NCR Corporation Q2 2009 Earnings Call Transcript

| About: NCR Corporation (NCR)
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NCR Corporation (NYSE:NCR) Q2 2009 Earnings Call July 23, 2009 8:00 AM ET

Executives

Gavin Bell – IR

Bill Nuti – CEO

Tony Massetti – CFO

John Bruno – EVP Industry Solutions

Analysts

Katie Huberty - Morgan Stanley

Matt Summerville – KeyBanc

Kartik Mehta – Northcoast Research

Ajit Pai – Thomas Weisel Partners

Reik Read - Robert W. Baird

Gil Luria – Wedbush

Operator

Welcome to the NCR Corporation second quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to your conference host this morning, Mr. Gavin Bell. Sir you may begin.

Gavin Bell

Good morning everyone and thanks for joining us for our second quarter 2009 earnings call. Bill Nuti, NCR's Chairman and CEO will lead our conference call this morning. After Bill’s opening remarks, John Bruno, Executive Vice President of our Industry Solutions group will update you on our progress with respect to certain initiatives and Tony Massetti, NCR’s CFO, will provide comments on NCR’s total company financial results and our guidance for the full year.

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

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

A replay of this conference call will be available later today on NCR's website, www.ncr.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of July 23, 2009 and NCR assumes no obligation to update or revise the information included in this conference call whether as a result of new information or future results.

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

Bill Nuti

Thank you Gavin, and good morning everyone and welcome to our second quarter earnings call. NCR delivered revenue in line with expectations of $1.12 billion in the quarter and earnings that were ahead of expectations, non-pension operating income or NPOI of $78 million and non-GAAP earnings per share from continuing operations of $0.13 per diluted share.

Our performance continues to be reflective of our continued uncertain and challenging and macro economy and although we don’t see signs as of yet that this environment is becoming more favorable, we are moving aggressively to exploit areas of business opportunity where they exist and we’re excited about the strategic steps we’re taking to position NCR for the better times that we expect will lie ahead.

As we continue to take steps to improve our long-term position, steps I will talk about in greater detail in a moment, we’ve kept our eye on the ball with respect to near-term performance. Though the end market environment continues to be challenging, there were several positive notes in the second quarter.

With expense down 17% year on year we continued to create leverage in our cost structure and our future results will benefit from these tangible actions when the business climate improves. We continue to expect our multiyear cost reduction program and we also remain on track with our goal of reducing costs by $200 to $250 million by the end of 2011.

It is important to note that this program is driving transformational cost reduction initiatives that will be sustainable in nature for the long-term. We closed the quarter with a strong balance sheet and cash position having repaid $300 million in senior unsecured notes that came due in June.

We closed the quarter with $407 million of cash on hand and long-term debt of $7 million. Our working capital execution continues to be solid with 16% less revenue volume accounts receivable is down $135 million and inventory is down $44 million year over year. And based an overall second quarter performance in line with our expectations we are reaffirming our full year guidance with respect to revenues, NPOI, earnings per share, and free cash flow.

As we review second quarter performance, one of the areas of positive business activity continues to be the rollout of intelligent deposit solutions in the United States by major banks. Our financial business in Asia and China in particular is also performing well. And we continue to be encouraged by the traction we’re seeing for our self service offerings in some key verticals.

We’ll update you today on the progress of our entertainment rollout as well as some encouraging wins in both the airline and healthcare verticals. In financial services broader market conditions continue to be challenging, however the rapid adoption of intelligent deposit by major banks in the United States is a very important sign for the business.

This technology has momentum and as the financial services market in broader economy begin to recover other segments of the banking market will need to address the competitive advantage that the major banks are opening up on this front.

The current weakness we’re seeing in the mid size bank however does span throughout Europe, including Eastern Europe, with Western Europe overall remaining slow due to weak economies and continued industry consolidation.

Asia and NCR’s stronghold continues to see solid demand. China is one of our strongest markets currently and India is beginning to show signs of renewed growth. Overall despite the global slowdown we are pleased with our execution in areas where opportunity exists and we are well positioned for a recovery.

Turning to retail we continue to see significant near-term challenges in this market. New store growth and store refurbishment activity is a low point. Retailers are closely watching how the upcoming back to school and then the holiday season develop as they begin to think ahead to growth plans for 2010.

At present we believe that 2010 will be a better environment than 2009 but any potential growth will be off a weak base this year and visibility remains poor. As this market recovers though the same story applies. We are positioned attractively with leading edge solutions.

In late June BuzzBack Market Research, a leading international market research firm issued research affirming that NCR is the global leader in self checkout for retailers. In fact, they estimate that NCR sold about two thirds of all such solutions in the last five years and estimate that the markets install base could triple by 2012.

We have good future opportunity both within our current installed base and with prospective new customers and we are staying close to all of them as we work through this pause in investment.

This predicted trebling of growth in the self checkout dovetails with our bigger picture thesis about the growth of self service solutions. On our last call we unveiled our strategy for the entertainment kiosk market which we see as an opportunity that can rival the size of our retail business within a few years time.

