Q3 2019 Earnings Call
Good day and welcome to the deep old Nixdorf posted third quarter 2019 earnings call. At this time I would like to turn the conference over to Mr., Steve Everest. Please go ahead Sir.
Thank you Brittney and welcome everyone to default Nixdorf's third quarter earnings call for 2019.
Joining me today, our George Smith, President and Chief Executive Officer, and Jeff Rutherford, Our Chief Financial Officer.
During our prepared remarks, we will be referencing slides, which can be accessed on the investor relations page of people next door Dot com.
Later this afternoon and audio replay of today's webcast will also be posted to the IR website.
Slide two of our presentation. Today contains reminder, that number of our comments pertain to non-GAAP financial information, which we believe is helpful in assessing the company's performance.
The supplemental slides, we have provided schedules, which reconciles each non-GAAP metric to its most directly comparable GAAP metric.
On slide three we inform all participants that certain comments, maybe characterize as forward looking statements and that there were a number of factors that could cause actual results to differ materially from these statements.
They find additional information on these risk factors and the company's FCC filings.
Also please keep in mind that forward looking information is current as of today and subsequent events. They render this information out of date.
With that I'll hand, the call backs.
[noise]. Thank you, Steve good morning, and thanks to everyone for joining our call.
When we laid out our DNA transformation changes at the beginning of 2019.
All right, that's what focused primarily on sustainable improvements in cash flow and operating profits.
While enabling a greater focus on our customers and solutions.
This quarter and on a year to date basis I'm very encouraged by the year over year improvements, we have delivered to both gross margins and cash flow as key measures about progress.
As you can see on slide three we are driving sustainable improvements to operational efficiency, while evolving our solutions set and strengthening our financial position.
Executing our dealers now plans.
[noise] as a critical business partner to banks around the world and the largest European retailers.
The next commerce solutions enable millions of daily transactions spanning more than 100 countries.
Our industry leadership and geographic press has many benefits.
It also exposed as a company to changes in the macroeconomic landscape.
For example, this year, we've faced numerous revenue foreign exchange headwinds as the U.S. dollar has strengthened against other foreign currencies.
On a year to date basis currency fluctuations have effectively reduced the company's revenue by approximately $130 million or just over 4% versus the prior year.
We're also observing early signs of a weakening customer confidence in future economic activity in some markets most notably in Europe .
That being said we are confident in the competitiveness of our solutions.
Whether it'd be too our newly launched deal series are all connected data engine enabled services offering.
Our retail self checkout solutions fanatic software.
There are many services capabilities.
On slide four I'll speak to third quarter highlights.
Starting with orders in our retail segments, we experienced solid growth for self checkout and kiosks solutions.
Including a new contract for self service kiosks integration that monitoring software Sixtyv, Dave and Busters restaurants.
Point of sale orders, however declined after several quarters of growth.
Certain European customers reacted to slowing economic activity.
We also saw certain contracts extend into later quarters.
For Eurasia banking orders decreased in constant currency as a few deals with customers in EMEA slipped into future periods business conditions in the UK remain challenging and we maintain our focus on profitable contracts in Asia.
Americans banking reported relatively flat orders versus the prior year as we were up against a strong prior year period comparison in Latin America.
We continue to see solid activity from regional banks in the U.S. with some easing of demand from larger banks in the U.S. as they complete their windows 10 upgrades.
During the quarter, we secured a sizable new soft create contract to transform the Devon platform at a top 10 us financial institution.
Turning to our revenue performance in the quarter.
Total revenue was essentially unchanged versus one year ago after accounting for approximately 300 basis points of foreign currency headwinds.
100 basis points from our portfolio shaping actions.
We believe this latest provides an important perspective on our revenue performance and this approach will become even more meaningful as we expect to complete a few transactions over the next few months.
non-GAAP gross profit for the third quarter improved $29 million for 12% versus the prior year.
Primarily as result of idea now initiatives and despite $7 million a foreign currency headwinds.
Our non-GAAP gross margin increased approximately 350 basis points versus the prior year to 25.5%.
