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NCR Corp. (NYSE:NCR)

Q1 2010 Earnings Call

April 22, 2010 4:30 pm ET

Executives

Gavin Bell - IR

Bill Nuti - Chairman, President and CEO

Bob Fishman - SVP, CFO and Senior Accounting Officer

John Bruno - EVP of Industry Solutions Group

Analysts

Katie Huberty - Morgan Stanley

Gil Luria - Wedbush

Matt Summerville - KeyBanc

Robert Walker - Thomas Weisel Partners

Paul Coster - JPMorgan

Kartik Mehta - Northcoast Research

Zahid Siddique - Gabelli

Operator

(Operator Instructions)

I would now like to turn the conference over to host Mr. Gavin Bell. Mr. Bell, please begin.

Gavin Bell

Good afternoon and thanks everyone for joining us for our first quarter 2010 earnings call. Bill Nuti, NCR's Chairman and Chief Executive Officer will lead our conference call this afternoon. Please note that we have posted a presentation on the investor page of our website www.ncr.com and Bill will be referring to that presentation as part of his prepared remarks this afternoon. After Bill's opening remarks, Bob Fishman, NCR' Chief Financial Officer will provide comments on NCR's total company financial results. Also with us today is John Bruno, executive Vice president of our Industry Solutions Group. John will participate in the Q&A following the prepared remarks.

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 risk 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 the results excluding the impact of pension and other items.

Reconciliations to 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 our website.

A replay of this conference call will be available later today on our website. For those listening to the replay of this call, please keep in mind that the information discussed is as of April 22, 2010, 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.

With that, I will now turn the call over to Bill.

Bill Nuti

Thank you, Gavin and good afternoon and thank you all for joining us. NCR is of to a good start in 2010 as summarized by slide number three in the accompanying presentation on our website.

Our first quarter financial results were ahead of expectations and we are beginning to see signs of a slow but steady recovery in our core end markets. Our return to revenue growth, gross margin improvement, cost and expense reduction and significant NPOI, EPS and ex-pension growth were all positive indicators in the first quarter. This results are signals that we expect to be a return to growth company in 2010 and give us increased confidence in our outlook for full year revenue and operating earnings, which we are reaffirming today.

Returning NCR to growth is of course vital to building shareholder value, but so is addressing our pension liability and we are pleased to share with you today our strategy for addressing this issue. This road map is a result of a comprehensive analysis of our capital allocation strategy. We have chosen a three year aggressive yet balanced approach that we believe should enhance shareholder value. by significantly reducing the pension overhang on NCR’s equity valuation, while preserving our strategic and financial flexibility.

I will go through more detail on NCR’s pension situation and the specifics of our plan for addressing it after providing an overview of Q1 business results. However, I would like to say here that our goal is to substantially reduce the risk and volatility of our pension portfolio.

We committed to our investors that we would come to you with a game plan and the one we will present in our view is a good plan that is reasonable yet aggressive, but achievable and meaningful.

To summarize, our first quarter performance on the next slide, revenue grew 2% to $1.03 billion. Gross margin improved a 120 basis points year-over-year and excluding the investments in our Entertainment business, gross margin would have improved 190 basis points.

Non-pension operating income or NPOI grew 54% year-on-year to $43 million and earnings per share excluding pension expense more than doubled to $0.15 from $0.06 in last year’s first quarter.

Customer activity is picking up both in retail and financial services sectors, as evidenced by strong order growth and an improved backlog. This building a backlog was driven by an 18% increase in orders including balanced double-digit order growth in financial and retail.

We also continue to make good progress in improving our cost structure due to our focus on initiatives targeted at sustainable productivity growth. As a remainder, we are targeting $75 million to $100 million in gross cost reduction during 2010. About half of which will be reinvested in the business with the remainder dropping to the bottom line.

Our efforts to promote the efficiencies across our operations and drive productivity will further strengthen our financial position.

Our balance sheet remains strong as we ended the quarter with $408 million of cash on hand and only $11 million of debt.

Looking at our businesses in greater detail, the big headline is that both financial and retail sales volumes demonstrated overall improvement. In financial services, the upgrade cycle with several of our large US customers is reaching its conclusion in 2010. This is no surprise and it’s factored into our outlook for the year.

The good news is that in Q1, we saw business begin to modestly pickup in the regional and mid-sized bank segment, an important sign of recovery for NCR.

Our leading technology and service offerings places us on solid ground to capitalize as spending in this segment resumes.

All in all, the large and mid-sized US banks as well as overseas banks recognize the value proposition of NCR's leading solutions offer. The launch of our Self-Service ATM product family has proven to be the most successful ATM launch in our long history.

Beyond ATMs, large banks also continue to adopt our newer, multi-channel solutions offers such as our APTRA Consumer and Mobile Passport offering, which Citibank recently implemented to expand its virtual banking capabilities and provide its customers with a mobile banking solution to enable remote deposit for check processing.

Other advanced technologies beyond the traditional ATM space such as cash recycling continue to demonstrate notable growth overseas and we are making continued headway into key developing markets such as China and India.

