Diebold, Incorporated (DBD)

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Diebold, Inc. (DBD)

Q2 2011 Earnings Call

July 27, 2011 10:00 am ET

Executives

John Kristoff – VP and Chief Communications Officer

Tom Swidarski – President and CEO

Brad Richardson – EVP and CFO

Analysts

Matt Summerville – KeyBanc Capital Markets

Gil Luria – Wedbush Securities

Grant Keeney – Northcoast Research

Zahid Siddique – Gabelli

Roman Leal – Goldman Sachs

Paul Coster – JPMorgan

Michael Saloio – Sidoti & Company

Presentation

Operator

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

John Kristoff

Thanks, Tim. 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 the 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 with past calls, it’s important to note we have restructuring, impairment charges and non-routine income and expenses 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 be focused on non-GAAP financial information.

For a reconciliation of our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation.

In addition, our results of operations reported today, including prior periods, exclude discontinued operations. Finally, a replay of this conference call will be available later today from our website. And as a reminder, some of the comments today may be considered forward-looking statements. Internal and/or external factors could significantly impact actual results. As a precaution, please refer to the more detailed risk factors that have previously been filed with the SEC. And now with opening remarks, I’ll turn it over to Tom.

Tom Swidarski

Thanks John. Good morning, everyone. Thank you for joining our call today. We are pleased to report a solid second quarter with better than expected results in several key areas of the company. Growth continues in North America particularly in the U.S. regional bank space, driven by strong demand for deposit automation and new technology needed to meet pending regulatory and industry compliance standards. We also drove operational progress in EMEA during the quarter and are on track to reach a breakeven run rate in the region by year end.

In addition, during the quarter some revenue came in earlier than anticipated helping to reduce the heavy second half of our forecast. Increased order activity in North America continues to drive the business on a macro level. In fact, our financial self service product order backlog in North America is up 75% from last year and is now comparable to levels we had prior to the financial downturn.

Importantly, much of this growth is occurring in the regional bank space, where financial self service product orders grew 180% in the quarter. This is an increase from the growth in product orders we experienced in the first quarter of this year and fourth quarter of last year, which were up 90% and 150% respectively, illustrating the continued momentum in this segment. Given this continued strength in our North America financial self service business we have increased confidence in our outlook for the remainder of the year.

Let’s now take a closer look at our financial results in North America. During the quarter, total revenue increased 5%, while overall product and service orders grew about 14% in the region. Looking at just product orders for financial self service in this region, we saw an increase of around 18%. Demand for deposit automations and need to meet new ADA requirements early next year and ongoing PCI compliance once again fueled momentum in the regional space during the quarter.

These demands are creating a level of complexity that is driving more institutions to adopt an integrated services approach. This enables them to meet regulatory requirements and offer their customers the latest technology without investing a great deal of capital. This environment has resulted in another record quarter for our integrated services business. The company signed new IS contracts during the quarter valued at more than $75 million representing a threefold increase over the prior year period.

One such example we announced during the quarter was with First National Bank of Pennsylvania, where we are providing a variety of product and technological upgrades through integrated services. The bank chose Diebold to help expand its consumer banking options and enhance security by replacing 150 ATMs with Opteva and upgrading an additional 100 ATMs adding deposit automations to nearly one third of the bank’s fleet.

Another U.S. regional customer who has signed an integrated services agreement with us during the quarter was Teachers Credit Union. We are helping TCU implement new technologies and services, including ATM upgrades for deposit automation, monitoring and security that will enhance the Credit Union’s operational efficiencies and improve convenience for its members. We now have more than 500 customers in the United States that are leveraging our deposit automation technology.

In summary, we are very optimistic regarding the state of the North American financial self service market and our strong competitive position. As our large backlog in North America begins to convert to revenue we expect a significant uptick in operating profit for the second half of 2011. Our brand is the strongest and we have an unmatched service capability. As such, North America will serve as a primary catalyst for earnings growth in the second half of the year.

Read the rest of this transcript for free on seekingalpha.com