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Edited Transcript of DBD earnings conference call or presentation 30-Apr-19 12:30pm GMT

Q1 2019 Diebold Nixdorf Inc Earnings Call

NORTH CANTON May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Diebold Nixdorf Inc earnings conference call or presentation Tuesday, April 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerrard B. Schmid

Diebold Nixdorf, Incorporated - President, CEO & Director

* Jeffrey L. Rutherford

Diebold Nixdorf, Incorporated - Senior VP & CFO

* Stephen A. Virostek

Diebold Nixdorf, Incorporated - VP of IR

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Conference Call Participants

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* Ishfaque Faruk

* Justin Laurence Bergner

G. Research, LLC - VP

* Kartik Mehta

Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Robert Jost

Invesco Ltd. - VP & Senior Loan Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Diebold Inc. hosted First Quarter 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Steve Virostek. Ma'am (sic) [Sir], please go ahead.

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Stephen A. Virostek, Diebold Nixdorf, Incorporated - VP of IR [2]

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Thank you, Katie, and welcome everyone to Diebold Nixdorf's First Quarter Earnings Call for 2019.

Joining me today on the call are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, our Chief Financial Officer.

For your benefit, we've posted presentation slides which will accompany our prepared remarks on the Investor Relations page of dieboldnixdorf.com. Later this afternoon, an audio replay of today's webcast will also be posted to the IR website.

On Slide 2 of our presentation, we have a reminder that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. In supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric.

Moving to Slide 3, we inform all participants that certain comments made today may be characterized as forward-looking statements and that there are a number of factors that could cause actual results to differ materially from these statements. You may find additional information on these risk factors in the company's SEC filings.

Also, please keep in mind that forward-looking information is current as of today and subsequent events may render this information out of date.

And now I'll hand the call to Gerrard.

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [3]

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Good morning, everyone. I'm pleased to join you today for a discussion of our first quarter results, an update to our DN Now initiatives and the reiteration of our outlook for 2019.

On Slide 3, we've highlighted the company's first quarter performance. Overall, I'm pleased with the results, which show our sustained execution against our priorities.

Total orders decreased 1% in constant currency during the quarter versus 1 year ago. We delivered strong growth in Americas Banking, where our success was supported by orders for more than $70 million of Windows 10 capable machines. Key wins included a multiyear agreement with KeyBank to digitally transform more than 14,000 ATMs with dynamic -- with DN's dynamic software; a $5 million contract to provide recyclers and installation services with a top 5 financial institution in Brazil; a contract with Teachers Credit Union to upgrade their entire fleet of ATMs to Windows 10 in Midwestern states. This win indicates we're seeing Win 10 demand from financial institutions of all sizes. And we renewed a $40 million 3-year Services contract with one of the top financial institutions in the United States.

Eurasia Banking orders declined modestly in Q1 with very different trends across the subregions.

Orders from European customers were down slightly while customer orders increased nicely in the Middle East and Africa. Orders in Asia Pacific declined meaningfully year-over-year, as we maintained our bidding discipline and focused on profitable opportunities.

Important wins included an expanded partnership with a major financial institution in Belgium to upgrade more than 2,400 devices including a large number of cash recyclers to Windows 10, leveraging Diebold Nixdorf's AllConnect Services and our DN Vynamic software suite.

Secondly, a multiyear managed services contract renewal with a top tier bank in Western Europe; a cash recycling win at Halkbank in Turkey and Bank Pekao in Poland; and a new contract to provide over 250 cash dispensers and DN Vynamic connection points to a Taiwanese financial institution.

Retail orders declined slightly in the quarter due to strong performance in the year ago period. In the quarter, DN won a 5-year agreement valued at more than $60 million with one of the world's largest fuel and convenience retailers to deploy a new centralized card acceptance platform. Our contract includes software licenses, professional and maintenance services for stores located in 10 European markets.

In addition, we secured a $18 million contract with the French retailers' supermarket cooperative for 600 self-checkout systems and a 4-year services contract.

We're experiencing good growth for our self-checkout solutions in several European countries.

