Diebold Nixdorf Inc (DBD) 2015 Q3 法說會逐字稿

Good day everyone. Welcome to Diebold Incorporated third-quarter 2015 financial results conference call. At this time for opening remarks and introductions I would like to turn the call over to the Vice President of Investor Relations, Steve Virostek. Please go ahead.

Thank you, Hanna. I would like to welcome everyone who is joining us today for Diebold's third-quarter earnings call. Joining me today are Andy Mattes, President and Chief executive Officer, and Chris Chapman, Senior Vice President and Chief Financial Officer.

In addition to our earnings release issued this morning, we have posted presentation slides on the IR page of Diebold.com. We will be referencing the presentation during our commentary and we encourage you to follow along.

Today's webcast is being recorded and a replay of the webcast will be made available later today on Diebold.com.

On slide two of our presentation, we disclose that we will be making references to non-GAAP financial information on this webcast. Consistent with the Company's prior practice, we exclude restructuring charges and certain non-routine expenses from our non-GAAP financial metrics. We believe that these non-GAAP metrics provide a helpful indicator of the Company's baseline sign performance. And a reconciliation of GAAP to non-GAAP metrics is included in the supplemental materials at the end of today's presentation.

Moving to slide number three, I will remind you that certain comments made during our webcast may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve a number of factors that could cause actual results to differ materially from these statements. Additional information concerning these factors is contained in the Company's filings with the Securities and Exchange Commission.

Please keep in mind that the information discussed is only current as of today and subsequent events may render the information in this webcast out of date.

I am sure many of the participants are aware that on October 17, Diebold announced that the Company had entered into a nonbinding term sheet agreement with Wincor Nixdorf regarding the key parameters of a potential strategic business combination. Entering into a transaction is still subject to material conditions including the satisfactory completion of due diligence by both parties. There can be no assurance that any binding agreement will be reached or that a public tender offer will be launched.

Diebold will have no further comments on any potential combination during today's webcast or until a binding agreement is reached or the discussions are terminated.

Now I would like to hand the call to Andy Mattes.

Good morning and thank you for joining us. As you can see from our recent announcements, we have had quite a busy summer. Our portfolio shaping actions demonstrate that we have fully arrived in the Walk phase of our transformation. I will discuss these developments and speak to our third-quarter operating highlights before handing the call to Chris.

This week we announced the divestiture of the North American electronic security business for $350 million in cash to Securitas, an $8 billion global leader in security services. The electronic security business provides access control, video surveillance, intrusion and fire protection solutions along with system design, installation, monitoring and security related managed services.

The transaction achieves three business objectives. First, it places our electronic security customers in the very good hands of a larger company fully focused on delivering security solutions which will bring significant resources to enhance and grow this business.

Second, the transaction sharpens our focus on the dynamic self-service industry and on the terrific growth opportunities which we are pursuing in the areas of branch automation and omnichannel.

Third, it provides a source of capital for ramping up these activities and building up intellectual property necessary to deliver transformative solutions to our customers.

As an example of these activities, the Company introduced two new concept solutions at the Money20/20 show in Las Vegas just a few days ago. The first concept combines consumer recognition technology and a secure mobile phone app to execute cardless transactions. The second concept is a dual sided self-service terminal which features video teller access and is capable of serving two customers simultaneously.

Going back to the divestiture, carveouts don't materialize over night because they require a lot of preparation. We have outlined a detailed transition plan which is designed to deliver a seamless experience for our electronic security customers. The transition to Securitas benefits from the fact that this business has its own IT platform, salesforce, installers, technicians and monitoring facilities. The companies have also agreed to a strategic business alliance in which Securitas will become Diebold's preferred supplier for electronic security and Diebold will become the preferred supplier for Securitas in all areas relating to self-service.

Importantly, the companies have agreed to collaborate on enhanced service offerings for our customers.

Irrespective of this divestiture, ATM related security is a key differentiator for Diebold in the market as demonstrated by innovative solutions such as our ActivEdge anti-skimming solution, Cryptera PIN pad encryption technology and GAS logical security software. We have long been the leader in self-service biometric identification in the Western world and we are taking our leadership capabilities to the next level by piloting an iris-scanning ATM concept with Citigroup as featured on the Today Show earlier this week. This is a prime example of Diebold's collaborative innovation approach with our customers.

In support of our service-led strategy, we are retaining our physical security business which generated approximately $230 million of revenue over the last 12 months. Nearly 80% of the business is services related. We are maintaining the physical assets of our customers which includes safe-deposit boxes, vaults, vestibules, after hour depositories and drive-up solutions.

These skill sets are important enablers for connecting the physical and digital worlds of cash and it would benefit our self-service business in the area of branch transformation and next-generation video enabled drive-ups.

Now let's turn to Q3 results. The Company delivered $0.36 of EPS on a non-GAAP basis. For our full-year outlook, we are narrowing our non-GAAP EPS range from $1.70 to $1.90 to a range of $1.75 to $1.85. Chris will walk you through the puts and takes during his remarks.

In general, we delivered good operational performance around the globe. However, the political and economic environment in China and Brazil is weighing on our results.

