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China, Brazil help ATM growth for Diebold

CEO says Diebold sees promising financial growth in '08 and '09.

August 11, 2008 by Tracy Kitten — Editor, AMC

With the closing of a U.S. manufacturing hub, withdrawal from one European market and consolidation of operations and services throughout the world, the world's third-largest ATM manufacturer says it's expecting 2008 to end on a high financial note.

Yesterday, North Canton, Ohio-based Diebold Inc. released preliminary earnings for the second quarter of 2008, with some guidance for the rest of the year and early 2009.

Among the takeaways from the investors' call was the announcement that Diebold is closing its Newark, Ohio, manufacturing facility — a closure that will lead to the cutting of 100 jobs. Tom Swidarski, Diebold's president and chief executive, said the cuts are part of the company's plans to reduce its global workforce by 5 percent (800 jobs) by the end of the year — a plan Diebold announced in February.

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Diebold expects the cuts to help it reach its goal to reduce expenses by $100 million. The company plans to cut $70 million in expenses by mid-2010.

For the last 15 months, investors, analysts and the market at large have speculated about Diebold's financial future. After run-ins with the Securities and Exchange Commission over the company's long-standing practice of bill-and-hold financial reporting, Diebold has been unable to share much about its financials and has been reluctant to share much about its business.

And when the United Technologies Corp. bidhit the wires back in March, it only fueled ever-growing suspicions among industry observers that Diebold was in some serious financial trouble.

Diebold shrugged offthe UTC bid, saying the proffer was unsolicited and unexpected. But some industry insiders question Diebold's response, saying the UTC offer could be a viable one.

No mention, however, of the UTC offer was made during the call Monday. More attention was paid to Diebold's restructuring efforts and anticipated growth in financial-self-service products and services.

Diebold said the loss of its Newark plant, which makes security equipment, will be absorbed by Diebold's Lexington, N.C., plant, which currently manufacturers the Opteva ATM line.

Layoffs are expected to begin in October.

"A total of 800 is the number we communicated in February, and to date, we are 75 percent of the way there," Swidarski said during the Aug. 11 investors' call. "Some of that has to do with (what we are doing in) other parts of the world."

Over the next several months, Diebold will move production of its Opteva line from Lexington, N.C., to Shanghai, China, and Hungary, where Diebold already has production facilities that manufacture financial self-service products.

From there, Swidarski said, Diebold will focus the last six months of the year on closing 86 of its U.S. warehouses — reducing the total number of warehouses in three "strategically" located areas.

"We are improving our supply chain and production distribution," he said.

Earlier this month, Diebold also announced plans to exit Germany, where strong market competition has prevented Diebold from making significant inroads. Instead, the company plans to place greater attention on business growth in Central and Eastern Europe, Asia-Pacific and the Americas.

In 2006, Diebold closed a manufacturing facility in Cassis, France, also part of its plans to restructure and realign costs.

"Europe is our slowest market," Swidarski said. "We are making strategic decisions there, because we don't have the infrastructure in Western Europe like our competitors do. But we feel good about Eastern Europe and we will continue to invest there, and we will be more dependent on Hungary as we go forward."

Diebold anticipates an 11 percent increase in revenue from the second quarter of 2007 to the second quarter of 2008, with most of the growth coming from the financial self-service and outsourced-servicing growth. Second-quarter revenue is expected to hit $771 million. The company plans to hit margin targets of 7 percent in 2008 and between 9 percent and 10 percent in 2009.

Year to date, Diebold's revenue is $1.5 billion, up 9.3 percent from last year.

"In the Americas, I feel like we're in a very strong position," Swidarski said, "even though the market is up and down in the Americas. Brazil is just in a very unique position, because of their trust over the years and their move toward outsourcing. We received one of the biggest ATMorders in history, and we're taking that and leveraging that across the board."

Growth in its servicing businesswill be key going forward.

"A lot of the investments we have made benefit the service business," Swidarski said. "Plus, those are longer-term projects, which are sticky and good for the customer."

Diebold reported preliminary net income of $25.6 million, 38 cents per share, for 2Q 2008, down from $26.9 million, 40 cents per share, reported for 2Q 2007.

Growth in the company's financial self-service revenue, which is expected to be up 15 percent from 2Q '07, has been fuelled by the Olympics, Swidarski said, but he expects Diebold's growth in China to continue.

"If you look at the Asia region, we had a very successful early part of 2008, especially from China," he said. "We face stiff competition there, from manufacturers in Japan, but we are building out our Opteva line there and it looks promising."

Despite challenges in the U.S. financial market, Swidarksi says Diebold continues to see growth in its product sales.

"This is partly driven by an increased demand for deposit automation, where approximately one out of every two Opteva full-function ATMs shipped in 2008 is equipped with deposit-automation technology," he said.

From there, Diebold will move from product relationships to servicing relationships.

In Brazil, where Diebold says it holds 60 percent of the market, product and outsourced-servicing relationships go hand in hand.

"In the U.S. we have 10,000 banks, and we are just beginning to scratch the surface there (with deposit automation)," Swidarski said. "We are taking various vendors down to one, when we start looking at all of our service. From that perspective, we are starting with the smaller FIs and credit unions, with the smaller ATM networks of 20 or 30, and moving our way out."

See Tom Swidarski on CNBC during Power Lunch.

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