Q4 2019 Earnings Call
Fourth quarter 2019 earnings call.
At this time I would like to turn the conference over to Mr., Steve <unk>. Please go ahead Sir.
Thank you Britney and welcome to all our listeners. This is that evil fourth quarter earnings call for 29 team joining me today, our Gerard Smith, President and Chief Executive Officer, and Jeff Rutherford, Our Chief Financial Officer.
So your benefit we posted slides, which will accompany our discussion today and our slides are available on the Investor Relations page Diebold Nixdorf dotcom.
Later today, we'll post a replay of our webcast to this IR website.
On slide two of the presentation, where reminding all listeners that today's comments will include non-GAAP financial information, which we believe is helpful. When assessing the company's performance.
In the supplemental schedules of our slides and we have reconciled each non-GAAP metric to its most directly comparable GAAP metrics.
[laughter] over on slide three.
We remind all participants that certain comments may be characterized as forward looking statements.
And there are number of factors, which could cause actual results to differ materially from these statements.
Additional information on these factors can be found in the company's FCC filings.
Please keep in mind that are forward looking information is current as of today and subsequent events.
Under this information out of date.
Now I'll pass that like Gerard.
Thanks, Steve Good morning, Thank you to everyone for joining our fourth quarter earnings call.
2019 towards a good here for the company as we executed on our do you know transformation initiatives.
Delivered financial results, which were inline or better than our expectations.
To set the stage a bit I want to respect for a moment on where we were one year ago.
We were in the early stages of streamlining our operating model and simplifying our portfolio.
And we had goals for strengthening our balance sheets.
Forwards to today. After you want to do you now and we have met or exceeded on every commitments. We made at are on track for huge targets.
As shown on slide three we reported total revenue of just over $4.4 billion, which was within our initial range and our results also included substantial currency headwinds of approximately $850 million.
We delivered adjusted EBITDA of $401 million, which was within our initial outlook from February of 2019, which represents a 25% increase over 2018.
Also included foreign exchange impact of approximately $7 million.
Most importantly, we exceeded our free cash flow targets.
Operating $93 million versus our initial expectation of breakeven.
[laughter] inline with our focus these results demonstrate meaningful improvements in profitability and cash flow.
We increased our non-GAAP gross margin by 280 basis points to 25.2%.
With strong margin expansion in all three segments and business lines.
I promise enable D N to boost its adjusted EBITDA margin by 210 basis points to 9.1%.
Free cash flow increased by $256 million.
Unlevered free cash flow chunks by 315 million.
Reflecting our companywide focus on driving both operating and net working capital efficiencies.
While delivering these against a backdrop up significantly stronger customer satisfaction levels.
Our progress reduced our leverage ratio by more than a full term.
Ending 2019 at 4.4 times.
With this progress our core business has a stronger foundation, yielding a more focused and efficient company.
I'm extremely pleased with how the entire team at D. and focused on a shade goals. It is because about people that were executing inline with our plan.
On slide four you'll see a list of operating achievements for 2019.
For our banking customers, we enhanced our differentiation by launching a next generation fivefold Colds D N series.
Most aiotv enabled platform on the market.
We also introduced a new cloud based analytics platform called the old connect data engine through which we will further differentiate us services capabilities.
During the fourth quarter key wins included a multimillion dollar global agreement well by NAMIC software and D N series Atriums with Citibank.
We're excited to work the city across its retail banking channels.
I will drive connected Congress with our about Emmick software suite C and D N series ATM.
In Belgium, we want a multiyear ATM as a service agreements to update and maintain approximately 1568, Tim's with a joint venture cold tropical.
All right solution features IDN serious units at common Dnbi dynamic software stack and cloud based analytics from our old connects data engine.
Banking product orders in Q4 declined year over year as we're up against a strong results from the fourth quarter of 2018, especially in Latin America.
As we enter 2020, we expect some easing up demand from large north American banks as they complete their upgrade efforts.
And the retail segment, we increased our retail self checkout shipments by more than 50% in 2019.
More recently and leading market research firm in our space retail banking research.
Recognized Steve mixed off as the largest self service kiosk provider in the world.
