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NCR Corporation (NYSE:NCR)

Q4 2008 Earnings Call

January 5, 2009 8:00 am ET

Executives

Gavin Bell – Investor Relations

Bill Nuti - Chairman and CEO

Tony Massetti – CFO

Analysts

Reik Read - Robert W. Baird

Katie Huberty - Morgan Stanley

Matt Summerville – KeyBanc

Gil Luria – Wedbush

[Daniel Alcher] – Hovde Capital Advisors

Bennett Notman – Davenport & Company

Operator

(Operator Instructions) I will now turn the call over to Mr. Gavin Bell.

Gavin Bell

Thanks everyone for joining us for our fourth quarter 2008 earnings call. Bill Nuti, NCR's Chairman and CEO, will lead our conference call this morning. After Bill's opening remarks, Tony Massetti, NCR's CFO, will provide comments on NCR's total company financial results and our guidance for the full year.

Our discussion today includes forecasts and other information that are considered forward looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These factors are described in NCR's periodic filings with the SEC and our annual report to stockholders.

On today's call we will also be discussing certain non-GAAP financial information such as free cash flow and results excluding the impact of pension and other items. Reconciliations of non-GAAP financial results to our reported and forecasted GAAP results, and other information concerning such measures are included in our earnings release and are also available on the Investor page of NCR's website.

A replay of this conference call will be available later today on NCR's website, NCR.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of February 5, 2009, and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

I will now turn the call over to Bill.

Bill Nuti

Speaking of earnings against the backdrop of a worsening global economy, NCR’s earnings for the fourth quarter were in line with our expectations. After adjusting for non-recurring factors, we delivered non-GAAP earnings growth of 7% or $0.58 per diluted share. Revenue for the period declined by 7% to $1.42 billion with about four percentage points of that decline being driven by foreign currency which was volatile throughout Q4.

Revenue fell short of our expectations by about $40 million in the quarter largely due to late quarter push outs, not lost business or cancellations. On a very positive note, NCR generated $108 million in cash from operating activities, up from $59 million in last years fourth quarter.

Relatively speaking these are solid results given the circumstances of today’s economic environment and the specific issues in our core end markets. Deteriorating macro conditions across the globe became more apparent to us in the later part of the fourth quarter particularly in the retail industry where we experienced a significant drop off in business activity.

The early weeks of the first quarter of 2009 reinforced that these challenges will continue in our major end markets, especially in retail. While we expect these issues to remain throughout 2009 we will manage our costs effectively and balance our investments accordingly. I’ll talk today about how we are adjusting to this environment and share what visibility we can on what lies ahead.

As we look at the future, however, we do need to take a minute to recap how far we came in 2008. In the past year we made very good progress on our long term business goals. We generated profitable revenue growth, made progress towards building the lowest cost structure in our industry and optimized our capital structure.

Some of the more notable highlights include revenue growth of 7% and non-pension operating income or NPOI growth of 15% versus the prior year. Diluted earnings per share excluding special items rose 22% for the year to $1.72. We generated $277 million in free cash flow up from $39 million in 2007. We launched over 50 new products in 2008, the highest number in more than a dozen years including the launch of the industries newest and most innovative ATM family NCR Self Serve an ATM family with first of its kind features and capability.

In the retail industry we introduced our next generation self checkout solution 5.0 and other ground breaking point of sales solutions such as the RealPOS 70 XRT the younger brother of the highly successful RealPOS 80 XRT platform that has captured so much new market share due to its unmatched performance and serviceability.

We regained the number one share of shipments of ATMs in North America while preserving our lead in key global markets and our overall global market share leadership. We gained significant traction in the execution of our self service strategy expanding into new industries including the entertainment industry that promised to open up future avenues of growth for NCR.

We continue to execute well toward building the industries lowest cost structure. Gross margins improved by 30 basis points and expense to revenue improved by 20 basis points year over year. We repurchased almost 22 million shares of our common stock for approximately $494 million. These achievements not only translated into good financial results they helped fortify the company as we manage through current macro economic turbulence and position NCR to come out of the economic downturn a stronger company.

For now though, the environment will remain challenging. Today we issued guidance for 2009 that calls for revenue to be down in the range of 2% to 6% compared to full year 2008. While our business typically gets stronger as the year moves along we will be dealing with some record year over year compares for 2008 especially in the first half.

For those reasons you can expect that our year over year comparisons will be challenging in the first half of the year but should begin to show some improvement as the year progresses. The global economy of course is a wildcard in that outlook and we will update you every quarter.

We’ll also be talking about our profit outlook today and in particular NPOI, the key metric by which we measure our financial success. As we indicated at our analyst day in December increased pension expense will create significant earnings per share headwinds in 2009. Tony will take you through our NPOI and EPS outlook later in the call.

