Diebold, Inc. (DBD) Investment Community Conference Call February 22, 2011 10:00 am ET Executives John Kristoff – Vice President & Chief Communications Officer Thomas W. Swidarski – President, Chief Executive Officer & Director Charles E. Ducey, Jr. – Executive Vice President North American Operations Mychal D. Kempt – Vice President North American Sales & Service Joao Abud, Jr. – President Brazil Division Bradley C. Richardson – Chief Financial Officer & Executive Vice President Analyst Unidentified Analysts Presentation Operator
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Mychal Kempt who runs our North America sales organization is going to talk about some of our growth strategies over the next two to three years here in North America and we’re very excited to have Joao Abud with us. He runs our Brazil business and he’s not only going to talk about the Lain America and Brazil markets but he’s going to talk a lot about our Brazil operations and how they fit into our global organization from a development standpoint.
Finally, we’ll wrap up with Brad Richardson, our Chief Financial Officer to talk about our financial framework and Brad will also be covering the EMEA region this morning. We weren’t able to have all of our executives from around the world here but we are glad to have a few here. After the formal presentations we’ll break for lunch in the Conrad room just down the hall here and then this afternoon we’ll come back for a deep dive on our securities business. We’ll have a couple of customer presenting at that. So before we get started just a couple of housekeeping items. First of all, non-GAAP information is used throughout our presentations this morning and we are providing however, complete GAAP to non-GAAP reconciliations in the handouts that you have and we would refer you to that. Of course, we’re using a lot of forward-looking statements today and we would obviously refer you to the more detailed information that’s been filed with the SEC.
Just a couple of other quick notes, we would ask you to mute your cell phones during the presentations. There are no breaks scheduled for the next two hours just given the nature of the webcast so if you need to make a phone call, or use the restroom, or what have you, we would encourage you to do so at your leisure. Then from a Q&A perspective, if we have time we’ll take one or two questions between speakers. We may or may not do that depending on how we’re running but we will definitely have a group Q&A at the end of all the presentations.Without further adieu please welcome Tom Swidarski. Thomas W. Swidarski In addition to what John was communicating in terms of the presenters here, we also have quite a few of Diebold senior leaders that will be available during the networking session so we’ve really tried to provide a day where you can have a lot of interaction with some key folks at Diebold. We obviously, are very excited to spend the day with you. We think we have a very chalk full day as well as tomorrow where we’re going to get even deeper into certain strategies. But, to frame it up I thought I would start and give you a perspective relative to how Diebold’s revenue breaks out in terms of businesses, also in terms of products and services, and then you see on the far right in terms of the regions of the world. I think the critical aspect of this that you are going to hear consistently is in the middle the movement to services across all of our businesses. Where we think we have some competitive advantages, where we think we have a business model that is transformative, where we’ve had some good momentum that we’re going to talk about, and we’re going to go into detail on that both this morning relative to North America and Brazil as well as in the afternoon sessions when we really start looking at that on the securities side. Services is the key underpinning really relative to the transformation of Diebold.
On the far right side, both Chuck Ducey and Mychal Kempt are going to talk about North America. Abud is going to talk about Latin America and Brazil but we also have Mike Mateo who runs our Latin America region here with us so in a breakout session if you want to catch up with Mike relative to Latin America you can. Certainly, the Americas are the core strength relative to Diebold.Then Brad is going to talk about the EMEA section and I will be talking about Asia Pacific, but this gives you a good sense relative to the breakdown. The services provides us with what we believe is solid recurring revenue and sustainability of our business model. So we are very excited and we’re at a very good point in time with some very recent activity that we’ll be updating you on relative to the marketplace voting relative to the success there. The four pillars in terms of our transformation to a services company really are outlined here. The financials, certainly in the creating value from a shareholder standpoint in the top left, all are predicated upon the key strategies, the ability to execute those strategies, and the transformation that we’ve begun to talk about. If you look from a value standpoint our operating targets have not changed relative to the revenue growth which we think is a modest revenue growth, operating profit margins of 10% and return on capital of 15%. Those are still very much in our sights. Also, we’ve had the good fortune of being the only company, that I know of, globally that has had 59 consecutive years of dividend increases. So from a solid balance sheet and the ability to make the types of R&D investments as well as M&A type activity necessary for us to continue to grow, we feel we’re very well positioned.