In addition to our initiative with Blockbuster, we are pleased to see the strategic progress being made in the buy/sell/trade market, another area where NCR has invested and aimed at being the first kiosk solution to go beyond movies. In fact you may have already recently read about large pilots for this technology being driven by Wal-Mart, and others.

John Bruno will provide you with more color in a moment. However entertainment is clearly and important growth opportunity for NCR in this emerging self service market segment, but it is also not the only great opportunity we have. Delta Airlines a long time kiosk customer, has become the first airline to move to our advanced TouchPort 70 check-in kiosk.

This solution speed the check in process further by providing barcode and e-passport reading capability via our new high performance design while it also prints boarding passes on our innovative two-sided thermal paper. We expect Delta to further invest in TouchPort 70 this year as it integrates its airport check-in operations with those of the merged North West Airlines.

Aside from Delta, we also added China Southern Airlines as a TouchPort customer extending our market leading position in the United States market to China underscoring our goal to expand this solution to international markets.

We’re also seeing positive activity in healthcare where we bring a variety of self service solutions to the market. Conifer Health Solutions which provides revenue cycle management for more than 9 billion of [inaudible] healthcare’s business began deploying NCR MediKiosks and the NCR Patient Portal across a base of hospitals and health systems and the early results in terms of usage and patient satisfaction have exceeded the customers’ expectations.

Meanwhile we’re also deploying other innovative solutions like our e-clipboard, which helps digitize and expedite patient data collection for customers like The Iowa Clinic. All of these areas of activity underscore the fact that despite the global economic downturns’ impact on overall business performance, both corporations and their customers are embracing self service channels.

Core services industries like travel and healthcare are leading the way for us now. We believe entertainment will surpass them and the self service movement will also resume in retail as consumers recover from the global recession.

In the meantime we’re preparing organizationally for NCR’s future. We recently announced the selection of Duluth, Georgia as the home of our new worldwide headquarters and our innovation efforts in self service. The Atlanta Metro area provides excellent access to human capital, world class technology universities, has great infrastructure for logistics, improved access to our customers, and economic incentives that will benefit NCR and our shareholders for years to come.

Simultaneous with this move, we also announced separate plans to build an innovative, clean energy based manufacturing facility in nearby Columbus, Georgia, in which we will build our next generation self serve ATMs. For many years our retail operations have been based in the Atlanta area, and by bringing our headquarters and all of our self service innovation to a single campus environment we’re centralizing our technology development at a time when we are aiming to cement our position as the global self service leader.

We also recently announced plans to build a manufacturing and R&D facility in Brazil and we’re in the process of finalizing our site selection. Brazil is an important growth market but one where NCR has not been competitive. The biggest reason is the unique customization demands of Brazilian financial institutions combined with the cost of import duties and taxes.

While our technology is ideally suited to meet these demands, our manufacturing structure was not. Moving closer to these valuable customers is the biggest step in helping to build a market leading position in the Brazilian market over the next several years.

As we move into the second half of 2009 and look ahead to next year our organization is focused not only on executing against our business strategy but on increasing our speed of innovation, of service delivery, and excellence in customer support.

We are investing in efforts to make NCR more efficient, flexible and fast. Speed is an important ingredient in any technology company but especially in one like NCR where we have transformative opportunities in front of us. Many of the activities I’ve just highlighted are part of this effort.

Our planned innovation hub at our new world headquarters in Duluth, Georgia, will drive growth, improve our innovation output, increase productivity, and continually upgrade our focus on the customer. Our inner sourcing manufacturing strategy for the Americas in Columbus, Georgia and Brazil will provide a speed advantage by moving manufacturing near the production and product design staff, shortening the gap on time to market and giving us an opportunity to extend our global market share leadership position.

And the acceleration of our entry into the entertainment vertical through the acquisition of TNR is yet another example of our commitment to be the global leader in self service. These and other moves to enhance our infrastructure and operations are aimed at optimizing our pace of innovation and driving improved margins by unlocking production and cost efficiencies.

These objectives become even more vital in a challenging revenue period like the one we are currently in but the real pay off is over the long-term. I’d like to now turn the call over to John Bruno who will provide you with more color on our activities in entertainment and some other developments.

John Bruno

Thank you Bill and good morning everyone, as Bill mentioned we’re moving forward with our entertainment business and remain bullish about our opportunity in the entertainment market as consumers increasingly embrace the flexibility, ease of use and cost advantages of DVD and video game kiosks.

This changing market dynamic aligns well with our strategy and is a logical extension of our other self services businesses. Self service delivers highly valuable, cost effective and convenient access to products or services resulting in an unstoppable trend of consumer preference for self service channels.

As we announced last quarter our acquisition of TNR and partnership with Blockbuster immediately established us in the market with an install base, a proven business model, and a committed partner in Blockbuster, the best known brand in the movie rental business.