Overall, we are cautiously optimistic about the improving trends we are beginning to see in financial services and believe our best-in-class Self-Service ATM product family, emerging multi-channel solution offers, integrated services capabilities and improved manufacturing and sourcing infrastructure position us to capitalize in this industry as the market recovery accelerates.

We are equally well-positioned in retail, where the NCR brand remains quite strong. While, this market continues to face challenges and is somewhat unpredictable we are starting to see pockets of customer activity amid an environment of stabilizing sales and improving consumer confidence.

Retail sales are beginning to show signs of life, leading our customers to reset planning processes and begin to allocate budget for investments. While, we expect customers to remain cautious on IT renewal programs in the near-term, we see 2011 spend improving and a continued willingness on the part of retailers to invest in cost containment initiatives and multi channel solutions. We don’t expect recovery in the segment to be rapid but we experienced encouraging trends in overall activity in the first quarter.

During the quarter we also continued to advance our entertainment initiatives and secured several wins across our other emerging growth self service businesses. Looking specifically at entertainment we are aggressively meeting deployment plans, investing in new innovations and capabilities, and as we recently announced are taking important steps to our digital entertainment delivery solutions.

We are on track to deploy up to 10,000 DVD kiosk by year end with demand not being an issue. We experienced strong customer activity during the quarter including new store launches like Gristedes Supermarkets in New York City, 365 Sheetz or convenience store locations in six new markets, 100 Bashas' and Food City supermarkets in Arizona and Brookshire Grocery Stores, which represent 150 plus locations in Texas, Louisiana, Arkansas and Mississippi.

In addition to extending our Kiosk footprint, NCR has further solidified its position at the forefront of consumer consumption habits and transaction channel preference.

We launched our new Blockbuster Express website in February, which offers consumers the option to rent up to three movies at a time online and then pick those tiles up at their most convenient kiosk location, use promotion codes and select their preferred kiosk.

We created the best online rental experience in the industry by placing our customer first, when we designed the new blockbusterexpress.com.

Consumers are now a finding a faster and easier way to rent DVDs at the same great price. Then our partnership with MOD Systems provides consumers their first opportunity for digital download of movies, music or TV shows stored in a kiosk. These various delivery initiatives will enhance consumer’s entertainment experience and address the growing preference among consumers for interactivity and portability.

Our recently announced partnership with electronic retailer InMotion entertainment provides a great opportunity to test consumer adoption of portable digital content in airports across the United States. InMotion currently has 57 stores located in 35 airports with plans to open an additional 20 stores this year. Our digital download kiosks are designed to store thousands of video titles, both movies and TV shows and a host of other media including millions of music titles, travel videos, games and e-books.

We believe this is a great opportunity to further validate digital medial distribution and establish an initial airport presence. We look forward to keeping you posted on our progress.

Slide five summarizes NCR’s business from the standpoint of how we intend to create value. As I have just discussed our core financial and retail segments remain very well-positioned globally generating more revenue and EBITDA than other industry peers.

In addition, we are the number one market share leader in ATMs globally and self checkout and number two in point-of-sale.

Despite our leadership position, we trade at a material discount to our primary competitors on both on EBITDA and price-to-earning ratio basis. While many factors determine valuation of NCR and our competitors, it is our belief that the pension overhang contribute significantly to this discount.

We fully expect to achieve our long-term goals by executing our business strategy. Our core businesses will grow profitably by increasing our market share and continuing to expand into single and multi-channel adjacencies.

We will maintain our industry-best cost structure via productivity leadership and grow revenue and margin by expanding into new industries, starting with entertainment. We continue to expect the entertainment business to generate $125 million to $150 million of revenue in 2010 and our goal is to breakeven by the end of 2011.

As we work towards these goals, we now have a plan in place to address our pension overhang and we believe this plan will provide greater clarity to the marketplaces our core businesses performed.

Let's turn to slide six. What I mean by greater clarity is that addressing our pension issues goes a long way to resolving our valuation gap and best enabling shareholders to see the benefits of the NCR longer-term growth plan. As we mentioned on our last call, we have done a significant amount of analysis on our capital allocation strategy with a specific focus on the pension situation.

The basis of our approach is two-fold. One, to eliminate the underfunded liability in the US plan overtime and two, to eliminate future volatility in our funded status by rebalancing the asset allocation from the current 60-40 equity to fixed income mix to a portfolio of entirely fixed income assets by the end of 2012. With the results being a pension plan funded entirely with high grade , fixed income securities duration matched to the liability.

We will implement this change in an orderly manner over the next three years. This action will correspondingly reduce our risk and the volatility inherent in the equity value. In our view this action should be very positive steps toward reducing what we see as a significantly discounted equity valuation. Our plan addressees that discount by reducing risk in the portfolio, improving our ability to direct capital to the highest value investment opportunities for the benefit of NCR shareholders and funding the plan according to regulatory requirements as opposed to pre-funding.

