Good day, everyone, welcome to Diebold Incorporated First Quarter Financial Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

Thank you, Patrick. Good morning and thank you for joining us for Diebold's first-quarter conference call. Joining me today are Tom Swidarski, President and Chief Executive Officer, and Leslie Pierce, our Corporate Controller and Interim Chief Financial Officer. Just a few notes before we get started. In addition to the earnings release, we've provided a supplementary presentation on the investor page of our website. Tom and Leslie will be walking through this presentation as part of their comments today. And we encourage you to follow along. We've included non-GAAP financial measures throughout our presentation this morning. Specifically, I would refer you to slides 25 to 31, which provide our rationale for the use of non-GAAP measures, as well GAAP to non-GAAP reconciliations. A replay of this conference call will be available later today from our website. And as a reminder, some of the comments today maybe considered forward-looking statement. Internal and/or external factors could significantly impact actual results, and as a precaution, we refer you to the more detailed risk factors that have previously been filed with the SEC. Now, with that opening remarks, I'll turn it over to Tom.

Thanks, John. Good morning, everyone. While we turned into solid first-quarter performance, I'm sure you saw in our release that we've lowered our expectations for the full year, due to the difficult global economic environment. This has had a disproportionate effect on Diebold's core markets. I'll walk you through the changes we are seeing in our customer base and provide full details behind our assumptions in a few minutes. But before we review those details, let me spend a few moments on our first-quarter results. I'm pleased with the first-quarter performance, which exceeded our expectations. We continue to improve our operating margins in the service business, despite slightly lower revenue, and a difficult business environment. In addition, we experienced stronger than expected performance in our Asia-Pacific business unit. Also our net cash from operations increased 5% during the quarter despite a year-over-year decrease in revenue. This has resulted in a another solid free cash flow quarter. Finally, we've strengthened our balance sheet and increased our dividend for the 56th consecutive year. As the quarter progressed however, the earlier weakness in orders that we had experienced in Russia, Eastern Europe, and the regional bank segment of the United States, became much more pronounced. Market demand, however, remained solid in Asia-Pacific, Latin America, and the US large bank segment. This presents a unique challenge for Diebold, because the weakness is occurring in some of our most profitable markets. The large banks in the United States continue their brisk pace in deploying deposit automation. We are proud to be the only company to have deployed our deposit automation technology in all 50 states. Our strong relationship with the national accounts and a longer term nature of their implementation plans provide us good visibility to this segment. Through the remainder of the year, we…

Thanks, Tom, and good morning, everyone. Before we review the financial information, there are a couple items to note. First as we disclosed yesterday, we've reached an agreement in principle with the staff of the SEC on settlement terms. This marks an end to all the government investigations. This proposed settlement comes as a result of an incredible amount of hard work from a number of people both within and outside the organization. Our work in this area, however, is not complete, as we aggressively address our remaining material weaknesses. We remain committed to improving our financial control systems, processes, and procedures with proper controls that drive efficiency, accuracy, and timeliness in our accounting and financial reporting. Secondly, it's important to note that we have restructuring charges, non-routine expenses, and impairment charges in our financial results. We believe that excluding these items, provides an indication of the company's baseline performance. As a result, many of my remarks will be focused on non-GAAP financial information. For a reconciliation of our GAAP to non-GAAP financial information, please refer to slides 25 to 31 in the supplemental material provided on our website. Now let's turn to our financial results. First I'd like to refer to slide 12, which focuses on the first-quarter revenue highlights. Total revenue decreased $29 million or 4% in the first quarter, which included a net negative currency impact of 6%. Looking at our financial self-service business on slide 13, revenue increased $5 million or 1% in the first quarter. The increase was driven by growth in the U.S national bank segment and our Brazilian operations. These gains were partially offset by lower revenue from the US regional bank segment and from EMEA, mainly in Russia and Eastern Europe. Asia-Pacific performance was lower than the first quarter, due to an…

Thanks, Leslie. Patrick, we'll open it up for questions now and take our first question.

(Operator Instructions). We will take our first question from Matt Summerville with KeyBanc.

Morning a couple of questions. Tom, in your prepared remarks, I believe you gave a figure for new branch applications or some sort of construction figure. Do you have what that full-year number was in '07-'08 and what it's projected to be in '09?