In China, we are working towards a longer-term solution and expect to be able to discuss a new approach going into 2016. In Brazil, we are narrowing the scope of our Brazil Other business by eliminating large IT equipment government contracts from the mix, thereby containing downside exposure. Earlier this year, Brazil was rolled up into Latin America under the leadership of Octavio Marquez, who operated the country manager, adjusted our fixed cost structure and aligned the business with market realities.

Turning to total global orders, we continue to see the effects of the strong US dollar in the third quarter. In aggregate, orders were down 7% as reported but increased 1% in constant currency. Excluding China, orders were up high single digits in constant currency. My regional comments will focus on FSS orders.

In North America, orders grew by 4% year on year led by strong demand from the national players and increasing volumes of our new family of ATMs. We are seeing a good take rate following several months of customer collaboration and education with respect to the increased functionality and lower total cost of ownership of the new line of ATMs.

It is encouraging to see that our services led strategy continues to gain traction. For example in North America, we secured a multi-year contract with Wells Fargo to service more than 6000 non-Diebold ATMs. Wells is one of the top three banks in the United States and it is good to be back in this account in a meaningful way. This is the fourth major multi-vendor services win in North America alone this year and we have added more than 11,000 non-Diebold ATMs to our contract base.

The other good news is the branch transformation continues to take hold across financial institutions of all sizes. For example, we deployed our first two-way video solution at Affinity Credit Union in Canada using the 9900 In-Teller ATMs. We also launched our mobile cash access software at ALMA Bank in New York which facilitates cardless transactions via mobile phone. And in Louisiana, we secured a contract with Iberia Bank to upgrade nearly their entire fleet with ActivEdge anti-skimming card readers.

Developing, testing and introducing these innovations and transformative solutions is no small undertaking. We invest millions of dollars in R&D to bring these innovations to market so it should be no surprise to anyone when we take strong action to protect our intellectual property as we have done with Hyosung.

Turning to EMEA, orders were up more than 20% in constant currency led by significant wins in the UK, France, Turkey and the African nations. These wins were also spurred on by the new family of ATMs and our account focused approach.

For example in Saudi Arabia, we received a new product order from Riyad Bank for 100 new 5500 Series ATMs. We are doubling down on the Middle East and we recently opened up a new office in Dubai. We look forward to delivering our innovative branch automation solutions to customers in that geography.

On a lighter note and in the spirit of Halloween, we also just secured a competitive win in Romania with Transylvania Bank.

Moving on to the Asia-Pacific region, orders were overshadowed by the Chinese government buy local initiative which led to sizable reduction in total product orders. Services in China by contrast are doing well as we reported 2% growth in the quarter and 12% growth year to date.

In Latin America, we delivered another very strong quarter as orders increased more than 20% in constant currency boosted by strength in Mexico, Ecuador and across the region.

In Brazil, we won a new contract for 400 deposit automation ATMs with Bradesco, the second largest private bank in that country. This win demonstrates Diebold's ability to bring innovation to the market and it is our first significant win in that account since they formed an alliance with a competitor of ours four years ago.

We also signed a $20 million, five-year management service contract with a top bank in Mexico following our Q2 win to install 2200 ATMs with the ActivEdge anti-skimming card reader. This outsourcing contract when combined with other services led wins in the Americas and in Europe enabled the Company to break through the $300 million mark for total contract value thus far in 2015.

As you can see, Diebold's transformation towards a services led software enabled company is starting to manifest itself into our contract.

Along these lines, expanding the installed base that we are servicing is another avenue toward this goal. We recently announced that the Company had entered into a non-binding term sheet agreement with Wincor Nixdorf regarding the key parameters of a potential strategic business combination. We are currently working our way toward the diligent process. As Steve said in his introduction, there can be no assurance that we will reach a binding agreement and we cannot comment further at this time.

In conclusion, we continue to make significant progress in the Walk phase of the Diebold 2.0 transformation. By reshaping our portfolio of businesses, we are sharpening our focus on our self-service customers. It is our mission to move up the value chain and become the strategic partner for financial institutions and retailers around the world. We are moving closer to our goal of becoming a services led software enabled company.

And now Chris will discuss the financial details.

Thanks, Andy, and good morning, everyone. I will start off by walking through our third-quarter financial performance and then provide an update on our 2015 outlook.

Starting on slide nine, in the third quarter total revenue as reported was down 11% compared to prior year and down 3% in constant currency. The main drivers of the year-over-year change in the third quarter were significantly lower volume in our Brazil Other business, currency headwinds from the weakening of the real and slower product sales in China.

Our Latin America region excluding Brazil Other delivered solid constant currency revenue growth of approximately 28% driven by strong delivery of product in the financial self-service business. Additionally, EMEA revenue grew more than 7% in constant currency as services growth outpaced product growth.

Finally, North America increased approximately 1% in constant currency in the quarter while Asia-Pacific decreased 16% adjusted for currency. As you can see on our slides, currency continues to have a significant impact on our 2015 results. In the quarter, currency headwinds negatively impacted total revenue by approximately 9%.