Even with these challenges we remain very confident in NCR’s future and like our position in the market. It is important to note that we are not seeing broad based weakness in our business. The industry where we are seeing the most significant impact is retail. While I mentioned on prior calls that I expect our significant growth in retail to slow down for NCR in the later part of 2008 the actual results were worse then we anticipated. Our retail customers are addressing a very difficult environment and that is affecting our orders, especially in North America.

As a result, retail revenue was down in the mid teens in Q4. Financial services, another sector that is undergoing historic dislocation has remained fairly solid. In fact, we grew our financial services business in the fourth quarter on top of a 12% increase in the fourth quarter of last year. Our services business continues to perform as expected.

In the financial services industry a critical part of our strategy is driving growth in both core and adjacent markets. Through adjacency initiatives spanning self service automation, services, online banking, mobile banking and branch automation, we’ve expanded our available market to a size in excess of $9 billion. All of these initiatives have the direct ability to help the banking industry deal with their immense pressure to cut costs and to create enhanced loyalty and intimacy with customers.

On a global basis, banks have initiated a renewed and aggressive focus on growing core deposits and self service plays a key role in creating a differentiated service experience for customers. Self service plays a central role in customer acquisition and retention. It is a source of growth and is a critical tool for more efficiently managing customer interaction. Our banking customers are very aware of the economic value proposition of our solutions, the tremendous cost savings, productivity, attractive return on investment and very positive customer satisfaction levels.

In terms of opportunity, emerging markets and the global landscape outside of the developed markets represent a significant opportunity going forward. Using the simple metric of density, the number of ATMs per million people, underscores the growth potential in emerging markets like Eastern Europe, the Middle East, Africa, India and China.

In China, for example, where there about 100 ATMs per million people versus 1,300 per million in the US we continue to build upon or market leading position. NCR’s China revenue hit a new record in 2008 as we secured orders for 7,000 ATMs from China’s top five commercial banks. We also won in excess of 75% more orders from China’s small and mid size banks over the previous year, all of which helped us maintain our number one market share position in China. Among the ATMs purchased, more than 1,200 units were NCR self serve ATMs which we introduced in China last May.

The new ATM family featuring innovative self healing capability increased availability, intuitive usability, intrinsic security and informed manageability, has gained extensive customer recognition in a relatively short period of time. In November, the NCR self serve 25 ATM won the 2008 most successful design award from Fortune China Magazine for its innovative design and outstanding performance, further evidence of our leadership in product development in that part of the world.

In the retail space everyone knows there are challenges and as I mentioned earlier we are seeing those play out in the market. However, there are two underlying trends that lend a base of support as we and our retail customers manage through the economic downturn. The first is that we believe we are in the midst of a POS upgrade cycle. Market data supports that we’ve been the biggest winner in this upgrade cycle relative to point of sale solutions. Our technology is enabling retailers to lower operating costs, attract and retain customers and drive top line revenue.

In the fourth quarter we began new deployments of store automation solutions with Coles Meyer in Australia, Murphy Oil in the US and maintained our roll out momentum with Macy’s, Target, Limited Brands, and The Home Depot to name a few. We also displaced competitors in several accounts for our new scanning and kiosk platforms.

After hosting hundreds of customers at the 2009 National Retail Federation Show in January we believe the strength of our value proposition has never been more relevant. However, we remain pragmatic about the state of this industry and concerned about 2009 market growth.

One of our key solutions in the retail space in self service category is self checkout. Our retail customers clearly recognize the value proposition of self checkout. Increased store productivity, lower costs and improved customer satisfaction. Many large retailers are now seeing upwards of 50% of their store transactions executed at a self checkout station rather than traditional point of sale. We’re constantly perfecting the consumer experience whether it involves the user workflow, software application, or platform reliability.

We continue to believe that 10 years from now you will find very few traditional point of sale checkouts. With most retail front ends changing and evolving to a more self service led experience. Companies like Fresh & Easy who are 100% assisted self checkout today will be the norm as opposed to the exception.

Self checkout showed continued strength in the fourth quarter with expansion into the convenience store segment via our partnership with QuickChek, a privately held retailer based in New Jersey. Whether it’s a new customer like QuickChek, or a long time customer, self checkout is a new adjacent segment for growth as evidenced by our progress with Meyer, Tesco and Lowe’s to name a few.

We also made great progress in retail with our two sided thermal receipt printers, a technology that reduces paper costs, improves consumer marketing and is environmentally friendly. Silver Greens restaurant has announced it is the first restaurant to deliver personalized nutritional information on the back of its sales receipts with our patented 2ST technology.