In the fourth quarter, we want to new 6 million dollar contract at the U.S. value retailer kiosks and by that make software.
Continued growth in self checkout orders and the easing of point of sale orders were inline with expectations in the quarter.
At the Mako point of sale solutions evolves.
This is funding with the introduction of an all in one point of sale system. The brings together the latest technology and the stylish space saving design.
Important wins in the quarter included a $15 million contract with the Swiss gaming co-operative for 5000 point of sale terminals.
And then use three year 14 million dollar payments with the European do it yourself retailer to refresh the end to end customer checkout experience and several hundred stores spanning 12 countries.
When I reflect on 2019, the greatest accomplishments are those which required coordination across large sections of the company.
For example, we're very encouraged by the broad based success of our services modernization plan.
Which includes proactively upgrading hardware or software on more than 140000 terminals and implementing stem practices globally.
Similarly, we have substantially increased our product gross margins by streamlining our manufacturing footprint, improving product pricing strategies and optimizing the number of ATM models.
In addition, we dramatically improved efficiency of our inventory levels collections, and payables, which added $110 million to our cash flow.
And our improving performance led to a successful extension of nearly $800 million of credits in August.
With these accomplishments in the books, we answer the second year of our DNR transformation with momentum across our efforts and confidence in our strategic direction.
Slide five summarizes our key Vietnam initiatives, which are positively impacting both the quality of revenue and the efficiency of our operations.
Our execution momentum gives us confidence to increase our targeted gross savings from $400 million to $440 million through 2021.
I'll comment briefly on several initiatives that have been in place for several quarters.
First the transition to our new operating model is complete and about $100 million of savings have been realized in 2019.
Next we'll continue to simplify our product portfolio and further optimize our manufacturing footprint I.
I think it's 2020, our focus is squarely on realizing the benefits from our next generation banking solution the Dan series.
Earlier in the call I spoke about the actions and significant achievements of our services modernization plan.
While we're pleased with our progress we believe there is further room to improve service delivery and operating efficiency.
In addition, we launched a new series of actions Cold software excellence.
Aimed at improving our software operations and gross margins.
We're enhancing professional services delivery by optimizing our resources and improved Presales scoping.
Within our software products, where simplifying our offerings and placing a greater emphasis on software development effectiveness.
Our efforts to reduce general and administrative expenses picked up steam in Q4.
And are expected to deliver meaningful savings in 2020.
As we build a fit for purpose support structure for our business.
I've already mentioned, a 2019 success, our net working capital and we're continuing to pursue efficiencies on this important metric.
The final initiative on the slide is divesting noncore assets, enabling us to focus on businesses that meet our returns hurdles creating value for shareholders.
In 2019, we divested or shutdown, a half dozen businesses, which generated about two percentage of revenue.
True Jeff's remarks, he will discuss our focus on revenue quality in greater detail.
Including two additional transactions, which further simplify the company's business operations enhanced liquidity and reduce risk.
On slide six I'll discuss the progress, we're making to simplify our product portfolio.
We successfully reduced the number of ATM terminals by about 30% in 2019.
And we solidified applies to further reduce legacy terminals by about 45% in 2020.
When coupled with changes to our manufacturing footprints and better rigor on contract bids we expanded our non-GAAP product gross margin by 310 basis points in the quarter to 22%.
Which is a multi year high for the company.
Going forward, we expect to build our success with the rollout of Dan series.
Early field performance results.
Affirming substantially higher performance levels, then our already strong field performance from prior models.
Customer reactions have remained very positive.
And they see a compelling value proposition, including and more modular and Upgradable design, which includes our next generation cash recycling technology.
Advanced sensor technology and connectivity to the Deanne, all connect data engine, which will increase uptime and offer a better customer experience.
Great or no capacity improved reliability and industry, leading security features and a smaller footprints.
And increased options for personalization and branding.
We have initiated the certification process for DN series with 240 customers across 35 countries.
Our sales pipeline is growing nicely and we fully expect to ramp production as many certification processes are completed and the next few months.
Slide seven contains key performance metrics for our services modernization plan.
Our services renewal rates continued to exceed 95% during the fourth quarter.
Contract base of ATM has remained stable at 582000.