Represents the best performance on this key metric since our combination.
We delivered solid margin expansion across all three segments with contributions from services and products and software.
Our progress is indicative of changes we are driving the way that we conduct business to idea now initiatives.
Adjusted EBITDA for the third quarter increased by $5 million year over year or 5% as higher SGN, a expenses offset some of the gross profit benefits.
Our cash flow performance was excellent.
And generated $65 million of positive free cash flow in the third quarter, which is ahead of our expectations.
When compared with the prior year, a free cash flow improved by $100 million under $90 million.
For the quarter due to more efficient collections inventory management payables as well as higher operating profits.
On a year to date basis, our execution in these areas.
So the free cash flow improvements of $390 million over to 2018.
We believe this points to sustainable change in operating behavior is from the broader team at Dan.
Slide five is a familiar chart, which summarizes our key DNR initiatives.
And our objective to deliver $400 million of gross savings through 2021.
The transition to our new operating model is virtually complete and we have good line of sight towards approximately $100 million up gross savings for 2019.
As well as cumulative savings of $130 million of savings through 2020.
We've also made good progress and simplifying our ATM product portfolio and optimizing our manufacturing footprint.
Our focus has shifted to realizing the benefits from a successful launch of our next generation banking solution. The DN series.
Our services modernization plan continues to generate positive results, which can be seen in our non-GAAP gross service margin.
Which expanded by 350 basis points versus the prior year period to 26.9% in the quarter.
We continue to execute on our companywide initiative to reduce selling general and administrative expenses by about $150 million through 2021.
This includes a number of actions, which will right size, our support structure improve internal processes.
Enhance our productivity and better leverage a global scale.
And while SGN, they ticked up in the quarter, we see that as an exception to a long term trend.
Dan remains focused on improving our net working capital and we are on track to meats and possibly exceed our 2019 goal of $100 million year on year improvement.
The third quarter, we reduced net working capital as a percent of trailing 12 months revenue to 15.6% from 24% in the prior year period.
As we close outs 2019, and build our operating plans what 2020.
We are developing additional productivity initiatives, which will be shared on future earnings calls.
Slide six updates the progress, we're making on simplifying our product portfolio.
The efficiency gains from our manufacturing initiatives contributed to our non-GAAP product gross margins of 20.8% in the quarter.
Which increased 320 basis points versus a year ago period.
What about biggest drivers of competitive differentiation is the Dan series, our next generation banking platform.
While we're still in the early stages of our launch I can tell you that the initial customer reception has been very positive.
As they see clear benefits from a more modular and Upgradable design, which includes our next generation cash recycling technology.
Advanced sensor technology and connectivity to the Deanne all connected data engine.
Which will increase uptime and offer better customer experience.
Great and load capacity and industry, leading security features in a smaller footprint.
And increased options for personalization and branding.
Do you serious offers a compelling value proposition driven by a vastly better customer experience.
We're pleased to announce that we have initiated the deal series certification process with more than 150 customers across 30 countries.
We are encouraged by this early progress including interest from customers that have not historically purchased hardware from Dan.
On slide seven we've provided an update of our services modernization plan.
We accelerated the replacement of older hardware and software in the quarter.
And now have created more than 100000 to touch points.
This activity delivers a performance benefit for our customers and a financial benefits to the company from reducing the volume of service calls and spare parts.
A key performance indicators across the services business are tracking to plan.
During the third quarter, we continue to maintain a services renewal rates above 95%.
And our contract base of ATM sustainable at approximately 621000 units.
A key financial metric is the gross services margin, which increased 350 basis points year over year, reaching 26.9% in the third quarter.
This is the fifth consecutive quarter of year on year service margin expansion and all three segments contributed to our success.
These results and continued engagement from our services team is very encouraging and underpins our confidence in delivering target gross margin of 28% to 29% by 2021.
On slide eight speak to our initiatives for further reducing our selling general and administrative expenses.
Within the finance organization, we continue to lay the groundwork for centralizing, our accounting processes, making greater use of shared services and increasing automation.