Changing over to revenue. The company increased our top line by 3% in constant currency versus 1-year ago, excluding approximately 6.5 percentage points of FX headwinds.

During Jeff's comments he'll discuss the impact of currency on our profitability in the quarter.

We delivered 11% revenue growth from Americas Banking and 4% growth from Retail both in constant currency.

In Eurasia Banking revenue declined 4% in constant currency reflecting lower volume from Asia and modest growth in Europe, the Middle East and Africa.

Our profitability improve into the quarter is encouraging as we're starting to realize benefits from our DN Now initiatives. Gross margin expanded 60 basis points lead by 140 basis point expansion in services and 230 basis point improvement in products.

Our software margins reflect a combination of lower volume, solution mix, higher delivery costs and accounting changes.

Operating profits increased by $9 million or 54% year-over-year to $27 million, due to our continued focus on streamlining our expenses.

Adjusted EBITDA increased by $3 million year-over-year and our adjusted EBITDA margin increased 50 basis points to 6.3%.

Moving onto cash flow. As most of you know our business tends to use cash during the first half of the year and generate cash late in the year. Through proactively managing our collections, payables, inventory and other cash uses, the company was able to reduce cash use by more than $90 million versus the prior year period for a 56% improvement.

Moving onto Slide 4. Our recent improvements to profitability and cash flow are largely driven by momentum from our DN Now initiatives that we laid out last year. This program is simplifying our operations, reducing costs and enabling a greater focus on our customers.

Slide 4 is a reminder of those initiatives, the time lines and expected realization of $400 million gross savings through the year 2021.

I'd like to expand upon a few of these initiatives. Starting with our new streamlined operating model, approximately 1,400 employees have departed from the company through March 31, and we have clearly-defined exit dates for more than 95% of the remaining 300 employees. As a reminder, we expect this initiative will about $100 million in gross savings through 2019 and $130 million of saving by 2020.

Equally as important, our new structure has clarified roles and responsibilities, which is driving increased accountability across the organization. Second, we are simplifying our ATM product portfolio and manufacturing footprint.

During the quarter, we successfully relocated the production of certain ATM products to lower cost locations, and we've stood up transition teams in preparation for closing a few subscale facilities.

Third, with respect to improving our net working capital, the company demonstrated good progress in the first quarter. Jeff will comment on these initiatives in a few minutes but let me say that I'm very encouraged by our ability to reduce net working capital as a percent of revenue to 19.1% in the first quarter down from 24% in the year ago period.

I'll discuss our progress with service modernization and the reduction of selling, general and administrative expenses in just a moment.

And finally, with respect to our noncore assets, during the first quarter we terminated our unprofitable business in Venezuela, liquidated a cash and transit business for retail customers in Europe and divested our program management IT consulting business serving European financial customers.

This month, we divested our Netherlands-based cash and transit business for banking customers and net proceeds were approximately $10 million.

One larger divestiture is taking longer than we originally envisioned, and we continue to make progress on several others.

On Slide 5, I'll spend a bit more time discussing our Services Modernization Plan. As discussed on prior earnings calls, our key actions include: automating incident reporting and response; standardizing our contract terms and other processes, which enable the company to realize scale benefits; and upgrading older customer hardware and software, which typically generates a higher volume of service pulls.

On the prior earnings call, we introduced 3 key performance metrics to help track our progress: the first metric is a trailing 12-month service renewal rate, which remained solidly above our 95% target for the first quarter; next is the contract base of ATMs, which we maintained at approximately 630,000 versus the prior year; and most importantly, the key financial metric is our gross services margin, which increased 140 basis points year-over-year in the first quarter to 24.7%, made by gains in both banking segments.

At the country level, we drove notable improvements in the United States, Canada, Mexico, Germany, France, the U.K. and several other markets.

In fact, our gross service margin in the United States was just above 30% for the quarter. These results coupled with the strong service level quality for our customers and strong engagement from our Services team, it's highly encouraging.

Moving to Slide 6. We describe our work streams and early progress to further reduce our selling, general and administrative expenses.