As we move to slide 10, financial self-service revenue decreased approximately 7% as reported. On a constant currency basis, revenue grew 1% versus the prior year period led by growth in our services business. Revenue in Asia-Pacific declined by approximately 13% in constant currency primarily due to a decrease in product revenue resulting from the Chinese governments buy local initiative.

North America revenue decreased approximately 4% in constant currency as higher national account activity partially offset the spend from regional banks which declined following strong Windows 7 upgrade activity in the prior year.

In EMEA, we delivered constant currency growth of 7% led by solid contributions from both product and service.

In Latin America, we reported nearly 26% growth adjusting for currency driven by broad-based growth including Brazil from the increasing sales of our new family of ATMs.

Total security revenue on slide 11 increased approximately 5% or 7% in constant currency. Electronic security continues its solid performance with revenue increasing approximately 9% or 12% in constant currency as we prepare to transition the North America portion of this business to its new owner, Securitas.

Revenue from our physical security business was down approximately 2% year-over-year as this business is beginning to stabilize.

Looking at slide 12, Brazil Other declined approximately $54 million year-over-year as we delivered on a large lottery contract in the third quarter last year.

On slide 13, total gross margin decreased 130 basis points to 24.9% on a non-GAAP basis. Service margin increased 10 basis points as we continue to benefit from our efforts to improve the mix of revenue and grow our services business.

The product gross margin decreased 460 basis points to 16.6%. This was primarily due to lower volume in our Brazil Other business and the adverse impact of a $4.7 million inventory write-down related to the cancellation of two local government IT equipment projects in Brazil.

As Andy described, we are narrowing the scope of the Brazil Other business to focus primarily on lottery and election systems.

Moving on to slide 14, total operating expense was 20.2% of revenue compared with 19.5% in the prior year period with overall spend down $12 million net of a $4.6 million bad debt reserve. This overall operating expense reduction is an indication that reinvestments are beginning to ease in the second half of 2015. The bad debt reserve is related to the cancellation of a previously awarded government contract for IT equipment in Brazil Other.

Turning to slide 15, we have realized approximately $70 million in net cost savings since the program's beginning. We had reinvestments year to date in 2015 of $16 million and still expect approximately $20 million in reimbursements for the full-year. As we have discussed on previous calls, the vast majority of our reinvestments are hitting in operating expense while approximately two-thirds of the savings come through in the gross profit line.

For the year we are on track to realize $40 million in gross savings which after investments will result in an additional $20 million in net program savings.

Turning to slide 16, non-GAAP operating profit decreased approximately $20 million from the prior year and our operating margin was 4.6% due to lower volume in China and Brazil, the canceled IT equipment projects in Brazil Other of $9.3 million and reflecting FX headwinds.

Looking at operating profit as reported by segment on slide 17, North America decreased $4.5 million versus the prior year driven by the increasing mix of National Account business. Asia-Pacific decreased $6.6 million as a result of lower product volume in China. EMEA decreased $3.3 million due to the impact of currency and mix of business across the region. In Latin America, operating profit decreased by $13.9 million driven by Brazil Other and FX headwinds.

The global and corporate line improved by $8.6 million reflecting our cost actions in addition to our reinvestments beginning to ease. As noted in the previous quarter calls, we have been taking action to control our spend and pace our reinvestments to help offset some of the headwinds I discussed earlier.

Turning to the EPS reconciliation on slide 18, non-GAAP EPS was $0.36 for the quarter which was in line with our commentary that we provided on the previous earnings call. Non-GAAP EPS excludes restructuring charges of $0.08, legal, indemnification and professional fees of $0.02, $0.03 related to acquisition and divestiture fees, and a benefit of $0.10 primarily related to the allocation of discrete tax items in accordance with our non-GAAP tax rate procedures.

During the quarter, the non-GAAP effective tax rate came in 13.4% and is 23.2% on a year-to-date basis. The decrease is attributable to the repatriation of foreign earnings and the associated recognition of foreign tax credits.

Moving on to free cash flow on slide 19, our results in the quarter reflect a $38 million free cash use which is unfavorable approximately $4 million from the same period last year. This is primarily due to a change in working capital. On a positive note, we have launched several pieces of our new Oracle platform in North America providing enhanced visibility and efficiency as we replace our 30+ year old systems.

As with any software implementation, there is always a cut over period that can cause delays. In our case the transition to our new service contract system resulted in invoicing delays of approximately two weeks in September. As a result, collections were impacted by approximately $20 million for the quarter.

Turning to slide 20, DSO reflected an increase of two days to 67 days in the quarter versus the same period last year primarily due to the delayed service contract invoices for North America that I just discussed.

Inventory turns improved increasing to 5.2 turns compared with 4.4 in the third quarter 2014 reflecting lower volume in China and Brazil as well as continued improvements in our global supply chain.

Net debt on slide 21 for the period was $402 million, an increase of $355 million from year-end 2014. The increase in net debt is largely attributable to the acquisition of Phoenix, continued adverse exchange rate impact on cash balances, as well as working capital expansion to support our business.