Look for more success in this business in 2009. We believe we are at an inflection point where over the next few years two sided thermal technology can capture a larger proportion of the thermal printer and paper market with new applications also coming in the label space.

Our services business provides a stable annuity and continues to be a key ingredient of our strategy. For every solution we sell we want to have a services agreement wrapped around that sale. Our attach rates continue to improve and we remain the largest service provider in the ATM industry today. We also have a growing and vibrant managed services business and outsourcing opportunity in front of us. A stable annuity business is a tremendous asset for our company, particularly in the current economic environment.

We continue to drive better margins in services while also continuing to build on our leadership position. As we look across our company we see a lot of opportunity. NCR’s operating from a position of strength and in fact we are in the best competitive position we have been in years. At the same time, the realities of the macro economy are front and center and will feature prominently in our 2009 financial results.

Our job in this uncertain environment is to focus on the things we can control and that is exactly what we are doing. First, we will accelerate our cost reduction efforts. Our long term goal is to have the industries lowest and most efficient cost structure. Our near term goal is to preserve margin in a more challenging revenue environment. These objectives go hand in hand.

In the early part of this year we will be focused on key initiatives to drive down costs and expense. Those include an across the board freeze in merit, travel restrictions and a continued effort to right size our organization and reduce our labor costs.

Second, we will press our advantage with customers and continue to innovate. NCR has the strongest product portfolio in its history. Key end markets are challenged near term but we have a compelling value proposition. You will see us continue to invest in R&D dollars and devote resources to demand creation. We will be smart and very targeted, however, in how we spend these precious resources and will be practical. High value investments will continue in the business.

Third, we will continue to enhance our global service capability. We have improved our service provisioning, we have increased our service attach rates for products like ATMs, and we’ve developed customer services into an improved profit center for NCR. We will continue to improve that position, our service capability provides, a growing advantage in winning customers and it provides NCR with an evermore attractive and stable revenue source.

Finally, we’ll be thoughtful and practical in managing our balance sheet. We have the financial wherewithal to invest in the right places to ride out this economic storm and capitalize on opportunities that depressed markets may provide in the future. We’ve had a successful track record of smaller deals that fill in key technology and vertical gaps and you can continue to expect that from us albeit under more scrutiny in 2009.

To sum up 2008, it was a great year for NCR. Much of the progress we made will help us manage through a very tough environment in 2009. We have a strong balance sheet, a track record of managing the company for strong business results, the right business strategy and a dedicated smart workforce who believes in our vision.

We have ample opportunity to drive continued performance benefits during the downturn and we have a compelling message to deliver for our customers on what is a difficult time for them. We’re focused on managing through this period in a way that positions NCR for renewed strength and momentum as the market conditions improve.

With that I’ll turn it over to Tony to cover some of the financial details and our guidance.

Tony Massetti

NCR’s total revenue from continuing operations in Q4 2008 was $1.42 billion, down 7% versus Q4 2007. This includes a four point negative impact from currency translation. Revenues in our Financial Services business were up as Bill mentioned with growth coming on top of a difficult comparison with the prior year period. Our retail industry revenues were down mid teens versus fourth quarter 2007 a period which saw growth of more than 20%.

Reported GAAP income from continuing operations of $55 million or $0.34 per diluted share, this compares to $96 million or $0.52 per share in Q4 2007. NCR’s results from continuing operations include special items in both periods. In Q4 2008 there was a $53 million cost or $38 million after tax related to organization realignment activities, legal matters and the Fox River environmental matter. In Q4 2007 there was a $15 million cost or $4 million after tax related to realignment activities, the Teradata spin off and the Fox River environmental matter.

Excluding these items non-GAAP diluted earnings per share grew 7% to $0.58 per share in Q4 2008 versus $0.54 per share in the prior year. Pension expense was $7 million from continuing operations in the quarter compared to $9 million in the fourth quarter 2007. To analyze NCR’s operational performance without the effect of special items and pension expense please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results.

The remainder of my comments excludes the impact of special items and pension expense. Q4 gross margin was 23.5% compared to 23.9% in the prior year period. As a difficult economic environment offset the benefits from manufacturing realignment and continued emphasis on cost reduction initiatives. Operating expenses were down 9% or $20 million versus Q4 2007 due to our diligent focus on expense control. Operating expenses as a percentage of revenue decreased 30 basis points versus the prior year period to 14.6%.

Total company non-GAAP income from operations or NPOI was $127 million in the fourth quarter compared to $136 million in last year’s Q4. NPOI was 8.9% of revenue in the quarter even with the prior year period. Below the operating income line, other expense was $5 million in Q4 2008 compared with $4 million of other income in the fourth quarter last year.