To elaborate on the last point, although we have the financial capacity to fully fund the entire pension funding GAAP, if we choose to do so, our analysis suggest that a multi-year approach the funding and rebalancing asset allocation would allow us to benefit from any potential future increases in the discount rate and pension plan asset improvements both of which reduce our under-funded liability. I’ll provide some historical perspective in a movement on why recent history suggests this is a prudent approach.

Let’s first turn to the next slide number seven and I’ll walk through the action plan with most specificity. We plan to shift asset allocation of the domestic pension plan to 100% fixed income by the year end 2012 and to targets specific percentages, namely, 60% fixed income by year-end 2010, 80% fixed income by the year-end 2011, and 100% fixed income by year-end 2012. At that point, we planned to be invested in mostly high grade corporate bonds with an overall duration that approximates the duration of the liability.

With respect to the international pension plans we’ll work with local pension trustee boards to recommend similar changes in asset allocation to the extent that it is appropriate. Each international plan operates in a unique environment, which influences appropriate asset allocation and the local pension trustee boards have final authority in determining asset allocation.

Now those are the specifics, so let’s next update out current pension funding status as at the end of the first quarter on slide number eight.

The top half of the chart shows that market have cooperated with us a bit at least in the first quarter. For accounting purposes, the pension plan is not mark-to-market on a quarterly basis. However, we estimate that the funded status of our US plans improved to approximately $82 million in Q1 due to improved asset returns and the 13 basis points increase in the discount rate. Though this was offset a bit by some deterioration in the international plans.

In the bottom half of the chart, we share the latest in terms of current estimated funding requirements based on expected returns and current interest rates. Obviously these estimates are subject to significant variances, but they provide a good grounding as we constructed our plan.

Noted that the cash funding estimates for 2012 and 2013 assume no pension funding relief, resulting from pending pension reform legislation. We continue to actively support legislation actions to reduce the near-term cash funding burden on companies in that situation and remain hopeful that we will see pension reform enacted this year. I will come back to the topic of pension reform in just a moment.

The following chart number nine, depicts the moving pieces driving the first quarter improvement just to give a little bit more color on the various elements. Clearly asset returns and discount rate are the critical factors.

Let’s turn to next slide number 10. I mentioned that recent history suggest the probability that we will see some recovery. You will note that we were almost $500 million underfunded in our US plans entering 2003 and more than $200 million overfunded at yearend 2007.

A few takeaways here, one, pension management is an economically, correlated, cyclical business. Two, NCR has historically recovered from prior adverse positions and three, we clearly recognized that this recent recession and market disruptions were exceptionally severe, leading us to undertake a major strategic shift.

On the following chart, number 11, we dig one level deeper to show the impact of historical volatility on our pension expense requirements and the takeaway here is that while we have historically seen and managed a relatively high degree of volatility, the recent market break has led us to focus on significantly reducing the risk of volatility in our funded status.

Let's turn now to the next chart where we provide a sensitivity analysis that we feel supports the major underpinnings of our plan. Essentially, given our historical experience, we may want to be sure that while we execute a balance plan to remaking our approach to pension, we also want to capitalize on the potential beneficial aspects of recovery.

For example, a 25 basis point upward movement in the discount rate each year over the three-year period in conjunction with a 10% annual equity would meaningfully reduce our projected underfunded status as of 12/31/2012.

Part of the reason for showing this analysis is because we recognized that there are different ways to come at this issue. Given our strong financial position, we analyzed several options to deal with the pension situation. I will speak to that on the next slide, slide number 13.

The first point highlights what I have just explained in the sensitivity analysis namely that addressing volatility over a three-year period achieves our goals while enabling us to benefit from market recovery. We analyzed the option to pre-fund or accelerate the rebalancing process but based on our analysis we believe we have higher value-added uses for our existing cash and credit capacity. In addition, pre-funding the pension is inefficient from a tax perspective today because it creates deductions earlier than we can use them.

Under current pension funding rules we expect to begin making contributions to the US qualified plan in 2012. We are highly confident in meeting our scheduled contributions ultimately eliminating our pension deficit.

Turning to slide number 14, our efforts to mitigate the risk and volatility of our pension plan also includes active support of federal legislation and by providing pension funding relief for plans affected by the precipitous market declines. Balanced legislation have been passed in the senate and the bill is currently in the house Ways and Means Committee with an outcome expected by the third quarter.

Taking a step back, the proposed bill would give company the option to elect one of two different amortization schedules versus the current law, one known as the two plus seven plan and the other the 15-year plan. Under the two plus seven plan employers would be able to amortize their pension shortfall over a period of seven years, but would be obligated to pay the interest on the shortfall during the first two years.

We believe the two plus seven versus current low will provide only marginal relief to NCR and as such we would not anticipate adopting the schedule. Under the 15 year option, companies would be able to amortize a short fall over 15 years. This 15 year option is more attractive and we believe it would be providing NCR meaningful relief.

NCR is working with the American Benefits Council, other industry partners and members of Congress to improve the proposed legislation as well as secure a final passage. One area of focus is on minimizing the duration and negative impact of the cash flow rules that are attached to the two relief options.

However, while the currently proposed legislation contains provision we are working to change, we believe the final and past legislation would ultimately provide valuable relief for NCR and help us manage our pension plan.