Turning to slide 22, the Company is narrowing its outlook for non-GAAP EPS to be in the range of $1.75 to $1.85 for the full-year 2015. While there are a number of moving pieces at a high level we are maintaining the midpoint of our previous EPS guidance. We have two significant negative impacts to EPS for the year since our previous guidance; $0.12 tied to the write offs from the canceled Brazil IT equipment projects and approximately $0.08 from increased FX headwinds.

On the positive side, these items are being offset by a more favorable non-GAAP effective tax rate resulting from the realization of foreign tax credits tied to repatriation of foreign earnings. The non-GAAP effective tax rate is now expected to be approximately 21% for the year.

We expect total revenue to be down 7% to 8% for 2015 primarily due to the increased FX headwinds. We are now expecting a currency headwind of approximately 8% for the full year.

Looking at the businesses, FSS revenue is expected to be down approximately 1% as reported but up around 6% in constant currency. Security revenue is now expected to be approximately 2% as reported. Brazil Other revenue should be around $20 million for the year.

Finally, we are reducing our free cash flow outlook to be approximately $100 million for the year primarily due to the change in our expected GAAP operating results which are inclusive of fees related to the pending divestiture and potential acquisition.

Overall we are encouraged by the momentum we are seeing across the majority of our business. We are managing through challenges such as the situation in China and Brazil. Irrespective of strategic moves, we remain focused on serving our customers in the day-to-day execution of our transformation.

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

(Operator Instructions). Gil Luria, Wedbush Securities.

Thanks for taking my question. So you discussed the order growth in the quarter on a constant currency basis, it still looks good. How about the TCV type metrics, the services contracts, how are those shaping up as compared to last quarter and last year?

Last year the number was anemic. We said we were around about $150 million-ish at our last call. We have set ourselves a target to be around about $200 million for the year so we've blown through the target by quite a mile and the Wells contract is just an incredible add to the portfolio and most importantly is an incredible verification of the strategy that we are taking.

If you think about what I mean and you translate that into your models, on average these contracts are five-year contracts. So do the math. That is roughly $60 million per annum and then you've got some runoff that you have from the previous year where the service business was positively impacted by some of the Windows 7 upgrade. But net net, you are looking at least at some $40 million-ish upside to our service revenue going into 2016 that is baked as of January 1.

The other thing that was very encouraging we told you about a very large multi-vendor services contract at the last call with another top three bank in the US. Between then and now, we have taken over that complete base, the whole park is up and running and we did not have one hiccup along the route.

Both the customer as well as our teams have done a tremendous job but we know we are onto something both from a sales but also equally as important for the customer, from a delivery point of view that we are able to delight our customers and grow our business.

Got it. And then in terms of the delta from last quarter and your revenue guidance, China and Brazil have been challenged and then you have currency. In terms of the change to guidance, how much of it is the shift in currency versus China and Brazil getting worse? Is the change in guidance entirely currency or have China and Brazil gotten worse than what we were talking about three months ago?

I think the short answer is it is primarily the side of the currency and so if you look at where we are at on the FSS basis, we are right in line on a fixed-rate at approximately 6% growth for the full year.

And so the last thing on China and Brazil, just could you remind us of total revenue how much do China and Brazil compromise -- comprise -- how much of revenue comprised of China and Brazil as of this year?

So for this year for China, we are at approximately -- it is approximately a $200 million business is what we have talked about before. It is roughly about 40% to 45% of the total Asia-Pacific business and you should think of that probably weighted around 60% product, somewhere in the 60% range and then 40% on the service side. On Brazil, it is roughly a $300 million business give or take.

Got it. Thank you very much.

Joe Radigan, KeyBanc.

Good morning, guys. First, a couple of questions on the electronic security divestitutre. What will the tax impact be from the sale there and will there be any hung overhead costs that will burden the rest of the P&L? Maybe Chris, maybe you can give a framework on how to think about the impact on 2016?

So let's just talk about the high level pieces for the ES business. First of all with regards to timing, the expectation is we are going to close I would expect in the January timeframe. We have to clear the typical regulatory hurdles and a couple of other pre-close items.

When you think about it from a full-year impact in 2015 first, it is roughly a $345 million business that comes through and again, this is just a rough number around 7.5% operating margin on that. From a calendarization standpoint, Q1 is usually the lowest quarter and then it is pretty steady after that. Q2 through Q4 in this business, it is not as volatile as -- or it doesn't swing as widely as our FSS business does. And so if you think about that in order of magnitude, apply a pretty similar framework into 2016 and with regards to stranded costs and some of the items that we are going to have to deal with overall, this has been fairly standalone for a while.

We will have a handful of stranded costs that we will have to ultimately deal with but I think on the positive side with the growth that we are seeing in our overall multi-vendor service activity, we are really going to be able to leverage the overall organization as we are growing in our services business in North America. Those are the high level pieces, Joe.

That is very helpful. Thank you. And then what happens to the electronic security business in Latin America? Is that still part of the long-term plans here and will you continue to report security as a separate segment going forward into next year once the North American ES business is gone?