Using global spend analytics, we have identified significant sources of savings from consolidating and reducing the company spend with third parties. In fact, any leaders within the company have taken ownership for this procurement initiative, and we're using a well-renowned model to track our progress at a granular level using 5 different degrees of implementation.

Additionally, we're beginning to consolidate our real estate footprint with a particular focus on underutilized office space. During the first quarter, we announced plans to close 7 European leased offices. Our analysis indicates that we have incremental cost reduction opportunities across all our regions.

In our finance organizations, we implemented initial actions to streamline certain finance functions during the first quarter. This program is expected to build more momentum in the latter part of 2019, as we make greater use of shared services and increased automation of finance and accounting.

Also during the quarter, the company's information technology leaders successfully contracted to reduce our global telecommunications spend as well as our storage costs in the United States.

We expect the collective impact of first quarter SG&A decisions to drive future annualized run rate savings of about $20 million, once they're fully reflected in our P&L.

On the bottom half of this slide, we'll see a key performance metric, SG&A expense as a percent of revenue for the last 5 quarters and our 2021 target of 13% to 14%.

During Q1, the company's SG&A, as a percent of revenue, was 17.7% or unchanged on a year-over-year basis. However, there were a few items working against this metric in the quarter and they include: normalized compensation expenses; unfavorable mark-to-market entries, resulting from legacy Wincor auctions, which are linked to the Diebold Nixdorf share price; and other benefits in the first quarter of 2018 which did not recur.

Collectively, these factors accounted for about $13 million or 120 basis points of headwinds versus the prior year.

In summary, our first quarter results demonstrate solid execution from the leadership team and good alignment on our priorities.

For 2019, we continue to expect our DN Now initiatives will generate approximately $160 million of gross savings. Since the majority of these actions are within our control, we remain confident in our clearly defined path for value creation. As a result, we are reiterating our output for 2019 for revenue, adjusted EBITDA and free cash flow, which Jeff will detail in a few minutes.

And now I'll hand the call over to Jeff.

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Jeffrey L. Rutherford, Diebold Nixdorf, Incorporated - Senior VP & CFO [4]

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Thank you, Gerrard, and good morning, everyone. During my prepared remarks today, please keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted.

On Slide 7, our revenue table provides a year-over-year comparison for the segments and the business lines, both as reported and on a constant currency basis.

The foreign currency headwind in the quarter was significant at nearly 6.5 percentage points or about $66 million due to the strengthening of the U.S. dollar against the euro, the Brazilian Real and the British Pound. For this reason, we believe the currency-adjusted growth rates provide the most meaningful comparison.

Total revenue increased 3% in constant currency, led by 11% growth in Americas Banking, 4% growth in Retail and a 4% decline in Eurasia Banking.

Looking at the business lines, product revenue increased 15% in constant currency due to growth in banking and retail volumes. Our Services revenue decline of 3% is largely attributable to our focus on more profitable contracts, particularly in Eurasia.

Software revenue was down versus the prior period due to retail -- lower retail activity and the divestiture of our program management business in Europe.

Our next 3 slides provide segment level financial information.

Starting with the Eurasia Banking on Slide 8, revenue could decline 4% in constant currency to $383 million during the first quarter due to 4 factors: number one, significantly lower product volumes in Asian countries due our -- due to our focus on profitable business; two, lower service revenue resulting from our decision not to renew low margin -- a low margin maintenance contract in India; three, the impact of a divestiture; and four, modest revenue growth from customers in the EMEA region.

Non-GAAP operating profit for the quarter increased from $20 million last year to $34 million due to higher gross margin for both product and services coupled with lower operating expenses. All of which can be attributed to the DN Now initiatives.

Foreign currency was approximately a $4 million headwind to operating profit in the quarter versus the prior year.

On Slide 9, you can see the revenue from the Americas Banking segment increased 11% in constant currency to $363 million, led by strong product and software growth.

Our impressive product revenue growth of 52% benefited from Windows 10 upgrades, continued demand for cash recyclers and from the resolution of supply chain issues, which impacted the first quarter of 2018.

Service revenue in the quarter declined modestly year-on-year due to -- due primarily to a lower contract base resulting from different customer dynamics as well as lower build work.