Yes. There's a couple different things we look in that regard, Matt, all from various government sources. Probably the biggest indicator from an annual basis would be, we went back over the last seven to eight years and on a typical year, you would see applications for new bank branch and credit union branches in the neighborhood of obviously 3,500 and 4,000. What we've seen this year in terms of the applications that are out there, that number is closer to 1,500 to 2,000. So, no matter how you sliced it, it was about 50% off from an application, and then we had some indications as the actual number of facilities opened in the first quarter compared to the past. And that was well off like 35% to 40% as well. Somewhere in that neighborhood I think is kind of the indicators we're looking at.

Okay. Then you, I'm just curious, in the $1.70 to $2 guidance, last quarter you had mentioned the old range, $2.10 to $2.40 contemplated regional's being down as much as 30%. What is the underlying assumption for the small bank market in the US now versus your prior assumptions? And then if you can walk through a some similar numbers for Eastern Europe and Russia as far as what your assumptions are?

Okay. Let me start with the US first. In essence, when we came into the year and were providing guidance, we were looking at the low end of the range as you've indicated. We said somewhere north of the 25%, I don't know if it's quite 30% or not. But right now what we're indicating in the bottom end of that range is approximately 40%. Pretty close to 40%. Based on what we've seen so far. As far as, and again, that's the regional bank space, which includes the credit unions and everything else. Obviously we have a different experience with the US -- with the major banks. As far as Russia, for instance, what we've done with Russia in there is really taken Russia off the table for the remainder of the year. Basically, looking at that to say that based on we just had a conference call with our leaders from Russia over this past weekend, they were there for a week looking at the environment and talked to a number of banks. And in essence we've backed everything out that we had for Russia for the remainder of the year. So in essence, we've taken Russia, Eastern Europe risk off the table in the $1.70, the way I'd look at it.

Okay. Just a comment on gross margins. I guess can you sort of walk through and quantify, you really provided in earnings walk-through by line item on, I think it was page 24 or something like that. I was curious if we could think about the additional negative mix shift, how much of an impact will that have on gross margins relative to what would have been embedded in the prior guidance? I'm trying to get a feel for what the incremental mix headwind is in terms of gross margin is my question.

Yes. I'm not sure I have that at my fingertips. Leslie, do you have that?

No. We didn't.

I guess my suggestion would be there was that I'll get back to you on that, but, yes, I think it's probably best that I get back to you on that. But in essence, the details behind that, I don't have quite at my fingertips, but I think what we were looking at previously was something in the range of before around 27.5%, 28%. I think now 24% to 25%. But I have to get you more specific ones. And that really would be, on the product side of the equation. The service side of the equation, the thought is we are going to continue to improve that margin. We've done a lot of things relative to that and we're looking to see an improvement in the subsequent quarters, maybe up a percent or so.

Okay. That's helpful. Then one last question, I'll get back in queue.

Yes.

I was curious as to how much free cash flow you think Diebold will generate in 2009, and what the anticipated? It said in the slides that you provided that the $12 million was a voluntary contribution. I guess so as we think about '09 free cash flow, will there be any additional voluntary contributions this year? And then again, how much free cash you think Diebold will generate in '09?

Regarding the pension contribution at this point in time, there is not a planned additional contribution. However, contingent upon market performance of the pension asset may dictate something different later in the year. As far as our overall free cash flow guidance, we haven't historically given free cash flow guidance for the full year.

But we mentioned last time, north of $100 million. And I think we're comfortable with that still, Matt.

Okay. Perfect. Thanks.

We'll take our next question from Kartik Mehta with Midwest Research.

I wanted to follow up on the free cash flow and maybe your thoughts on how you used it going into 2010. Is it your intention just to continue to improve the balance sheet and then take a wait-and-see attitude how to use it? Or are there other plans on how you might use that money?

Yes. I think you got it spot on. As you've seen with the dividend, we continue to be confident in terms of providing that. There may be some small acquisitions here and there that we look at from a technology standpoint that make sense. But right now, it's going to be steady state relative to where we're at strengthening the balance sheet. And as we move forward and see what the economic climate looks like and as we come into 2010, we may have a different attitude relative to share repurchase, but I'd say right now kind of current course of speed.