We are underway with our plans to deploy more than 2,500 Blockbuster branded kiosks by year end. From an addressable market perspective the movie rental market is an $8 billion industry in which rental kiosks currently account for just 6% of that revenue. However that number is growing and we are well positioned to capture meaningful share.

We are also optimistic about the potential of the video game kiosk that business as we believe the value of providing consumers the ability to buy, sell, and trade both movies and games. It’s a model that has been proven in a retail store format as well as in an online environment and will be brought to consumers through a kiosk network in more locations where they shop.

We will keep you posted on our progress over the coming months. The bottom line is there is no other company that understands the technology behind consumer interactions and transactions in more industries than we do.

A supporting piece of evidence in that regard is Gartner’s recent ranking of global technology companies across the broad category of infrastructure, maintenance, and support. NCR ranked number on in retail, and number 10 across all segments and in all cases, we ranked higher than any of our direct competitors.

The self service market new areas like entertainment does not yet have an established global leader for the long-term and we’re excited about this business. We have 125 years of relevant experience and we have the financial flexibility and strategic imperative to invest in this business.

Before handing off to Tony I also want to update you on another technology of NCR’s that gets less attention, our 2ST thermal printing technology which is continuing to gain traction in the marketplace. In Europe, Sainsbury became the first European retailer to deploy our NCR real pause, two-sided thermal receipt printers. As a result, Sainsbury was awarded the Business Commitment to Environment, BCE, environmental leadership award in 2009.

And BNZ, one of New Zealand’s largest financial institution is deploying NCR self serve ATMs complete with our 2ST printing solution. In late May, we completed the market building phase of our 2ST IP licensing program and 2ST printers are now available for a wide range of applications.

Many of these applications provide end market self service solutions including ATMs in airline boarding pass terminals as well as for a variety of kiosk applications. These developments show that our 2ST solution provides an add-on revenue stream for our customers and are available through our licensee program.

With that I’ll ask Tony to talk to the Q2 results in more detail.

Tony Massetti

Thanks John, NCR’s total revenue from continuing operations in Q2 2009 was $1.12 billion, down 16% versus Q2 2008. This includes a four point negative impact from currency translation. We reported GAAP income from continuing operations of $23 million or $0.14 per diluted share. This compares to a GAAP income from continuing operations of $45 million or $0.26 per diluted share in Q2 2008.

NCR’s results from continuing operations include special items in both periods. In Q2 2009 there was a $4 million or $2 million after-tax benefit from an insurance settlement related to the Fox River environmental matter. In Q2 2008 there was a $32 million, $23 million after-tax or $0.14 per diluted share and costs resulting from organizational realignment activities.

Excluding these items non-GAAP diluted income per share was $0.13 per share in Q2 2009 versus earnings of $0.40 per diluted share in Q2 2008. Pension expense was $39 million in Q2 2009 compared to $7 million in Q2 2008. To analyze NCR’s operational performance without the effect of special items and pension expense, please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results.

The following comment up to NPOI exclude the impact of special items and pension expense. Our Q2 2009 gross margin was 22.4% compared to 23.3% in the prior year period as the difficult economic environment offset the benefits from manufacturing realignment and continued emphasis on cost reduction initiatives.

Operating expenses excluding pension expense and special items were down 17% or $36 million versus Q2 2008 due to diligent focus on expense control in this environment. Operating expense as a percentage of revenue was down 30 basis points versus the prior year despite a soft revenue performance which demonstrates our ability to manage our cost structure to fit the operating environment.

Total company non-GAAP income from operations or NPOI, was $78 million in the second quarter compared to $101 million in last year’s Q2. Income tax expense on a GAAP basis was $14 million in Q2 2009 resulting in an effective income tax rate of 37%. This compared to income tax expense of $17 million and an effective rate of 28% in Q2 2008.

The increase in the quarterly effective income tax rate was primarily due to an unfavorable mix of taxable profits and losses by country. We continue to expect our full tax rate to be 25%. Turning to the balance sheet cash on hand at 6/30/2009 was $407 million. During the second quarter we repaid $300 million of senior unsecured notes leaving long-term debt of just $7 million at the end of the quarter.

Approximately $26 million of Board authorization remain under our current share repurchase plan with an additional $6 million available under the dilution offset program. Moving to the cash flow statement, NCR generated $27 million of cash from operating activities in Q2 2009 versus $69 million in the prior year period.

Capital expenditures of $36 million in Q2 2009 were unchanged from the prior year. NCR generated negative free cash flow of $9 million as we provided $25 million in net funding for remediation activities related to the Fox River environmental matter.

NCR defines free cash flow from operations less capital expenditures for property, plant equipment and additions to capitalized software. We continue to deliver good performance of our working capital management. I’ll conclude my prepared remarks by reaffirming our guidance for full year 2009.

We continue to expect revenues in 2009 to decline in the range of 5% to 10% on a constant currency basis. Based on average exchange rates in June this would translate to top line being down in the range of 7% to 12% for the year. We expect non pension operating income or NPOI to be in the range of $310 million to $350 million for the year which includes the impact of approximately $30 million from the entertainment investment as previously announced.