Let me start with the business. The electronic security business that we have in Latin America as well as in Asia, predominantly in India, will be part of our go forward operations and will be primarily part of our service organization and our service numbers in those countries. And I will let Chris talk to the reporting.

With regards to the segment, we will clarify on that in the first half of 2016. The initial thought as of now is the security business is going to be broken out as is through our 10-K and we will define how we want to handle that with our 10-Q and first quarter of 2016.

And then the last question, you mentioned you got a win at Bradesco. That used to be a pretty significant account for you guys so is this an indication of possibly more positive things to come or can you talk about kind of the moving pieces around that?

We think it is indicative of a few things. First, in a country that has enough political turmoil, winning with private banks very, very important.

Secondly, as you know, they have done a joint venture with our competitors so we were not in the account in a meaningful way for the last years.

And the third thing which is really the most exciting is in the last go around, they had bid out, they turned to Diebold for their high-end machines fully loaded, highest software contacts, the most complicated solution, the most value add to the customer went to Diebold. And we are super excited about that and yes we do see that as a springboard going forward.

Great. Thank you, guys.

Saliq Khan, Imperial Capital.

Thank you. If you are looking at the electronic security divestiture, it certainly does increase the overall focus on financial self-service but it was growing at double the rate of the overall industry. How did you and your team weigh the cost and benefits when making the decision?

That is a great question. It is a great business. We grew the business organically and we outgrew the markets for basically for as long as I have been with the Company. But for me it is a little bit like raising a kid, taking it all the way through high school, it gets great scores and now it is time for the kid to go to a great college. There is only so much you can do in this space organically and we think the business given its drive and its assets deserves an even brighter future and we are looking for a way to continue to outgrow the industry and most importantly also to make sure that our customers will continue to benefit from innovation in the security space. And when two parts of your business are in a market that is fundamentally transforming, the electronic security market is transforming in its own right as well as the self-service market, and you've got ask yourself how much capacity do you have, how much attention can you give to two fundamental transformations? And our thought was we've got to double down on the core business of the company and we need to make sure that Tony Byerly and has team who have done an incredibly great job will have an even brighter future and our customers have even better innovations going forward.

As you look at the remaining portions of security which is physical security going forward, it has been slow-growing versus the electronic security. How do you reverse the trend that we have seen over the last several quarters of physical security not growing at the rate that you wish it did?

You are being kind. It is actually been shrinking for the last years. But the big thing is the rate of decline has come down dramatically and it is providing a very stable floor to our service organization. As I said on the call, about 80% of that business is service. And by the way, it is all in branches for financial customers.

And here is the flip side, as customers are not moving out of old branches into new branches as branch transformation is definitely on everybody's mind but banks are moving at their own pace, it is actually an inbuilt hedge in our numbers where branch transformation might be coming over a longer period of time until banks roll it out in mass quantities. The physical securities that we provide in the branches actually provides a continuous service revenue stream at a very accretive margin.

So net net, we stopped the decline, we are now looking at ways to include it into branch transformation solutions and I think I highlighted on the call that if you are looking at next gen solutions let's say around the drive-up space, that is where these skills come in really handy and we want to benefit from them.

Maybe just one last question for you, then I will hop back in the queue. As you have announced the partnership with Citigroup when it came to the iris-scanning ATMs to be able to better reduce the overall cash withdrawal time to around 10 seconds or so. Within your research, do you believe that the end user will be willing to A, submit the biometrics but on the other hand what security measures will be put in place to secure the biometrics once they have been submitted?

That can be a long conversation. Let me just rephrase this. In the US, we currently have a very skeptical consumer attitude towards biometrics but we have seen in other parts of the world where biometrics are a standard already today think about palm readers, fingerprints, what have you in that. When crime and insecurity becomes more topical for consumers, the question is you change your weighting on do I over rotate on the sense of personal privacy or do I want to make sure my transaction is secure? And if you take a look at all the stuff that was happening and you think about the big breach at Target, people are getting more and more conscious that safety is very important.

And now the question is what is the most convenient thing? And the other aspect is ever since the iPhone has added fingerprint to its authentification, people have gotten way more relaxed about the idea of using biometrics. I am a huge fan of biometrics. I believe it is a level of security that we are underlevering in this country and it will provide consumer protection combined with the added benefit that you can reduce all the other steps that machines normally go through to identify people, and hence, you reduce the time to do what you want to do at the machine which is to do your transactions.

Thank you, Andy.

Joan Tong, Sidoti.

Good morning, guys. I have a question regarding the multi-vendor service business. Obviously you have done a great job signing another $150 million in contract during the quarter. And just wanted to see if you can give us like a higher level how you think about maybe 2016, what is really in the pipeline, the pipeline profile, how should we think about it going forward and then the growth rates and all that?

That is a great question. I can tell you the pipeline is expanding on all levels small, medium and large. But large deals, they are always binary so it is very hard to forecast them. You cannot forecast half of [Wells]. It is either in or out so I have to dodge the bullet on the forecast number.

But the thing that you have to see is when we are moving to branch transformation, when the cash is no longer at the teller but it is in the machine, uptime of the machines is the single most important issue to any retail banker because without the machine half of the branch won't work.