Turning to the balance sheet, cash on hand at 12/31/08, was $711 million, short term debt balance was $301 million, and long term debt was $7 million. During the fourth quarter we repurchased approximately 3.7 million shares of our common stock for $70 million. Approximately $26 million of Board authorization remains on the current share repurchase program.

Moving to the cash flow statement, NCR generated $108 million of cash from operating activities in Q4 2008 versus $59 million in the prior year period. After investing $33 million in capital expenditures we generated $75 million of free cash flow in the fourth quarter compared to $25 million in the fourth quarter 2007. NCR defines free cash flow as cash from operations less capital expenditures for property, plant and equipment and additions to capital software.

We continue to deliver better performance in our management of our accounts receivable and inventory. In the fourth quarter our net accounts receivable balance declined $30 million sequentially and $254 million year over year while our net inventory balance declined $19 million versus the third quarter and $25 million compared to Q4 2007.

I’ll conclude my prepared remarks by providing guidance for full year 2009. We expect revenues in 2009 to decline in the range of 2% to 6% as very difficult comparisons in the first half of the year and limited near term visibility potential dampen growth in the first half of 2009. We expect non-pension operating income or NPOI to be in the range of $360 million to $400 million for the year. We expect earnings per share in the range of $0.85 to $1.00 in 2009.

Pension expense is estimated to be approximately $170 million in 2009 spread fairly evenly throughout the year. The estimated pension expense for 2009 is toward the higher end of the metric we provided on analyst day primarily due to the decrease in discount rate in December. The cash funding requirement for NCR’s pension plans is estimated to be $120 million in 2009 versus $82 million cash funding in 2008. Our full year tax rate is expected to be approximately 25%. Finally, we expect the important metric of free cash flow to be approximately $125 million to $150 million in 2009.

I’ll now turn the call back over to Bill for some closing comments.

Bill Nuti

Just a quick summary before we go to Q&A. Over the past three plus years the NCR management team has done what we’ve said we were going to do and even a bit more. We are very confident in our strategy and we’re very, very confident in the go forward picture for NCR and we’re not changing. Having said that, we’re going to course correct as the realities of the market dictate.

We’re very pragmatic in the sense that we’re planning for a challenging year and ready to take on any advantage this market provides. We’ve traditionally done just that. We’re conservative by nature and we’ll continue to be so. I’m highly confident in this company that we’ve got the right strategy, the right people and the right position to win in the long term.

With that, operator, let’s turn the call over to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Reik Read - Robert W. Baird

Reik Read - Robert W. Baird

You had talked about the retail business; I want to make sure I understand your comments. I thought at one point you talked a little bit about an upgrade cycle and I know that this part of the retail segment has really not seen a lot of activity since the last upgrade cycle in ’04. I’m wondering is this a situation where they were starting to upgrade and it’s become a disrupted cycle. If that’s the case what do you think it takes for these guys to continue that on?

Bill Nuti

Relative to retail you’re exactly right. What I would characterize was a really robust point of sale roll out has slowed down, not stopped but what we’re seeing is they’re pushing out the roll outs to another year. To characterize it this way, if we expected one of our larger wins, $150 million win to roll out in three years, $50/$50/$50 million it’s probably now going to roll out in four years. You see a little bit of a longer tail.

They’re committed to rolling it out because of the benefits the point of sale upgrade provides in terms of employee productivity, etc. but they’re pushing it out and so they’re pushing out their capital spending as a result. I think we’re going to see that point of sale upgrade cycle in terms of implementation going to 2011, maybe into early 2012 before it ends as opposed to my thought was it ends around 2010.

Reik Read - Robert W. Baird

Is this a situation where, are you introducing enough equipment that has not just productivity features from a customer standpoint but also equipment that allows easier serviceability, things like that and that’s something that might induce these guys in a down environment, are you seeing any activity there?

Bill Nuti

That’s the reason why that we continue to see roll outs. The advantages of our 80 XRT which is the one that really has knocked the cover off the ball the last few years it’s just unmatched in the marketplace. If you talk to customers yourself they would tell you that. Its two reasons; one, performance of the platform so think about performance enabling a retailer to cut 20 seconds off of a transaction which of course you can do the math is huge savings and enabling the move productivity through the front end of the store much more rapidly.

Serviceability would be backed into this platform, the ability to actually repair it in record time, very, very quickly because of the serviceability aspects. Yes, those are the fundamental reasons why we continue to see the Macy’s, Target, The Home Depot continuing their point of sale roll out. The difference is they’re rolling out a little bit less quickly then they originally anticipated and that’s largely due to having less capital spending.

