Diebold's Management Hosts Investment Community Conference Call Transcript

| About: Diebold Inc. (DBD)

Diebold, Inc. (NYSE:DBD)

Investment Community Conference Call

February 22, 2011 10:00 am ET


John Kristoff – Vice President & Chief Communications Officer

Thomas W. Swidarski – President, Chief Executive Officer & Director

Charles E. Ducey, Jr. – Executive Vice President North American Operations

Mychal D. Kempt – Vice President North American Sales & Service

Joao Abud, Jr. – President Brazil Division

Bradley C. Richardson – Chief Financial Officer & Executive Vice President


Unidentified Analysts


Welcome to the Diebold Investment Community Conference. I’m John Kristoff, Vice President and Chief Communication Officer. I’d also like to take a moment to welcome our web audience. For those in the room, we are streaming this event live from the Diebold website. We’ve got a very busy agenda this morning so I’ll just jump right in here.

We’re going to kick things off with Tom Swidarski, our CEO who is going to be covering an overview of our growth strategies and he’ll also be covering the Asia Pacific region as part of his comments. Then we’re going to move to Chuck Ducey who will provide an overview on our North America operations as well as our security business, which I’m sure a lot of you are interested in.

Mychal Kempt who runs our North America sales organization is going to talk about some of our growth strategies over the next two to three years here in North America and we’re very excited to have Joao Abud with us. He runs our Brazil business and he’s not only going to talk about the Lain America and Brazil markets but he’s going to talk a lot about our Brazil operations and how they fit into our global organization from a development standpoint.

Finally, we’ll wrap up with Brad Richardson, our Chief Financial Officer to talk about our financial framework and Brad will also be covering the EMEA region this morning. We weren’t able to have all of our executives from around the world here but we are glad to have a few here. After the formal presentations we’ll break for lunch in the Conrad room just down the hall here and then this afternoon we’ll come back for a deep dive on our securities business. We’ll have a couple of customer presenting at that.

So before we get started just a couple of housekeeping items. First of all, non-GAAP information is used throughout our presentations this morning and we are providing however, complete GAAP to non-GAAP reconciliations in the handouts that you have and we would refer you to that. Of course, we’re using a lot of forward-looking statements today and we would obviously refer you to the more detailed information that’s been filed with the SEC.

Just a couple of other quick notes, we would ask you to mute your cell phones during the presentations. There are no breaks scheduled for the next two hours just given the nature of the webcast so if you need to make a phone call, or use the restroom, or what have you, we would encourage you to do so at your leisure. Then from a Q&A perspective, if we have time we’ll take one or two questions between speakers. We may or may not do that depending on how we’re running but we will definitely have a group Q&A at the end of all the presentations.

Without further adieu please welcome Tom Swidarski.

Thomas W. Swidarski

In addition to what John was communicating in terms of the presenters here, we also have quite a few of Diebold senior leaders that will be available during the networking session so we’ve really tried to provide a day where you can have a lot of interaction with some key folks at Diebold. We obviously, are very excited to spend the day with you. We think we have a very chalk full day as well as tomorrow where we’re going to get even deeper into certain strategies.

But, to frame it up I thought I would start and give you a perspective relative to how Diebold’s revenue breaks out in terms of businesses, also in terms of products and services, and then you see on the far right in terms of the regions of the world. I think the critical aspect of this that you are going to hear consistently is in the middle the movement to services across all of our businesses.

Where we think we have some competitive advantages, where we think we have a business model that is transformative, where we’ve had some good momentum that we’re going to talk about, and we’re going to go into detail on that both this morning relative to North America and Brazil as well as in the afternoon sessions when we really start looking at that on the securities side. Services is the key underpinning really relative to the transformation of Diebold.

On the far right side, both Chuck Ducey and Mychal Kempt are going to talk about North America. Abud is going to talk about Latin America and Brazil but we also have Mike Mateo who runs our Latin America region here with us so in a breakout session if you want to catch up with Mike relative to Latin America you can. Certainly, the Americas are the core strength relative to Diebold.

Then Brad is going to talk about the EMEA section and I will be talking about Asia Pacific, but this gives you a good sense relative to the breakdown. The services provides us with what we believe is solid recurring revenue and sustainability of our business model. So we are very excited and we’re at a very good point in time with some very recent activity that we’ll be updating you on relative to the marketplace voting relative to the success there.

The four pillars in terms of our transformation to a services company really are outlined here. The financials, certainly in the creating value from a shareholder standpoint in the top left, all are predicated upon the key strategies, the ability to execute those strategies, and the transformation that we’ve begun to talk about. If you look from a value standpoint our operating targets have not changed relative to the revenue growth which we think is a modest revenue growth, operating profit margins of 10% and return on capital of 15%. Those are still very much in our sights.

Also, we’ve had the good fortune of being the only company, that I know of, globally that has had 59 consecutive years of dividend increases. So from a solid balance sheet and the ability to make the types of R&D investments as well as M&A type activity necessary for us to continue to grow, we feel we’re very well positioned.

The far right, you’re going to hear a lot about those growth strategies so I’m not going to take you through those but that’s what the individual presentations are going to take you there. And again, for each of those we’re looking at where we create distinct value and create competitive advantage. That is just not North America, a lot of the premise that we talk about today are global platforms and this transformation that we’re talking about will be happening globally.

We’re going to use examples here in North America because we have the North America team, because of our size, and scope, and scale here, and because it is very relevant in that everyone really can understand in a very meaningful manner. On the bottom left, execution and that’s really what I look at 2012 to be, is a very solid period of execution. We’ve not performed to the level of my expectations on the security side and that has a lot to do with the difference between physical and electronics security, but we see a lot of movement happening on the electronic security side that we’re going to talk about both this morning and in the breakout sessions which gives me really good confidence in terms of our ability to really start growing that business based on the level of activity there.

But it’s also investing in both the processes and the leadership of Diebold and that happens globally. We’ve got very sophisticated systems that we’ve put in place. If you think about this chart, you think about at one point in the United States Diebold had a fractured organization that eventually became one in terms of the processes that we have in place relative to service. You go to any service technician, there’s 4,000 in the United States, on any coast, or in the middle of the United States, the process they follow in terms of monitoring and managing their daily activity as well as a call is identical. That same system is going to be going in across the world.

Likewise, when we talk about services, the backbone and engine relative to services that we’re going to be talking a lot about is identical and will be going in identically around the world. Thus, our ability to remotely manage complex situations whether it be on an ATM or in a security environment, are going to be identical around the world. That’s the power of what we’re building and as the world becomes smaller and as banks become more global that’s a pretty important component relative to our overall strategy.

Diebold is 152 years old so this transformation that we’re going through certainly doesn’t happen overnight but ever since I’ve become CEO in 2006 that top guardant in terms of moving from metal [vending] to electronics which took 150 years to get to, has been in full focus relative to our vision: high value services model, software led services, and you’re going to hear and see evidence of that very credibly today.

So with that, a good framework to understand how tangible this is and understand what I’m talking about, is looking at the current ATM ecosystem. This could be any bank anywhere in the world. The transactions are routed from the ATM to either the bank or through a processor. What’s interesting about the transaction model that happens today is the transaction gets routed but so does all the status information from the ATM. So no matter what supplier you’re talking to all the intelligence they built into the ATM goes to a processor or a bank end system. It could be a third-party, it could be the bank, and then the routing is sent to a facility like Diebold, or you see that monitoring center, we’ve got several around the world.

But all the status, all the brains, all the intelligence of the ATM is dumbed down. Sometimes the ATM has over 1,000 statuses they can send and what happens on the backend of that system coming into Diebold is you may only get 10. So instead of saying the third picker mechanism on the dispenser is down, which is what the ATM says happens, all we get is there is a problem with the dispenser so we have repeat calls and costs associated with the service side of the business.

As you know, service for us and services represents over half of our business, that’s an important understanding of today’s ecosystem because I’m going to tell you how we’re transforming this and how it makes such an important role in terms of our future. So when you take a look at the traditional model as it exists today, we are very focused relative to our inherent hardware. You see the transaction processors really take a lot of the intelligence and reduce them down to basic information which is not usable to the level that we need relative to 4,000 people rolling trucks out to fix an issue.

Every call is expensive and we bear the burden of that. So as you see, the insufficient status really has higher service costs and lowers availability which is all the banks care about. So this is a very collaborative issue with banks to try and solve this fundamental issue that has been in place for many, many years in the ATM ecosystem.

So how do we gain operational efficiencies? We’ve been talking about for some time, the ability to take status from the ATM into a cloud, or into Diebold’s OpteView Resolve system which we introduced several years ago. What is OpteView Resolve? OpteView Resolve is the ability to understand what’s happening at the ATM remotely and fix things remotely and it is not just linked to Diebold hardware. It is any ATM that is connected to OpteView Resolve and we’ve had a couple of the biggest banks in North America move down this path over the past year.

So now not only do we have the ability to understand what’s happening in the environment, but we can remotely fix that and do the work flows in an automated fashion. If you went to the back of many big banks, it could be 50 or it could be 100 people monitoring status on 100 or 200 ATMs. This automates the whole backend of that system and it also allows us to take all the rich data from the ATM to know it’s the fifth wheel on the picker of the third cassette that is the problem and show up with the right part and fix it much more quickly.

That’s the power of what OpteView Resolve is on the front end. On the second part of why it is so important is starting to get the difference between the transaction flow, “I want $20 from my ATM,” that needs approval back through the transaction processor. So you’ve separated the transactions now. We now can drill into the ATM remotely and not be dependent upon the third party or the transaction processor to send the information. That’s a huge shift everywhere in the world that is taking place, none more so than here in the United States. That’s a huge shift.

So all of our facilities there that are monitoring things on the backend now have the ability to respond intelligently. When I talk about this I’m showing you the ATM world, I’m going to show you the security world next, it’s the same basic principle. That OpteView Resolve which sits on what we call an advanced services platform is Diebold’s and that’s where the shift starts recurring relative to the value of services and creating additional revenue streams.