We expect earnings per share in the range of $0.60 to $0.75 in 2009 which includes approximately $0.15 of dilution from the entertainment investment. Pension expense is estimated to be $170 million in 2009.

Our full year tax rate is expected to be approximately 25% and finally we expect free cash flow to be approximately $60 million to $90 million in 2009 which includes the impact of the entertainment investment.

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

Bill Nuti

Thank you Tony, while the economic crisis and its impact on our end markets have impacted NCR, we are focused on those things we can control and have executed well. Along the way we’re making the right investments for our future. We’re also increasing productivity; we’re reducing costs, making good progress in new product development and paving the way in new growth markets that will benefit NCR for years to come.

Our cost reduction initiatives are on track which also enables us to reinvest in these growth initiatives. Our wins in the airline and healthcare markets and our tremendous opportunity in entertainment increase our conviction in our long-term pursuit of leadership in the growing self service marketplace and our strategy.

And we are now realigning our corporate organization around our core technologies and our market opportunities and quickening the pace of innovation and execution across all of our business. All of these activities point us toward a longer-term outlook of profitable revenue growth, a more diverse base of revenues and a more efficient operating infrastructure.

I want to thank you for joining us today and now we’ll open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Katie Huberty - Morgan Stanley

Katie Huberty - Morgan Stanley

You did a great job on the cost front this quarter and the services gross margin in particular is the best we’ve seen in a non calendar fourth quarter, so what drove the upside, is it sustainable and in light of the execution why not raise the full year EPS guidance.

Bill Nuti

Let me answer the services question first, we’ve been working as you know for several years on a variety of initiatives to improve productivity, to reduce our costs on a sustainable basis. I’m very confident that the margins we’re generating today in services are sustainable but there’s still a lot of work ahead of us and I have high expectations of us going forward.

We’re not quite ready though to raise guidance in this environment because of a lack of visibility. Its still an environment where if you look out there’s just not enough visibility to call the ball as we were able to in prior years so it would be irresponsible I think to do so at this juncture.

We’ll see how things pan our here in Q3 and Q4. Just some color on my thinking here would be Q1 was certainly for us and most of the S&P 500 and Fortune 500, the difficult quarter. Q2 was interesting, things started to improve a bit in Q2 incrementally off of of course a terrible base. And I would say towards the end of the quarter here into Q3, moderated a bit.

So I think there’s ebbs and flows both of the psychology of the market, the psychology of our customers and we also have seasonal challenges that we always face in Q3 and that we’ll continue to face so, to stand here today and to take up guidance despite the fact that we’re executing well operationally to your point, we’re just not ready to do so.

And candidly I don’t see it right now so I wouldn’t feel confident doing it.

Katie Huberty - Morgan Stanley

And then as the US banks or at least some of them have returned to profitability, are they now executing on the deposit automation plans they had in place going into the downturn last year.

Bill Nuti

Yes, we continue to see the large US banks move aggressively on deposit automation. There hasn’t been any meaningful change positive or negative. They’ve actually continued with a fairly good pace. I think you’ll see in the back half of this year deposit activity to pick up and going into 2010 the thing we all have to keep our eyes on is what happens in the national and mid sized banks.

They have not been nearly as aggressive as the large banks and candidly large banks who are moving forward with deposit are creating somewhat of a competitive advantage that the mid sized banks will have to face. So we’re hoping that in 2010 those mid sized banks that put off deposit automation projects because of the economic crisis, will once again review them and move forward more aggressively.

Wait to be seen, but certainly you’re correct in saying and our experience has been large banks in the US continuing to move ahead with deposit.

Operator

Your next question comes from the line of Matt Summerville – KeyBanc

Matt Summerville – KeyBanc

Couple of questions first on cost savings, I think in your prepared remarks you mentioned putting pension aside, your Op expense was down $36 million in the second quarter, how much of that would you say is sustainable versus cuts in discretionary spend and then I guess through the first half of 2009 how much cost savings would you say NCR’s realized in aggregate versus 2008 and I guess how we should be thinking about that full year number.

Tony Massetti

You’re right, we’ve executed well on our cost and expense reduction initiatives as we said we would. Non-GAAP expense was down 17% year on year in the quarter and down sequentially and the changes we’re making in the company, transformative changes, are sustainable so we expect that our run rate reductions in expense and cost will continue into the second half of the year.

And we’re on track as Bill said in his prepared remarks; we’re on track to the $200 to $250 million that we outlined for investors as cost and expense reduction savings through 2011. As far as first half second half, I really can’t provide any additional color on that other than to say we do expect the current run rate in spending to continue.

Matt Summerville – KeyBanc

And then again how much of that reduction year over year would you say is structural in nature versus discretionary.

Tony Massetti

The majority is structural in nature. And that’s why we have confidence in saying it’s ongoing.