So to sum this up with the final slide. Our pension strategy dovetails with our three-year vision for NCR. In our core industries financial and retail, our goal longer-term is to growth faster than the secular market by increasing our leading market share position, while expanding our solution offers in to synergistic market adjacencies. Particularly focused on multichannel enablement, which is what our customers are asking for from us.

Outside of financial and retail, we will exploit our opportunity to become the preeminent, enterprise, subservice solution company in new industries such as hospitality, travel, healthcare and entertainment.

Entertainment offers NCR a significant growth platform and like all of our other strategic growth initiatives an opportunity to increase our margins. In entertainment, NCR will continue our focus to build on an unsurpassed kiosk network, while expanding our offers in sell-through, digital download and other digital content such as games and television.

We do not intend to stand still as this market evolves. We see a great many opportunities to grow this business in complimentary channels that we feel can be huge business opportunities in the years to come. In all industry segments, we expect to grow our services business and become the definitive global leader in the delivery of managed services.

NCR has traditionally grown our services business correlated to our hardware sales. Going forward, we are investing in people, process and offers to turn this highly correlated services business into a growth engine and while this will take us some time, this is yet another opportunity to extend our market-leading position into a significant competitive advantage.

We support our growth strategy with our ongoing efforts to build a sustainable industry-leading cost structure via initiatives targeted on increasing our productivity, quality and enterprise efficiencies.

The good news is that all of the pieces are in place to achieve this goal and we continue to prove ourselves through our results. All of this translates to our goal of significantly strengthening cash flow and now the final piece is in place with the pension strategy that reduces risk, volatility and unpredictability. Overall, we feel the picture translates to significant opportunity to consistently enhance shareholder value over the long-term.

I will now turn the call over to Bob Fishman, who will review the quarter's financial results in greater detail. Bob?

Bob Fishman

Thanks, Bill. NCR's total revenue from continuing operations in the quarter was $1.03 billion, up 2% versus Q1 2009. This includes a five-point benefit from foreign currency translation. We reported a net loss attributable to NCR of $19 million, or $0.12 per diluted share. This compares to a net loss attributable to NCR of $15 million, or $0.09 per diluted share in Q1 2009.

NCR results include special items in both periods. In Q1 2010, results include $5 million or $3 million after-tax in incremental cost directly related to our headquarters relocations. Additionally, pension expense was $56 million in Q1 2010 compared to $38 million in Q1 2009.

Excluding these items non-GAAP diluted income per share was $0.15 per share in Q1 2010 versus income of $0.06 per diluted share in Q1, 2009. 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 and on our website that reconciles our GAAP to non-GAAP result.

Our Q1, 2010 gross margin was 21.5% compared to 20.3% in the prior year period demonstrating the benefits from the successful implementation of cost reduction initiatives.

Operating expenses excluding pension expense and special items were $178 million or 17.3% of revenues, down 30 basis points from Q1 2009, as a direct result of our ongoing efforts to optimize our cost structure.

Total company non-GAAP income from operations or NPOI was $43 million in the first quarter compared to $28 million in last years Q1. Income tax represented a benefit of a $1 million on a GAAP basis in the first quarter, similar to the benefit of $1 million in Q1, 2009. The income tax benefit in the first quarter of 2010 was due to an operating loss before income taxes and accruals related to uncertain tax position. NCR expect its full year 2010 effective tax rate to be approximately 27%.

Turning to the balance sheet, cash on hand at 3/31/2010 was $408 million with total debt of just $11 million at the end of the quarter.

Moving to the cash flow statement, NCR generated $14 million of cash from operating activities in Q1 2010 versus $38 million in the prior year period. Net capital expenditures totaled $51 million in Q1 2010 compared to $25 million in the prior year primarily due to the investment in the entertainment business.

NCR generated negative free cash flow of $37 million as we were impacted by the increase in our investment in entertainment business and a small increase in working capital. NCR defines free cash flow as cash flow from operations less capital expenditures for property, plant and equipment, and additions to capitalized software. We continue to deliver good performance with our working capital and continue to expect break-even cash flow for the full year, including our investment in the entertainment industry.

I will wrap up my remarks with a few comments on the second quarter. With improved backlog and strong orders in Q1, we are expecting a solid back half of the year.

For the second quarter, we expect pension expense of $50 million to $55 million or $34 million to $37 million after-tax. Including the continuing investment in our entertainment portfolio NPOI is looking to be in the $75 million to $85 million range compared to a strong performance last year, when we generated $78 million of NPOI.

Then finally we expect the second quarter effective tax rate to be in the range of 35% to 40% as the tax rate in Q1 is typically higher than the full year effective rate.

Now, I will turn the call back over to Bill for closing comments.

Bill Nuti

I want to take a moment to congratulate Bob on becoming NCR’s CFO. Bob has been a fantastic leader in our finance department for many years and he served to stints as interim CFO. We evaluated a number of incredibly qualified candidates for the job in this most recent search, but Bob is the one we just kept coming back to and many of you know him already and we look forward to making the introduction to those of you who yet to spend time with Bob in the very near future.