This chart shows our revised contract base figures, which exclude about 35000 units in China.
Following our reduction in ownership in a strategic alliance as part of our noncore asset divestiture actions.
As minority owners services revenues from units will be deconsolidated going forward.
The recent trends in contract base units reflects our focus on making the business more profitable.
We have completed much of this important work and as a result.
We expect the services contract base to expand modestly to 590000 by year end 2020.
In addition, evolving customer demands have created a growing opportunity for managed services and we're excited about the potential for securing these contracts.
Our gross services margin increased 330 basis points versus the prior year to 28.2% in the fourth quarter.
Once again, both retail and banking contributed to these gains.
This is the six quarter since we launched the program and we have consistently delivered strong year on year gross margin expansion.
Our momentum underpins our confidence in achieving full year gross margins of 28% to 29% by 2021.
Looking forward to 2020, a service priorities include.
Continuing on modernization program across both banking in retail.
Growing our services contract base of ATM and self checkout terminals.
And leveraging our organic data engine across more of our state.
On slide eight.
Cover our initiatives to further reduce general and administrative expenses.
This is a key opportunity for D. in 2020 to further improve our effectiveness and efficiency.
Within the finance organization, we are executing on centralizing, our accounting processes, making greater use of shared services and increasing automation.
In Q4, we built meaningful momentum.
And Jeff will provide more details about our plans to realize substantial savings from these actions over the next few quarters.
During 2019, we reduced our ITC spend by consolidating datacenters.
Ramping down spend on legacy platforms and by proactively improving the resiliency and utility of our systems.
In 2020, we're shifting our focus to digitally enabling more capabilities across the company.
So while we continue to rationalize our legacy systems, a greater focus will be on implementing new tools to support our digital transformation.
We also continue with our procurement rigor and are proactively managing external spend.
Looking forward, we see incremental benefits to be realized.
With respect to our real estate footprint, we reduced our office square footage by about 10% by closing for Rightsizing more than 40 locations.
For 2020, our goal is to reduce office space by another 10%.
Also implementing more agile workforce practices.
In the fourth quarter, we were pleased to drive non-GAAP SGN expense 269 million a low point for the year.
Looking forward, we expect our initiatives will harvest further efficiencies from functional gionee costs in 2020.
Before I hand over to Jeff.
I want to address what we're seeing with respect to the Corona virus situation.
Our first priority focuses on the safety of our employees customers and suppliers.
We're closely monitoring all developments.
We're also paying close attention to the impact that this developing situations may have on our supply chain production and logistics.
As you're aware many Chinese companies resumed production only yesterday.
And with partial capacity and the situation therefore remains fluid.
Our current view is that we may incur higher freight costs and could experience potential delays from our suppliers as they work to return to normalcy in a way that ensures worker safety.
We were being proactive in developing alternative supply of strategies and have initiated efforts with other technology providers and exploring potential broader solutions to mitigate any supply chain disruptions.
At this stage the substitute the situation remains dynamic and any near term impact should not change how long term trajectory.
Now over to Jeff for a discussion of our financial performance before rejoin with a few concluding remarks.
Thank you Gerard and good morning, everyone.
2019 was a very strong year as we took major steps forward in our journey to value creation and are looking forward to building on that success in 2020.
As I discuss our financial results for the fourth quarter and 2019.
Lets keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted.
Slide nine continues our fourth quarter financial highlights, which are squarely in line with the company's outlook.
Excluding the impact from foreign currency headwinds.
And our divestitures revenue declined 8.1% to $1.15 billion for the quarter.
Maybe you should recall that we reported exceptional strength in our product revenue in the fourth quarter of 2018.
It was approximately $50 million more than we would typically expect resulting in an unfavorable comparison.
In the fourth quarter and throughout 2019, we have focused on higher quality revenue and that have been proactively reducing our exposure to load margin business, which had a fourth quarter revenue impact of approximately $40 million.
As a result, the year over year comps for the fourth quarter are not indicative of our 2020 revenue expectations.
These efforts covered coupled with our Dia now progress are producing tangible and sustainable gains to gross profit operating margin and adjusted EBITDA margin.