It helps solve the fundamental problem everyone has. We want the ATM up 99.99% of the time. We want it fixed quicker, faster and we’re able to do that and resolve problems remotely as well as then send the part in a van, with the right person, more quickly and not just on Diebold technology. A big shift. That’s the gaining operational efficiency side of the equation, the things I point out here in terms of what the results are, are the things I just talked about improve the availability up time, lower service cost, improved reliability, fewer visits, improved margins both for ourselves and delighting the customer in terms of increased availability.

The transformation is taking place, you see the hardware getting a little bit smaller, you see the advanced services platform with a whole host of possibilities of what you can do once you start connecting the transactions through something like that cloud which separates the financial transaction. It also allows you see on the backend to tie in the other service capabilities, or other delivery channels from the bank.

What does that mean? That means I can now do something that Diebold introduced a few years ago called Card Lock. Everybody has a cell phone, I can turn my card on and off using my cell phone tied to this advanced services platform. Why is that important? Because, it addresses skimming in a whole new way, rather than just trying to identify that someone has a skimming device on there, detect that remotely, which we do and we now say, “Hey you can put a lot of power in the hands of the consumer.”

I have a card that I use with my institution that right now if I drop this it is turned off. If someone had my pin and card, they can’t use it in my ATM, they can’t use it anywhere because of this advanced services platform linked the bank’s delivery channel. That list of items in there is just the tip of the iceberg of what we expect to do here and so again, when we talk about the transformation here, we’re talking about being able to drive capability and functionality faster into the ATM for an institution and managing this entire process for the institution.

It is very complex for a lot of smaller banks but as you saw the announcement relative to TD, we also have capabilities that some of the largest banks in the world are looking to leverage as well because we can do this in a very secure meaningful manner because those facilities on the bottom right side, those are built and they’re there and we do it today for many institutions. That’s when we’re talking about transforming our business, this is the tangible representation of our business that eventually gets into sales, and into revenue, and into margins right on down the line.

But, it’s a different business model, it doesn’t mean the hardware is irrelevant what it means is we are less dependent on our hardware than we ever have been in our history and will be going forward. So when I think about what the summary is in terms of that transformation, much like I said, the dependence on hardware for Diebold hardware for our revenue stream, is going to continue to be lessened over the years as we continue to install these types of systems in place.

We gain efficiencies relative to our service operations which is important both to the bank and ourselves. We expand into new services, we create revenue, software downloads, patch management, compliance. Go into any bank today compliance, audit, internal control types of things, which we can do to allow them to meet all the regulatory requirements. We have the capability of doing that. We can not only do it once, we can do it for hundreds of institutions and we do that today in certain parts of the world. And, improve scalability and the ability to speed to market.

Those are the essence of what we’re doing relative to this business model transformation. As I mentioned before, I used the example on self service because that’s pretty easy to understand but if I hit the bottom and say the security transformation is the exact same thing. We don’t make the cameras anymore, we don’t make any of the hardware in most of the security environments. We don’t make the access control systems, we don’t make the ID systems, we tie it all together through this cloud and the same facilities that we have around the world are able to monitor those remotely.

We’re able to do surveillance for a site or be back up for a site as well as the metrics, the video, and the video analytics that allow someone to be a lot more understanding of what is happening in an environment than ever before. So the same business model works on the security side of the business as it does on the self service side of the business and these platforms that we’re talking about and the ability to add services through those is really the linchpin for us going forward.

A couple of comments relative to some of the innovations that you’ve seen from us over the last year. Frank Natoli is with us today. As you may have read in one of the releases, Frank is Executive Vice President really in charge of innovations and technology at Diebold. You see Flex Series, a capability relative to the ATM of both taking cash, checks, and recycling all within the same footprint which has been very well received around the world.

You saw the introduction of the first prototype of a virtual AMT at VM World, a lot of excitement around that. The same thing were happening to IT shops, we’re looking at that roll to the ATM. The technology allows you to do things that were unthinkable three or four years ago. It doesn’t mean everybody is automatically going to move there but it means it is changing the business model. These changes, 4G, the IS offering, help us change and transform the company as these are happening. These are helping facilitate the movement for Diebold so we’re pretty excited about this.

Again, we’re looking to continue to spend at the levels we are and increase that spending on our R&D side to be very effective in terms of how we’re piloting and going to market with some of these innovations. We’ll be learning with our customers.

When I talk about this movement relative to growing IS and outsourcing, it’s not just a US and Canada phenomena. This is happening in India, this is happening in Columbia, this is happening markets all around the world. This is what we’re leading within our markets around the world. China would be the most product centric market in the world, but when you look at what we’re doing here and how we’re differentiating ourselves we’re giving ourselves a real opportunity as you see on this chart, to accelerate our growth and these are long term contracts, generally five to seven years of us taking over and doing what I just showed you on those previous pages whether it’s on the security front or whether it’s on the self service front.

You’ll get into a lot more of that as North America gets up here and presents. That picture is taken over the World Trade Center site, that magazine SDM has to do with marketing distribution relative to the security business, but this is a site where we have four contracts at one of the most recognizable sites in the world. We do the perimeter security for the World Trade Center. We do the security for several of the towers as you’re going up from access to control to integration of what’s happening on that site.

We also do the transportation hub which is just going to be built and then we have the software that ties in all of those different towers together to one center, the command center, which we were in yesterday. This was a recognition of Diebold’s capabilities. It was interesting, when we received this they said, “This has nothing to do with what you’re doing at the World Trade Center, this has everything to do with your capabilities and competencies kind of across the United States where we’ve seen integration and the power of that. World Trade Center just happens to be a nice example and happens to be the place where we’re going to give you the award.”

This is something we’re going to be talking a lot more about in our breakout session and you’re going to understand again, this is recurring revenue service based business on the security side. I’m very proud of what we accomplished there. This says not only do we think it’s a good strategy, when we take a look at the financial performance relative to our services, it’s a business we can grow both in terms of percentage of revenue recurring from a services standpoint as well as the margins which is absolutely essential for us. We’re creating value and growing our margins.

If I frame up today for you relative to self service, because you’re going to hear a lot about self service, I thought the place to do that would be right here where we take a look at the global size and market for self service. These are estimates, as you see on the bottom, based on our sales, RBR Phoenix and a host of other folks. So we’re saying basically the market is somewhere around $10, $11 to $12 billion over the next few years. You’re going to see on the next page it’s broken out by hardware, software and services. On this page we have it broken out by the regions of the world and we’ll be talking about each of those regions briefly today. We’ll be drilling deep into Brazil and North America, but we’ll certainly at the breakout sessions talk further about Asia Pacific, EMEA, Latin America as you so deem.

If you take those same numbers and break it down by the hardware, software, maintenance, deposit automation management services, not surprisingly the growth rate is close to 10% on the services side which is exactly where we’re focused. Deposit automation leads someone right down to the services path because it is a very complex interaction because it changes the back room operations for an institution.

As we move down this path our solutions fit all of those categories and it shows you still the size and the power of the hardware and maintenance side of the business. It’s an enormous piece of the business and we’re going to be very focused on that, we’re going to be world class on that as we always have been. But, it’s not necessarily the differentiator and the services become much more the differentiator and the service organization becomes much more of a differentiator going forward.

So as you can see, in 2008 the market was probably closer to $10 billion. It took a dive in 2009 and it’s slowly starting to grow back so we feel very good about our outlook over the next several years and our ability to really grow at market, if not faster, than the market with good margin performance.

John mentioned that I’ll spend a minute here on Asia Pacific and that Brad is going to talk about the EMEA market. We weren’t able to bring in our executives from each of those regions so I’ll make a few comments there. As you see at the bottom, when we look at Asia Pacific we have close to 3,500 employees, and you see the size of our service operations. You can’t build services without a good service operation. That’s where you build the trust with the banks in each of the regions.

You see the size of the revenues there $420 million? If you went back 15 years, our revenues in Asia Pacific was zero so we’ve been on a very good path there. But, the realities of what is happening in Asia, as you can see on the bar chart in terms of the revenue breakdown is it is a much more product centric part of the world than we have in the Americas. That’s because it’s less mature so it’s much more product dependent.

If you looked at just China, China probably the revenue split would be 90% product and 10% service and services. That will change over time. Remember, one time in the United States every bank ran their own service operation. Every bank in the United States ran their own service operation. Today, no bank runs their own service operation in the US because they need availability, they need reliability, they need uptime, they need the sophistication we bring and our competitors bring into the marketplace.

That will happen in China but it’s going to take time. There has been a slow shift in that direction over the last few years. India on the other hand is very service oriented so it is a very different market. People like to link China and India together, China is much more mature, much bigger infrastructure, India is far less mature but they are moving right to a services model and the government is getting involved in India as well.

Then you have a place like Thailand which is pretty mature good service infrastructure that is evolving into the services side. So our basic premise in moving towards services, is something we’re going to be doing everywhere in the world. The market may dictate that it takes longer in certain places that others but we’re transforming our sales organization now because we know that’s where the real battle ground is. That’s where the sustainable revenue is long term and that’s a big part of our focus here.

So when I look at Asia a couple of the other highlights I would comment on is Asia clearly is the most competitive market in the world. You have Japanese competitors, you have Chinese competitors, you have folks from Korea in there, very aggressively from a hardware standpoint, and we’re there as well and we’re a very significant player there and plan on continuing to be a significant player there. We will have to drive the growth opportunities relative to services.

A few of the market trends, you see the size of the market, it is the fastest growing market in the world and there are opportunities in every country and every region throughout Asia Pacific. Certainly, it’s driven by China and India and Thailand would be a strong third market as well but places like Indonesia and Vietnam are coming up very quickly.

The profitability is challenged because of the Asian centric competitors. There is a shift in that market of all the regions of the world where recycling is a key technology there. If you are in the United States and have walked around you have not seen yet a cash recycling ATM but there it is very cash centric thus, the movement. In the United States cash goes in and comes out from a different mechanism within the ATM. Recycling the cash goes in and comes out of the same mechanism so it is very different technology even though it is very close in germane it is very different. So recycling really changes the market there.

Most Chinese banks, the big five Chinese banks would use anywhere between five and eight suppliers. If you went to any of the big banks in the United States they’d use two or three, or any of the big banks in Brazil would be two or three but they tend to use five to eight. Why? Because, they are very hardware centric, they like to play with the hardware and thus they want everybody in there.