To wrap up today's call, we are gaining confidence in our projections for 2010, given growing backlog and increased activity in our core end markets. We are also seeing tangible benefits from the various organizational steps we have taken to operate more efficiently and effectively.

Our decisions to rethink our sourcing and manufacturing operations, align our key functional areas including engineering, design and services, and continue investing in our products, technologies and people will allow NCR to better capitalize on its growing business opportunities.

We are securing continuous improvement productivity gains to ensure that we are getting the most out of every dollar of revenue we generate. We are also pleased to have determined our go-forward pension strategy, which I've shared with you today. We recognized that our pension issue creates a notable valuation overhang on our stock and are taking immediate steps to address the situation.

All of the above point to an exciting outlook for NCR in 2010 and beyond. Thank you and I'd now like to open up the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instruction) Our first question today comes from Katie Huberty with Morgan Stanley.

Katie Huberty - Morgan Stanley

Can you provide further details on the pension as it relates to the sensitivity analysis, is there any reason that pension expense wouldn’t become a tailwind to earnings growth next year, if the move in return rates and discount rates remain in positive territories as you go to the next couple of quarters?

Bob Fishman

Now that’s a good question. Certainly that environment will help pension expense, the issue though with pension is that, the loss that was book back at the end of 2008 will really find its way in to the P&L over the next say seven years and so a big piece of the $250 million of pension expense that we have in 2010 is this unamortized loss, finding its way in to the P&L. So unfortunately from a P&L perspective, pension expense will remain high for the foreseeable future because of that unamortized loss. Again every year though that we can beat our assumptions that are built in to the pension expense will help offset that unamortized loss, but we do expect it to be high for the foreseeable future.

Katie Huberty - Morgan Stanley

Then just a quick follow-up for Bill. You mentioned double-digit order growth, IBM reported double-digit growth in its retail POS business earlier this week. Is there any reason that we couldn’t see some double-digit revenue growth quarters, may be not in the very near-term but in the medium term?

Bill Nuti

It is possible, Katie, it’s possible in the medium term, if the order book continues to be as strong as it was in Q1. I think relative to IBMs results they were coming off of an actually and even easier compare than NCR in terms of if you look at the trends of your business in retail. We were candidly, pleasantly surprised with retail in Q1. We were pleasantly surprised in two ways. One is we actually saw revenue growth in our retail business in Q1, but the order book was up in the high teens in terms of orders, but the mix got better and we are starting to see the mix of self checkout versus point-of-sale improved and for us given the margins on self checkouts that’s the most encouraging aspect of what I saw in Q1.

Operator

Our next question comes from Gil Luria with Wedbush.

Gil Luria - Wedbush

Thank you for taking my question. Could you gives us a most specific update on the DVD business. How much revenue you generated in Q1? How many kiosk did you end the quarter with? I think I’m seeing a little bit of a subtle change in terms of the guidance for kiosk. It sounds like a couple of quarters ago you maybe you were talking about 10,000, by the end of the year and I think now up to 10,000. Could you give us a little bit of an update on that?

John Bruno

Sure, Gil. It’s John. We are not backing off the number if that’s what you read in to the comment. We don’t give out the numbers on a quarterly basis, but on average you can think about the businesses we guided and discussing about, the 20 or so million dollar range in the first quarter and came out of the first quarter with about half of the 10,000 completed in the installed basis, which is where we said we would be and that allows us to build the pipeline through the summer months and then ease off a bit as we get in to the peak season for the retailers, especially the grocers and convenient store chains, which we typically see a bit of a slowdown there on installed rate. So we're right on track on installs, on pipeline and on revenue.

Gil Luria - Wedbush

Then my second question, I also want to comment on helpful all this information about your pension situation is and it really helps us understand the kind of long-term planning that you have for that. I wanted to specifically to ask about slide eight where you layout your cash outlays and a couple of slides later you talk about some of the historical trends. So in terms of your international and executive plans, can you tell us how much of the increase from 83 to 110 to 125 is driven by more workforce, more obligations versus pre-funding and underfunding type issues that you are dealing with outside the US?

Bob Fishman

The US, the international and executive plans, it’s really a mix of different situations. The majority of that cash funding requirements comes from Pay As You Go plans where we basically are paying the pension obligations in the current year. So that can move based on that. The reason it stays fairly steady from 2010 up to 2013 is because the underfunded position is obviously is not as large as the US. At yearend for example, at 12/31/09 you can see that the, your underfunded plan was roughly couple hundred million dollars. So that, those contributions really don’t vary too significantly in the future.

Gil Luria - Wedbush

So, just as a quick follow-up. So even if you’d had no underfunded status internationally by 2013, we should expect that cash need to be 125 going forward regardless?

Bob Fishman

Yeah, I don’t if it could be as high as that. I would say it would certainly be in the, call it $75 million range, based on the Pay-As-You-Go plan.

Bill Nuti

Then Gil, I think we'll have Gavin just get back to you with more specifics on that question as well.

