Diebold, Incorporated (DBD)

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Diebold Incorporated (DBD)

Q3 2012 Earnings Call

October 25, 2012, 10:00 am ET

Executives

John Kristoff - VP & Chief Communications Officer

Tom Swidarski - President & CEO

Brad Richardson - EVP & CFO

Analysts

Kartik Mehta - Northcoast Research

Gil Luria - Wedbush Securities

Matt Summerville - KeyBanc

Roman Leal - Goldman Sachs

Paul Coster - JPMorgan

Michael Kim - Imperial

Zahid Siddique - Gabelli & Company

Presentation

Operator

Good day everyone. Welcome to Diebold Incorporated Third 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 the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

John Kristoff

Thank you, Danna. Good morning and thank you for joining us for Diebold’s third 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 that we are restructuring non-routine 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, all results of operations reported today, including prior periods exclude discontinued operation.

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 will turn the call over to Tom.

Tom Swidarski

Thank you, John. Good morning everyone. While our business in the third quarter was sound from a topline perspective, we experienced a number of unique challenges relative to profitability. First, we had a forecasting issue in our North American operation that caused us to overestimate our profitability going into the quarter. Our business in North America remains robust as we turned in 9% revenue growth during the quarter; however, a shift in mix significantly impacted profit margin on several sub-segments of the business.

Second, North American service margins were adversely affected by lower than expected build work and continued investments in our integrated services platform, software and productivity tools. Finally, a couple of very large financial self service projects with government banks in Brazil have been pushed out in 2013. Brad and I will address each of these factors in more detail in our comments this morning.

As a result of the revenue mix shift in North America and project delays in Brazil, as previously announced, we have reduced our earnings expectations for the full year. Despite these mixed shift and timing issues, we remain confident in the fundamentals of our global financial self service business which we anticipate to grow at 8% to 9% this year or 12% to 13% on a constant currency basis. While product margins are under continued pressure, we expect our service margins to return to the positive sequential trajectory in the fourth quarter.

Also I am encouraged by our security business performance during the quarter which grew nearly 8%. Security is the key strategic growth initiative for our company and we are beginning to gain increased traction in this space. As a result, we've tightened our full-year security revenue guidance within a higher end of our prior outlook and remain confident in our ability to execute on the many opportunities on our horizon for Diebold and deliver profitable growth led by our services capabilities, both in the near-term and beyond.

Now lets look at our regional performance. In North America, revenue grew approximately 9% with growth across the financial self service and security businesses. Though orders for products and service decreased slightly up a strong comparable to the prior year when we experienced a double-digit increase in orders. However, order entry was in line sequentially with the first and second quarters on a dollar basis. As I mentioned earlier, we had a greater than expected drop in profitability based on customer mix shift taking place on the heels of the upgrade cycle and the regional bank space related to ADA and PCI compliant.

To put this impact in perspective, in a given year, a 10 percentage point mix shift from regionals to nationals translates to about a $10 million drop in operating profit and an impact of approximately $0.10 in earnings per share. Likewise, when we saw a shift in the opposite direction in the first quarter, it resulted in dramatically higher profitability for the company. However, this shift towards the national account segment should not be interpreted as the weakness in the market.

Demand remained strong for deposit automation where at this stage by the national account segment which carries lower margin. Yet, it's important to note that regional bank self service revenue has grown 94% on a year-to-date basis and grew again during the third quarter, but at a significantly lower rate than the growth we experienced at the national account level.

Our integrated services front; we continue focus on building our infrastructure and extending our competitive advantage in the market. The integration of the Toronto-Dominion business, the largest such outsourcing deal in the industry continues to progress. We're on schedule to begin transitioning their machine and we’ll have more than 500 ATMs or about 10% of their total base on our systems in the fourth quarter. In addition, TD has decided to replace all its competitive terminals with [0.5 GB] units.

Also during the quarter our integrated services competencies enabled us to replace the ATM hardware of our primary in a number of regional account, Prudent Capital Bank and Midland State Bank. This exemplifies the added value we bring to our customers and helping them manage their retail delivery aspects of their operations.

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