Of all the regions of the world you’d say it’s the one where market share changes dramatically year-to-year depending upon who is buying. We clearly have a significant share in the Asian market, but again, it’s hardware and less services oriented. In terms of integrated services and outsourcing, there are absolute opportunities there. We have our first two banks in China, small banks, that have begun to move down that path but I just came back from China the beginning part of January. I met with five different banks, different sizes, every single one spent I’d say 45 minutes of the hour with them on integrated services and outsourcing. They’re understanding the value of that.

Some understand it from the standpoint they can’t move fast enough themselves, they don’t have the capability internally so we can help them get there faster. Others are looking at it in terms of taking costs out, in terms of how do you do that because as more the western banks and they compete on a more global basis they know that’s going to be a requirement. So uptime availability which was never near what you’d expect in the United States is starting to become more and more important.

Certainly, every where in the world including Asia, deposit automation is a key battleground as well as security. The good news for us is the more conversation there is about security the better we are situated with anyone in the world. Certainly, the Asian competitors aren’t up to speed relative to software and services like the other global players are. But, that’s the sweet spot where Diebold differentiates itself because our heritage in security, because of the investment we have made in logical security, and when we talk about some of the biggest contracts here relative to TD, I would say the security side of the piece was the one we clearly differentiate ourselves in, so that is an important piece.

When we talk about security today we’re certainly talking about it as a business but we’re also talking about the knowledge gain from security that applies to all our businesses as well. I will summarize simply by saying over the course of today and tomorrow as you’re with us, you’re going to hear a pretty consistent theme about our confidence in terms of where we are going both in the security space as well as in the self service space. You’ll also see and hear the services theme continue to come through loud and clear.

You’re going to see the growth strategies in deposit automation, integrated services outsourcing. On the securities side you’re going to see the capabilities that we can bring leveraged off a backbone of a solid and credible service operation. So we feel very good about where we’re at despite the challenges we face, and everybody faces them. I mean, Europe is in a very difficult position, even the US banks as they come out and deal with all the regulations that they have to deal with. The changing environment has been very difficult for all of us which just makes us even more confident in the business model that we’ve been building.

I think with that I will close down my portion of it and turn it over to Chuck and our North American market to take you through some details relative to the opportunities we have here in the United States.

Charles E. Ducey, Jr.

First of all I want to thank you all for attending our conference. Today I’m going to talk a lot about North America and the agenda for today will be to talk about our growth and how we’re going to grow our business. I would tell you right now is a great time to be in North America because I can remember back in 2008, the second half, when spending was completely frozen in the banks especially, in the regional and community sectors.

If you fast forward all the way to today, we have seen a really big movement in the financial self service market. We’re seeing good strong drivers and we’re exceptionally excited about our opportunities there as we move forward in the next three years and we’re going to share a lot of that with you today. I’ll give you an overview of our North America operations and then we’ll ask Mychal Kempt who is responsible for our sales and service in both Canada and the US to come talk to you about our growth strategies and he’ll go into a lot of detail on how we’re growing our business, what’s driving it and what our expectations are as we move forward.

Then, I’ll end up with the security business and talk to you about our strategies, how we feel about that business, why we’re confident and we believe that we’ve got the right strategies to go execute on that business to grow it and have an additional growth stream in North America other than what we’re seeing in financial self service. So a very good day today and I think it will be very informative for you all.

If we move to North America, right now North America is about $1.5 billion in revenue. It is the largest geography in Diebold. If we look at the businesses, it’s broken out in balance between about 60% financial self service and about 40% total security. So we have a pretty strong mix of both businesses that run through the North America operation.

I think when you look at what is really critical about North America which I think is somewhat unique, is we’re about 70% services in this business. So when you think about North America, I think you can safely say it is a services company and we have grown that over the last five years. It is a core competence that we have. We have a very strong maintenance business which makes up the bulk of what we’re talking about in our current 70% but as you can see, we’ve grown our integrated services to $576 million total contract value this year. That is the highest total contract value that we’ve ever achieved so it is a very exciting business to be in right now in the integrated services side.

We started out in 2008 it was about $5 million total contract value and it has just exponentially grown. So we’re very pleased with that and we’re very excited about that business and Mike will talk a lot more about that. As part of that $576 million we have a total outsourcing contract with Toronto Dominion and basically it’s about 4,400 units and expands across both the US and Canada. This is a very, very big important win for us in this marketplace.

As you know, we have got a very strong relationship and we do very well in the regional and community banks but to take our business processes outsourcing model and bring it up to the next level, we’re very excited about. There’s a lot of complexity and we’re going to prove our worth and we’ll be able to take this into more and more markets as we learn and grow with this contract. So we’re extremely excited about that.

Tom touched on some of the innovations and we’ll touch a little bit more on that as we move forward. When we move to the strength of North America it is our services organization. Basically, we have 4,700 service professionals which includes 3,100 service technicians and as Tom had mentioned, what’s really important about this is we run 1.8 million calls a year. We have 1.8 million opportunities to make our customer satisfied with us, we have 1.8 million opportunities to make sure our customers trust us, and that is very, very important as we leverage our products and our services.

I will tell you, if you can’t do those things and you want to build an integrated and a managed services you can’t do it without strong trust, strong relationships, and good maintenance businesses. So we are extremely proud of this and we’re going to continue to build on it. We train our folks, we give them over 120 hours of training per year and we’ll continually do that so they can be the best in the business.

I’m going to switch gears here a little bit and really hone in a lot more detail on the financial self service market. So we talked about the overview of North America, now we’ll specifically drill into the financial self service market. When we think about the banking environment, right now we believe that the retail banking environment as it exists today is really favorable to Diebold’s products and solutions. We think we’ve got the solutions that fit very, very well.

Right now, the banks are facing a lot of regulation that is putting tremendous pressure at all levels. This is not just community or national, it’s through the whole banking system on their costs, their cost structures, their revenue, and how they’re going to generate revenue as they move forward, and probably most importantly is the capital structures and the capital positions that they have to take.

This kind of environment fits very, very well into what we’re bringing out into our core solutions such as our deposit automation solutions. In my opinion, we have a very, very strong suite of solutions out there. We have tremendous flexibility, we can go single deposit with cash, we can go single check, we can go dual check, we can go dual cash in and we also have a recycling module that will do both. When you look at our suite of solutions it is absolutely the most flexible and we have the best reliability and we think that gives us a great advantage.

Secondly, our integrated services as you’ve seen, we’re addressing the key issues in the financial space with especially the smaller regionals with the cost, the changing technology, and also the capital that they have to expense. So that’s what’s really given us a big lift on the integrated services side. So why is that important? When we look over the chart on annual growth and market size, you can see that North America and the financial self services is about a $2.5 billion market. But, the growth in this market is going to come from integrated services and it’s going to come from deposit automation.

That’s why the competencies and what we’re building there is absolutely critical as we move forward because this is where the growth is going to be [inaudible], and you can see that install base is pretty much flat so the growth is going to come on top of that install base. Finally, we’re in a great position in this market. We are in the number one position, have been for many, many years, and we fully expect to continue our number one position as we move forward.

There’s a lot of things happening in the North America financial self service market, a lot of drivers, but then there’s a lot of [inaudible] forward and how we think things are going to move forward in this space and this opportunity. So right now, we all know ADA/PCI from the last 18 months has been a driver of financial self service growth especially in the regional and the community space and we’ve seen very good orders in our regional markets.

We see that tapering off in 2012. The deadline is March but it’s like most [inaudible] everybody meets those deadlines so we are going to have folks that are going to need orders, that are going to need these installed as we work our way through 2012 so we see that main driver sort of tapering off. But we’ve also had the driver of deposit automation in the regional business since over the last 18 months and we have seen very good acceptance. We have seen good consumer acceptance, we have seen great bank acceptance as to what they need to do.

As these big three banks and as the larger tier banks move even further out into the marketplace, the regionals and the communities are going to be forced to respond from a competitive perspective to bring in these deposit automation modules. So it helps them compete but it’s also going to help them get the cost down. So we see those two factors over the last 18 months really driving growth.

As we look forward into the future over the next three years, we see deposit automation from the balance of the nationals, the four through 24, they’re in pilots right now. They’re testing it, they’re getting ready for production rollouts and so we expect over the next three years that wave of new deposit automation moving forward and we are very well positioned in that four through 24 large accounts so we expect to get our large fair share as we have been getting in those accounts as we move forward over the next three years.

Deposit automation at regionals, as we talked about, another driver over the next three years and Tom had mentioned this on his conference call, about we’re seeing a change in the replacement base. That replacement base had been stable for the last 40 years since we’ve been doing ATMs and it’s been very regular. We’re seeing now with technology and what’s happening in the marketplace that we’re getting a faster cycle of replacements than we had in the past. So instead of 15 years, or 12 years, we’re starting to see the seven and the 10 years. The technology is going to continue to drive that and expand that so we see that as an additional driver as we move forward.

I know most of you are wondering about EMV, it’s out on the horizon. We see EMV will be a driver but it’s going to be a very, very slow driver. EMV will not be like ADA/PCI so Visa, MasterCard said, “We want you to go to EMV.” They’re not mandating it, if you don’t go to EMV and you’re a processor and a bank the liability shifts over time for fraud to you versus MasterCard or Visa. So it is really somewhat of a very slow migration into that EMV and there is a ton of back room that has to be fixed before you can even go to EMV. We think it will be an opportunity, we think it will be a driver, but we don’t think it’s going to be as pronounced and as robust as we saw in the ADA/PCI.

On innovation perspective, Tom had hit on most of these, on the Flex performance we’re dealing with a cash handling technology and we call it flexible because it will take cash in and do cash only, it will do cash in and cash out, but also it will be recycling enabled. We can go to our customers and say, “Look, you’ve got a site with low cash so let’s just put the cash in feature in.” Then as that site goes with more and more cash we can say, “Look, we think you need to upgrade and you need to go into recycling.” Recycling provides tremendous advantages to the financial institutions in an ATM because it reduces the number of cash runs, it has more capacity to hold cash so your cost of managing cash goes down significantly and so that’s a very key piece of what we’re doing here.