Operating profit increased from $5 million to $18 million in the quarter, primarily due to higher product gross profit, improving gross service margins and reduced operating expenses resulting from our DN Now initiatives.

Slide 10 highlights for our Retail head -- segment. Revenue increased 4% in constant currency to $283 million in the first quarter as product growth in Europe and the Americas more than offset mild declines in services and software. The decline in services was primarily due to the liquidation of the cash and transit business.

Operating profit decreased from $10 million to $8 million due primarily to lower software volume and an unfavorable solution mix.

The foreign currency impact and the underperformance in a noncore business. These factors more than offset DN Now savings.

We provide a year-over-year comparison of our profit metrics on Slide 11. Non-GAAP gross profit decreased $2 million year-over-year due primarily to foreign currency headwinds of approximately $15 million and $5 million of inflation. These factors more than offset the DN Now savings from the new operating model, ATM portfolio simplification and our Services Modernization Plan.

Non-GAAP gross margin increased approximately 60 basis points to 23.9%, led by gains in products and services. As mentioned during the segment comments, we are also driving operating expenses lower through our DN Now initiatives.

Removing the effects of foreign currency, operating expenses -- expense was favorable by approximately $1 million with cost reductions offsetting the approximate $13 million of the headwinds which Gerrard described earlier on the call.

As you could see from the bottom half of this slide, our profit metrics are moving in the right direction. Operating profit increased 54% during the quarter to $27 million and operating margin increased 90 basis points to 2.6%. Adjusted EBITDA increased by $3 million to $65 million, while the adjusted EBITDA margin expanded by 50 basis points to 6.3%.

I'd like to mention that the company made minor corrections to certain foreign subsidiary amortization expenses which were used to calculate adjusted EBITDA in 2018. This change does not impact reporting operating profit or free cash flow. You'll find revised GAAP to non-GAAP reconciliations for each quarter of 2018 on Slide 16 of this presentation.

Moving to Slide 12, we continue to aggressively manage our networking capital investment, and we reduced this metric as a percentage of trailing 12-month sales from 24% in the year ago period to 19.1% in the first quarter of 2019. Our progress is due to better collections, improved payment processes and inventory management.

In fact, our first quarter collections represent the best start to the year since the combination. Our working capital improvement was a key reason why the company was able to reduce its free cash flow use in the quarter by $91 million versus the prior year period.

Other contributing factors were modestly higher adjusted EBITDA and lower CapEx, partially offset by higher net interest and restructuring payments.

On the left side of Slide 13, we illustrate our liquidity position at the end of March 2019. With cash of $409 million and net debt of approximately $1.8 billion, our net debt to trailing 12-month adjusted EBITDA ratio was 5.7x, which is more than a full turn below our bank covenant maximum.

To the right side of the slide, we provide a time line for our debt maturities. While there are no meaningful maturities in 2019, our revolving credit facility and Term Loan A will mature in December 2020. We incorporated these debt maturities into our 3-year plans so that we maintain sufficient capital for meeting all of our operating and funding needs.

On Slide 14, we maintained our outlook for 2019. We expect to generate revenue of $4.4 billion to $4.5 billion, which reflects a modest year-on-year decline due to currency headwinds, near-term divestitures, continued banking revenue weakness in Asia as well as modest growth in Americas Banking and Retail.

Our outlook for adjusted EBITDA is $380 million to $420 million, which we expect will be supported by approximately $160 million of DN Now savings. Our outlook also includes about $50 million of inflation and normalized compensation net of expected benefits from divestitures, but does not include approximately $20 million of benefits which occurred in 2018.

Our free cash flow outlook for 2019 is breakeven and includes the following estimates: net working capital cash flow of approximately $100 million, net interest expense of approximately $190 million, restructuring payments of approximately $130 million, and approximately $80 million of capital expenditures, $60 million of cash taxes and $40 million of other cash uses.

While we do not provide quarterly guidance, I would like to remind our investors that we expect typical seasonal trends to play out over the course of 2019. Specifically, we anticipate revenue to increase modestly on a sequential basis in the second quarter and again in the second half of the year.