Year to date savings are approaching $5 billion from streamlining and outsourcing certain finance functions.
And we're tracking to substantially greater savings over the next few quarters.
In our sales organization, we are realigning support resources with market opportunities and in doing so we've been able to reduce our expenses.
We also continue to bring strong discipline to the procurement activities associated with external spend.
For the nine months ended September Thirtyth, we have reduced third party spend by approximately $90 million.
With respect to real estate holdings, the company continues to consolidate underutilized space.
Putting half dozen offices in the Americas.
And we streamlined our presence in China.
Year to date, we've either closed or right size more than 30 locations.
And we're on track to reduce our office square footage by about 9% by year end.
In the third quarter, our progress on reducing non-GAAP SGN expense.
Was masked by about $12 million of unfavorable items listed on this slide.
Jeff will provide further color during his remarks.
Looking to the fourth quarter, we expect progress from idea now initiatives as well as the easing of unfavorable items, which will result in a noticeable sequential improvements in our SGN a expense.
Looking at the past 12 months non-GAAP asked you name as a percent of revenue edge slower by 20 basis points to 15.6% and we remain confident in our ability to reduce estimate 2% of revenue and we are reiterating our target of 13% to 14%.
In conclusion third quarter results demonstrate that the company continues to drive substantial improvements to our profitability and cash flow.
Even as revenue is relatively the same as the prior period.
Based upon our year to date results currency headwinds and our current order book, we are revising our outlook to about 4.4 billion dollar revenue for 2019.
We're also narrowing or outlook for adjusted EBITDA of 400 to 410 million in light of higher compensation expenses based on a stronger than expected cash flow performance.
On the strength of our working capital achievements, we are raising our free cash flow outlook.
From a modest positive two range of $70 million to $100 million.
And now I'll hand, the call over to Jeff.
Thank you Gerard and good morning, everyone.
Third quarter results demonstrate that the.
People next start to strengthen his financial position by improving our operating efficiencies generating positive cash flow and reducing our debt leverage ratio.
Slide nine contains the revenue comparison for our three segments and business lines.
Both as reported and on a constant currency basis, excluding the impact of our portfolio shaping actions.
Total revenue of $1.08 billion.
It was essentially unchanged year over year after factoring in the effects of foreign currency and our portfolio shaping activities.
The foreign currency had one was approximately 300 basis points during the quarter or about 26 million versus the prior year, primarily due to the U.S. dollar strengthening against the euro and to a lesser extent against the Brazilian real and the British pound.
Our portfolio shaping actions accounted for another percentage point for about $13 million up year on year variance.
Using the same lands for the segments.
Dan delivered revenue growth of approximately 6% from the Americas.
While Eurasia banking declined 2% and retail declined 6%.
Looking at revenue trends within our three business lines software and products revenue increased 3%, primarily due to growth in the Americas.
The 2% decline in services revenue is largely attributable to lower installation activity in Europe .
And maintenance and the United States.
Moving to slide Ted I'll discuss discuss the financial highlights for all three segments.
Starting with Eurasia banking revenue decreased 2% after adjusting for currency and our portfolio shaping actions to $405 million during the third quarter.
Lars installation activity in Europe impacted services revenue, although product revenue increased primarily due to customers in EMEA.
Software revenue was relatively flat year over year.
non-GAAP operating profit decreased modestly.
From $44 million last year to $42 million in the third quarter as benefits of our idea now initiatives were masked by the items Gerard mentioned during his comments about SGN expense.
In the Americas banking segment revenue in Q increased 6% to $404 million led by product and software growth.
We continued to benefit from Windows 10 refresh activity in North America, and cash recycler shipment growth in Latin America.
Service revenue in the quarter decline modestly year on year, due primarily to lower maintenance revenue and the United States, partially offset by growth in Mexico and Brazil.
Operating profit increased from $2 million, one year ago to $29 million in the quarter due to product revenue coupled with significant expansion of our product and services gross margins.
Yeah, our idea now initiatives.
Our retail segment experienced lower than expected product volumes.