Then Tom has mentioned virtualization at VM World and we are actively right now working with customers, partnering with them, to go ahead and figure out how this works in their system, what are the benefits, and we were the first to come with that and we’ll continue to put out first as we move forward.

This is pretty much the overview of North America. I’m going to let Mychal come up and talk about our key growth strategies as we move forward.

Mychal D. Kempt

As Chuck and Tom both alluded to, I get the chance to talk about our growth strategies in North America today. First, I’ll talk about integrated services and we’ve heard from Tom and Chuck how we’re pretty excited about that, deposit automation. Then our last strategy will be delivery channel innovation.

I’ll start first with integrated services. Integrated services for us really is something we’re very proud of and this is really innovation dating back to 2005. It’s innovation in the form of a business model. We created this business model for the community regional bank space. We’re very focused on providing a single point of contact, true business process outsource to really provide an end-to-end ATM management system. As you can see, by the chart, as a couple of us who has shown this so far, we’re very, very excited about the acceptance and success that we’re having in the marketplace today.

Integrated services for us as well has been a catalyst for competitive wins. We have a couple recent wins that are top of mind for me, a local bank, Lakeland Bank just awarded us a $2.5 million total contract value to replace over 50 ATMs. Capital Bank down in the southeast just provided a contract to us that we won greater than $10 million replacing over 150 terminals. Both of these competitive networks where we haven’t been before total outsource led by integrated services. So it really has been a competitive catalyst for us as well.

You look at our growth for 2011 and acceptance, we added over 11,000 sites in management for integrated services in 2011. Of those 11,000 sites, as Tom mentioned, over 4,400 of those came through our very exciting win that we talked about last week on the earnings call at Toronto Dominion Bank and I will talk a little bit more about that in the future.

For us, really thinking about integrated services and the success that we’ve had so far based in the community regional bank space, we’ll really take the win at Toronto Dominion Bank and it really gives us the credibility to extend up. So we have been very focused and it has been very well received in that community regional bank space and now having a contract of this magnitude really gives us a chance to take this business model and take it up to our larger national banks.

If you think about it, the problems are the same. I mean the problems are the same at the community banks as they are for the regional banks, it’s just on a much larger perspective for national banks traditionally who have the people and processes in place to be able to deal with this. So our win at Toronto Dominion really gives us an opportunity to go talk to similar size banks and really extend that business model up.

We also take the business model and we think about taking it to other lines of businesses. So predominately it’s been seen in financial self service today but we’re starting to extend that to other lines of business. We have a leader who is in the back that you’ll hear from tomorrow, Greg Steffy who was originally part of the team that started integrated services for us in 2005. So not only did we take the model and extend it to other lines of the business, I took the leader that was running integrated services and took us through all this growth and we asked him to run our electronic security sales operation.

Greg takes his passion, his commitment, his discipline, his desire, all the processes, all the things that were built with integrated services for financial self service and he takes it with him to our electronic security business. We have seen almost immediate results. Again, competitive catalysts Kern Federal Schools just issued a contract for $500,000 total contract value, South Carolina Bank and Trust over $600,000 total contract value, Community Bank and Trust $1 million total contract value, all competitive wins, all integrated services led, all security based. We see great extension of that business model to other lines of business specifically here electronic security.

Then really as you see this business model really start to accelerate the number of customers we continue to add gives us a great opportunity to continue to develop deeper relationships. So as we’re developing other services and we’re going to extend it to other lines of businesses it creates an easy opportunity for us to go to what now is greater than 650 customers, to be able to sell into those existing relationships. So as you think about integrated services and the successes that we’ve had so far in that regional community bank space, I just wanted to provide a little bit of color that talked about where we kind of see this going to continue the trend.

Now, on to Toronto Dominion and I know Tom had covered this last week in the earnings release. Obviously, we’re very, very excited about this contract providing end-to-end management in true and across border total ATM business outsource. It’s a game changing win for Diebold, 4,400 ATMS. Understand the complexity of this, of those 4,400 ATMS 2,400 of them are Diebold and over 2,000 of them are competitive.

The software that is going to run on that ATM network is hardware agnostic. It is neither ours nor our competitors. Then we take OpteView Resolve, which Tom talked of earlier, and we’ve spread that across the entire network to manage this. That is going to be done in our competency center in Green Ohio and we’re very, very excited about this game changing win for us. So if you think about the complexity and the opportunity that it provides us to go out into the marketplace.

To win TD, the feedback we got from our customer really lends us back to our strength and security and our expertise in logical security really was kind of the thing that really pushed us forward in their eyes. We do have 15 years of experience, we do have the infrastructure, we do have processes, we do have all the things in place to leverage today, but it was really our strength and our expertise in securities specifically, logical security that really kind of differentiated us from our competitors in our customer’s eyes.

So that’s integrated services for us. We’re very excited about our forward-looking opportunities in integrated services. I’ll now go to deposit automation. Not a new growth strategy for many of you in the room, we’ve talked about it to you before, but we’re very excited about kind of where we see the market going kind of the next two turns of the crank if you will. Our position is strong in North America. We have over 20,000 ATMs that are deposit automation installed today.

We have ATMs installed in all 50 states, so we have trained associates in all 50 states to be able to leverage the growth that we see coming. We have superior service support as both Tom and Chuck talked about, in North America that is in position to leverage the growth opportunities for us in North America. We feel very, very good as Chuck mentioned, about our offering. It’s very focused on high reliability, high availability. We have the flexible offering that kind of serves all the markets and we just feel very strong about our current position in North America to leverage kind of the next two turns of the crank for deposit automation.

This chart here just kind of gives you a sense of what the market looks like and I’ll orient you to it. In blue, that basically speaks to what has already been installed so that’s the deposit automation units that have already been installed in North America. The white line is what analyst say kind of the overall network, like 60% or so of the network, will be converted to deposit automation. That white line kind of represents the 60% for an account or a segment. Then the green obviously up to the white line constitutes opportunity.

We’re very well versed in the fact that BofA, Chase and Wells have kind of gone across the United States and have done this already. You can see they kind of blew past the white line for 60% or more of install base. What Chuck talked about and Tom talked about earlier, the opportunity that we see, that we feel very, very good about is kind of that next tier bank, the national bank, banks four through 25 as well as regional banks.

You can kind of see, as we mentioned earlier, the work that’s been going on the last six to 18 months really in terms of certification, in terms of offering, in terms of pilots, in terms of all the things that the next tier national and regional banks have done is really set to take fold now. So ADA and PCI is kind of winding down to the end of the year and I think the focus is really starting to go to deposit automation.

We’ve seen good strong orders towards the ends of last year and the start of this year and we feel very good about that and really our relative position in these two markets is very strong. We have significantly greater than 50% share in both markets. We talked about the strength of our offering, we talked about the strength of where we are currently today, and we just feel very good about this growth opportunity really over the next three to four years. So it is not something that is just going to come and go in the next year or so it’s really the next three of our years that we see deposit automation in North America moving.

The last growth strategy for us is really something that we’re working on, and executing on, and launching in 2012 and it is really focused back into the branch environment. Chuck is going to spend a little bit more time talking about branch and how we see the branch, and where we’ve been strong in the branch before. We have a very strong brand in the market, we have very good share, but really focus more on the new build. I think Chuck is going to talk in greater detail in terms of security about that.

But really, where we see our opportunity now is on what’s existing already. So even in a curve like this that is fairly flat, you can see the absolute number is still massive. There are over 115,000 branches that are currently sitting in the US market today. Well known to many of us, I know, that it’s the most expensive transaction that’s out there for banks today. This is a significant issue and we think our strength in self service really positions us well to be able to take advantage of it.

We think the opportunities are very complimentary to our business strategies. We think there is opportunity for us to place in the branch operation analytic space both in the drive up and in the teller line. We think about our OpteView Resolve platform that Tom spoke of and we think there’s great opportunity in the branch where you have smart devices and be able to control and understand what goes on in terms of OpteView Resolve.

Our integrated services business model built for self service, we’re leveraging it in electronic security, there’s no reason we don’t see that going and playing a large part in the branch as well. Really though, kind of the strength of what we’re working on in terms of a growth strategy into ’12 is this transaction migration to self service in the branch, or repositioning self service in the branch. Self service is a core competence and strength for Diebold and we think we have a nice opportunity here.

The big banks get this, I mean they get it, they’ve got large bank footprints already they understand the challenges that they have and I think they are down the road in terms of being able to look at transaction migration and self service. Much similar to deposit automation, we think the big banks will go on their own. We’ll participate, as we are already, but they’re going to do similar to deposit automation, I think they’ll take this and they’re going to run with this. This is a big challenge that is facing the industry and really our sweet spot where we think our strategy fits is back into that community regional bank space.

I want to talk about a couple of things that we’re working on today that are relevant that we’re doing that are kind of tied to this transaction migration of the branch. I brought a couple of examples, Americu is a small credit union in upstate New York and they are very focused on transaction migration. So they came to us, we sat with them, we innovated and created a custom terminal that is very focused on transaction migration.

The things in the terminal we’re doing for them are things like printing checks which is very labor intensive for a teller to do that but that’s something that they offered their members. So we’re able to work with them and build a custom terminal to be able to move those transactions off of the teller line to self service. So we’re taking some of the costs that sat in that teller, moving it to a self service device, they are increasing the services they provide their members, the length, and service, and time they provide their members. But, it’s a migration from the core transaction that sits in the branch and be able to take those transactions and move them out to self service.

The next example is CO-OP. CO-OP is a business partner of ours and it’s a little bit of a different theme but kind of stay with me it’s kind of the same motive here. We built a shared branching application with CO-OP and that’s going to reside on our ATM or our competitors ATM. The very notion of what it says is what it is, it’s a shared branch. It provides the credit union marketplace the opportunity to kind of compete with those larger bank footprints.

So, if I’m a credit union member on the west coast and I’m traveling down south, or I’m traveling in the east and I want to visit a credit union shared branch network, this transaction is going to allow, the software application that we built will allow a transaction to see me where I go and treat me the same. So I’m leveraging fixed cost in a branch so I’m using other credit union branches. I’m also leveraging deposit automation technology that they invested in to be able to do this transaction.