Reik Read - Robert W. Baird

On the working capital side of things is the very good performance you had on receivables, do you think that’s sustainable throughout 2009 and given the business probably slowing in a lot of the things you’ve been doing in 2008 should we see inventory turn more positive?

Tony Massetti

We did a very good job on working capital in 2008. We improve DSO performance from around 80 days in the March quarter to about 58 days in the December quarter. Looking into 2009 incremental improvement here will get more difficult. We think given our customer mix and mix of payment terms low to mid 50s is the right DSO target for the company. Of course we’ll drive lower then that but we think for this year we’re looking at a few day improvement over the course of the year.

On inventory turns we did again see improvement both sequentially and year on year in the quarter. We’re forecasting inventory to be flat to slightly down next year. Those assumptions are built into the free cash flow guidance that we provided of $125 to $150 million for next year.

Reik Read - Robert W. Baird

On the services side of things you discussed plans to drive more managed service and increase that business. Can you talk a little bit in more detail about how you’re going to do that to expand the managed services and the outsourcing?

Bill Nuti

We already have a fairly sizeable managed service business and a few outsourcing customer today. We announced last year the NAB deal, National Bank of Australia which is an outsourcing contract we won for well over $150 million. Typically what you’ll see is you’ll see many more customers now in the financial services space looking for managed services and/or potentially outsourcing opportunities because of the impact on their cost structure.

How we’re doing it is we’re continuing to enhance the offer that we provide. We have a fairly robust offer today, however, so I would just want to characterize the progress we’re making it’s off of a very good base. We’re enhancing the offer so continuing to build partnerships with all of the third parties necessary to deliver the end to end solution in terms of the managed service or an outsource.

Today we already have a large help desk capability that we’ve outsourced. We have a tremendous relationship with the CIT’s and CMS’s; cash in transit vendors, cash management services companies. We do a lot of incident management for our customers and have wonderful software tools such as our Gasper and SSDG tools that we put in place to help manage those particular ATM environment and/or retail as well.

There are a few more gaps we need to fill and we’re going to fill those in 2009. I think being a leadership position in the market globally because the one advantage we have is we can do this in just about every country around the world because of our presence and our footprint. It’s interesting we’re seeing as much opportunity for managed services outside the US as we are inside the US. I feel pretty good about that space and as you know in winning that business it’s very sticky and it enables you also to potentially win a higher proportion of market share of the ATMs.

Operator

Your next question comes from Katie Huberty - Morgan Stanley

Katie Huberty - Morgan Stanley

Given all the moving parts on the top line in December with currency and then late in the quarter push outs. Can you summarize the factors that get you comfortable from going from down 7% growth in December to something a little bit better in 2009? Is it compares, currency, strength you’re seeing in ATMs, etc?

Bill Nuti

Let me start with building you up on the revenue side, the way I look at the company this is simplistic and its high level but it will give you a view. About 40% of our revenue is services, annuity based services today and we expect that to be flat to up on the year. Another 8% or so of our business is consumables which is relatively stable business. Up around 50% of the business I think is fairly stable today.

We have about $1 billion in backlog that’s going to roll into the year and that’s approximately 20% of the revenue stream so fairly close to that. We’ve got another $300 million or so in professional services which is relatively stable. You can find yourself in a position where about 25% of your year needs to be driven with new sales. We work our way backwards with that, we look at financial services, what is financial services going to do, what is retail going to do, what are the new industry segments we’re going into going to do?

For us we feel relatively comfortable that the bigger challenge we’re going to face is in retail so we mark down retail significantly. We think financial services is in a range of flat to down a few points in that model but that’s the way we pegged it. Some might argue that it might be up a few points, down a few points. That’s the way we look at it here.

We find ourselves in a position where that high level view I’ve just given you combined with the fact that we don’t think currencies are going to be as volatile this year and the fact that the back half offers us some opportunity for better compares gets us into that kind of a range.

Katie Huberty - Morgan Stanley

Were you able to close some of the deals that pushed out in December over the last month?

Bill Nuti

Some of them yes. If you remember going back to the Q3 call I started to talk to you and other investors about the push outs were kind of beginning. I Q3 we saw about $20 million push out now Q4 we see about $40 million push out. I think we’ll see the same in Q1, maybe even a little higher in Q1 push out. What’s being pushed out of December into January gets closed but what’s being baked into March gets pushed into April. We’ve got to be careful we don’t find ourselves double counting.

The good news here if there’s any in this equation is that we’re not losing share so we find ourselves in a position where we’re maintaining our share. Customers aren’t yet canceling. I haven’t seen a cancellation flat out saying look we’re just not going to do what we purchased. We purchased it; we’re just not going to do it.