As was lower gross margin stemming from a less favorable mix of products and this is primarily the primary driver over the year on year revenue and gross profit declines. Additionally, operating profit at $13 million was impacted by slightly higher operating expense versus prior year.
On slide 11, we prefer to provide a year over year comparison of our non-GAAP profit metrics.
Gross profit increased $29 million year over year, primarily as result of our Dan now productivity gains and cost reductions and acquitted pharmacy current headwinds approximately $7 million.
non-GAAP gross margin increased approximately 350 basis points to 25.5%, which is our best performance since the combination of Diebold nixdorf into 2016.
Reflects our focus on sustainable in sustainably improving our profitability.
As mentioned during Gerard comments.
Any expense was unfavorable in the quarter as a few items are met our masking the progress of our D. and now initiatives on a year over year basis. These items include.
$14 million of annual incentive compensation.
Which includes lower expense in the third quarter 2018, do that accompanies performance underperformance in 2018.
And higher than expected expense in the third quarter of 2019 do too much better cash flow performance.
$7 million from Mark to market accounting on our legacy Wincor option program, which is tied to the value of the d. and stock price.
And approximately $4 million invested in HR tools and other items to enable R&D and now transformation.
In the fourth quarter, we expect to report a strong sequential improvement in SDMA expense.
As we realize savings from our D. and now initiatives.
Operating profit in the quarter increased $10 million versus the prior year period to 66 million.
And the operating margin expanded by 120 basis points to 6.2%.
Correspondingly adjusted EBITDA Rose 5 million year over year to 98 million and adjusted EBITDA margin expanded by 80 basis points to 9.1%.
Expenses in both the current and prior year period included a reclassification of approximately $2 million from cost of service to selling expense.
This change pertains to a handful of software employees, who have been involved in pre sales activities.
Moving to slide 12 I.
Im pleased to discuss our free cash flow accomplished accomplish much which continued to exceed our expectations.
Third quarter, we generated $65 million free cash flow, which translates to $190 million improvement versus the prior year period.
Unlevered free cash flow of 102 million for the quarter was 209 million better year on year on year.
The strong gains can be attributed to clear management focus better governance and sustainable process enhancements for high received net working capital.
As a percentage of revenue net working capital decreased from 24% to 15.6% year over year I'd like to recognize the hard work and dedication of doesn't have segment and finance leaders for their tremendous performance and collections.
Inventory management and Pales management.
Our cash generation during third quarter is even more impressive when you consider that interest and debt payments increased by approximately $20 million versus the prior year.
Lower integration payments in the quarter offset higher cash restructuring outflows.
I'm gratified by the company sustained improvements to cash flow over the past 12 months, we generated $227 million or free cash flow.
Which is better by approximately $390 million versus the comparable period.
Over the same time period, Unlevered cash flow improved by approximately 480 million to approximately $413 million.
Based on these results, we've clearly engineered a cultural change in the way Dan employs think about and manage cash.
On slide 13.
We've provided our liquidity and leverage highlights as of the end of September .
Our liquidity of $680 million includes nearly 300 million of cash plus available credit. So the company has sufficient liquidity to me and seasonal cash flow needs invest in R&D and funded in our transformation program.
At the end of the third quarter. The company's net debt was approximately $1.85 billion and our leverage ratio was approximately 4.7 times for the trailing 12 month period.
The chart on this page illustrates our steady progress in reducing our leverage ratio through EBITDA growth and debt reductions over the past five quarters.
Such a subsequent to the quarter, we used approximately $19 million a net proceeds from the sale of our equity stake in Connie to reduce our secured debt.
Since our last earnings call.
Maturity schedule change as shown on the right of the slide.
We successfully accessed the capital markets by amending and extending the vast majority of our revolving credit facility and that term loan aid from December 2020 to April of 2022.
This extension provides ample time to deliver significant value creation from our idea now transformation.
We are pleased to receive strong support from our lenders and demand for the term loan aid was oversubscribed repriced our refinancing at low end of the proposed range and total debt was unchanged as a result of this event.