Then what’s really in it for credit unions is there is a revenue play in there that’s much richer than your normal transaction so it is significantly greater in terms of normal interchange to drive up revenue opportunities for a credit union. So, leveraging fixed costs, leveraging investment, and creating another opportunity to drive revenue up.

The last example I want to give you is something we’re doing with the University Federal Credit Union down in Texas and this is a teller less branch. This is to an even greater extreme but kind of along the same theme. They have a number of full service branches in their market. They are building very small footprints that are self service only. They are strategically locating them near full service branches so if someone comes in and wants to do a full service transaction, they won’t allow it which is a bold move for them, they’ll ask them to go to a full service branch.

But, they’ve created this environment of a smaller branch, self service only transactions so there are no tellers. So they reduced tellers, no teller transactions, self service only in a sales environment. So they created a sales culture or sales environment in their stores. So focused on smaller branches less money, focused on no tellers less people less money, focused on a greater seller environment to drive top line revenue.

The theme of the three are things that we’re doing today and I think the theme of being able to address the high cost in the branch and the challenges that the banks have on the revenue side is in our sweet spot. We’re working on a strategy right now we think we’ll have done an deployed by the mid part of 2012 and then this time next year hopefully we’ll talk to you about how that’s gone.

So those are three growth strategies for North America. I’m going to turn it back over to Chuck who is going to spend a much greater deal of time on electronic security, another key growth strategy for us.

Charles E. Ducey, Jr.

We’re going to switch gears and talk about our security business strategy which, as you know, we’ve talked about this on our conference calls and what we’re going to give you today is a good overview of how we’re thinking about the security business. We’re going to give you more insight into how this business looks, what the components of it are and how we see it. Then at two o’clock you’re going to have just a great venue to really get into a tremendous amount of detail on the security business and get a great understanding of that with our folks that run that business.

First of all, we are very confident that we can grow this business and there are a number of reasons why. First of all, we have a very strong brand in security. That’s where this company grew up 150 plus years ago so especially in the financial markets, it is a very, very strong brand. We also have an integrated services model that we’ve talked a lot about that we can bring right into this marketplace and be very, very successful. So that’s the second reason.

The third is we talked about our service and installation organization which is best in class that’s going to deliver the kind of services that will grow a security business. Then fourth, we have very, very strong system integration skills to do the high complex jobs that we need to do in all of our markets.

So we have really those four fundamental pieces and we’re going to talk a little bit about this as we go through the presentation that we can leverage as we move forward. First, this is the first time we’re going to share this level of detail and data with you and we want to be transparent so that you can really understand what our business looks like. So when we look at the security business in total it is made up of two components. The first, is a physical business which is about 52% of our overall revenue and the second is the electronic security business which is 48%.

So on the physical security side this is our heritage products, this is where the company grew up safes, vaults, safety deposit boxes, extremely strong in the branch and so it’s a very core stable business for us. The electronic security is obviously our alarms, surveillance, intrusion, logical security, all those pieces that we’ve built over the years. I think the most telling point of this whole chart is when we think about the services piece of this. This is a heavily oriented services business and we have all the components of that service. As you can see, we have the monitoring, we can do the break/fix, we can do the implementation project management, engineering and design so we have all the fundamental components to really be successful in this business.

So let’s take a little deeper dive into physical security. As you can see from the chart on the far right, this business has been declining since 2008. The growth in this business is heavily tied to new branch construction which trends towards what’s happening in the housing markets. So you can imagine in 2008 what happened to this business and you can start to see the decline that we’ve been seeing in it. Our expectations are for 2012 that it starts to stabilize and that’s what we’re showing here.

So first of all, it’s tied to new construction. It’s a very profitable business for us. It requires very little capital investment so it has very good strong cash flow with it and right now we’re the market leader in this business. We have a 60% share in this business that we’ve grown up through the years so we think it’s a very good solid business for us. It’s just not on a growth path, we expect it to stabilize.

When we go to the electronic security business it is really a whole different story. The electronic security market is large, it is profitable, and it is growing. If you look at the financial market alone, which we’re heavily, heavily focused on, you’ll see it’s a $1.8 billion market that is growing at a 5% rate. You can see from the chart on the right that we’ve been able to grow the electronic security business we just haven’t grown it at the pace where it’s covering the decline in the physical security business but it is growing. We have proven we can grow and we’re going to continue to do that. It also has a low capital investment and we have again, a very good strong brand in this market space so it makes tremendous sense for us to look at the strategies to grow this business.

We did about six months worth of work on our electronics security strategy because we knew it was so important. We saw the declines coming in the physical side of the business so we said where do we need to play, where do we need to participate? We spent six months studying it and if you look at this chart it is just one of many charts that we created and built to understand this business.

On the left side are big businesses, Fortune 1000, new construction, big revenue businesses but not a lot of services, not a lot of profit. So from a participation perspective we said we probably don’t want to go there. We want to go on the right side of this chart where you look at the financial that has good size, it has good growth, and also it has good services, and then good profitability. The data that we spent a tremendous amount of time on makes us feel very comfortable. We’re in our sweet spot and we’re going to start to really hit hard on that financial market in electronic security.

So how are we going to go do that? I won’t spend a lot of time on this chart. We talked about integrated services, Mychal talked about it, Tom talked about it, we feel extremely confident we can take this exact model that we used in the ATM side and bring it into the electronic security side. The fundamental drivers are the same, the banks are faced with cost pressures, they’re faced with new technology that is emerging very very quickly in the electronic security space, they’re faced with constraints and so this integrated services model plays right into that and we have the structure, we have the processes as Mychal talked about, we also have the leadership to bring that over and dedicate ourselves into that space and be able to move it. That’s one of the big go to market things, we’re very comfortable how we’re going to grow the electronic security business.

As you can see from this chart PNC is obviously a great customer of ours both on ATMs and then also on the electronic security side. We do all the outsourcing on the electronic security side for PNC Bank. We do the technology outsourcing, we do all of the alarm monitoring, also the logical security management, and we provide the maintenance service. So this is a prime example of a financial institution where we have very good leverage, very strong relationships over time, we bring our model in and we provide a tremendous amount of value and we can replicate that and bring that into other financial institutions. In fact, we’re working on a number of RFPs that really look like what we’re doing with PNC.

How about our capabilities? What kind of capabilities can we bring into the electronic security market that will help us differentiate? When we think about it we can do large complex network systems basically in the access control area. If you think about it, we did a large project for RBS on their corporate headquarters. Tom talked about the World Trade Center and I was blessed enough to be able to go on that tour and I have to tell you what struck me the most as we walked through the buildings, as we walked through the sites, was the absolute scale of what’s going on there and then the absolute complexity.

Then I looked at our folks that were working on this site and providing the electronic security and I have to tell you I was in awe. We have just unbelievable capabilities that will really shine through as we do this World Trade Center. So we have that very strong competency right now but we also, and we think this is unique in the industry, we can marry that up with a coast-to-coast service and installation organization that can consistently move across and provide services to all our customers.

So when you take those two components, you take those two skills and we’ve got a very powerful combination. There are a lot of competitors who are good at the high end of this business, there are a lot of competitors who are only good at the multiple sites, but we’ve got both. That’s why I feel very, very confident in growing this business as we move forward over the next three to five years.

In short, let me just summarize how we’re thinking about things in the next 12 to 18 months. First of all, we’re going to focus our resources in the financial market space. It doesn’t mean we won’t go outside the financial market space, but we believe we have a great opportunity there, we have relatively low market share, and we have an opportunity to grow there so we’re going to be heavily focused on doing that.

Secondly, we’re going to go penetrate the high end access control market in the financial market. We have not been good there. We have not really participated heavily and we’re going to change that. We’re going to take the competencies we talked about, the skills we talked about at World Trade Center, and we’re going to move those into the financial market. We have a whole team of people who are focused on doing that.

We’re going to look at acquisitions and they’re going to be very targeted towards companies that have services and monitoring with them because we know that is where the cash is going to come from and we know that’s where the profitability is going to come from so we’re going to focus on those kinds of acquisitions. Then finally, as Tom talked about, we’re going to take our advanced service platform that we talked about in ATMs and financial self service, we’re going to leverage that same platform in the electronic security space.

So we have pretty clear strategies on how we want to go grow this business and we’re just excited about the opportunity to go execute and start getting us even on a much more relevant growth path than what it’s on today. That’s a little overview of the security business and you’ll obviously get a lot more detail when you go to the two o’clock session.

Let me provide you with an overview of North America. As we talked about, first of all, the retail banking environment today is very, very favorable to our services and solutions. We’re seeing market acceptance, we feel good about what we have, we’re starting to grow the business both in financial self service, we’ve grown it in electronic security we just need to keep that growth path moving at a much accelerated rate.

We expect to grow in North America in the mid to high single digits during the three year period. Part of this growth is going to come from the regional business, and as you are probably all well aware, the regional business carries with it very good margins. We expect our margins to improve over the next three years and that’s due to a lot of that regional business that is going to come through that we haven’t had in the past in 2008, 2009, and 2010.

Again, we talked about innovation but I think the biggest piece of this is that when we say we’re going to grow mid to high single digits the reason we feel good about this is, as we talked about, we believe we’ve got the growth strategies that this industry wants today and we have them honed, we’re well positioned to do them. We talked about integrated services, we talked about deposit automation, the financial institutions will have to do something with the branch. It is too expensive from a transaction perspective. I think deposit automation and self service will start to drive into the branch and that will help that and again, that fits into our niche. Then finally, our focus on electronic security.

So as we think about North America, very strong, we see good profitability, good cash, we see good growth over the next three years so I guess I have to tell you we’re just really excited to be in that position after the last couple of years that we’ve been through.

Question-and-Answer Session

John Kristoff

I’d like to take a moment to take a question or two for Chuck and Mychal. Please wait for the microphone. Does anybody have a question for one of these guys?

Unidentified Analyst

Either Chuck or Mychal, you talk about the TD business and that being a large win for you, are there other large banks that are looking at integrated services or is this more of a one off situation because TD Bank has unique circumstances?

Mychal D. Kempt

We are involved in a couple good conversations currently, but as I said earlier, we built this model focused in that regional community bank space and so this win has really given us credibility to take that to our larger customers. So it is a longer lead time, this is a 12 to 18 month lead time cycle, and we’re involved in some conversations and we’re really going to start to take this conversation to the national banks.