As I said, to Reik earlier however, retail customers push out the implementation timeframe of what they already have on the books with us. So they may have a large number of point of sale terminals that need to be deployed as opposed to deploying 25,000 this year they’re deploying 15,000 and they’re moving 10,000 into 2010 but they’re still moving ahead.

Katie Huberty - Morgan Stanley

It looks like you repatriated some earnings from the international sector this quarter. What are your plans with that cash and do you expect to continue to repatriate earnings through ’09?

Tony Massetti

The plans for the cash are first we have to get the bond coming due in June so we’ll need to pay off that bond and then evaluate whether we’re going to re-up on the debt or draw down on the revolver or just use existing working capital to fund the company’s operations. Uses of cash; repay the bond. Secondly continued smaller technology kinds of acquisitions as we’ve been doing, broaden the IP portfolio and provide future revenue streams.

Thirdly, although we did repurchase $70 million of stock in the quarter we have about $26 million left and we continue to talk to the Board about whether repurchase program makes sense. Those would be the three uses of cash in 2009.

Operator

Your next question comes from Matt Summerville – KeyBanc

Matt Summerville – KeyBanc

One of the last things you said on potentially going back to the Board for another authorization how do you handicap that for 2009 probability?

Tony Massetti

It’s really up to the Board. We have $26 million left on the previous authorization. We’ll use that to offset any option dilution that we may have but I would say at this point that the priorities would be repayment of the debt and small technology acquisitions. We’ll continue to talk to the Board about re-upping on the repurchase plan.

Bill Nuti

It depends upon the market as well and on the forecast. If things start to look like they’re going to improve in the back half of the year certainly we’ll talk to the Board about potentially looking at a buy back. As I sit here today what I know today I think the odds are very low.

Matt Summerville – KeyBanc

Over to the ATM business, can you do a little more detailed walk through of the three major geographies that you compete in terms of current up to date trends there as to what you’re seeing?

Bill Nuti

North America large banks rolling with deposit. I haven’t seen a slowdown relative to their appetite to roll out deposit automation largely because the acquisition of depositors is such an important critical success factor for these banks. Helped somewhat by the consolidation in the market of Wachovia and WaMu as an example so you have large banks looking at accelerating deposit automation in 2009.

Mid size banks slower, the national bank segment, slower segment for us I think we’re finding that segment to be relatively slow but still interested in deposit automation given they’re seeing this roll out in the large bank segment and need to compete longer term.

Europe, Western Europe I still categorize as placement cycle market. I’m actually encouraged about Western Europe going into 2010 however, because I think we’ve really firmed up our market position in that space and in terms of if you looked at overall replacement cycle and the age of some of the platforms in that market it looks like 2010 we could see some of the beginnings of a replacement cycle.

Eastern Europe very strong, continuing to be very strong for us, somewhat slower. I think it will be slower in 2009 versus 2008 but still lots of interest. It’s a density issue there and certainly the race to win in that side of the world.

Middle East and Africa slower largely based out of the crisis in oil or the lower prices in oil. You see for example in Dubai, real estate prices crashing, you see based on the oil markets. We’ve seen somewhat of a slower market for us in the Middle East. Africa remains okay. Africa has done very well for us actually the last several years. China very strong, we had a very strong Q4 in China, very strong overall year in China. I anticipate China will continue to be robust in 2009 albeit slower then 2008.

Southeast Asia, India, depends upon which country you’re in so I’ll just give you a general view is overall okay. India somewhat stronger but probably at par with 2008 going into 2009. Latin America for us is a market of great interest as you know. While we did well this year there’s a huge opportunity for NCR that we’re going to attempt to capture here in 2009.

Matt Summerville – KeyBanc

Flipping over to the retail business, can you give us some sort of center, or start with the whole company. Typically you give some sort of color on order activity for the quarter. If you can give that color as to what you saw in 4Q and then maybe just a little more specifics on how retail order degraded as you progressed through the quarter.

Bill Nuti

Orders were down mid single digits for us in Q4 in aggregate they were down mid single digits that’s inclusive of all markets. For retail we saw the beginning of the quarter was stronger then the end of the quarter that’s not atypical however of retail in any given year simply because they’re going into the end of their fiscal year and they tend to slow down relative to deployments and insulations and implementation.

Retail orders were down in the mid teens in the quarter and financial services was okay. I think financial services was only down a point or two for us. We actually had a fairly good quarter generally in financial services on top of a tough compare. Last year in Q4 2007 we had a tremendous quarter in financial services. We were pretty pleased with the financial services trends and orders and where we saw the biggest hit was in retail.