Operator

Our next question comes from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc

Couple of questions, first, just on the pension stuff, I apologize the business in the slide and I missed it. but I would assume if you rebalance the fixed income you are going to have the lower your expected rate of return,. How does that impact the sensitivity analysis and is that kind of worked just way in to the slide show presentation?

Bob Fishman

It really has, it’s reflected in the table on Page 12, where certainly if you have a lower mix of equities, we will bring down our expected returns based on that mix. So that that’s been baked in to less sensitivity analysis?

Matt Summerville - KeyBanc

Then how much would that have to come down by Bob?

Bob Fishman

How much? Certainly we have an assumption built in to 2010 at 7.5% return, so, based on the weighting it would come down as we change the mix.

Matt Summerville - KeyBanc

So where do you think it sort of normalizes, is it 4%, 5%, 6%, 7%?

Bob Fishman

I would say closer to something that matches the expectation for the discount rate. So for example if you are at 100% fixed income and you are assuming a discount rate of 5% and 3.25% that’s what our rate of return would be. If we are assuming the discount rate improves to 6.5% and that’s about what your rate of return would be as well.

John Bruno

I tell you, look at the discount rate over the 10-year average being 6.3 Matt. That’s a good benchmark to use, I think as we think about that.

Matt Summerville - KeyBanc

Perfect that’s what I was looking for it. I appreciate it. Just a follow-up on entertainment, I think Bill in your prepared remarks you mentioned that you are hopeful that business from a P&L standpoint reaches breakeven by yearend 2011, if I heard you correct. I guess I originally thought you were hopeful maybe on a run rate basis, you crossed that line a little sooner than that. Can you sort of reconcile that for me?

Bill Nuti

Yes, what we said in the past Matt is that we hope by the end of this year on a run rate basis, we are looking at a breakeven business going in to 2011 and today, given what we know today that’s still currently our expectation. The business gets accretive significantly in 2012 both in terms of profit and cash flow with current assumptions, but the goal of course internally is to see if we can improve the current 2011 business model, but we are not in a position today to make that commitment.

Matt Summerville - KeyBanc

Okay and then Bill from an order standpoint of 18% obviously a pretty good number, can you help remind us what kind of compares your business were up against and then maybe if you can provide a little more color across the regions, how that order trend evolved as the quarter progressed?

Bill Nuti

No question we had an easier compare in Q1 2009 Matt on orders. So that's a good point. That being said orders themselves were up against [augmentation] for our internal plan and that was a positive indicator. It was fairly well balanced across industries, both financial services and retail were double-digits, financial services was in the low 20s, retail in the high-teens, up in terms of orders.

The region that had best performance was EMEA, Europe, Middle East and Africa, up above over 30% order growth year-on-year and the other regions did fairly well, even Asia Pacific did well. So it was fairly well balanced across the board by geography and with EMEA being the star of the show.

Operator

Our next question comes from Ajit Pai with Thomas Weisel Partners

Robert Walker - Thomas Weisel Partners

Hi, this Robert Walker on for Ajit. Just given what your comments on sales cycle for upgrades reaching their conclusion in 2010 and what you said about seeing a modest pick-up in the mid-sized bank segment, orders above your internal plan. Why not raise your revenue outlook for 2010 to what you had and is there anything out there that’s gotten worse and keep you cautious?

Bill Nuti

No, I think we are just being appropriately cautious in light of what we believe to be a slow and steady economic recovery. I think a double-dip is off the table, but given the state of the global economy today and what we've just gone through, we think it’s prudent right now until we see increased signs of improved volumes to stay at our current guidance. It's only early Q2, I think it’s too early in the year to make a call that things will improve. Although, as I said, you know some of the signs in Q1 were very positive, we’ll see at the end of Q2.

Robert Walker - Thomas Weisel Partners

Okay fair enough and then just a quick follow-up, I guess, how would you say the DVD Kiosk business has been ramping up? How is the ramping going? Where are you in terms of where you thought you’d be?

Bill Nuti

I’ll give you my perspective and John will jump in. It's like where we expected it to be. As John mentioned earlier, we have over 5000 Kiosks deployed. Revenue came in around where we expected in Q1, same on the profit line. We continue to execute to our internal plan in particular as it relates to the deployment of new solutions like rent by online, our new blockbusterexpress.com website, which I encourage all of you to go to and rent a movie, Avatar would be a good rental this evening. I would tell you that generally speaking for us, we remain very encouraged about what’s happening in the space and our potential participation in the space. On a longer-term basis feel very, very good about what this business can mean to the company? John.

John Bruno

Yeah, I think the Bill had the major key points Robert, I’d add that. For us it's always about driving high quality site selections and making sure that we have the right titles available to our customers and the right mix of product offers. So, as Bill mentioned in his prepared remarks we have no shortage of site opportunities and so for us it’s ensuring that the sites have the right footfall, have the right visitation traffic and have the right returns to ensure that we continue to maintain that ramp because it’s a business that’s growing as I explained on the previous call it’s always diluted by new machines because it takes new machines some time to reach their full rental potential.