Adjusted EBITDA is forecast to modestly increase on a sequential basis, however, our profitability in the second half of the year should be considerably stronger as our DN Now initiatives gain traction.

With respect to free cash flow, normal seasonal trends, indicate that the company will use cash for the first 3 quarters of 2019 and generate significant free cash flow in the fourth quarter.

And now, I will hand the call back to the operator to begin our question-and-answer period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matt Summerville with D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [2]

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Couple of questions. Gerrard, could you maybe give just a little bit more of a granular overview on the Americas Banking business, the kind of order momentum you're seeing there, perhaps quantifying that. And then talk about the Windows 10 cycle in the context of whether you're finding it to be more replacement versus upgrade heavy and perhaps tilting a bit more towards small banks versus big banks.

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [3]

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Matt, thanks for your question. So for the Americas, we're very pleased that we're seeing solid order momentum or -- in the double-digit plus range across the board, across Latin America, Mexico, United States and Canada. So it's broad brush regionally. And when we take a look at it on an institutional size basis, we're seeing it play out across both the bigger banks and the small banks at a relatively similar momentum level. So that really is pointing to a broad brush growth over what we've seen in prior periods. Now we expect that to continue as we look at our order activity for the next couple of quarters and obviously, things will likely flatten out given the exceptionally strong result that we posted in Q4 of last year. In terms of your second question as to the mix between replacement versus upgrades, I think that this is a topic where we're seeing a relatively even balance between those 2, with some institutions favoring a software upgrade, others favoring a full-on machine replacement. So it's a relatively even mix today, when you take a look at our order activity.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [4]

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Then maybe, can you spend a minute perhaps talking a bit about the new product pipeline you have, more specifically in the ATM business, as we think about the balance of 2019. And then Jeff, can you comment based on where currency rates are today, how much top and bottom line headwind you expect related to FX?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [5]

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Yes, Matt, so I think I've already provided the comments vis-a-vis the Americas, in terms of new order activity. We are continuing to see very strong pipeline and sales momentum in the Americas and expect that to continue on a go-forward basis. Europe, what we're starting to see, and we mentioned this in -- a couple of quarters ago that we're starting to see Europe show some early signals of momentum, in particular, in Western Europe. Middle East is showing very strong momentum for us right now. And as we've pointed out for the past several quarters, we've maintained a very, very disciplined focus on Asia and as a result, we're willing to concede market share in favorable profitable business. So we're seeing our order activity moderate in that market.

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Jeffrey L. Rutherford, Diebold Nixdorf, Incorporated - Senior VP & CFO [6]

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And then Matt, as far as currency, obviously the euro is the most impactful currency for us. We expect based on where the euro is trading today that there'll be an impact in the second quarter. We are actually modeling it somewhere between 3% and 4% impact on the top line, and then it'll level out as we go into the third and fourth quarter as the levels will be less. It'll be less than 1% in the third and fourth quarter, based on the current euro level trade.

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Operator [7]

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Our next question comes from Justin Bergner with G. Research.

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Justin Laurence Bergner, G. Research, LLC - VP [8]

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My first question, just related to noncore asset sales. I think you gave a brief synopsis. Could you just remind us what was completed in the first quarter? I heard the mention of the $10 million sale this month and progress towards remaining asset sales. And where do you ultimately intend to end up versus your initial goals on asset sales?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [9]

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Yes. So Justin, let me start with the latter part and then back into the actions in the quarter. We're still tracking towards divesting around 5% of our revenues. There's obviously a number of assets in that mix. And as I said in my prepared remarks, the broad range of those are tracking in line with our expectations. There's one slightly larger one that's taking a little bit longer than we'd expected. In the specific quarter for Q1, we exited Venezuela. We also divested our banking cash and transit business in Europe as well as a retail cash and transit business in Europe. And furthermore, in April, we concluded the divestiture of our IT consulting business geared towards European financial institutions.

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Justin Laurence Bergner, G. Research, LLC - VP [10]

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Okay. That's helpful. And then were the first quarter proceeds pretty minimal or could you quantify what the proceeds were in the first quarter?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [11]

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So they were $10 million.