Matt Summerville – KeyBanc

A follow up question on retail, can you give us more of an idea as you think about 2009 how much of a decline can your guidance stomach in the tradition point of sale business? How do you think about self service and the growth there ’09 versus ’08 does it flatten out, does it decline because of CapEx cuts or because these things essentially take people out do they do perhaps a little bit better?

Bill Nuti

On the retail side our guidance contemplates a fairly aggressive pull back in retail. Again, I don’t have a crystal ball. I don’t know where it’s going to land at the end of the year and what’s going to happen relative to retail. It does contemplate a fairly sizeable pull back. We certainly were aggressive there.

Financial services as I said we are anticipating flattish to down a few points in that environment. That’s largely due to tough compares for NCR. We had an absolutely outstanding year we were up over 13% in financial services in 2008. We had a tremendous year. We continue to see good activity. As the year goes on compares are obviously going to get better. Q1 last year we grew 19% year on year.

We’re just not going to look so smart in Q1 or in Q2 where we had great growth quarters. We start to pick up the steam in the second half of the year. I also think you’re going to see some of the larger transactions that are now in our fee stage start to roll out in the Q3, Q4 timeframe as well. That’s going to help in large measure. That’s the way I see the year for both of those two industries.

Matt Summerville – KeyBanc

As far as bank M&A you talked about perhaps with Wells and Wachovia, JP Morgan, WaMu accelerating deployments into the banks that were purchased that really had not embraced the POS automation. Are you in fact beginning to see tangible evidence of that and if so can you describe that. With the M&A that is either going on in Europe or proposed in Europe how you think that plays into your ATM business.

Bill Nuti

In the US both of those customers are contemplating and in fact I think planning for intelligent deposit roll outs for the acquired companies starting in 2009. I feel fairly confident unless they decide to pull back which they certainly at their discretion could. I haven’t certainly seen evidence of that but they could. They go live or start to go live in 2009. Those were a few years of roll outs as you know because we’re talking about thousands and thousands of ATMs.

In Europe, the consolidation to some degree has helped us in most markets because of the strength of the acquirer and them being a larger NCR customer. Similarly they’re looking to drive depositors. As you well know intelligent depositing in Europe plays out a little bit differently then in the US. We’re seeing some interest level to continue to refresh and/or create a stronger deposit base in those markets. Similar to the US just not as robust right now.

Operator

Your next question comes from Gil Luria – Wedbush

Gil Luria – Wedbush

I wanted to drill down a little bit on some of your pension guidance. When we started the year the pension expectations for 2008 were a little higher then what you ended up reporting. What type of variability is around the $170 million expense guidance?

Tony Massetti

We think we framed it pretty well on analyst day with the metric that we presented in terms of discount rate and asset returns for 2008. Now that we’ve done the bottoms up on our 30 or so pensions plans we feel that that $170 million forecast that we provided is what we’ll expect maybe plus or minus $10 million or so for 2009.

Gil Luria – Wedbush

In terms of the cash expectations you said cash expectations for pensions for 2009 but if I remember correctly for 2010 we’re expecting to have to make a bigger contribution just based on where 2008 ended. Where’s the range for that now that you have that information from year end?

Tony Massetti

Of course difficult to predict a year out. It depends on where discount rates land in 2009 and what equity returns are for the pension portfolio. Assume discount rates are flat with 2008 and plus or minus 10% on the equity returns we see cash requirement in the range of $200 to $250 million for next year.

Gil Luria – Wedbush

A couple of updates on specific matters. US Postal service that was a very large contract that you won. When does that start rolling on and how much of a contribution do you expect from that in 2009?

Bill Nuti

We started that roll out in 2008 that will be a long term roll out inclusive of activity in 2009. It’s a very large multi-year roll out. We will see activity in 2009. I’d be lying to you if I told you exactly how much or what proportion of that will roll out in 2009 because it is quite large. Its multi-year we started in 2008. The bulk of it will happen in ’09 and ’10.

Gil Luria – Wedbush

Fox River you’ve been dragging that on for years could you remind us what the cash aspect of that is and is that ever going to end?

Tony Massetti

We topped off the reserve. There’s still a lot of work that needs to be done. We’re certainly hopeful that this will be the last reserve true up but it remains to be seen. There are a lot of variables including the overall cost of the project, NCR’s share of that project. We believe we’ve got some solid assumptions to true up the reserves at the end of Q4.

Bill Nuti

I know way too much about trudging now. Let me give you a quick update on the project. We actually are going to start cleaning up the rivers this year. While this has gone on forever inside the company without ever beginning the project, just to give you some perspective we’re actually going to start cleaning up these rivers along with the other folks who are involved in this matter in 2009.