Tom, what were your expectations for operating margins in 2009? I'm sure I realize there will be a range, but I'm trying to get a sense of what you think operating margins might do in 2009, considering new expense reduction and some of the mix shift in revenue.

Yes. I think, Kartik, that I won't be able to provide you anything relative to the operating margins, but, I think, if you go back to the conversation maybe that we were having regarding Matt's question, in terms of the impact on product gross margin and what we think we're doing on service gross margin, you'll get a good sense of kind of our confidence that our service recurring revenue business model makes sense that we can prove those margins. We think we can walk that up throughout the course of the year. We think the product gross margins are certainly going to be hampered this year because of what's happening in the regional bank space in Russia, two very important markets in that regard for us. As we've indicated, we're going to continue to be diligent relative to costs and pulling costs out, but I think that gives you a flavor for kind of the focus.

And last question, Tom. I just want to get your thoughts on maybe expectations for what's going to happen with branches. Obviously, a lot fewer this year than last year. I'm just wondering your thoughts about as we move forward, when do you think we might see an improvement or increase in branches at least in the US?

Yes. I think Kartik, the way we've looked at it, and again we're analyzing this data fresh as it comes off, but we basically see that we've hit the bottom here relative to kind of all indicators in that regional bank space. Now, the issue we have is in terms of as things begin to turn, most of that revenue isn't visible until 2010 with revenue recognition because most of the orders you start taking toward the latter part of the second year into the third quarter become 2010 revenue. And I think the big indicators to me, I mentioned it during my prepared remarks, but the issue of uncertainty, a lot of it is created by the FDIC insurance premium that's hanging out there. I was surprised at the intensity with which many of the regional banks and the credit unions, have looked at that, and someone have told me that it could be as much as impacted from somewhere between 25% and 40% of their, income for the year that they'd have to divert relative to the special assessment. And that has really hampered their abilities to move forward in that they do not know what the actual numbers are. And there's a lot of debate going on in terms where it's going to settle out. And I think in the June timeframe, we're going to get a lot more visibility there. I think the other thing you see is the results from the stress tests and the consolidation that's going on. You've got that trepidation that's still in the marketplace, but again, we will start getting that uncertainty behind us here in the next month or so. And, back to the initial kind of question you had in terms of the branch builds and the branch kind of environment, again, our indications are that it bottoms out here in the second quarter, and, not that we're going to ever revert back to maybe some of those higher levels, but the reinvigoration or reinvestment in terms of bank branch facilities, even if they're renovating an existing facility, starts to gain a little momentum. And we're putting some, programs in place that we think could help that in the second half of this year.

All right. Thanks a lot, Tom. Appreciate it.

You're welcome.

We'll take our next question from Gil Luria with Wedbush.

Thank you. Tom to follow up on some of those last points and SBIC assessment, you are saying that in June we'll get clarity about that. But in terms of what your customers are expecting right now, are they expecting a 20 basis point assessment? Are they expecting it to be one time, or are they maybe afraid that it will be bigger than that or it will happen more in the future? Where are the expectations right now, so we know when June comes around if that's a kind of a positive development or a negative development?

Yes. I think, the vast majority is thinking it's going to settle in about 20 basis points. So part of it is, it in fact being 20 basis point and then being able to get on with their lives versus something else. The other piece that's hanging out there Gil that we've had discussions around is there's also some language talking about a second one-time assessment that could be an additional 10 basis points. But again we should be getting something clarity on in the June timeframe. So I think part of it is the amount is less important than the certainty of what it is, and how it's going to be assessed. And you've got the same issue with credit unions where, you've had conversations of spreading it out over a number of years to a one-time hit kind of in the get-go. So the uncertainty is what really is causing the vast, I think, the vast pullback relative to orders.

And then in terms of Asia, it sounds like China almost carried your entire quarter this quarter. But your guidance implies that that's almost going to go away or going to contribute a lot less throughout the rest of the year. Why do you come up with that assessment?