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Justin Laurence Bergner, G. Research, LLC - VP [12]

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I'm sorry, they were $10 million?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [13]

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Yes. So don't forget, Justin, as I've said -- yes, they were $10 million. And as I believe I've said in the past as well, if you will think about the sequence of divestiture that we are executing against, not only are we targeting proceeds but also divesting businesses that have a drag on earnings. So a number of those that we exited in the quarter were a drag on earnings. So we'll increase our EBITDA on a go-forward basis, given that we exited those.

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Justin Laurence Bergner, G. Research, LLC - VP [14]

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Okay, great. And did I hear correctly in the opening comments that the April divestiture was another $10 million?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [15]

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No, it's $10 million cumulatively across that [portfolio] that I mentioned.

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Justin Laurence Bergner, G. Research, LLC - VP [16]

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Okay. Great. Shifting gears, I just want to dig a little bit deeper into the service performance. How should we think about the trajectory going forward for service gross margins? And I know you mentioned the 30%-plus gross margin figure in the Americas. I'm not sure sort of what to reference that to, and if that's indication that the Service gross margin improvement is more pronounced in the Americas or sort of there's more to be gained in the Americas than the rest of the world.

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [17]

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So if you look at Diebold before the Wincor acquisition, Justin, we were doing 30% service margins in North America. So no, we raised this to simply make reference to the fact that we really have made up a bunch of lost ground in prior quarters while still delivering very strong service levels for our customers. If I step that up to a more global level, last quarter, we provided a 3-year outlook on where we saw our services margins heading to, to north of 27%. And we're still on the view that that's the right way to think about this business on a global basis. Now obviously, we're seeing some very good momentum and we're pleased with the fact that for 3 consecutive quarters we've started to see some real progress coming out of that services business, but we're still holding firm that on a consolidated basis globally we're targeting north of 27%.

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Jeffrey L. Rutherford, Diebold Nixdorf, Incorporated - Senior VP & CFO [18]

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And that is by the year 2021. So we'll make steady progress [from] 2019.

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Operator [19]

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(Operator Instructions) Our next question comes from Kartik Mehta with Northcoast Research.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [20]

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Gerrard, I wanted to get your perspective on Asia and what you think the long-term perspective -- what the long-term business model could be there for you? Is this a market that you see yourself kind of just continuing to divest? Or are there opportunities to have a bigger impact in those markets?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [21]

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Kartik, so I think at the end of the day we need to split Asia into a more nuanced view then simply 1 macro market. I'd tell you that from our vantage point, markets like China and India are incredibly challenging to generate a reasonable return and therefore, it's not clear to us that over the medium term that those markets improve substantially. Yes. When we look at other markets in Asia, think of markets in the Southeast Asia region plus further south there are certainly markets where margins remain very robust, where banks are buying not only on price but also buying on services, machine quality and the depth of the software portfolio. So those are markets that we see as remaining attractive. So I think what I'd broadly say, Kartik, is we're going to pick and choose where we choose to compete in Asia. And as I've commented on the past, we have a number of competitors out there with just a very, very different perspective on pricing, and we're just not willing to participate in deals of that nature. So we're being selective on where we choose to participate. And those markets that are attractive for us, we think are likely to remain attractive over the medium term.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [22]

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And then, Gerrard, as you look into the U.S., as far as the Retail business is concerned. I know one of the goals was to try to expand the Retail business in the U.S. Where do you stand as far as getting more traction in the U.S.? Are you targeting maybe different retailers than you were previously?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [23]

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Yes. So Kartik, I think in prior management teams there was a view that we could pursue the U.S. in broad brush terms across the full range of our retail portfolio. I'd say that we're taking a much more targeted approach, focusing on those products where we believe we have a strong competitive advantage. And that would be most notably in our self-checkout area, where we're seeing very, very strong growth in Europe. And on a feature function basis we believe we actually stand tall. So I think we're being much more selective on our opportunities. By that very nature, it'll take more time for us to show that momentum. If I take a step back though, I definitely am not of the view that our retail growth is purely predicated on accessing the U.S. market. There's no doubt that there remain interesting opportunities for us in our existing core markets of Europe as well as in Asia. And -- now that's why I think it's worth calling out that we look at the competitive dynamics between banking and retail very differently in Asia Pacific market. And we think that Asia remains an attractive area for us to grow into.

