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Diebold (DBD)

Q2 2012 Earnings Conference Call

July 30, 2012, 10:00 am ET


John Kristoff – VP, Chief Communications Officer

Tom Swidarski – President, CEO

Brad Richardson – EVP, CFO


Kartick Mehta – Northcoast Research

Matt Summerville – Keybanc

Gil Luria – Wedbush Securities

Roman Leal – Goldman Sachs

Michael Kim – Imperial Capital

Paul Coster – JPMorgan



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Good day, everyone, welcome to the Diebold, Incorporated second quarter financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

John Kristoff

Thank you, (Deanna). Good morning, and thank you for joining us for Diebold's second quarter conference call. Joining me today are Tom Swidarski, President and CEO, and Brad Richardson, Executive Vice President and CFO.

Just a few notes before we get started, in addition to an earnings release, we've provided a supplementary presentation on the investor page of our website. Tom and Brad will be walking through this presentation as part of their comments today and we encourage you to follow along.

Before we discuss our results, as in past calls, it's important to note that we have restructuring, non-routine expenses, and impairment charges in our financials. We believe that excluding these items gives an indication of the company's baseline operational performance.

As a result, many of the remarks this morning will focus on non-GAAP information. For a reconciliation for our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation.

In addition, all results of operations are reported today, including prior period, exclude discontinued operations. Finally, a replay of this conference call will be available later today from our website and as a reminder, some of the comments today may be considered forward-looking statements.

Internal and/or external factors could significantly impact actual results. As a precaution, please refer to the more detailed risk factors that have previously been filed with the SEC.

And now with opening remarks, I'll turn it over to Tom.

Thomas Swidarski

Thanks, John. Good morning, everyone. Thanks for joining our call today. We generated solid top-line growth during the quarter and we improved our net debt position by nearly $50 million. Also we achieved profitability in AMEA during the quarter and are on track to achieve our goal to be profitable for the full year in that region.

We saw more than a 30% revenue growth in Latin America and Brazil a region where we are building upon our leadership position. I'm also pleased with our overall top-line performance as we experienced strong financial self-service growth in deposit automation with national account customers in the United States.

However, as expected, we saw reduction in the regional account activity associated with ADA compliance. This shift in activity resulted in a less profitable mix of business in our North American operation. Combined with a much higher tax rate in the quarter, this resulted in a sequential drop in earnings from the first quarter.

Given a recent significantly negative shift in currency, recall the delay of anticipated additional revenue from Brazil elections system into 2013, we are tightening our guidance for 2012. Aside from these two items, our outlooks remains unchanged and we are confident in the underlying factors that are driving growth in the business.

Now let's look at the business from a geographic standpoint starting with North America. Revenue in North America increased 18% from the second quarter, 2011 driven by continued strong performance in financial self-service partially offset by the decline in security.

Importantly, total order entry in North America Group in the low single-digit range had very good performance in second quarter 2011 when we saw double-digit growth in borders further illustrating the robustness of the market in our leadership position. This growth was driven by significant increase in the national accounts segment associated with the deposit automation adoption.

When looking at deposit automation shipments through national account excluding D of A, Chase, and Wells, we saw an increase of more than 150% with multiple customers accounting for the growth. This represents a good, sustainable trend. Also, deposit automation shipments to the regional bank segment increased nearly 50%.

We also grew our service revenue in North America. In addition to the increased installation volume, we saw nearly 30% increase in our Integrated Services revenue and a 50% increase in Managed Services reflective of our continued focus on growing our software-led services business.

While service gross margin in the quarter was down due to certain increased cost, we expect full year gross margins to be similar to 2011. Brad will provide more detail regarding our service margin in his commentary.

From my perspective, the most important element here is growth, particularly in the Managed and Integrated Services. Our expectation is that we will continue to grow our service and business overall in North America in 2012 strengthening the foundation upon which our market leadership in the region is built.

Looking at our security business, revenue decreased slightly consistent with our prior expectations. Orders decreased in the low single-digit range against a difficult comparison to last year when we had particularly large orders associated with United Nations building in New York.

I'm very encouraged by the progress we're making in the financial electronic security space where we've been focused on building a dedicated sales force service infrastructure and delivery platform for Integrated Services.

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