So until a machine is actually fully up and running over a number of months, these things start to normalize out and so since we are in deployment mode pretty heavily, as going from talking to you guys a year ago and having zero and talking to you guys now and having nearly 5000 that’s a very good result, but we are always pulling down the ramp by net new machines. So to Bill’s point we track new and we track the age of every machine and it’s all tracking well to plan.

Operator

Our next question comes from Paul Coster with JPMorgan.

Paul Coster - JPMorgan

Thank you, Bill. First can you just talk a little bit about the competitive landscape in the financial services segment domestically, but also can you spend a few minutes on Brazil and what’s happening down there at the moment?

Bill Nuti

I think relatively speaking the pricing environment has continued to moderate to some degree with the exception of course the emerging markets as I said, I think consistently now on many, many calls. I don’t think there has been any material changes quarter-on-quarter. Brazil is coming up to speed for us as I mentioned as well. We expect that to kick in for us later this year and become a very important part of the company’s business going in to 2011.

Our plant is up and running. Our research and development center is up and running. We are winning some business. That’s all good news and working through what I would call the early days or kinks of building up our business in that market, but remain very encouraged by the dynamics of the Brazilian ATM space and what that offers us. By the way, inclusive of deposit automation that will be another country where you're going to see like the US an upgrade to deposit automation technologies starting in the year 2013. So I think we'll be very well prepared certainly for that opportunity and on our way there begin to take hopefully more share in that marketplace.

Paul Coster - JPMorgan

My second question is, you seem to have escaped the 28-day rule as it relates to renting out DVDs that have just come for sale. Why is that relative to your nearest competitors in the entertainment kiosk segment?

John Bruno

Paul, I will address that. It's John. It's not a question of escaping it or not. Really the issue here has been and I previously talked about, we are not purely a rental play. So by the virtue of the fact that we've designed these machines from day one with 2X the capacity, the robotics to handle finished goods products because we see a sell-through opportunity for the studios and so forth and the digital signage capabilities, digital upgrade capabilities. While rental is the initial offer and it’s certainly what's driving the revenue today.

We have been and continue to work through our partner BLOCKBUSTER is, is that this naturally augments them through their [mall] and also their store footprint with our kiosk footprint and so we continue to work within a multi-channel automated retail window versus rental, so we look at these machines a little bit differently and we are in the different segment of the market in a way we developed it and that's why we have been negotiating differently and working differently in order to enable that. We will be this summer selling finished products through our machines, which is fantastic for all parties involved.

Paul Coster - JPMorgan

So you competitor's machines do not reflect to support the sales of the sell-through process?

John Bruno

That’s correct, they are optimized for a different segment of the market. We optimized our robotics in our machines differently.

Operator

Our next question comes from Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

Bill, question on the pension side. Would NCR continue on it strides you to go to a 100% fixed regardless of where you are on the underfunded side, the returns are really good, lets say in 2010 and the portion comes down. Is this the strategy you are planning on follow regardless?

Bill Nuti

It is, we feel strongly that in terms of capital allocation, just really you know capital allocation strategy that we do need to put this to rest and significantly reduce the risk in volatility associated with having over $2 billion of our assets tied up in the equities markets, which are highly correlated with our operating businesses. So you know, at the end of the day it could be a really double negative on the business and it’s risky. So for us to completely eliminate that risk and of course the volatility that’s inherent in our equity or the beta if you look at our Beta as a result is very good thing for the company.

Now along those lines we decided to do it over three years to take advantage of what we expect to be, a better environment in terms of return on assets and perhaps even an environment where interest rates will be on the rise, both of which are incredibly beneficial NCR’s underfunded pension position by the end of 2012 and on the charts we provided, we actually give you the sensitivity model to kind of see what that means to us. It also helps you to bracket what potential underfunded status is in and our underfunded pension to us is essentially unsecured debt. So I don’t think given the cash we have on our balance sheet are operating cash and/or our ability to access the credit markets. I don’t think we would consciously today in our current position go out and prefund debt, that's unsecured and candidly that has no tax benefits to us. So that’s another benefit if you will of the strategy allows use our bracket if you will, what you think the underfunded might be and then if you treated that underfunded as debt, you can properly value that along those lines.

Kartik Mehta - Northcoast Research

Question on the Brazilian ATM markets, the markets you entered I’m just wondering if you can talk about maybe if you started producing ATMs in those markets maybe if you started to having success and gaining market share or how far long you are?

Bill Nuti

We have started producing ATMs. We have been producing ATMs throughout the first quarter. We monitor the factory along with our other factories weekly. We have secured some wins in the quarter, but it just too early to call whether or not it’s going to translate at least in the short-term and to a significant advantage for the company, but no question as we continue to build our supplier network up around our factory, as we continue to do a better job of the research and development side of helping our customers design a solution, we are going to be a force to be reckon within that market.

Kartik Mehta - Northcoast Research

Bill, just a question on the DVD kiosk business, I just want to make sure I understand. You talked about the new release, are you guys having to do the work around from the studio and then new releases, or do have an agreement that allows you to get the movies from the studios and therefore not having to do the work around.