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Kartik Mehta, Northcoast Research Partners, LLC - Executive MD, Director of Research, Principal & Equity Research Analyst [24]

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And then just one last question for you, Jeff. As you -- I know that the next set of maturities for you, really the big maturities are 2020 in the Term Loan A and the Credit Facility. And I'm wondering, how do you -- the opportunity to maybe reduce interest expense with those debt maturities coming up?

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Jeffrey L. Rutherford, Diebold Nixdorf, Incorporated - Senior VP & CFO [25]

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Yes, when we look at our maturity stacks, we have a short-term opportunity and a long-term opportunity. The short-term opportunity is to address the revolver and Term A stack and move it out towards the Term A-1. It's not feasible to move those stacks beyond the Term A-1. So that's the first step. The second opportunity then will be once that is accomplished and addressed. And as we move through this model, and you know we've given long-term goals. We've given 3-year goals and you can think about what the potential is for refinancing. And I'll qualify it by saying this all depends on the capital markets too. But there are going to be opportunities that are not available to us today as we progress through the maturity of the model and realize higher levels of EBITDA and free cash flow.

So we actually look at it as 2 tranches. A short-term tranche and the opportunities to address the revolver in Term A in the short-term and then the long-term. So to answer your question, the ability to reduce our weighted average cost of capital is really going to come in the long-term addressing of our capital structure, not necessarily in the short-term.

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Operator [26]

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Our next question comes from Rob Jost with Invesco.

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Robert Jost, Invesco Ltd. - VP & Senior Loan Analyst [27]

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Coming back to the Retail segment, I guess a couple of things. You point out the profit being down for a number of reasons. If we were to strip out some of these onetime things, is there a way to see what that would've looked like on a year-over-year basis? Would have it been up?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [28]

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Rob, so as we said in our prepared remarks, Retail was down due to slightly higher software delivery expenses in the quarter plus some headwinds due to a noncore business that -- underperforming in that area. So when we look at our outlook for Retail profitability for the balance of the year, we remain very encouraged that our retail profitability will show meaningful momentum year-over-year. So I think there's a bunch of one-off items in the quarter that are not symptomatic of a trend in our retail business.

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Robert Jost, Invesco Ltd. - VP & Senior Loan Analyst [29]

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Okay. And in the past you've talked about investing in that business, I think the -- it was on a sales capacity. And I wonder if there is probably more of a North America than a European thing. I guess first of all, can you clarify if what I'm remembering is correct. And secondly, are you still investing there or have you reached the level that you're comfortable with?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [30]

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So I'll go back to the comments I made to the prior question. The heavier investment in sales was certainly something that was done, quite frankly, before I joined the organization. As I said in my prior comments, we're taking a more targeted view towards our retail focus in the Americas. And by definition, we don't see ourselves facing higher investment expenses in that market.

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Robert Jost, Invesco Ltd. - VP & Senior Loan Analyst [31]

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Okay. Great. And then my last question is on the Eurasia Banking. Talking to different people who are familiar with the ATM markets, we've been lead to believe that the ATM refresh in Europe will be slight delay behind the U.S. I'm just curious, is that what you're seeing? Would you expect the European markets -- or are you seeing European markets going at a slower pace? And perhaps, they'll serve as a bit of a tailwind after the U.S. market cools off?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [32]

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Yes. Robert, if you take a look at our comments through most of last year and even this year as well. There was no doubt that North America and the broader Americas lead the refresh cycle. And we weren't seeing the same growth momentum in Europe as we were seeing in the Americas last year. During the back end of last year and now as we start to move into Q1, we're starting to see European activity pick up. So we do see it lagging the Americas. And as I've commented in the past, our sense is that that'll add some tailwind to our European activities as we look out over the next several quarters.