Yes. Well, a couple things. First of all, China is a very big contributor. And we've got a big presence there. But we had several significant things that pulled forward on us. So that was a surprise to both us and our team in terms of the speed with which, we installed and moved forward in China. There was expectations in terms of rollouts that we had built into our plans through the course of the year that really impacted us in the first quarter. I mentioned that there are three areas in Asia that we're seeing, significant strength in terms of the orders. China was certainly was one, but also Thailand, as well as Indonesia and India has been relatively remained fairly solid for us. Australia continues to be a challenge, currently is a challenge. We took down revenue and profits associated with Australia, which really dampens kind of the Asia-Pacific overall performance, but, as far as if there are other opportunities that present themselves throughout the course of the year, I think in terms of the four big countries outside of Australia, I think we're well positioned and have good teams in place to take advantage of it. Australia has been a lingering issue, and it's become a significant problem for us in the first quarter this year. So that's reflected in our guidance going forward.

And then just to clarify, Russia and Eastern Europe for the rest of the year, do you have those set at zero or at Q1 levels?

We basically have taken them off the table. So zero. While we have a few in order there in essence, I'd say it's about zero for your purposes.

The last question I think, Tom, I heard you say, used the words 'Hit bottom'. And I think you're specifically referring to the regional banks. But if you take a broader point of view and some of the weaker regions, obviously Russia can't go any lower than zero. But in terms of the global market, do you feel that you're getting a similar sense?

Yes, if I could mention that relative to each of the regions yes, my comments they were specific to the regional bank market. And the reason I said 'Bottomed out,' we had a week-long conference here in Canton with all of our field leadership. So, we had maybe 35 field leaders in from the United States representing the team that calls on the biggest banks in the United States to the smallest banks in the United States. And each of the regions represents various states. So we went state by state through each of the markets for the regional bank, both on the security and the self-service side. The amazing part was there are regions that are doing exceedingly well. Then you have regions like Florida and Ohio and Detroit, I'm sorry and Michigan, California, parts of that that are really just off, 60%, 70%, 80%. And when we look at the economic environment that we're in, basically they've scrubbed that. We've looked at it and the team overall felt good about the dialogue that we're having in these markets. It's just the dialogue, start moving into bigger kind of issues like integrated services. So from my standpoint, we got some indications as recent as Friday and Monday relative to orders here in the April time frame. While April I wouldn't call robust here relative to this market, I would say that it was modest improvement which I think was a sign we were looking for. It was reflective of the kind of conversations we were having with our team. So while we were getting anecdotal evidence, in fact the order book looked a little bit better than we had the first three months of the year which, again, gave us confidence that we've really hit the bottom in that regard. And again, we're staying on top of that. We've got specific plans and activities in place, but we were able to very much dissect by state and by region within the state kind of where the issues were and feel very good that, we've got a clear understanding of it. And the 40% at the lower end reflects, what we think is possible. By the same token, if things turn a little quicker, I think we're going to be well positioned. And also we've very much focus a lot on the longer sales cycle things like integrated services and outsourcing and energy management solutions, and those don't turn as quickly. But I feel good about the activity and felt good about what we saw in April.

Got it. Thank you very much.

Welcome.

We'll take our next question from Reik Read with Robert Baird.

Good morning. Tom, just back on the services side of things; it seems like you also expected that will moderate a little bit. The declines won't be as significant as they will on the product side. Can you talk a little bit about, how much of that is due to stickiness of today's offerings? And then also as you can add new offerings, how much offset do you get out of that?

Yes. Right. Let me talk about kind of service and services collectively together. I'm thinking over the course of this year, we're going to see increased revenue in that space and increased margins in this space in terms of where we're at with service and services. What we're seeing is the delay in terms of timing has to do with the initial decision maybe to move the outsourcing or integrated services of the longer-term contracts. Those become lengthier kind of conversations. So, for instance, in the first quarter, we've had good activity and a big pipeline there. But in terms of those turning into orders, that's taking some time and I think that's because of the hesitancy in the market. But I'm very happy with the level of conversations we're having about it. Likewise, we had a couple significant ones where we actually had an order and in one case it was canceled as a result of an acquisition or someone acquiring the guy that had the contract. That was a significant order that we had worked on for, 12, 13 months, but we have seen a lot of delays. We've seen things pushed to the right. So, in that regard, I'm very confident in terms of our ability to deliver and what we're able to do both on the service side as well as the services and that's not just in the US, that's really around the world.

And would you expect Tom that that gross margin for the full year would be in that 24%, 25% range?

Yes. I think that's kind of where we're envisioning it.