Matt Summerville – KeyBanc

From an incoming order standpoint can you give us some color on, for the quarter what orders obviously removing currency, what total orders for NCR looked like in the second quarter versus Q1 and versus last year and then can you maybe give a little more detail on what you saw in the major product groups as you progressed through the quarter. You mentioned a little bit of detail to Katie’s question, I’m just looking for a bit more depth.

Bill Nuti

I would say orders got better sequentially. No question we had a good sequential growth in orders but orders are still down significantly year on year from as you know very tough compares in 2008. So we have a ways to go to catch up to the order rates that we were generating in 2008 but it was very good to see the comeback we had in Q2 versus Q1.

Relative to the other markets, financial services continues to be challenged. My color on financial services would be, we gave you a little bit of the US comments in terms of large banks versus mid sized banks and what’s happening there. Western Europe continues to be relatively slow. Eastern Europe is a really a tale of two cities, mid sized banks in Eastern Europe are very slow similar to the US market.

Large banks continue to remain active. The Middle East and Africa relatively speaking is a healthy environment but still down mid single-digits year on year and we continue to be cautious about the Middle East and Africa going forward. The markets that are generating great business for us are certainly China and the Asian market in general and the market that we’re excited about that continues to be robust and will continue to be will be Brazil.

And given the fact that we really don’t have a significant business there our investments there should prove to be a very positive for the company in 2010 and beyond. The retail side continues to be challenging in the US. While we’re not as far down as our peer competitors there for example, we’re down in the high single-digits in retail year on year and we continue to perform as best as you can in that environment, it is still a difficult market, particularly the US market where we’ve not seen any tangible pick up in capital spending.

We won’t expect to see that this year, we haven’t planned to see that this year. Europe is similar to the US but very market dependent and the only other large market of substance for us. So that’s a little bit of extra color for you on the industries.

Matt Summerville – KeyBanc

With regards to what you’re doing in media and entertainment can you talk about how long you anticipate the pilots you have going with some of the major retailers here in the US to convert to rollouts, is that a 2010 event in your mind, early or late, and then can you just give an update on what the installed base is so far that you have with Blockbuster if any and then I assume that 2,500 unit target by year end does not include the installed base you inherited when you bought TNR. Is my statement correct in that as well.

John Bruno

Let me answer that question in two parts, so first there is some swap as we had discussed on the previous calls when we entered into the entertainment business. Some of the machines were coming out of the TNR network that are being replaced with Blockbusters are going into new locations so the 2,600 is a net of wins and losses that came from TNR as we entered into the business here directly.

So at the end of the period the 2,500 plus units we discussed with be all Blockbuster branded kiosks toward the end of the year. And from a run rate perspective and a trajectory, we’re on plan. We’re doing well against plan. We’re making the progress we expected. Its early days as you know, we’re just getting into this now, a couple of months and we’re on the ramps that we want to see both on kiosks installed as well as on revenue per kiosk and we watch that obviously very, very closely.

With regard to your question on pilots and pilots converting to production, if you’re talking about DVD vending in particular we see pilots converting to installs quickly so when a retailer puts one or two sites out there to just kind of test the waters, we see that conversion happening towards rollout of what the commitment would be within the quarter that they make that commitment.

So we don’t see long pilots at all on DVD vending at this moment.

Matt Summerville – KeyBanc

And what about buy/sell/trade and the do you still feel comfortable with the longer-term target of 10,000 switching back to convenience DVD rental, would you still feel good about the 10,000 unit goal by mid 2010 of Blockbuster branded units in the market.

John Bruno

We, on planned and so yes I do. As long as we continue to move on the plan that we are and we’ll give you the progress quarter on quarter. As I see it today the answer to that question is yes. On your other question on buy, sell, trade, since that is a new area and a new environment we are in the early days with our experimentation so I would say that those pilots will last longer.

Those will eclipse the quarter in which the proven model of just DVD rental, because it’s a change in behavior for the consumer. That said we’re very encouraged in what we see early days in those businesses so the ramp to revenue on one of those boxes is actually doing better than what the early day ramp to revenue was on just pure DVD.

So the signs are encouraging but the size of the install base is smaller so we want to see it a little longer and we want to trend it more accurately and feel better about it so we’re going to continue to do that through the second half of this year.

Matt Summerville – KeyBanc

With regards to free cash flow I believe in your prepared remarks, if I’m not mistaken, you indicated that you were reiterating your free cash guidance, I actually did not hear a number as to what that is for the year so if we can get an update on that and then I just want to talk about pension for a second. You now essentially other than the $7 million in long-term have a debt free balance sheet, would you consider any action to try and fund the pension, take it off your balance sheet. Obviously the stock is getting significantly penalized for the pension expense that you have this year, the $170 million versus the $25 million. Does it make sense to fund it with debt, lever up the balance sheet a little bit and try and just make it go away. Can you talk about how you’re thinking about that. If the equity markets don’t turn around this year is that something that’s on the table for NCR that you’re at least thinking about.

Tony Massetti

I’ll answer the free cash flow question, we guided in the March quarter $60 million to $90 million free cash flow for 2009 including the entertainment investment and we’re reaffirming that guidance at this point.