Bill Nuti

No, we do not have agreements today with the studio. That's our goal. Our goal is to work closely with the studios and come to an agreement on how we treat new releases. Today, we are essentially working by the advantage of the first auction around being able to supply our kiosks with new releases on day and date. So however we do feel strongly about the advantages of our solution, the differentiation of our solution. As John said we're not a rental arbitrage play. We are an automated store. Our partnership with BLOCKBUSTER and the multi-channel nature of that entity, if you looked at it end-to-end, with BLOCKBUSTER having a day and date privileges, we think that all of that added up is a very powerful argument to bring forward a very powerful channel for the studios to partner with.

Kartik Mehta - Northcoast Research

Then one last question Bill on just the DVD business, there was a story our recently that maybe NCR might test $2 for new releases. I am wondering have you tested this in any of the market and if so maybe what type of feedback you received on it?

John Bruno

This is John. We have not to date, but we are planning on doing so. So with limited supply, with the situation that we have with the awareness of the titles that are coming out in this next month or two, this represents a perfect opportunity for us to test those markets and demonstrate the results as we continue to negotiate with the studios.

Operator

Our next question comes from Zahid Siddique with Gabelli.

Zahid Siddique - Gabelli

My first question is on the ATM business, could you talk about the orders for ATMs across your various regions, please?

Bill Nuti

Orders for ATMs, as I said earlier in aggregate we're in the very low 20s in terms of year-on-year order growth. The most significant growth in Europe for ATMs which is our largest market for ATM. So that's encouraging to us. Europe, as you remember last year was surprisingly slow for us but generally speaking, if you looked across financial, you’ve got about 15% year-on-year growth for just the Americas. You’ve got 19% growth for EMEA and you’ve got 25% growth for Asia-pacific. So as you can see, as I said earlier, very well balanced order growth across all region, including the Americas.

Zahid Siddique - Gabelli

Then my final question is on share buyback strategy, have you thought of share buyback at all as you have evaluated your options?

Bill Nuti

We have evaluated the share buyback. We spend and we continue too. As I had mentioned on multiple calls, we are not going to stop what we are responsible in the company and that’s figuring out how we leverage our balance sheet and get the best return on capital for our investors and a share buyback along with a number of other tools that we have, will continue to be in our toolkit and continue to be discussed on a regular basis with the Board of Directors.

Operator

(Operator Instructions) Your next question comes from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc

From a tax standpoint you mentioned that there were some discrete items in Q1. Can you sort of quantify what kind of benefit that was to your income tax rate? Then second, Bill just within the retail business, can you sort of walk through what you've seen in the sub-segments among grocery versus Big Box versus apparel kind of from the demand standpoint?

Bob Fishman

Yeah, actually we're in benefit. We ended up with the 6% rate for the quarter on an operating loss and so the discrete items that we mentioned in the quarter actually were unfavorable to the tax rate and it was basically just our typical accruing for interest as part of the FIN 48 calculation, so nothing unusual there but definitely no discrete item that we took advantage of.

Bill Nuti

On the retail question, Matt the food segment which continued in 2009 to be relatively stable sub-segment of retail, picked up in Q1 in particular for self-check-out. That was the one area where we saw some increased investment. General merchandise is improving because of the obvious consumer sentiment and consumer spending trends in that space, but there is less enthusiasm still in that space to increase budget or spend, however a heck of a lot more in the way of discussion and RFPs and work being considered for future quarters and 2011.

Big Box continued or I should say got a little bit stronger in the quarter to some extent self-check-out driven as well, both in the US and particular in Europe, but I would say in that segment as well because of some of the tailwind you are seeing in consumer spending, there has been some excitement. Now that segment, particularly DIY segment of the Big Box retailers, we're going to find out an awful lot of about this month and next month because spring is of course their Christmas and so we'll find out little bit more about that particular segment, but generally the optimism or the tenor of retailers today is improving and certainly it was reflected in the activity we saw in Q1.

Operator

Our final question today comes from Gil Luria with Wedbush

Gil Luria - Wedbush

Just a very quick follow-up on order numbers, I think the order numbers you are referring to the growth rates are year-over-year, could you also tell us how the order rates in the first quarter are compared to Q4 and Q3 of last year?

Bill Nuti

Up low single-digits from Q4 in a 3% range and Q3 Bob?

Bob Fishman

Low single as well.

Bill Nuti

Yeah, low single digit for Q3 as well. Q3, Q4 last year were similar, good quarters. Q3 was a very good quarter for orders last year. Q4 was okay. Typically we have a higher rate in Q4, but we beat both those quarters in Q1 by about 3%.

Gil Luria - Wedbush

Great, so nice sequential improvements, thank you very much.

Bill Nuti

I think that’s the last question. I want to thank everybody for joining us today and bearing with what was I know a lot of detailed information and education on our part vis-à-vis pension. We hope you find the presentation useful and we look forward to speaking with all of you throughout the remainder of this quarter and look forward to seeing you again in July. Take care.

Operator

Thank you for joining today’s conference. That does conclude the call at this time. All participants may disconnect.

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Source: NCR Corp Q1 2010 Earnings Call Transcript
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