We increased gross margins by 300 basis points to 26.3%, which translates into higher gross profit of $3 million.
Higher gross profit coupled with lower operating expenses enabled the company that boost operating profit by 20% from $83 million to $100 million.
Correspondingly, our operating margin increased by 230 basis points at 8.7%.
While the adjusted EBITDA margin improved 180 basis points to 11.4%.
Return on invested capital was approximately 10% and 29 team much better than our me mid single digit resolved in 2018.
Going forward will will continue to be selective about how we go to market and build on this momentum, which you always see reflected in our 2020 outlook.
We believe this will set us up nicely to execute on our growth initiatives for 2021 and beyond.
Slides 10 through 12 contains segment financials for the fourth quarter and full year.
On slide 10, we disclose highlights for Eurasia banking, which were inline with our expectations.
Excluding currency and Divesture revenue declined 8.8%.
The year on year variance was primarily due to our proactive efforts to address low margin business.
These actions include our service contract renewal discussions higher margin thresholds on new deals as well as decline in certain noncore businesses, which are in the process of being divested.
Operating profit juries are banking was impacted by revenue volume as well as a higher mix of professional services, which has a lower software gross margin.
On the plus side, we continue to drive higher growth service margins for this segment from our idea now initiatives.
For the full year revenue declined 2.4% adjusted for currency divestitures and other actions. This decline was primarily due to our actions to harvest low margin business, partially offsetting these trends we delivered product revenue growth from customers in EMEA.
Operating profit increased by $19 million or 13% to $169 million and includes foreign currency headwinds of approximately $10 million.
Our operating profit gains reflect Dia now success in driving higher service and product gross margins as well as lower operating expenses.
Slide 11 provides financial highlights for America's banking fourth quarter revenue declined 1.5% after adjusting for currency headwinds and divestitures.
During the quarter, we experienced lower product volume in Latin America, partially offset by product and software growth in North America.
Operating profit nearly tripled in the quarter from $14 million to $40 million when compared with the prior year period.
Again execution of our idea now initiatives resulted in a 630 basis point expansion of the profit margin to 9.5%.
For the full year revenue increased 7%, excluding the impact of currency divestures and related actions.
Upgrades, the adoption of cash recyclers and increase offer activity fuels these revenue gains.
And our services business, we exit we exited certain contracts, which did not align with our gross margin hurdle rates operating profit increased increased by more than $100 million to 120 million.
Merely due to our idea now initiatives and revenue growth.
This is by far the best performance in Americas banking operating profit in margins since the combination.
Moving to slide 12 retail results were inline with expectations revenue decreased 15% after factoring in currency headwinds in divestitures due primarily to a challenging comparison.
Our fourth quarter 2018, retail revenue was approximately $50 million or 15% above our quarterly average as we delivered on a number of large Pos refreshed contracts.
Within the segment, we continue to grow self checkout product revenue as we experienced lower Pos sales versus the prior year.
Another factor is our strategic decision to reduce our exposure to low margin business, such as shuttering, our consulting business and discontinuing the discontinuing the reselling of certain low margin hardware from third party suppliers.
Higher quality revenue and better cost structure from the Dia now initiatives increased operating profit by 62% to $21 million.
For the full year retail revenue decreased 2.5% again, excluding the impact of currency Divestures and related actions operating profit increased by 23% to $58 million as we benefited from a more favorable mix of self checkout drives higher services gross.
Margins attributable to our services Monetizations plans and lower operating expenses.
Referencing slide 13, I'm pleased with our team's ability to generate $93 million a free cash flow for the full year of 29 team.
On a year on year improvement of $256 million demonstrates the broad base commitment.
Financial discipline across the company.
The DNR initiatives, where the key to our says success as we increase adjusted EBITDA to $401 million and harvested $110 million of net working capital.
To put a finer point on our improvements the company reduced net working capital as a percentage of revenue.
440 basis points from 18.3% to 13.9%.
Our free cash flow for I guess is even more impressive considering that we offset $60 million of incremental interest payments.
Unlevered free cash flow is $275 million and improvement of $315 million.
For the fourth quarter, the company generated free cash flow of $116 million, an unlevered free cash flow of $168 million.