Bill Nuti

And on pension, just I think it’s just prudent to say we always look at capital structure options each and every quarter at the Board level. I can tell you candidly this is not one that has been recently reevaluated but its one that we do reevaluate regularly and certainly we will continue to look at it as we look at all of our other capital structure strategic options we have at a company level.

Operator

Your next question comes from the line of Kartik Mehta – Northcoast Research

Kartik Mehta – Northcoast Research

I wanted to ask a little bit about the DVD business, you just talked about the free cash flow guidance for $60 to $90 million, I’m wondering as you’ve gotten into this business what the infrastructure costs have been based against your expectations, are they running fairly in line or are you noticing that you might have to put in more or less infrastructure since you’re going after consumers now rather than businesses.

John Bruno

The infrastructure expenses that we forecasted in our business plan are running right in line. We look at every part of the infrastructure which is inclusive of the machine itself, the disk inventory, and everything we’ve seen as we ramp has maintained plus or minus single-digit percentage points based on plan and so the net is we’re right on plan.

Kartik Mehta – Northcoast Research

The overall gross margins for the company in the Americas were up, were very good and I’m wondering in this environment where you’ve talked about the retail environment being very poor, obviously everybody knows about the banking environment, were the gross margins just a reflection of maybe product mix or is it just all this cost cutting. I’m just trying to figure out how sustainable those gross margins are and maybe what their drivers really were this quarter.

Tony Massetti

Margins overall in the quarter were up sequentially on a non-GAAP basis, up nearly 200 basis points, down year to year 90 basis points so we did see some favorable mix in some geographies, Americas being one sequentially and also we’re seeing the effects of all our cost reduction initiatives that we’ve talked about I mentioned earlier.

So they are sustainable longer-term. Quarter to quarter we do see mix, customer mix, product mix, geography mix that does drive margins up or down slightly but over the longer-term basis yes, those cost reduction and issues certainly are sustainable.

Bill Nuti

Just to backstop that, Tony hit the nail on the head, this is about largely mix for us. When you have less point of sale retail in your number or if you have a certain mix of banks in your number, types of banks with types of solutions, you could get a very different skew on your margins.

I would expect the rest of this year margins in the US potentially be under a little more pressure because we’re seeing large scale rollouts come to fruition in deposit for large banks where certainly pricing in those banks is different than it would be in the mid sized bank segment. So while we’re encouraged with the longer-term trajectory of margins because we’re doing all of the right things internally in terms of cost reduction and to improve our mix, I want to make sure we’re clear as well in the short-term that there’ll be ebbs and flows to that based on there very large rollouts that are coming to fruition.

Kartik Mehta – Northcoast Research

And you talked a little bit about, and I just want to make sure I understand it, the Brazil manufacturing, is that only for Brazil or will you be able to use those machines elsewhere and is that also the part of the cost reductions you’ve talked about in the past.

Bill Nuti

Its for Brazil and other Latin American countries where there are free trade agreements in place between Brazil and those countries so we can export out of Brazil. One of the major benefits of being in Brazil as well is the free trade agreement that Brazil has with Africa. And the potential to lower our costs of ATMs, be it logistics and manufacturing and shipment, to Africa. So there are tangential benefits to that.

Your second question I want to make sure I understand, I think it was a question around has Brazil been a partner of our plan relative to lowering cost in that $200 to $250 and the answer to that is yes. If that was the question. If not, just re-ask it please.

Kartik Mehta – Northcoast Research

No that was the question. And my last question and I just want to make sure I understood right, when you were giving your comments on the market did you say that India is back to growing, so was it, I know its semantics, I just want to make sure I understood what you were saying about the market.

Bill Nuti

What I was saying, first what I was saying is India is growing. Growing slightly year on year for us. It grew slightly year on year for us in the quarter which was very, very encouraging and we are beginning to see an up tick in activity in India. So much like China and the China environment, China as an example while down slightly year on year had a terrific Q1 and at the half is up.

So we’re encouraged with what’s going on in that part of the world and relative to the rest of the world its stable to growing.

Operator

Your next question comes from the line of Ajit Pai – Thomas Weisel Partners

Ajit Pai – Thomas Weisel Partners

Just a couple of quick questions here, one is in the entertainment business one of your competitors have actually just struck a five year deal with Sony Pictures and can you give us some color if that contract would have any impact on your business in any way and do you also have anything similar with other studios in the pipeline.

John Bruno

The answer to that question is yes, we have similar deals. Based on, each contract is based on specifics around minimums and titles, how much inventory you carry. We’ve looked at that deal, we’ve evaluated it, we continue to be in conversations with not only that studio but with others as this market develops and we have favorable and comparable deals similar to the ones that you’ve read about.

Ajit Pai – Thomas Weisel Partners

And then also you mentioned that sales in China are growing on a sequential basis and is that growth across the board or is it mostly in banking or retail.

Bill Nuti

Its mostly in banking.