I want to extend the thank you to all of our lenders for their confidence in our company.
Additionally, during the quarter, we brought on a new treasurer see shine knock the to lead our capital market and cash management activities.
Hi, John joins the company for Moody's Global credit aged grading aid season is you're already making a difference during the quarter, we entered into our interest rate swaps for approximately $500 million a floating rate debt.
We opportunity to Opportunistically reduced our interest rate risk and we expect to save approximately $2 million per year from this action.
I'm also pleased to announce a gym BARDA has joined Nivo nexstar as our Chief Accounting Officer.
Jim has a robust background and global County, and we'll Leverages experience to drive our own finance transformation.
On slide 14, we update our outlook for 2019 and the key drivers.
We now expect to generate revenue of approximately $4.4 billion, which reflects our significant currency headwind.
As well as changes into retail environment.
Our outlook for adjusted EBITDA is now $400 million to $410 million.
And then includes an additional $10 million of incentive compensation, which has triggered by are better than expected cash flow.
For the year, we continue to expect did now savings of $175 million, partially offset by about 65 million of inflation and normalize compensation.
Net of expected benefits from to divestitures as well as approximately $25 million, a bennett of nonrecurring benefits, which occurred in 2018.
Our free cash flow outlook for 2019 has improved from a modest modest positive to a range of $70 million to $100 million.
We are expecting the key components of free cash flow to include at least $100 million of cash generated from net working capital.
Approximately $185 million payment of of interest expense.
Approximately 115 million for Dia now restructuring payments and transformation expenses.
And approximately $50 million of capital expenditures $50 million of cash taxes.
And 20 million dollar of other cash uses.
Based on our strong year to date performance on net working capital and the lower levels of receivables and inventory and the performance of accounts payable are opportunities to generate cash flow into fourth quarter of 29 team has been reduced versus prior years.
Our cash flow outlook and the aforementioned balance sheet actions should enable us to end 2019 with a red leverage ratio in the mid fours.
It also should be noted that approximately 50% of our 2019 free cash flow will be used to pay down unsecured debt.
As our practice to provide formal guidance for the next year. When we report fourth quarter results in February .
However, I'd like to provide a few comments about what to expect in 2020.
First with the completion of certain portfolio shaping actions.
Dan's annual revenue is likely to be reduced by approximately $100 million.
Next our current backlog, coupled with moderating customer confidence in certain markets described by Gerard.
Points to modestly lower revenue year on year.
Our DNR initiatives are expected to deliver gross savings of at least $100 million. However, we also expect some offset such as lower revenue volume wage in fuel inflation certification costs for our Dan series.
And certain other investments needed to support our transformation.
With respect to free cash flow, we expect a positive year on year contribution from adjusted EBITDA growth and modestly lower restructuring expenses.
And now I'll hand, the call back to the operator to begin to Q in a period.
Thank you.
Next question please.
First thing Star one telephone.
If you're using speakerphone. Please make sure you hear me.
Sure enough to allow us to reach our equipment.
Chris Star one.
Well pause for just.
Everyone in opportunity.
Our first question comes from.
Subsidy in company.
Hi, Good morning, Jefferson Gerard.
My first question is can you give us a sense for.
However, the pilots for the DNA mouse D. and Cvs ATM has been so far and you know it looks like it's going pretty well you know you guys are undergoing certification and 150 countries.
150 banks excuse me.
Hi, Good morning is <expletive> , yes, we've been a as I said in my remarks, we've been very very pleased with customer receptivity to our Indian series.
We have them installed in production in a number of banks and in the 150 banks that we made reference to in our prepared remarks, they're going through the normal certification process. That's required before one can actually move them into production. So I'd say at this stage show we've been extremely pleased with the.
Demand for these machines.
We'll obviously you remind everyone that the certification process for each given bank can take a period of nine to 12 months. So yeah. There's still a period ahead of us before you'll start to see large numbers.
In production, but the early indicators are extremely positive.
Okay and.
Maybe one more for Jeff Jeff You said that you know you expect.
Slightly lower modest decline in revenue next year.
