contract terms. That's been a nice benefit that we've seen there from an efficiency standpoint on the working capital.

I would also point out, as outlined in a few of the -- on the slides, regarding the pension impact we're going to see next year of about $15 million that will impact of free cash flow. Overall, very happy with our focus and the performance.

(Operator Instructions)

Justin Bergner, Gabelli & Company.

First of all, I want to congratulate you on the strong free cash flow performance. Finishing 2014, it seems like you came in well above your forecast. It seems like you're also maintaining your $120 million free cash flow forecast in 2015 notwithstanding the better performance in 2014 and maybe some currency headwinds. Could you maybe talk about what's allowing you to maintain your 2015 free cash flow forecast?

If you look at our 2015 free cash flow forecast, we feel good about the underlying GAAP earnings and GAAP results that are going to drive the operational portion of that cash flow, and so we've got good line of sight to that. Our focus on the working capital efficiencies, in that regard, gives us pretty good line of sight. Again, very, very encouraged with the all-around performance across the geographies that we've seen as we exit in 2014. Again, this is an area where we see there is continuous room for improvement. Overall, again, we've outlined our goal as to finish our free cash flow at greater than 90% of our net operating profit after tax. I feel good about the target as we move forward.

Justin, let me just add on a higher level. I think it's a really good example how the alignment of Company goals and strategy and individual goals and composition payout. We started, two years ago, to make sure that working capital objectives, free cash flow objectives, are in everybody's goal sheets. It's a KPI that we talk about.

When I joined the Company we took it out of the financial closet and made it a broad area of discussion. There is not a monthly business review where we would not hit on these topics. There are weekly calls that we have around improvements. If you'd ask somebody today in the organization, and it doesn't matter whether you're talk to a salesperson, a service person, a finance specialist, an accountant, everyone within Diebold would be able to tell you which role he or she plays in driving better working capital matrices for the Company.

That's one of the main reasons why you see this improvement. Because free cash flow is one of the things where this is not the work of a few people. This is the work of all 16,000 people, employees we have around the globe. Everybody's been pitching in, and everybody will continue to pitch in. We feel very confident then that this is starting to become part of our DNA and part of the way we're thinking as a Company.

I should infer that whatever benefits you got in the fourth quarter from prepayments on the working capital side will either not be given back in 2015 or if there given that will be offset with gains elsewhere?

If you look at the overall prepayment benefit, I would say that the activity we saw in the fourth quarter of 2014 was above some of the historical performance we've seen there. As you point out, though, we'll continue to drive that activity appropriately. We've seen the behaviors in the past. We're not modeling quite a strong performance on the prepay side. Again, some of that can push a month or two and could end up in 2016 or 2015, but overall we feel pretty good about our program and delivering on that commitment.

On the pension side, is there any mortality table hit for your 2015 or is that going to come later?

We've adopted a new mortality table. That's impacting our pension expense slightly as we move forward in addition to the change discount rates. If you looked at that from a modeling standpoint, 2014 pension expense was around $3 million. As you think about that in 2015, it's going to be approximately $8 million, so about a $5 million increase year on year.

And that's within your adjusted guidance?

Correct. That was included in our guidance.

Was it anticipated back in December, as well?

A fairly similar amount, yes.

Finally, I know that we're trying to move beyond orders because they are very product focused. If I do the math on your constant-currency orders excluding Brazil other, I guess I'm arriving at a high-single digit quarter rate in the fourth quarter globally, weighting it by your different geographies. Am I in the right ballpark?

Yes, you are.

Great. Thank you. Good luck for the rest of the year.

Jeffrey Kessler, Imperial Capital

No security questions today. The question I do have, though, is about the content of your services business. As it becomes a more predominant part of the Company and drives more and more of the Company and hopefully with higher margins, what are the four or five leading services that you are going to be able to throw into that recurring revenue bucket so we can start maybe using monthly recurring as a part of the evaluation process to value your stock? In other words, what are those five or six bullet points in terms of services that are going to drive the majority of the services increase as it gets bigger relative to product?

That's a really good question, Jeff. If you think about, we like to focus on everything that is remote manageable. We do intrusion. We do video. We do fire. It's a lot of the monitoring. If you take a look at our solutions portfolio, SecureStat, I know that you're very familiar with, is a very important element, because what it does is it allows us to go into just about any customer, switch them over to Diebold remote monitoring without them having to upgrade any of their equipment on site. So there's no forklift upgrade.

We can work with whatever they have, whatever video camera, whatever monitoring panels, which ever vendor they like. If you look at the announcement that we just sent out yesterday in our cooperation with Eagle Eye, that's taken it even a step forward, because that's when you get into the cloud monitoring space and providing cloud analytics around video. Those are the main areas that we are thriving on.

The other thing that I know you're aware of that's a key value proposition for Diebold is our fact that we solely focus on large regional and national accounts. We don't do residential. We don't so small business. We only focus on those large operations because the value proposition that we bring is this one flow to choke, single solutions that you have that people have as easy access and especially when you talk about software, cash management, transaction processing. These are complicated things, and having one partner coast-to-coast is a huge differentiator.

Can you translate that over also into the FSS area? What specific services areas are growing fastest for you in that there?

Video is being one of them, especially, and everything that is around the ATM security. The fact that every one of our new machines is equipped with video cameras is yet another driver for that. Then, if you look into the other services elements, the whole idea of doing total implementation services, that when a financial institution wants to upgrade, whether it's going from a Diebold legacy base into a new base or from a competitive base into a new base, that we take care of all the idiosyncrasies, all the project management, all the work that has to be done.

Because whenever a bank looks at upgrading 20, 30 branches a week, as an example, that's a massive project management task. That's, again, one of the sweet spots where Diebold has been excelling. You know that, for instance in Europe, our Bankia contract started out exactly around this value proposition. A lot of our French contracts are based on this value proposition. We've now started to offer the same services here in the United States. It's starting to pick up traction.

At this time, I would like to turn the program back over to John Kristoff with any closing remarks.

Thank you, everyone for joining us on the call this morning. As always, if you have any follow-up questions, please contact me or Chris Sikora directly. Thanks again.

That does conclude today's program. You may disconnect at any time.