We think we’ve got it sized properly. We have already sent out RFPs, we’ve already got responses from companies who will be doing the cleanup for us. We think that they’re reasonably priced; we think that they’re in the right spot. Today, certainly we’re going to be looking for extra cost reductions as time goes on. We’re going to be kicking that off this year and that’s a good thing because at this juncture at least there’s activity going forward with respect to putting it behind us.

Gil Luria – Wedbush

Does that require any more cash flow though over the next couple years?

Tony Massetti

It will require cash outlay over the next several years. We do have that considered in our cash flow analysis and our cash planning.

Bill Nuti

It’s reserved for.

Tony Massetti

From a P&L standpoint we trued up the reserve at year end and we’re planning for any cash requirement in subsequent years.

Bill Nuti

The question very directly is there yet another potential true up to the reserve coming. We don’t know. We honestly can’t answer that question. We hope not as Tony said we just don’t know. We are managing it tightly, trust us on that.

Operator

Your next question comes from [Daniel Alcher] – Hovde Capital Advisors

[Daniel Alcher] – Hovde Capital Advisors

I was wondering if you could remind us or give us a little bit of a run down on top five customer exposures in retail and financial.

Bill Nuti

We are largely; think of the company as selling Tier 1 products to Tier 1 customers so we’re across all of the Tier 1 customers in both retail and financial. Our exposure is fairly well balanced from the point of view that we do business with just about every large major financial institution. In fact, most of the medium sized institutions out there. Similarly the same thing could be said in retail. There isn’t per se a customer that has a disproportionate size of our revenue stream in any one of those examples.

[Daniel Alcher] – Hovde Capital Advisors

You’ve done a really good job on managing the cost structure so far, pretty good execution on that front. Going into 2009 with a phase two roll out implanting some cost savings, can you give us a sense on what you think the fixed versus variable expense base can look like?

Tony Massetti

It depends on organization. We’ve done a lot of analysis around that as part of the 2008 plan process. We’re focused on certainly reducing the fixed portion of our fixed variable spend particularly in the area of operations and infrastructure. Not to share percentages with you because we think that’s confidential. We’re very focused on the fixed side of things and reducing that as we go forward.

Operator

Your next question comes from Bennett Notman – Davenport & Company

Bennett Notman – Davenport & Company

Could you talk a little bit about whether the pricing environment has changed any as a result of the downturn in the economy or if competitors are staying rational?

Bill Nuti

I’ll talk about it with respect to 2008 then I’ll give you a point of view on 2009. Two thousand eight relatively speaking the pricing environment remained the same. I would say in the US the pricing environment was moderate outside the US depending upon the marketplace it was a bit more aggressive. The pricing environment did not exceed our expectations in those markets because we knew they were going to be tougher markets because everybody is of course chasing share in these emerging spaces but about the same.

Going into 2009 at least in our assumptions we believe the pricing environment will remain fairly moderate as well. We’re out there, we’re talking to our customers, we think that the environment is such that we expect our competition and NCR will see and environment that will remain about the same as 2008 largely in the US I think you’ll find an environment that will be moderate but outside the US in some of the key emerging markets it will be a bit more aggressive.

Bennett Notman – Davenport & Company

Would that be more intense in retail then in financial services?

Bill Nuti

Interestingly I don’t think so. In retail we continued to see actually the retail environment is significantly better in terms of the pricing environment then financial services for us. That’s relative of course. It’s also because it’s a much lower margin business in terms of the competition. I actually think retail will remain fairly stable relative to pricing. Remember much of our business is on contract. We have a significant backlog of retail point of sale roll outs as an example that has already been purchased, already been priced and sit inside the backlog.

Financial services that’s much less of an impact to the overall price environment. You see the pricing environment a bit more in flux as the year goes on. Its something, by the way, we intend to keep you abreast of each and every quarter because we’re interested to see what happens as well in this environment and how the industry behaves.

Bennett Notman – Davenport & Company

I know this is a tough one to answer specifically but how long do we think we’re going to be wrestling with this pension issue. Is it something that we have to think about being with us the next couple of years or can this be behind us relatively quickly with some help from the margin.

Tony Massetti

You’re right, that is a tough one to answer. It really depends on what equity returns do in 2009 and beyond and what the discount rate does. If history is a guide the last time we saw a downturn in the equity markets which was 2003, 2004 timeframe our pension expense did stay higher over two or three years. It really depends on what kind of returns we get in 2009. We’ll keep you posted as the year goes. We model this on an ongoing basis so with each earnings call we’ll try and give you as much visibility as we can.

Bill Nuti

I wanted also say thank you all of you for joining us on the call today. We look forward to speaking to you again in late April. All the best.

Operator

Thank you for participating in today’s call you may disconnect at this time.

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Source: NCR Corporation Q4 2008 Earnings Call Transcript
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