It is that something to do with the the length of the certification process or to mix. Some of the FX headwinds you guys mentioned earlier.
It's not it's not due to certification, it's it's more to the expected FX headwinds and and the.
Activities in the markets that Gerard spoke to earlier on the call.
Alright, thats it from me.
And so specifically as both FX as well as.
Some softening of demand in retail that we're seeing a in Europe , given some economic contraction in that market.
Thank you.
Our next question comes from Kartik Mehta with North Coast Research.
Hi, Justin Gerard.
George you talked a little bit and so did you Jeff about some weakening in Europe and I'm wondering.
Is that already having an impact on your orders on the ATM side or is it still is strictly retail related.
And are you just anticipating that to continue now into 2020, if it hasn't impacted ATM demand yet.
[laughter] Kartik guide to date, it's being primarily on the retail front.
And we depending on what happens economic you would probably expect that to continue through 2020 on the banking side. You know there anything we noticed was a handful of deals extend from this quarter into future quarters, it's not clear that those are necessarily tied to.
Changes in economic conditions, but we obviously are mindful that that may or may unfold, but to date, we haven't seen any impact there.
And then I think in slide presentation, you talked about Latin America, slowing a little bit and I'm wondering is that.
Any specific countries is that Brazil since that's the largest market for you or.
Or other countries in Latin America, there maybe being impacted.
Yeah Kartik.
I don't believe we actually said that Latin America was slowing down we there we've been some tough comps in certain countries, but we continue to see very active activity across Latin America.
And then just finally, Jeff you gave some indications on 2020, obviously, you're anticipating a revenue decline year over year.
Maybe would.
What percentage of the decline do you think is FX related and maybe what is what you're anticipating from business conditions, and then I think W. said upped idea now savings of Port a portion of it would be.
Bob said because of higher see any cost and others. So just a little bit more color on those two would be great. Thank you.
Yes, I think I think we've covered down on and I just current just to be clear your questions about 2020, right. So we're not giving guidance yet on 2020, but what we're talking about as we expect.
FX headwinds.
And 22, wanting and we expect to the retail be weakening and in Europe and 2020.
As far as the de on now initiatives. We said, we expect them to be $100 million, but we're going to we're going to still and experienced some level of inflation.
When we get to 2020 that will offset that and we're also looking at what investments we're going to need to make that may have TNL effect.
But have long term growth and we're not ready at this point in time to Tim to release that.
Thank you Jeff I appreciate it.
But certainly our expectation is that from.
Oh expansion in gross margin and reduction in expenses and we're at the forefront.
I'll have some major changes and SGN a expenses they're coming through.
We expect EBITDA to be up year over year, but we haven't given guidance on it.
Okay. Thanks, you up I, just you had given some commentary so just trying to understand a little better.
Yes.
Our next question comes from Matt Summerville with D.A. Davidson.
I want to be clear on the anticipated debt pay down so at the midpoint of your free cash range 85 million, you're saying half of that will be used to reduce debt. In addition to what sounded like 19 million in net proceeds from KONI that also went to reducing debt.
Our my numbers correct there please.
Yeah, that's that's correct.
Okay, and then maybe Gerard could you. Please compare and contrast kind of the readiness of U.S. advise.
Cycle as it pertains to kind of the Windows 10 side of things versus maybe the prior cycle just trying to get a feel for sort of how much is left in the tank and then I also have a follow up related to the D. N series are you seeing customers delaying purchases of current generation terminals in.
Favour of opting for the next Gen D N series.
Good morning, Matt So as it relates to the U.S. market, you know I think I'll break it into two different traunches. Yeah. We continue to see very good order activity from the regional banks and we continue to anticipate that that will extend well through 2020.
When I take a look at the large U.S. banks and number those are starting to taper off there wouldn't 10 upgrade cycles through the back end of 2019, so don't necessarily anticipate that much.
Buying activity from them as we look into 2020 beyond their normal refresh activity. So I'd break it into a tale of two different stories.
As it relates to the D N series.
No we havent seen any evidence of any material nature of banks delaying.