Well these metrics are squarely in line with our expectation.
They do represent a quarter over quarter decline as we had focused on working capital management throughout the year versus the fourth quarter push in 2018.
In summary of our liquidity leverage and capital structure can be found on slide 14.
The company has sufficient liquidity to meet its seasonal cash flow needs investing in R&D and fund our D. and now transformation program.
Total liquidity of approximately $770 million includes nearly $388 million of cash plus available credit.
Nobody ended the year with gross debt of $2.1 billion, a net debt of $1.76 billion.
Our leverage ratio continues to improve declining to approximately 4.4 times.
At year end.
Over the next few weeks for our credit agreements will use approximately $50 million of our free cash flow to pay down unsecured debt.
Reducing 2020 interest costs.
To the right side of the slide we provide our debt maturity schedule.
Well there are no meaningful meaningful maturities in 2020 and 2021.
We can do continue to develop strategies to reduce our weighted average cost of capital through the optimization of our capital structure.
Reduction of interest rates, an extension of maturities.
Today, we launched a process to obtain an amendment with our secured lenders, which will allow us to greater flexibility to issue additional sources of long term secured or unsecured debt.
On slide 15, we outline our finance transformation actions and savings targets.
Our finance and accounting transformation is a good example of the opportunities to harvest.
Efficiencies from our Gionee functions.
We're replacing our legacy structure unforeseen standard processes, and leveraging new tools to automate tasks.
At a high level Deanne will follow in to put stuff. So many other global companies and centralizing back office resources and Regionalizing compliance activities.
Our workforce streamlined finance personnel and processes, which should lead to incremental gene a savings of $30 million and 2020 and another $20 million in 2021.
Subsequent to the quarter the company made significant progress and divesting.
And divesting non core business.
First the company finalized the transaction to consolidate its joint venture operations in China with parents Ensberg group.
As a result, the animal repatriated approximately $25 million of cash and become a minor minority shareholder in the combined operations.
Moving from approximately 55% ownership to approximately 48% ownership.
Due to our minority ownership status in the consolidated JV, We will report pro rata profit or loss on the piano as equity in earnings unconsolidated subsidiaries.
Deconsolidating approximately $50 million of future revenue.
We believe this transaction is an important step in strengthening our partnership with Inspur, while reducing our risk exposure to challenging ATM market conditions in China.
In a separate transaction the company signed a definitive agreement to sell at 68% ownership stake in four tavis to data group.
This noncore business provides application management and infrastructure outsourcing solar solutions to certain financial institutions in Germany.
The transaction is expected to close by the ended the first quarter of 2020.
Subject to customary closing conditions.
The animal Iris approximately $10 million in cash for 68% interest and will receive relief from future liabilities, including capital and pension obligations.
While maintaining good relationships relationships with common customers.
During 2019 this business generated revenue of approximately $60 million.
On slide 16, we discuss our 2020 outlook.
We are expecting revenue will be relatively flat, excluding approximately 110 million dollar impact.
From our recent divestitures and reflecting expected currency fluctuations.
Adjusted EBITDA is expected to be in a range of $430 million to $470 million.
Reflecting approximately $130 million of Dia now savings plus $25 million for growth initiatives.
$10 million, a nonrecurring profit from our Divestures and typical inflation.
Headwinds and other items.
When compared with 2019, we expect 2020 results will be slightly more weighted to the second half of the year.
Specifically, we expect to generate approximately 45% of our annual revenue and approximately one third of adjusted EBITDA during the first half of the year.
This reflects the timing of our product backlog, our idea now initiatives and the priorities of our services business.
Additionally, as Gerard mentioned, we're working with 240 customers and certifying our Deanne series. So it follows that production activity or ramp in the second half the year.
From a free cash flow perspective.
We expect to generate between 101 hundred $30 million for 2020.
Including the falling components, and EBITDA midpoint of $450 million and net working capital benefits of approximately $30 million.
That is interest payments of approximately a hard $170 million.
Restart restructuring cash outflows.
Of approximately $80 million.
Capital expenditures, approximately 70 million, which include certain investments in our internal system supporting our digital transformation.