Diebold service has been ranked number one in every study that I have seen in the last two years in every part of the world. So being able to provide customers the level of service, the level of quantity, the level of response time that we are able to provide at a reasonable price point is a great value add and we expect this business to grow. We have said before our next milestone is we think that our services software/hardware mix is going to be 60/40 and we are going to push it north of that and if you look out long-term, we are going to be two-third services software and one-third hardware.

Okay. What is the rationale behind keeping the rest of the Brazil Other business? And it obviously is a business that would continue to fluctuate from year to year, quarter to quarter. Just wanted to see would that be more a strategic business realignment to maybe get rid of the rest of the Brazil Other business?

Look, just because business is lumpy doesn't mean a business is bad as long as it comes in as predicted and it comes in with good margins. The issue we had in Brazil is that previous management got hooked on the drug of doing other deals so bad that they forgot to run a good book of business in our core business and that is what we are changing.

So first order of business is we are going to run a profitable accretive business in our core FSS business and then we are taking lottery and voting when and if these businesses occur as upside to our forecast and not as the lifeline that we need to justify the P&L and the cost structure of a country.

The other site, don't underestimate all these machines, they are not that dissimilar to an ATM, need service. We have got a huge service force in Brazil. And back to your initial question, whenever you can service more, can drive utilization up, your service margins will increase and given the density, especially of the lottery machines around the country, this is a great way to continue to improve Brazil service margin. And third, the lottery is run by Caixa, which is a government-owned agency which also happens to be the largest or second largest bank in the country which is also our largest customer on the banking side. So we are actually reusing the same customer relationships as we go forward.

I wanted to add just one additional point here as well. I misspoke earlier on the total Brazil revenue so if you think about the current Brazil business, it is roughly $200 million not $300 million that I mentioned with about $20 million of that in the Brazil Other for the current year.

Okay. That is fine. And then finally, the question regarding your hardware business, just want to get a sense of the competitive landscape and also pricing, any major pricing pressure, any heightened pricing pressure that we have seen in the past couple of quarters? Thank you.

First of all, competitive landscape is increasing dramatically. Just think about what branch transformation does. It changes all the processes in a branch. So self-service providers all of a sud0den are being faced with competition from behind the counter technology providers, are faced with competition from the cash in transit providers. And around all of that, you've got the big gorilla, you have the banking softwares, the IBMs, (inaudible) and Oracles on one side and you have got the Visa and MasterCard as the largest payment structures on the other side.

So competition definitely increasing new players and new geographic mix of players. The Asians, the Koreans, the Japanese, the Chinese are moving into every market in the world and hardware will continue to commoditize. We have said earlier and we continue to say that we believe hardware has about a 5% price pressure on it margin and we see very competitive pricing in the market and we also see some of our established competitors to get a little bit more nervous and putting a lot of pressure on pricing out there.

Thanks for the update. Thank you.

(Operator Instructions). Matt Summerville, Alembic Global Advisors.

Good morning. Couple of things. First, I want to talk about Brazil a little bit more. If I look at slide 17, your Latin American profitability both in the quarter and year-over-year I have to conclude you are losing a bit of money in Brazil, probably not a small amount although smaller given what the currency has done. So I really want to understand what you are doing to make this business profitable going forward and whether or not there is incremental cost actions that you are evaluating or are underway now? And if that is the case, why not raise the cost out bar that you have set? Then I have a follow-up.

Let me first just address the profitability in the quarter and so we have talked about the $9.3 million write-off that we had. Excluding the impact of that $9.3 million write-off, Brazil would have been profitable in the quarter. On a year-over-year basis, we are also then bumping up against last year we had a fairly large lottery project that we delivered on which was $50 million and so you have the combination of the write-off plus bumping up against a fairly tough compare from last year that is causing some of the variance really.

When you look at it with regards to actions, we talked a little bit about this in the last quarter. We have had some further actions along those lines. I'm not going to give the exact number but I will say we have reduced the overall headcount in Brazil by a meaningful number and are continuing to take appropriate delayering actions in Brazil as well to right-size the organization such that the financial self-service business stands on its own two feet and drives a nice profit strength for us regardless of getting potential one-off upsides from the Brazil Other business.

And then with respect to -- so you are in the midst of a divestiture, you obviously are in talks about a potential acquisition. Next year in 2016, I believe it is the last year of the turnaround grant I believe you referred to it as and you have talked about free cash flow being the metric for 2016. How does all of this M&A feed into how the Board is looking at that in terms of a yardstick if you will by which to judge senior management? I guess what conversion rate should we be looking for given cash flow was a little disappointing this year relative to what you guys were thinking previously? Thank you.

I would have a couple of comments on this, Matt. I think number one if you look at our current cash flow and some of the items that are coming through and impacting it, number one, we have talked about multi-vendor service and we have taken very specific actions there and a the longer-term view as Andy talked about approximately net $40 million increase to the service business in North America next year but we have also had to make an investment and we have had an increase in our service inventory of approximately $15 million to $20 million as well to be able to service all of these units that we have brought on. Again, that is looking long-term.