Current buying patterns here now and again there is one offs here in there, but when you look at the overall portfolio, we still have a good mix of banks buying our existing fleet the machines plus those starting to run certification processes with the in series.
And then maybe just as a follow up Jeff with respect to kind of the going forward flow through of as it relates to the 400 million in gross savings is there a number you would maybe triangulate us on is we think about that for 2020 and 2021 kind on a go forward flow through in that regard.
Yeah.
So so again, where we have we're not providing guidance for 2020 and 21, but but.
You know, it's going to be similar to what we saw in 19.
We're going to have.
No $100 million, then and we already said $100 million expected in 2020, but it's going to be offset by by inflation.
And other investments.
So so the the net dollars will probably be less than 19, but it'll be the same type of ratio.
And then Jeff you're also basically saying we should see further improvement in free cash in 2020 would you care to maybe speculate kind of where you would target your net leverage ratio coming out of next year are we comfortable saying it should be sub four times, maybe approaching three and a half.
No no no we're not going to give guidance on AD today, I, but what I would say as though on on cash flow you have to remember for 20 as.
And I already said, we're expecting increase in EBITDA, we're not going to have the same level of opportunity in working capital that we have this year and you're going to see a little bit of that affected in the fourth quarter. We that we've done such a good job of harvesting and working capital started in the fourth quarter of last year that it's going to become a very difficult.
Comparable for us starting already in the fourth quarter in fact fourth quarter be fourth quarter of 19 will be hit the hardest because we had such a good.
Collection period last year and now it's spread over time, our processes are continuing its just not a onetime event and that goes to what I said earlier about.
Congratulating of all the company. This is a company after relative to cash flow, but so we're not expecting as high a harvest of working capital, we're still going to have some restructuring payments.
Yeah, we're moving in to have any portion of the finance transformation.
So I'm not going to get into too much depth on that because it does affect people, but it's going to be we're going to spend some money.
And in.
The fourth quarter and.
First two cores and next year.
So we have a how do we have an expectation for free cash flow, but we're not going to provide guidance today.
Got it thank you guys.
Our next question comes from Justin Bergner with GE research.
Good morning, Gerard good morning, Jeff.
Good morning, Justin.
A couple of questions here on the reduced revenue guide for 2019, how much of that hundred million relates to FX and portfolio shaping actions versus core markets and then looking into 2020 I just wanted to confirm that the portfolio shaping up.
Things are an incremental 100 million headwind versus whatever you're experiencing in 2019.
Okay.
Yeah.
So and portfolio shaping it's approximately just a little under 30 million dollar effect on on revenue and and it's going to be the same number for FX.
So approximately $60 million Oh, the effect will be will be for the fourth quarter.
Okay, great not 2020, it's a further hundred million year on year reduction in revenue from portfolio shaping actions.
Versus yes here yeah.
Be spread throughout the year, but $100 million reduction off of where we're going to end 19.
Okay. That's helpful. Secondly, moving to free cash flow there was a benefit on cash taxes and other in your guide that I guess was 10 million and 20 million respectively are those sort of onetime benefits are those benefits going to persist as we look into 2020, X. I know you've sort of comment in the past.
Some sort of lingering you know free cash flow headwinds from taxes and other.
Yeah Yeah.
Gerardus smiling at me because he knows that I loved to have a questions about taxes right now I can go on forever and bore you guys to death, but.
Well here's the deal there are some onetime deals and and 19, we got to refine and we've had some payments on some other prior periods, but it's going to net out that we're going to be last we're going to be $10 million favorable to what we thought coming into 19 going forward. We're oh, you know the the waiver.
Restructure it is <unk> and and this is going to be more than you want to know.
Were structured as we're manufacturing and in Germany, and and the United States. They are also our tax principle.
They are selling all the product to the distribution subsidiaries.
And our problem from a structure perspective is that all of our capital costs are in the principles and we're making too much money and the distribution subsidiaries.
So we have to balance that out when we balance that out.
Right, our cash taxes will go down so we are still anticipating if a favorable movement in cash taxes as we move into 2020.