Unidentified Analyst

I’m looking at the chart for the financial self service market drivers, the one where you laid out ADA, PCI, our page 16 and wanted to get a sense, it sounds like from what you’ve been talking about ADA and PCI as a trend was a relatively short lived trend and there’s some other important trends, first and foremost deposit automation, that are going to drive the growth going forward. The question is, is there going to be a lull there in the middle? In 2012 or the second half of 2012, is there going to be a drop off? Are we going to grow 10% in the first half of the year and then not at all in the second half and then maybe go back to mid single digits for 2013 or going forward, or is that just order trends that tend to be lumpy? Is the revenue going to be smoother or is there going to be a drop off in revenue growth rates?

Charles E. Ducey, Jr.

Maybe I’ll answer it in a couple of parts. First of all, I think from a revenue perspective, we expect the revenue to be fairly smooth as we go out through 2012. We’re on an install basis so orders come in probably at a more rapid pace than we’re going to be doing with the revenue so we’re going to see a pretty smooth revenue stream as we move out into 2012. On the order flows, we will not see the pace and the robust energy that we saw in the last 18 months. As you recall, we had comparatives of 100% plus growth, that’s not going to continue.

It’s going to start to taper off and I think the mid to high single teens growth will start to take over as deposit automation hits at the four through 25 national accounts, the regionals will still continue to grow and then the replacement cycle. So we still see very good growth but you’re going to see it dwindling, you’re not going to see it at that frantic pace that we had over the last 18 months.

Thomas W. Swidarski

The other comment I would make is when you look back to the deposit automation slide, we still think there is an opportunity in the United States alone of 100,000 sites. That would just get us to the 60% level and there’s no way that’s going to happen in time with ADA and a lot of the ADA folks that moved didn’t put deposit automation in so they’re going to be coming back and looking at that. But, with the acceptance that we’re seeing on deposit automation from the consumer standpoint it’s forcing a lot of the folks who are pretty hesitant to say, “I’ve got to really consider that.”

Then that leads to the next discussion which has to do with IS. And so because IS spreads things out over five years it helps start smoothing out the revenue flows a little bit better. So while we may not see quite the aggressive product order entry that we’ve seen, I would see a much more smooth continuous growth on the service and services side as we go forward.

John Kristoff

Next we have Joao Abud from Diebold Brazil.

Joao Abud, Jr.

I have also my colleague Mike Mateo who runs Latin America without Brazil, he’s also here with me so you can also direct questions to him if needed. For those who don’t know me yet, my name is Joao Abud, I’ve been with Diebold for 25 years and I’m very excited about what we have done in Brazil. We are part of the global development from Diebold as well, it is not just a commercial subsidiary for Diebold. I’m trying to tell you about our business in Brazil.

Today, both Brazil and Latin America are considered different divisions of Diebold. In our core service we are financial self service, we are the leaders by far. From Latin American perspective there are three main business that is growing very much. First, deposit automation is starting to take off in Latin America. Not yet in Brazil because some regulatory issues. We also have a very large service footprint in both Latin America and Brazil. That is a very strong point for us in those two regions.

We are also starting to deal with recycling business in Latin America so we see room for growth in both divisions right now for different reasons. In Brazil, because the cash in circulation is becoming more and more the migration from Class D and E to Class C, the banking population is growing very much so we still see room for improvement in self service. We have combined about 5,400 employees in the region and more than 2,000 only in the field services which are by far the two largest service organizations in Latin America and Brazil. We combined have a revenue of about $663 million US.

As I said, the market trajectories for Latin America and Brazil, we still see room for growing in self service and also we see room for growing in the different type of business that we do in Brazil like voting, lottery, education, and a lot of other types of services. Cash in circulation is growing in Brazil, as I said. That demands ATMs, that demands installation, service, and so on. The market environment for both of us, more in Brazil than Latin America is becoming more and more competitive. Brazil, by the way, has two local suppliers of ATM that we have to deal with low quality, low cost type of equipment.

Our strengthen in Brazil besides our service footprint is our engineering capacity. We have a very large engineering theme in Brazil. We have more than 100 engineers working for local projects and also global projects, and we are able to differentiate ourselves from the competition by having a very large service footprint and also a capable engineering team developing customized products for Brazil.

The market in Brazil demands customization. We are not able to take an ATM, global ATM from the US and implement in Brazil without doing a lot of customization and that’s why competitors who are serious have a very good engineering team there. We are also, as our engineering permits in Brazil, we develop a lot of adjacency business. In Brazil, as you may know, voting we have developed the voting terminal in Brazil.

Today, we have 500,000 voting terminals manufactured, installed, and running in the country. All those terminals are under maintenance so recurring revenues for us. We also developed a customized lottery terminal that performs [inaudible] games, lottery, and financial transactions. That’s a unique terminal in the world. We have about 40,000 terminals installed in more than 10,000 lottery stores that also perform financial transactions for Caixa, one of the biggest banks in Brazil. We are also investing in some research in education, retail, and so on.

So we are a differentiated division because we have all those things self contained type of environment in Brazil. We were elected by Exame Magazine the most credible financial magazine in Brazil for the first time best IT company in the country. So we were able to develop the election automation, the lottery automation, and also banking automation in the country.

As I said, we are also part of the Diebold global development team. We have developed a lot of things in the country, all those in the list, but especially SMS OpteView Resolve which is the tool for growing integrated service globally. That was developed in Brazil by our engineers. Also Agilis which is the software that runs in the ATM. The core system of Agilis was also developed in Brazil and a lot of other projects that we developed in the country.

I would say our most important strength is our service organization. Just like North America, we are the second largest service organization within Diebold. All the banks in Brazil are nationwide, we don’t have regional banks like the US so all the banks install ATMs throughout the country. So Brazil is as big as the continental US, it is a very big country, so we have to have a very large and complex footprint for field service serving our nationwide customers as well.

So for that, we have more than 2,000 field technicians in Brazil in the service area. Our service base is more than 70,000 ATMs, more than 40,000 lottery terminals, 106 bank teller terminals, and other work stations, and more than 500,000 voting terminals. This is by far the largest IT field maintenance infrastructure in the country and this is a very strong point for us.

We are also by far the market leader. If you take the install based we have around 45% and as you can see our main competitors are local. Atotech is the second and [inaudible]. One thing that I would have to comment here is that Atotech is the captive supplier for Banco Itau. Not any more, Banco Itau decided to open bid for competition and then a big share of Atotech will be someone else and I hope Diebold. We are very well positioned to that, we are very close to be selected as the second vendor for Banco Itau which is the biggest bank in Brazil.

One thing that we also pay attention to because our revenues fluctuate a little bit because of voting and lottery in the past were not very predictable, we had to do a lot of operational improvements ourselves to offset the revenue volatility in the past years. Especially in the service area we were able to develop a lot of tools, a lot of improvements using a lot of software in order to almost double our service margins in three years. We’re very close to corporate US margins in the service area now by using technology and improving our logistics and our processes.

We are also, because of this volatility that we have in the country because all the projects are very big and if you win it’s not repeatable in a good fashion let’s say smoothly, we are also trying to make our manufacturing costs as flexible as we can and also our operating expenses in terms of transforming fixed expenses and variable expenses. We are doing a very hard job in that regard as well.

Talking about our two let’s say main business out of self service voting and lottery. In the past, they were building the infrastructure to lottery and to voting so we come now to a maturity in those markets. So we have already 40,000 terminals installed and they are aging right now. The first terminals are going from seven to eight years so there will be a replacement and the revenues will be more predictable for the future. The same situation applies to voting, so you have about 500,000 terminals which is 100% of the population today votes electronically. We will also have to replace those 500,000 terminals in, I would say maybe by my calculation, from 70,000 to 80,000 a year from now to the future. So both lottery and voting will become more predictable from now on.

Summarizing, we are very excited in Brazil about the things we have done, about the projects we are participating in globally, about our market. So Brazil today is the sixth biggest economy in the world. We have full employment in the country. We are going to host the ’14 World Cup, the ’16 Olympic Games so the environment in the country is very positive. A lot of investment in stadiums, transportation, airports, so the country is in a good mood, in a good phase, in a good momentum so we think that we can take advantage of that to grow our business in Diebold.

For example, establishing electronic security in Brazil that we don’t have yet. Diebold has a lot of expertise in the US so one of the things that we think we can grow business in Brazil is taking electronic security down to Brazil especially because of these games, the World Cup and the Olympics, is going to require a lot of security projects. The other thing that I would like to say is that we have developed so many products in Brazil out of self service, lottery, voting, etc. and also one reason for us to grow even more is to try to take those products from Brazil to other parts of the globe. This is also a line of growing that we can pursue.

John Kristoff

We have one last speaker here, Brad Richardson, CFO and then we’ll take questions.

Bradley C. Richardson

If I can go here to the first Slide, as Tom mentioned at the introduction, I’ll be talking first about our EMEA business and then getting into the financial results for 2011 as well as how we expect the business to operate in 2012. If we can first talk about EMEA, certainly I think everyone is aware in terms of kind of the revenue profile of our EMEA business.

You can see that it has plateau the last few years at about $350 million. Prior to that we were actually probably about $100 million higher but due to compliance issues with our Russia business, that business has been scaled back significantly and therefore the business over the last few years have been fairly stable.

So what we have been doing, it’s been stable if you will, at the top line but certainly we have not been satisfied with the overall level of profitability with that business and so 2011 was really a year of looking at restructuring that business. What we mean by that is really getting the business very focused in terms of being clear about the countries in which we are going to compete, getting our distributor network that is very important to us as we move into Eastern Europe and throughout Africa and Middle East, and finally looking at our cost structure for both our service organization as well as our functional organization.

One of the commitments that we made to our investors was to return that business to profitability in the fourth quarter. We did that. The other thing that we said is that we expected that business to actually be modestly profitable in 2012 and we think, barring significant issues throughout Western Europe, we expect to be modestly profitable in EMEA in 2012.