Okay. And then just a question on the operating expenses; if I back out the one-time items in the quarter, you get roughly $121 million. Is this given where you are with all of your cost initiatives? Is this kind of a good base level and we should be making volume adjustments off of that? Or are there some elements within that that simply aren't sustainable and we should think about those in the next couple of quarters?

I would stay's it's the latter. What we experienced in the first quarter were some unique cost reduction initiatives that won't repeat in each of the subsequent quarters throughout '09. We'll continue with cost-cutting initiatives in other areas. However, with the reduction in revenue volume percentage-wise, it will be difficult to maintain what we saw in the first quarter.

Yes, the other thing Reik that I would comment on the other side of the equation is, we think that we're continuing to improve our service and services margins because we'll continue to invest. So productivity and tools require investment. We are continuing to build out those capabilities on a global scale to allow us to improve margins, because I've mentioned in the past I was not satisfied with our service margins in Europe. We're increasing those, but it takes investment to get there. The other thing is I mentioned in my remarks that, this enhanced note acceptor which was a cash acceptance technology which I've said all along has been a big detriment to us in terms of the amount of service calls we have to make on this technology that we buy from a German source supplier. Well, we're rolling out our own here in the June timeframe. So, we are going to continue to invest heavily in that as we get that rolled out and make modifications necessary to achieve the kind of performance that really will help us on the service side, as well. So we're looking for that to not only be able to bring a more reliable, capable product that's easier to service at a better cost point to the market, and, as such we're continuing to invest there. So to Leslie's point, part of it was there were one-time thing. Part of it is we're going continue to invest along these lines to yield the kind of results on the long-term basis that I think are important.

And Tom, I take it from what you're saying is maybe those investments were little understated in the first quarter and become a little bit greater in the second, third, fourth.

Yes. I think that's correct.

Okay. And then just one follow-up on Asia-Pacific.

Yes?

You talked about, China and Australia, Australia moderating, China having some orders pulled ahead. With respect to orders, you've got up 30%. So, is that simply a timing thing where those order that you're seeing to date don't really occur until fourth quarter or first quarter of next year? And, therefore, the next couple of quarters wind up being a little bit weaker?

Reik, I'm not sure if I follow it completely. But in essence the 30% up really is the result of orders we are expecting in subsequent quarters that actually were pulled forward. So, in essence, we had very strong orders led by China, but they were, in fact, pulled forward. I think for the full year, though, we're still going to show nice order growth, up maybe, in the neighborhood of 5% to 10% for the full year. A lot of it happened to be pulled forward in the first quarter. So, I feel very good about where we're at, where we're positioned, and the fact that we took them off the table, it was a good thing. Australia, if I might clarify a little on Australia. Australia, while we normally are at some kind of break-even point in Australia, we are really seeing deterioration in the Australian market. For us, Australia is a combination of self-service and security. We have a security operation down there that's actually bigger than our self-service operation. So, when I talk about Australia, the security impact has been really negative for us in the Australian market. And we may be down year-over-year in the neighborhood of 30% to 40%.

Great. Thank you.

We'll have a follow-up question from Matt Summerville with KeyBanc.

Just a quick question. Tom, can you just spend a couple seconds talking about the dynamic that's impacting the election systems business. And I would assume it $40 million to $50 million in revenue that that Premier Election will not make money this year.

Okay. Yes. I think probably the biggest change that occurred in our forecast as we're thinking through the year was, Maryland I think was in the fourth quarter, and what we were thinking was going to be a sizable delivery there that we now think for all practical purpose is going to be pushed into 2010. So, from the election system business, since they're impacted by these states that move big volumes at one time, the fact that we're getting visibility to that being pushed back, because of what the state wants you from an investment standpoint has a material impact in that regard. Other than that, it's pretty much I think status quo there.

Any new thoughts as far as your long-term plans for that business?

Yes. I think our existing thoughts remain the same. We are obviously, have a desired outcome there. We haven't been able to achieve that. But that's not deterring us from spending energy and trying to get there. So we definitely have not changed opinions in that regard.

That's all I have. Thanks, Tom.

Okay. You're welcome.

And we have no additional questions at this time. I would like to turn the call back to Mr. Kristoff for any additional or closing remarks.

Thank you, Patrick. And thank you, everyone, for joining us this morning. As always, if you have follow-up questions, please don't hesitate to contact me directly. Thank you again.

This concludes today's conference. We thank everyone for their participation.