Number two, with pressure on the cash flow this year, we have increased our restructuring by about $5 million and again that is taking this longer-term view of getting cost out and taking the appropriate actions now and not sitting back and just admiring these problems.

Additionally, we have had deal costs. Again, some of these strategic things that we are doing unfortunately the advisors and bankers don't give you free services here and so we have to appropriately incorporate this into overall guidance as well.

So when you look at some of these items in the near-term, it is all about the longer-term strategy and growth and trajectory of the Company. Then as we start to move forward and we get some of these items behind us, obviously it is going to allow us to generate much healthier overall conversion rate from a free cash flow standpoint.

We talked about being north of 100% on notepad from a cash flow standpoint and again we are going to continue to drive to that mark and ultimately exceed that mark but again we have to take the right actions in the near-term to drive the right long-term performance of the Company.

That is exactly the way that the Board thinks about how to evaluate management which is are we doing the right thing for our Company, for our customers, for our shareholders, for our employees going forward? And do we get the Company not just a 12 month but do we get the company a five- to ten-year runway to grow which is also the philosophy when we said we are going to do adjustments in Walk so we can kick into more growth in the run phase of our turnaround.

So a lot of heavy lifting, a lot of hard work all with the objective of making sure that Diebold has a great future and a great springboard for future growth and to be able to take advantage of the shift in the market and the opportunities that are created with that.

Very helpful. Thank you.

Brendan Hardin, North Coast Research.

Hey, Andy, hey, Chris, this is Kartik. I wanted to ask you about the servicing business and maybe if you can just talk about why you are winning these businesses. Has something changed on the marketplace, is it how you are going to market, what is the catalyst that is allowing you to win?

The more advanced the machines get, the more processes you put on self-service, the more you drive branch transformation, is becoming a services play. It is all about uptime, it is all about availability, it is all about ease of use, it is all about remote service capabilities and ultimately it is all about an as a service model. And as you know from your own research, we score in every one of those buckets ahead of any competitor out there. And I mean I cannot give you the customer but I can assure you that of the four deals we won this year, one of them already gave us testament that other people's machine run better on the Diebold management than they have ever run before under the management of the original manufacturer. That is why we are winning. It is dedication to customers and having the best service. We have said service is our core business going forward and we are being rewarded by our customers.

Andy, you talked about restructuring China so that you can now go under the new rules that they have there. Will that change the economics? And if so, do you expect much of an impact?

Yes, yes and yes. But it is too early to squawk. Just think about it this way, Kartik, the only way that you are going to do business in China is if you are being categorized as Chinese in the bucket. And let me also be very clear everything we are talking about is a hardware play because I think I said it on the call, our service business in China is actually growing very nicely.

So how do you come up with a hardware structure where we are more Chinese than we are today, where we are not having a multinational company discount but where we have a local partnership premium. But you have got to do this in a way that it is complying with SCPA, you've got to do it in a way that you have a serious business partner that is predictable that understands how US companies tick and click. And there are many, many pitfalls if you don't do your homework and that is exactly what we are doing right now. We are very encouraged with the progress and the options that we have on the radar screen and we hope that we will be in a position on our next earnings call, we will be able to outline the China strategy going forward.

But once again, we are not sitting back and admiring the problem. We want to make sure we take our own destiny in our own hands.

And last question for you, Chris. Fourth quarter you are expecting a pretty big free cash flow number to kind of get to your guidance. How much visibility do you have to that number? And I guess maybe this might be difficult but what percentage do you feel like you have visibility to and what percentage of the business has to come through in the fourth quarter so you can achieve your target?

First, with regards to the number in the fourth quarter, if you look back the last four years, the fourth quarter expectations basically in line with what we have done in those last several year ends and so it is pretty much typical from the seasonality that we deal with.

With regards to visibility, obviously there are always some timing things that are outside of your control. I feel good about the focus of the organization, the time that we spend on it is significant. We goal our organization on the metrics around working capital and free cash flow and we obviously control certain aspects of that and we will look to deliver on our commitments.

Thank you very much. I really appreciate it.

Meghna Ladha, Susquehanna.

Thank you. Good morning. Most of my questions have been answered. Just a quick one, Andy. What do think is the long-term growth outlook of the ATM industry globally and what gives you confidence it can grow at that rate?

That is a great question and the way you have to think about it is that BRIC, at least for the next three years has pretty much been reduced to I, which means if you take a look at RVR reports and all of that once you exclude BRIC growth which the market research gurus had it around about 9% in units, you will end actually up with a low single digit unit growth scenario and which again revalidates our approach to more services because low single digit units would actually translate into flat dollars if you subtract the 5% headwind on the pricing. So in order to remain in the single-digit growth rate outlook going forward, all of that has to come from services and from software.

Thanks, Andy.

Now here is the good news on the services side. Most market research companies do not have the services opportunity in their numbers. I want to say 80% of the spend that all the banks around the globe have every year to run, maintain their ATMs is currently in-house spend within the cost centers of the banks, it is not in any of the TAM numbers. Once you add that business and you turn that from an insourced model into an outsourced model, into a partnership model, in a managed services model all of a sudden you are starting to add meaningful chunks of market opportunity to the TAM. In my mind, we are about to triple the TAM in our industry between now and the end of the decade.