Again, the market trends for the EMEA business, certainly again the caveat is we’re all dealing with a lot of uncertainties, specifically in Western Europe and specifically across the southern portion of Western Europe where a lot of our customers have really been more in what I call the capital preservation mode. But, as we go forward, you can see we actually expect the install base to grow, we expect the overall market to grow, and this is really driven by opportunities throughout the Middle East and Africa as well as opportunities in the Western European market for a lot of the drivers that Mychal and Chuck spoke to certainly around the need for the financial institutions to take cost out of the branch and that’s driving deposit automation. A lot of the innovation around the branch itself has actually taken place in EMEA and there’s more opportunity there as we go forward.

So again, our strategy in EMEA has been around returning this business to profitability, being very targeted about which countries we’re going to focus on for growth. You can see here Russia, Turkey, UK, and Spain are markets that we’re looking at for growth. We’re looking at these markets to participate in these markets either because they offer strong revenue and profit potential or they are home to one of our global customers and that’s how we actually look at where we’re going to focus our business.

In terms of what we’ve done in 2011, we spent about $25 million restructuring our business, restructuring the service side, restructuring the administrative side of the business and coring up the business and you can see we’ve taken on a run rate basis about $15 million out of that business. So about a year and a half pay back on the $25 million that we invested in order to restructure the cost base of that business.

Let me now turn to the financial results for the company. What I’d like to do again is kind of let you know, and I think you heard a lot about this this morning, but how we’re kind of looking at the opportunities for our business over the next three years. Certainly, we have to make some key assumptions around how we expect the economy to operate and we actually see just modest growth in the global economy with again, the caveats around Western Europe. Tom spoke to our Asia business, a very, very competitive business which creates pricing pressure as well as even here in our mature markets in North America where the large banks again, put a lot of pressure on the overall pricing.

But we also expect again, you’ve heard a lot this morning, about integrated services and the opportunity that provides us here in North America but the ability to grow, and then again we’ve talked about EMEA. So those are kind of some of the key assumptions in terms of how we look at our outlook. The growth strategies of the company are very, very clear. We’ve talked this morning about software led services, we’ve talked about deposit automation, we’ve talked about security, and we’ve talked about the emerging market growth.

All of these strategies are designed to allow the company to operate within its financial framework, or what we call our operating targets which are 4% to 6% revenue growth over the long term, 10% operating margins, and a sustained return on capital employed at 15%. We’ll come back and show you how we’re doing against those.

Let’s first look at the overall revenue picture of the company. You can see over the last few years our revenue has been very flat. We were late to go into the recession, you can see the strength that we actually had in revenue in 2008 and we’ve been flat the last few years and as we look to 2012 we’re expecting the business to grow between 3% and 6% to get us back up to that $2.9 to $3 billion level.

I would note, if you look at how this converts into the earnings for 2012, we’re expecting our earnings per share to be in the $2.30 to $2.50 per share. Again, based upon $2.9 to $3 billion in revenue and I’d point you to 2007 where again, we were at $2.9 billion in revenue and yet we only earned $1.80 per share. So, I think you can see what we’ve been able to do and what we’ve been focused on the last several years is driving our cost structure and driving the margins up in our service business which has really raised the overall earnings capacity of the company.

I would also just note again, for those of you who follow closely, our 2011 release we released $2.74 a share but that included in it what we call our Brazil valuation allowance adjustment of $0.43 a share so the underlying earnings per share was about $2.31. Again, to the point of what we’ve been able to do on the margin front, and you can see the product margins have come under pressure due to mix issues and specifically around kind of the growth we’ve had in the Asia Pacific market which again is more competitive, but we’ve been able to drive sustained growth in our overall service margins and again, that’s raised the overall earnings capacity of the company.

Certainly, one area that we must focus on are operating expenses. They’ve been climbing on an absolute basis and climbing as a percent of our revenue. For 2012, we’re expecting the operating expenses to be in the 18.5% to 19% range and so we’re addressing the trend here and bringing the cost structure down through a couple of activities. One is through the proven track record we’ve in SB, which we call our smart business, a $300 million target. This incremental $100 million from SB, $200 to $300 has really been focused and will continue to be focused on our indirect third party expenses. Again, that’s our operating costs.

Also, we’ve got significant work underway regarding our transaction processing, regarding our system investments to bring those together to drive efficiencies in our back office costs. Both of these significant efforts that we have underway are designed to bring the operating cost down and to create leverage in the business as we go forward.

The operating profit again, you can see it’s been relatively flat over the last couple of years, and again with that leverage that we’re getting out of our operating costs as we move into 2012 we expect to see further improvements in our operating margins. The free cash flow of the company again, a real hallmark, a real strength of the company and if you just look at 2007 to 2011 free cash flow, so cash flow from operations less the amount that we’ve reinvested back in capital investment, free cash flow from operations has been $1.2 billion.

We have returned $500 million of that back to the shareholders in the form of dividends and share repurchases. So about 40% of that cash flow from operations have been returned to the shareholders. The balance has been reinvested back in the business in terms of capital investment and also over this time you’ll know that we’ve significantly reduced the overall net debt levels, or significantly delevered the business over this period.

Certainly, the way that we’ve done this is to drive the earnings but also to be very, very focused on our working capital performance and you can see our cash conversion cycle, we’ve continued to improve that and our target is to get to 60 days on our cash conversion. Each day is worth about $4.5 million to Diebold in terms of annual cash flow. So again, the journey in terms of what we’ve been able to do on the working capital is not over.

The financial strength of the company, and certainly if you look at the cash resources of the company we have over $600 million of cash on the balance sheet. Again, most of this cash is outside of the United States. When you look at the balance sheet or the asset base of the company again, $2.5 billion of assets but the overall net debt, so looking at our cash relative to the overall debt levels of the company, we ended the year last year with a net debt position of about $7.7 million or net debt to capital of 1%.

I point this out when you take the net debt position coupled with the strong underlying cash flow which is the continue flow from the business, gives us the capacity to return monies to our shareholders and it give us the capacity to actually reinvest back into the business both in terms of organic investments but also acquisitions. Certainly, our dividend, which Tom mentioned, this is a real hallmark of the company and it’s this strong service base providing recurring revenue, providing sustainable cash flow, that allows us to have this strong 59 year track record of raising our dividend.

As it relates again, the balance sheet, the cash flow and that gives us the opportunity obviously to look at adding to the business in terms of acquisitions. This is kind of the way that we look at our M&A process, our strategy, and it starts first with strategic alignment. Chuck spent a lot of time talking about the work that we did on the security business. We first do the strategy work and then we look at the opportunities versus the other way around of looking at an opportunity that we think may be close to us and then trying to fit how it may fit into our strategies.

That’s now how we’re doing this. We’re first looking at doing deep strategic work on our various businesses, looking at opportunities then to put into the pipeline, and having a very, very rigorous evaluation process. I get asked a lot around what does that mean? Really, it is around looking at opportunities that one again, fits our strategy but two, fits the financial framework that we’ve set for the company which is to get the company to 15% return on capital employed. So we’re looking at these opportunities to make sure that they can fit within that financial framework.

I think the other thing too is as you look at our acquisition strategy, we feel very good about the organic opportunities that we have. There’s not the need within Diebold to have a third leg of the stole. But nevertheless, we are looking at opportunities that really help us accelerate the organic growth in the company and you can see some of the things, and you’ve heard about some of the things that we’re focused on.

So as we look at the outlook for 2012 again, 3% to 6% revenue growth, in the financial self service side of the business 5% to 8%. Chuck spends a lot of time talking about our security business, 1% to 4% revenue growth in our total security business so this is our physical and electronic security business. We’re expecting that business in the second half of 2012 to actually return to growth and give us a full year growth rate of 1% and 4%. Overall, elections and lottery will be between $60 and $90 million of revenue. So again, overall guiding to 3% to 6%.

If you look at what we’re guiding in terms of the non-GAAP EPS again, we’re expecting some restructuring and some non-routine expenses and our non-GAAP is between $2.30 and $2.50 a share. If you normalize for tax rate, we’re assuming a 28% tax rate. That is an underlying growth rate in the earnings of the company between 5% and 15% per share next year so meaningful.

A couple things here again, around our Foreign Corrupt Practices Act, this has been basically a two year journey the company has been on. This came as a result of looking at an acquisition in Russia of our distributors. We found some issues, we self reported, we also agreed with the Securities & Exchange Commission and Department of Justice to conduct a global review of the company. We spent the last two years looking at EMEA, Latin America, Brazil, and the Asia Pacific region and we have completed that review and we’re now in the process of working with the SEC and the DOJ to bring them up to speed on the investigation and we’re working to kind of resolve this issue. But, our internal review is essentially complete.

So again, the financial framework of the company that we’ve set for the long term I started out with this and all the strategies that you’ve seen looking to grow the business 4% to 6% and drive the business to a 15% return on capital employed. You can see on the bottom right hand chart, we’re making progress. Certainly, when you look at the overall growth rates, when you see the business, we’re again looking at about $3 billion of revenue for 2012 getting up to about the $3.5 billion in revenue is really where we’re getting the operating leverage and we can see the company can be sustained at a 15% return on capital employed.

Let me just summarize here again just some of the key things that you’ve heard from the various presenters this morning. We’re transitioning the company to a software led services company. You can see it coming through in the margins and you can certainly see it coming through in the percent of our revenues that are coming from services and sustainable revenue. We’re executing on four growth strategies for the company to drive that long term 4% to 6% revenue growth around services, deposit automation, security, and the globalization of the company. These are the four strategies that drive the 4% to 6% revenue growth.

Our balance sheet remains very strong which gives us the capacity to reinvest back in the company. We’ve talked a little bit about some of the things that we’re thinking about there, but also gives us the capacity to continue to return to our shareholders’ dividends where we have a very, very long track record in that regard. Thank you very much.

John Kristoff

We have got 10 or 15 minutes set aside for question.

Question-and-Answer Session

Unidentified Analyst

I just wanted to go back to the Slide where you talk about the financial self service market drivers on our page 16. First of all, I wanted to ask why is it that nationals beyond the top three are kind of lagging in terms of deposit automation behind the regional banks? What exactly are the drivers for that?

Charles E. Ducey, Jr.