The far right, you’re going to hear a lot about those growth strategies so I’m not going to take you through those but that’s what the individual presentations are going to take you there. And again, for each of those we’re looking at where we create distinct value and create competitive advantage. That is just not North America, a lot of the premise that we talk about today are global platforms and this transformation that we’re talking about will be happening globally.We’re going to use examples here in North America because we have the North America team, because of our size, and scope, and scale here, and because it is very relevant in that everyone really can understand in a very meaningful manner. On the bottom left, execution and that’s really what I look at 2012 to be, is a very solid period of execution. We’ve not performed to the level of my expectations on the security side and that has a lot to do with the difference between physical and electronics security, but we see a lot of movement happening on the electronic security side that we’re going to talk about both this morning and in the breakout sessions which gives me really good confidence in terms of our ability to really start growing that business based on the level of activity there. But it’s also investing in both the processes and the leadership of Diebold and that happens globally. We’ve got very sophisticated systems that we’ve put in place. If you think about this chart, you think about at one point in the United States Diebold had a fractured organization that eventually became one in terms of the processes that we have in place relative to service. You go to any service technician, there’s 4,000 in the United States, on any coast, or in the middle of the United States, the process they follow in terms of monitoring and managing their daily activity as well as a call is identical. That same system is going to be going in across the world.
Likewise, when we talk about services, the backbone and engine relative to services that we’re going to be talking a lot about is identical and will be going in identically around the world. Thus, our ability to remotely manage complex situations whether it be on an ATM or in a security environment, are going to be identical around the world. That’s the power of what we’re building and as the world becomes smaller and as banks become more global that’s a pretty important component relative to our overall strategy.Diebold is 152 years old so this transformation that we’re going through certainly doesn’t happen overnight but ever since I’ve become CEO in 2006 that top guardant in terms of moving from metal [vending] to electronics which took 150 years to get to, has been in full focus relative to our vision: high value services model, software led services, and you’re going to hear and see evidence of that very credibly today. So with that, a good framework to understand how tangible this is and understand what I’m talking about, is looking at the current ATM ecosystem. This could be any bank anywhere in the world. The transactions are routed from the ATM to either the bank or through a processor. What’s interesting about the transaction model that happens today is the transaction gets routed but so does all the status information from the ATM. So no matter what supplier you’re talking to all the intelligence they built into the ATM goes to a processor or a bank end system. It could be a third-party, it could be the bank, and then the routing is sent to a facility like Diebold, or you see that monitoring center, we’ve got several around the world. But all the status, all the brains, all the intelligence of the ATM is dumbed down. Sometimes the ATM has over 1,000 statuses they can send and what happens on the backend of that system coming into Diebold is you may only get 10. So instead of saying the third picker mechanism on the dispenser is down, which is what the ATM says happens, all we get is there is a problem with the dispenser so we have repeat calls and costs associated with the service side of the business.
As you know, service for us and services represents over half of our business, that’s an important understanding of today’s ecosystem because I’m going to tell you how we’re transforming this and how it makes such an important role in terms of our future. So when you take a look at the traditional model as it exists today, we are very focused relative to our inherent hardware. You see the transaction processors really take a lot of the intelligence and reduce them down to basic information which is not usable to the level that we need relative to 4,000 people rolling trucks out to fix an issue.Every call is expensive and we bear the burden of that. So as you see, the insufficient status really has higher service costs and lowers availability which is all the banks care about. So this is a very collaborative issue with banks to try and solve this fundamental issue that has been in place for many, many years in the ATM ecosystem. Read the rest of this transcript for free on seekingalpha.com