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Operator [33]

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Our next question comes from Ishfaque Faruk with Sidoti.

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Ishfaque Faruk, [34]

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Just piggybacking on the -- on a prior question that was asked. In terms of the digital transformation work that you've -- that you did for -- that you're going to do for KeyBank. Do you have like similar pipeline of work outside of the Americas?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [35]

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We absolutely do. So when you take a look at our software pipeline and some of the comments that we made in our prepared remarks, there have been software wins in most of our markets. In my prepared remarks, I talked about a large Western European financial institution that included hardware sales, service sales as well as a very large software deployment as well as other markets in EMEA. So it's pretty consistent across the board in terms of our pipeline of opportunities.

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Ishfaque Faruk, [36]

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Got it. Got it. Okay. Another one for me. In terms of, in your -- the DN Now Modernization Plan. You highlight -- earn like a 230 basis point jump in your services gross margin. Could you give a little more color on how you're going to get there?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [37]

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Well, so we realized a 230 basis point improvement in the quarter over last quarter. And if you go back and look at our prior releases, we have targeted a -- 27% services gross margins. We're seeing now 3 consecutive quarters of momentum flowing from our Services Modernization program. And the key drivers around how we do that are simplifying our contract base, introducing more automation in our call dispatch capabilities as well as automating other aspects of our services business. So there's a broad -- there are 11 different initiatives underpinning our Services Modernization Program, all really focused on driving up the precision with which we deliver services to our customers. And we started this work in Q2 of 2018 and are seeing very solid progress towards our multiyear goal of 27% margins in 2021.

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Operator [38]

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Our next question comes from [Ash Thomas with Bybrook Capital].

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Unidentified Analyst, [39]

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This is just a question on the balance sheet. It looks like there's a $172 million, thereabouts, of lease liability which appeared this quarter. Would you be able to talk about what that's in relation to?

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Jeffrey L. Rutherford, Diebold Nixdorf, Incorporated - Senior VP & CFO [40]

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So that is the adoption of the new GAAP requirement to capitalize leases, effectively. And that's -- so that's, we're basically taking all of our leases, which are generally our fleet for services and then any leases associated with offices and buildings. And the U.S. GAAP now requires you to basically capitalize that and put it one the balance sheet. So there's an offsetting asset and liability that's grossed up our balance sheet. You'll see it in the Q, which should be filed today or early tomorrow. And it has no real effect on our operations or any other metrics that we talked about today.

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Operator [41]

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Our last question will be from Justin Bergner with G. Research.

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Justin Laurence Bergner, G. Research, LLC - VP [42]

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I just wanted to ask if the order activity in the first quarter met your expectations or fell slightly short of our expectations. And it seems like you're reaffirming your revenue guidance despite somewhat stronger currency headwinds. So is there something that's a tailwind that's a positive offset to that?

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [43]

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Yes, Justin. So obviously, order activity moves around a little bit quarter-over-quarter. So we try not to pay too much attention to any one quarter, but look at it over a trending basis. And we are encouraged by the momentum we're seeing in our order activity. As I said, if you take a look at our operating performance in the Americas and match that to what we're seeing in our pipeline, that's really fueling the growth in our order book, coupled by ongoing strength in our retail business with Eurasia being more of a mixed view. So I would say, it's broadly in line with our expectations. And as we look forward to Q2, we're very encouraged with the order activity to match against what we hope to achieve for our plan.

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Justin Laurence Bergner, G. Research, LLC - VP [44]

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Great. That's good to hear. And then secondly, the SG&A initiatives that were listed on Slide 6, seems like some good initiatives there. Is any of that incremental to the DN Now program as it was updated last quarter? Or is that just more spelling out some of the individual initiatives? These would be the reduction initiatives you made.

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Gerrard B. Schmid, Diebold Nixdorf, Incorporated - President, CEO & Director [45]

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It's spelling out the additional initiatives. So we -- yes, it's a subset of the $40 million that we talked about, Justin. I'm just adding more color so that you can get a sense of how it [comes about].

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Operator [46]

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Thank you. This does conclude today's teleconference. You may now disconnect. Thank you for joining us.