Ajit Pai – Thomas Weisel Partners

And one final question you mentioned that you are target for $200 to $250 million cost savings through 2010, does that include the potential impact from your investments in Georgia and Brazil.

Tony Massetti

Its through 2011 and yes, that would include any kind of Georgia investment.

Operator

Your next question comes from the line of Reik Read - Robert W. Baird

Reik Read - Robert W. Baird

Just wanted to go back to the cost side of things, as part of your remarks you said that structurally the things that you have done are going to be sustainable, can you talk about what those changes are that are kicking in today and then as you go into the next nine to 12 months what are maybe the next set of milestones that might start to kick in in terms of specific operations.

Tony Massetti

Just try to provide a little bit of color, in the company we’ve identified mega processes, end to end processes, whether they be in cost or expense where we think we can get the most benefit from reengineering or outsourcing or in sourcing that particular process. So we kicked off this project early 2008. We’re well underway. I would tell you that we have the majority of the cost savings still ahead of us for the next year and a half or so.

So again we feel they’re sustainable. We’re making the right structural changes in the business and reinvesting at the same time for future growth.

John Bruno

And my group, the industry solutions group, the point of the whole consolidation of our businesses was to go from a silo based environment in which each one of these business units had top to bottom capabilities, to now have a shared engineering component which is something we have not done in the past which allows us to implement product life cycle management across our products.

That allows us remove a lot of SKUs in the system, remove a lot of common components and share things between retail, for instance hospitality and financial, the ability to share software development, hardware development, straight across the board from an industry development perspective is significant long-term.

As is all the go to market pieces, marketing, collateral, etc. So the alignment to the industry solutions model has a lot to do with the way in which we go forward as a company and we leverage a lot of the synergies that we haven’t taken advantage of in the past.

Reik Read - Robert W. Baird

But you’re also suggesting that most of that has not kicked in in terms of the shared services, its really more of the consolidation and head removal.

Bill Nuti

There certainly is more opportunity ahead than we’ve already realized as it relates to the $200 to $250 so in the indirect answer is yes, assuming that that’s what you were looking for. We’ve got a lot of work ahead in what we call project advantage in the company which is what Tony referenced around business process improvement, business process outsourcing and certainly productivity improvements around labor cost reductions that are not [inaudible] in scope.

And then of course there’s a tremendous effort afoot here in value engineering in the company to dramatically reduce the cost of our product footprint and in our landed cost. Most of those savings with those two projects alone are late 2010 and 2011 kinds of savings that will hit the bottom line.

Reik Read - Robert W. Baird

On the tax side you had mentioned that it was basically a geography thing and yet its going to be static at 25% for the year, what happened there and why would you expect that to reverse out.

Tony Massetti

With the tax accounting rules as you may know, FIN 18 specifically, you have to record the impact of country profit loss in a particular quarter so that’s what we saw in the current quarter. Our forecasts for country mix and country profitability give us confidence that we’re still tracking to the 25% full year tax rate. So you can expect a lower tax rate in the second half of the year then we seen in the first half.

Reik Read - Robert W. Baird

And I guess what I was getting at was there unusual geographic shift for a particular reason.

Tony Massetti

No, no there was not.

Reik Read - Robert W. Baird

And then just back on the retail side of things, with CIT being a key factor of a lot of the vendors out there if they wind up filing for bankruptcy that seems like it could be disruptive to the retail marketplace, do you see that something like that having an impact for you or is that just not going to make a difference for you.

Bill Nuti

I don’t know the answer to that today but what I would say is that at least NCR is largely a Tier 1 retail provider so very large retailers. It’s a pro and a con because of course we have a desire to go down market from Tier 1 into Tiers 2, 3, 4 through 6, where I believe the impact on a CIT bankruptcy will have a much greater impact than on the large Tier 1.

So assuming that Tier 1 retailers won’t be impacted, it should have little to no impact on NCR.

Reik Read - Robert W. Baird

And then on pricing on the ATM front, is there anything that’s changed there from a geographic perspective.

Bill Nuti

No change sequentially, still in the US relatively moderate. Always a bit more price sensitive in deposit in the international markets, particularly emerging markets, it still continues to be a little bit more competitive and price sensitive as I’ve said in the past.

Reik Read - Robert W. Baird

But from a competitive standpoint nobody’s doing anything that’s markedly different.

Bill Nuti

No.

Operator

Your next question comes from the line of Gil Luria – Wedbush

Gil Luria – Wedbush

Just to follow-up on that question, last night Wincor talked about the fact that the pricing environment is deteriorating and it actually pointed to its two US based competitors as the ones responsible for that, so to kind of revisit that question, if you’re saying that you’re not seeing anything or that that you’re trying to drive more volume through your facilities by utilizing the fact that you now have become more efficient, to become more competitive on some of the bids.

Bill Nuti

No I would just go back to my last answer. I don’t think we have seen any tangible change sequentially in the pricing environment and candidly while we do have because of our focus on cost reduction a bit more flexibility relative to end price where we haven’t used it as evidence by our margin improvement quarter on quarter.