What has happened in the four through 25 banks is they were very conservative, they took a longer term view, they wanted to let the big three get out there and see the market acceptance that was going to happen. So after that they’ve now taken, and they’re really working very hard to get these pilots up and get these production units out into the field. That was one of the main things, they wanted to see how the market was going to evolve, how the consumer was going to accept it and obviously, the big three banks went out and really got out there very strong and showed that the consumer has just really taken to this kind of convenience and self service.

Unidentified Analyst

Just a follow up to that, in terms of deposit automation as well, just shifting to the Slide on page 21, I believe you mentioned 20,000 terminals that are Diebold that are deposit automation at the moment? Is that the right number?

Mychal D. Kempt

Above 20,000.

Unidentified Analyst

If I’m counting right, about 50,000 total on this Slide at present, right?

Mychal D. Kempt

Yes, that would be a good guess.

Unidentified Analyst

How much has it grown over the past year? Was that adoption over the past year accelerated by the PCI and ADA compliance, and do you expect that kind of growth to continue or is it going to be a bit slower opposed to PCI and ADA for deposit automation specifically?

Thomas W. Swidarski

I think we gave some guidance on deposit automation shipments in our earnings release last week but I would see it probably opposite. I would see it where I think the community regional bank space and even this tier-2 national where ADA and PCI is kind of winding down, I would say the focus and attention would go towards deposit automation and you’ll see an acceleration there.

Mychal D. Kempt

I think because the consumer acceptance in the United States of putting checks and cash in and because the advertising that is taking place, there’s pressure on these folks to move on deposit automation. So while ADA/PCI may have been the reason someone wanted to start a conversation, the movement for deposit automation, our expectations of hitting 60% of the regional banks over the next few years going from 6,000 installed to 75,000, that’s going to happen over the next three to five years definitely. I feel good about that.

Unidentified Analyst

You had mentioned about cash recycling and the benefits of that and I guess it’s kind of a two tiered question. One, here in the United States do you have any statistics on what the actual benefit of that would be if there’s a lot of cash being deposited in these terminals to be recycled but if that’s not happening because most people are depositing checks them I’m wondering how much benefit they’re really going to get from small amounts of cash being deposited? Then kind of the second part of that is, you didn’t mention much about topping off or replenishing whether it’s stored value or mobile devices, is that part of the strategy as well when you’re looking at your products?

Mychal D. Kempt

On the recycling piece right now in the US, these are going out into the ATMs and the vast majority of transactions right now, maybe 80/20 75/25 are really sitting with checks going in. But the rate of increase of cash going in to the terminals is increasing so we’re starting to see the consumer put the cash in. The devices are getting much more reliable and as we talked about, reliability is absolutely critical in this. So when a consumer goes up to put cash into that module then they expect it to work because otherwise they’re going to have to go back into the branch and then do the transaction there which is really going to be significant. So the momentum is building for cash.

I think a bigger area that is starting to evolve from an emerging perspective is when banks look inside their branch, not outside at the ATM, when they look inside the branch there’s a lot of deposit transactions going on. A lot of those are cash and a lot of those are check and they’re saying, “Can I take this deposit automation and bring it into the branch space so I can offload a lot of these transactions that tellers are currently taking today and put them on to a self service device,” and start to run their cost down in the routine transactions and start to use their labor to sell more or however they need to deploy that critical asset. That’s what we’re seeing here in the North American operations.

On the mobile obviously, Tom had mentioned, we’re working with the mobile. We looked at the Card Lock function, how you integrate the mobile device in with the ATM and that channel integration is absolutely critical in the long term because I think all the channels that a bank has today are going to have to integrate more so than they are doing today. So yes, we’re looking at prepaid, we’re looking at top off, we’re looking at how we use mobile in the longer term as we move forward.

Charles E. Ducey, Jr.

The one comment I would add in terms of deposit automation, we had a forum maybe within the last year where we brought in a big bank and a small bank and really hashed through this. I mean, we work with a lot of banks across the world but certainly in the United States, there was not a single site that we’ve ever been at that the bank was not either completely blown away or shocked at the level of cash that got deposited which generally ranged between somewhere from 20% and 200% above what their expectations were.

So the idea of cash going into these terminals in the United States people say, “Well, why would people do that?” Well, there are a lot of cultural issues, the Hispanic culture tends to use a lot of cash in those types of environments, plus the commonality most people didn’t realize, there was a lot of cash going in blind envelopes in the past now there’s a lot greater comfort. Once you do it, it works exceedingly well thus the acceptance of cash I think is going to continue to grow much faster than we expected and much faster than the banks we worked with expected.

I think the other interesting thing was there are banks that have piloted having deposit automation with an envelope unit right next to it and one without it. Putting that check and that cash in really has proven itself from a business case standpoint on every measure.

Unidentified Analyst

Three quick questions, two related to the dividend. You mentioned a 40% payout relative to cash from operations, is that a target we can think about for the future? And if the current trend towards redistribution should prove popular and the dividend tax rate went up to 40% or more, would you consider a more tax efficient return of capital? In other words, take the dividend down and buy back more stock? The last one is it looks like sales and earnings are growing the last couple of years but cash flow has been coming down. Can you just talk us through that please?

Bradley C. Richardson

Let me respond to that. What I did say was the 40% is actually our cash flow from operations, so 40% of our cash flow from operations has actually gone back to the shareholders. About 30% of that was in the form of dividends and the other 10% or so was in the form of stock buybacks. Certainly, as we look at the priority uses of cash for the company again, the dividend is very important. Our value based investors very much appreciate that but we also certainly want to look at reinvestment back in the business and so I think that’s the intention of reinvestment back into the business as it comes to how we think about buy backs. I don’t really see that changing as we go forward even if there’s a significant change in the tax law.

What I would say about the cash flow again, during 2009 we had very strong cash flow, we were like a lot of companies that were unlocking working capital as the business declined. Then in 2010 we had another strong year of free cash flow even as the company began to emerge but in that $220 million that we had there was a $75 million kind of tax refund that we got and so therefore the underlying cash flow really had come back down to that $150 million. We did $160 million last year, we’re guiding to about $150 million in 2012 and what I would say there is we are looking to step up our capital investment by about $20 million so that’s putting a little pressure on the free cash flow as well again, a higher absolute working capital requirements just to support the overall growth that we’re seeing in the business. Despite those two factors again, we’re excepting healthy free cash flow at about $150 million.

Unidentified Analyst

Is there a way to gage of your current existing client base today what percentage already have managed services? I know you gave it to us in [revenue] but I’m just curious on the penetration you guys have in terms of number of customers in the United States [inaudible]?

Mychal D. Kempt

It would be very low 10% to 15%.

Unidentified Analyst

Then as I think about the FI outsourcing competition and well actually your evolution of your business towards more of these BPL type services, and you think about the competition with the FI outsourcers, the [inaudible] of the world, how do you guys coexist or compete in a world like that as you guys move more towards these managed service operations?

Mychal D. Kempt

It’s a market of co-opetition, sometimes we’ll go in and we’ll partner with these companies and have good relationships and there’s other times where we’ll compete with them head-to-head. We’ve taken a position in the market where we’re leading and a number of these companies that you named are partnering with us, want to be partnering with us and there are times we’re together and there are times we show apart. We have good strong relationships in the marketplace and we’ll continue to work with these networks that you speak of.

Unidentified Analyst

Just lastly, is there any advantage or disadvantage in either not having a core system or even an ATM network? Do you guys think those are some things that you would evolve to over time?

Thomas W. Swidarski

It’s not a requirement for where we’re at. I would use, for instance, TD is a very good example. In that case, they had used HP really to run the entire outsourcing operation for many years and we were the sub to HP. So we were cooperating with them but there were pieces of the flow that went through HP not to us.

Unidentified Analyst

[Question inaudible].

Thomas W. Swidarski

No, this was just through TD outsource and basically a lot of their IT operations through HP. When they started breaking that down where the real value was they said, “Boy, the ATM network in and of itself is large enough to be self contained,” and bid that out. Well then, we were selected as the prime to run that because of our experience of being able to do that. Second, because of our vision of where we’re going with OpteView Resolve now, it wasn’t a matter of, “The improvements we can make are only on Diebold hardware. The improvements we can make are on anybody’s technology and we can resolve a lot of those things remotely, we just need an agent running into someone else’s devices.”

So what Abud was talking about before in terms of development of this backend capability and the automating of this work flow improves their business process improvement. We just happen to be very focused on the ATM piece as the entrée but it leads to other things, but that’s where the focal point is. That’s where we’re going to step very close to our [inaudible] and as you might imagine, there are times when a third party processor may be in the middle of that and we’re subservient to them and other times they’re subservient to us. But, we will very much focus on where we have the greatest value and I think most of the banks really see that pretty clearly.

Unidentified Analyst

Chuck, when you talked about the security business you talked about the physical side of the security business stabilizing and the electronic side growing. I’m wondering, what are the margin implications of that as the electric side continues to grow because you said the physical was a pretty profitable business so as we move forward what would you think the margin implications would be?

Charles E. Ducey, Jr.

I think the implications will pretty much balance out because I think the targeted areas that we’re going into on the electronic security are in the services space where there’s a lot of margins. We’re not going to focus heavily on products and integrating products we’re going to go to the service so I would say it’s pretty neutral. I think they’ll offset each other and we don’t expect any margin deterioration by moving into electronic security services.

Unidentified Analyst

I had one for Abud, one of the things that you talked about and your teammates have talked about in previous years is how much of a development market you are for innovation for the company and integrated services probably one of the great examples of that right now. What’s the next big thing? Of the examples that you had in your presentation what’s the really interesting product that you’re working on ramping up in Brazil that you think could have global applicability?

Joao Abud, Jr.

Today we are taking a look at several different what we call adjacencies to our business. One thing that we are developing and we have been successful in is healthcare automation which is a little bit different from the US but we have been very successful in automizing hospital operations and customers’ attendance and those types of things. We are at one of the biggest hospitals in Sao Paulo Brazil, Hospital Albert Einstein. It was a very successful project, still in the very beginning but you know I’m very excited about doing this sequentially in other hospitals and other health care companies.

John Kristoff

To our web audience, this concludes the morning session and our webcast. Thank you once again for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!