Okay I'll follow up more on these issues.
Oh flag is it still seems little complicated, but lastly, sort of big picture, if you might be able to comment a little bit more in sort of the weak European service revenue performance or Eurasia service revenue performance in the quarter I mean, it was weaker installation against better product revenue.
And I guess on the Eurasia side, you know any benefit from sort of when 10, tailwinds sort of coming overseas as you look into 2020.
Yeah, just in the in the quarter in Eurasia, we saw lower.
Totally implementation services activity, which as you see project based activity.
Wrapped around various services activities that would you do just less of it in the quarter I wouldn't read too much into that.
In terms of a win 10 I know that a in prior quarters. We had started to comment on some early signs that we might have been seeing in some markets.
That it appears to be somewhat more muted this quarter and our suspicion is that in light of the evolving economic outlook for Europe that we may see that spread out rather than have the same.
Sustain momentum we saw come out of the Americas. So I I'd say, we continue to have a watching view on that topic.
Great. Thanks for taking my questions.
Welcome.
Once again, if he would like to ask a question you may signal by pressing star one on your telephone keypad.
Our next question comes from Rob Charles.
Okay.
Hi, Thanks, So just a couple what did it go back to the services.
Right.
And then.
Your renewal rates take a step down.
In the third quarter and this is on a trailing 12 month cases so.
Correct piece about what's happening with that 200 basis points reduction there because it looks like there's sort of contract gross or.
Project based.
Any commentary would be.
Yeah that really ties Rob to a modest reduction in units in the Americas, specifically related to two one contract.
You know I. Once again you. These are very very high renewal rates and we're not.
Seeing any structural change in our ability to attain our business.
But in a quarter or there was one Americas contract that accounted for most of that reduction.
Okay and then.
Your next year there.
I know you called out if you kind of unusual one time type expenses.
I'm just wondering about the glide path here, you're targeting kind of 13% 2021 are you thinking about it as a kind of 100 basis grew production yeah, you're going into 20, and then another hernia or base is going to the 21 or I'm just trying to figure out the grandparents here.
Yeah, you know, it's not going to be it's not going to be linear right, because it's going to be the some stuff movements and and some of the things we're doing in.
And.
Well, what we're looking at as.
Yeah, I understand what I said before about.
I'll give you some insight on some of the things were looking at if when you look at the business.
We are with the with Germany, you asked me in principle. So you have a full level of service requirements there.
When you get to distribution subsidiaries that can be.
She in a particular gionee can be handled more on a regional basis and those those are the types of things were looking at that will not be linear it's going to be step. So it will provide some additional insight into that one we provide guidance.
But we are committed to the $100 million a reduction of targeted reductions, but some of that's going to be cost of goods sold also and 2020.
Okay. Thanks.
Our next question comes from Justin Bergner with GE research.
Oh, Thanks for taking my follow ups in light of the KONI sale.
Mike, which I guess I wasn't aware that that asset side your books.
Are there other similar or you know stock holdings or or assets in your portfolio that can be monetized sort of that equity holding nature.
Yeah. Justin this is very few assets similar to our equity investment in Cody there are.
Other actions underway related to certain historical joint ventures, where we would be looking to move from a majority position to a much lower position, which certainly we'll have some positive benefits, but a straight up equity transactions similar to KONI. Those those are relatively limited for us.
That being said as you would have heard from Jeff when he talked about in the impact of $100 million. So revenue declines in 2020 due to divestitures. Obviously when you do the math that would suggest that we have a number that we expect to close in the east and not too distant future and obviously once we do we will provide.
Update on those.
Okay, Great were there any meaningful proceeds from asset sales or portfolio shaping in the current quarter are you speaking more about you know perspective additional.
Disposals or exits that would.
Really.
Revenue.
Yeah, the other than Connie we haven't heard anything material in the last 90 days.
Okay. Thank you.
Great well I want to thank everyone for joining our call today I. Appreciate your time you have follow up questions. Please give us a call here at Investor Relations have a great day.
Thank you everyone. This.
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