Gil Luria – Wedbush

In terms of your DVD business, I’d also like to revisit a question that you were asked before, just go through some key high level numbers here. How many kiosks did TNR have at the beginning of the year before you bought them. How many kiosks do you have under all of your brands today and how many do you expect to have at the end of the year under all of your brands.

John Bruno

From coming into the beginning of the year, they were a little over 2,000. We’re still on track on the 2,600 and we’re about a third of the way there on plan as we head into the second half of the year.

Gil Luria – Wedbush

So does that mean that you’re just being very deliberate in adding kiosks that you intend to only add 600 this year or were there some competitive losses along the way and you’re adding more.

John Bruno

TNR had a competitive loss prior to the acquisition which we discussed on a previous call that we’ve had to replace in the back fill in order to meet the 2,600 commitment and we’re on plan to do that.

Gil Luria – Wedbush

And then next year based on that and the fact that you still intend to get to 10,000 by the middle of the year, so that’s at least 7,500 kiosks in the first half of next year and I’m assuming more in the second half, how does that translate into CapEx needs for next year.

Tony Massetti

Too early to say. We haven’t given guidance for 2010 in any of the P&L or balance sheet items. I’d say roughly for modeling purposes probably something similar to 2009.

Gil Luria – Wedbush

For overall CapEx?

Tony Massetti

No, I thought you were talking about entertainment.

Gil Luria – Wedbush

Right so for entertainment how much, so that’s the $30 million that you’re talking about for this year.

Tony Massetti

Right. And again that’s very preliminary, and we’re only half way through 2009 and we’ll give more color on that certainly in the year end call.

Bill Nuti

I want to be very careful here because we have not done any homework and you have to appreciate what’s happening now is a great focus on cost reduction on the platform so without knowing the future cost of the kiosk its difficult to forecast future capital spending.

The goal the team has here and its very clear is to dramatically reduce the cost of the kiosk so we reduce the cost of capital requirements for 2010 implementation. But I want to be clear as well even the early results from this business are very encouraging. We’re going to move as fast as we can in this space because we believe this not only has tremendous upside with regard to revenue but of course on the profit side, mid teens EBITDA margins are very attractive to us and we think this business has a good five to seven year window of terrific opportunity in the US and perhaps a little bit longer then that in other major markets outside the US and we need to capture the lion share of that business.

Gil Luria – Wedbush

Just one more question on that, Coinstar talks about it being about $15,000 to install a kiosk, I believe that’s fully loaded and if I understand correctly they’re outsourcing manufacturing the kiosk I imagine you may decide to do the same, are you saying that its just based on the numbers that we just talked about, are you saying that you’re going to have a kind of order of magnitude smaller costs to install a kiosk for a fully loaded kiosk.

Bill Nuti

Don’t know the answer to that but we will know when we give guidance in January. I can tell you this, we would like to invest as much as we can next year in a quality way of course from a capital spending point of view to even exceed that number of units if we could because again, this is a race around market share, it’s a race to revenue and it’s a race to those margins that we described.

But to give any guidance it would be irresponsible. We’ve got a long way to go and do we expect to have a lower cost structure than our competitors, you bet we do. There’s no question about it. Could we utilize the assets of NCR, are we utilizing the assets of NCR in order to do that, you bet we are. We have an interesting number of synergies because of the other markets were in, the components that we use, and candidly the size of this company and our global reach.

Gil Luria – Wedbush

Just one last question when do you plan to complete your move to Georgia of all the facilities that you’re moving from Ohio and how will the CapEx required for the moves of the headquarters facilities and the manufacturing facilities compare to the money you’re getting from the state and possible money you’re getting from stimulus, how do you expect those to net out.

Bill Nuti

I’ll let Tony tackle the capital side of this question but just to say that we anticipate the move to be complete at the end of 2010 and some additional texture on the incentives, this is a very accretive transaction at the end of the day for the shareholders through year 10. Most of the accretion starts in year three and goes through year 10 but it’s a substantial savings and a substantial accretive transaction.

So we’re pleased with that, now that wasn’t the driving force of the decision. The driving forces of the decision were other things such as access to human capital over the long-term given where the company is going versus where its been. Certainly academia plays a role given the university systems here in Atlanta that will participate with us in innovation, universities like Georgia Tech.

The infrastructure because we have parts and logistics here in Peachtree City, and because we’ll have manufacturing in Columbus, the infrastructure here, airports, roads, bridges, tunnels, etc. is absolutely world class and lowers our cost for logistics. And of course the incentives that I just described.

Tony Massetti

I think that’s excellent color. Bill’s comment about it being accretive out through year 10 we haven’t really gotten into the details about the timing of the investment and the recoveries and so on, so suffice it to say it is accretive. There are significant incentives and recoveries over time and we’ll keep you updated over the next several quarters as we incur those costs.

And also very likely that those costs will be call outs, so we’ll talk about those on the earnings call.

Bill Nuti

I want to thank everybody today for participating in the call and I look forward to talking to all of you in October. Have a good day.

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