Got it. Thank you.

Justin Bergner, Gabelli.

Good morning, Andy. Good morning, Chris. Just a couple of clarification questions. The write-off or the bad debt in Brazil, what exactly is it affecting on the balance sheet?

So you would have a combination of an impact to inventory and that is roughly I think two-thirds of the amount and then you have the other impact which would be impacting on finance receivables buried between -- there would have been a short and a long-term component but in the finance receivables.

Okay, great. On the subject of receivables, how much of the $20 million reduction in free cash flow guidance is related to accounts receivable? Inventory seems in check but receivables seems a bit high again at the end of this quarter.

It is not. It is really the other items that I've talked about overall expectations on receivables are in line with where we have ended historically in previous year-ends.

The receivables, let me reiterate, Chris was mentioning it in his prepared remarks. We have cleared a very, very big milestone for our Company with our Oracle upgrade. It was mandatory for us to make sure that next year's service invoices, those are 12-month invoices, are being done on the new system because had we not passed that milestone, we would have the accounts receivables for yet another year in the old technology. So very crucial milestone on our IT transformation side. Team has done an incredible job around that.

It did slip it out a little in the quarter which is why we had the $20 million impact that Chris mentioned. People just couldn't pay the invoice soon enough, fast enough within the quarter but that is why we did it in Q3 and not in Q4. So we got it on the new system, it is all out there in a way that customers can actually understand our services invoices and have all of the opportunity in the world to start paying as of this quarter.

Okay, great. So the receivables impact on the free cash flow guidance is negligible I guess that is what I am hearing. A question on the security divestiture, what is the after-tax estimated proceeds?

I'm not going to give an exact number on that at this time. Obviously you've got to go through all of your final purchase accounting and your balance sheet adjustments, all those ins and outs which can ultimately impact the proceeds again cash could already be in house so to speak when you think about it from that perspective.

I would say that we have generated some foreign tax credits that we will have the ability to utilize and so the overall tax impact on this is not going to come out, just that the blanket US statutory rates will have a little bit of an offset there. So I would say the blended tax rate impact on this would probably be best to use the corporate average of around 20% and then we will update further on that after we finalize all of that purchase accounting work in the January timeframe.

Okay. Great. Thank you. Any sort of suggestions as to what that 20% rate would mean in terms of dollars?

I will update you on that after the end of the fourth quarter when we finalize the transaction.

Okay, that is fair. And then on the question of security margins, you mentioned that electronic security or the North American business I think was about a 7.5% margin. And then you also mentioned that physical security is a strong margin producing business for you. I mean should we sort of conclude that overall security margins are sort of above the corporate average from your comments?

I don't think it is fair just to apply it in that fashion. Again I'm giving the standalone average on that. I am not allocating back any of the global or corporate costs where you would have some of that allocation that is not sitting in one of the operating units. So I think net net when you look at the blend of the overall geographic businesses, most of our regions are running in double-digit margins excluding for the allocation of the corporate and global overhead.

So net net, it is probably under when if you were to fully burden it with all of the corporate and global overhead holistically.

Okay, that is very helpful. So the 7.5% is more of a pre-corporate number?

Correct, that is how you should think about it whenever you think of discontinued ops moving forward, the pieces that we are going to be taking out and then obviously we will have some other cost actions that we will take tied to some of the stranded costs the Company would have but that is how you should think about it from a modeling standpoint.

Okay, fantastic. Finally, I just wanted to commend you guys on what looks like a strong quarter of share gains at least excluding whatever headwinds you are facing in Asia-Pacific. Might you sort of comments on sort of the pace of share gains that you saw in EMEA and/or other regions in the quarter?

It is all about dedication and end-to-end solutions and services-led approaches to the customers. Our next gen product line is hitting it out of the park. Our security features, I mean you saw that -- just take right, 2200 machines with anti-skimming on it and as I said earlier on the biometric question that was raised is when theft becomes more of a reality in a market, security becomes a very attractive position.

And then the fact that we are the drivers of our own destiny, we have got no questions about the longevity of our Company, we are dedicated to our customers, we are driving innovation very, very well received and you can see it. We have made investments in Europe last year. We have made investments into Africa, we are gaining in Africa. We made investments into the Middle East; we are gaining share in the Middle East which is why we are also opening the office in Dubai. Even the win in Romania is an investment that we made in the sales force last year. And they are all competitive wins and they all come from our established competitors out there in the market and we are shaping new opportunities together with our customers.

So we are very excited. Our pipeline is full of creative ideas. Take a look at what we are doing with Citi, that is true leading edge technology in collaboration with a customer that will drive a lot of positive momentum going forward.

So we know we are taking share and we are getting all the feedback from the customers that we are doing the right things, we are not confused and that would like to interest their business with us.

Great, thanks. Keep up the good work.

Operator, I believe that is the last question for today. I want to thank everyone for joining us. If you have any calls, please dial us up at investor relations. Thank you.

That concludes today's conference. Thank you for your participation.