And cash taxes, and other payments of approximately $45 million.
And now I will hand, the call backs Gerard for closing remarks.
Thank you Jeff.
In closing following a successful year of execution in 2019, we entered a new year and a stronger financial position with solid execution momentum at a more efficient core operation.
We will advance our strategy as we expand our differentiation with Dan series the old connect data engine more sophisticated self checkout solutions and the strength of our services organization.
Secondly by laying the groundwork for future revenue growth opportunities by making targeted investments in services and software.
And thirdly by continuing to streamline the business embrace standard processes and operate as efficiently as possible.
And fourthly by continually strengthening our balance sheets.
As our path forward toward long term sustainable value creation.
To learn more about 60 volt next off and our plans for value creation.
I'd like to invite investors, who joined the management team for a discussion of our strategy market opportunities and financials on Thursday may 21st in New York.
Please mark your calendars and be able to look out for registration information from Steve Virostek.
This concludes our prepared remarks and ready to begin the Q and a session. Thank.
Thank you.
Thank you.
Yes. Good question. Please take note by pressing star one on your telephone keypad.
If you're using a speakerphone. Please make sure your mute function, it's turned off to allow your signal to reach our equipment.
Yes, our one to ask a question.
Our first question comes from Paul Coster with JP Morgan.
Yes, thanks for taking my questions.
Mentions as we roll into the new yet so some of the larger banks so.
Sounds good luck.
<unk>.
Great process and could you sort of just elaborate a little bit can you talk about the smaller regional banks in both mircera, so backed by the in Europe and how they buy.
Play out over the course Opn help me reconcile will be about.
Thank you combine that is a pending kind of backlog associated with the new D. in series.
Equipment Thats been service lines.
Yeah. Good morning, Paul Thanks to your question. So let me try and I hate to the different aspects to your question.
As you rightly put it up and we're expecting some of the larger north American banks to wrap up some of their upgrade activity through the back end of 2019. So we don't expect that same level of volume through 2020 that being said, we continue to see very solid buying activity from the regional banks and community banks.
As well as a larger banks in Latin American don't forget that those banks are often opaque with fleet substantially larger than the large U.S. banks.
As it relates to Eurasia as we've discussed in the past Eurasia has been experiencing a slower ramp in the refresh cycle versus North American banks and we're seeing.
Decent buying activity through 2020.
Across multiple regions and Eurasia, notably Southern Africa, the Middle East Eastern Europe, and parts of Western Europe.
And that ties to our broader observations that we're seeing a high degree of interest from multiple banks across the world for IDN series.
And clearly that's what's causing us to feel a fairly bullish about the back half of the year now once we're through the certification process is that these banks are currently executing against.
Okay, one quick follow up.
Turning back to growth things went to 21 and and semi got great.
And.
Things that needs to the world is it the D. N series product that you think will fuel the growth in software and services.
Is it stuff yet to be.
Introduced over the course for you.
Paul I think it's going to be driven by three different factors and obviously at 2021 is still a ways out than our focus is on 2020, but when you think about a medium term drivers. It really will be from the D. N series program. We think that there's a lot of runway ahead of us for that in part because of just have competitively differentiate.
It is the second quarter drive will come from growth in our software business and the third quarter drive it will come from comment I touched on briefly where we're seeing more and more banks showing interest in broader managed services with banks will be looking to outsource broader parts of their value chain.
Players like Diebold Nixdorf, when we think that that is an area in a trend thats going to continue to expand as we look out through 2021.
Just a quick question there in which comes is why did you let's go to pool tables.
Operations since it seems like its contiguous with that managed service business.
No it's actually not to that particular asset was focused on managing the data centers for certain smaller institutions in Germany was into.
Yes that was particularly scalable for us and as we've commented in the past our broad focus is building replicable scalable platforms globally in that particular asset.
Meet any of those criteria. So it's not contiguous with the strategy that we're executing against.
Got it thank you.
Our next question comes from Matt Summerville with D.A. Davidson.
Thanks couple of questions first just a follow up on divestitures Gerard with these two transactions that you're discussing this morning will this effectively conclude what you're looking to do divestiture wise and maybe talk through that in a bit more detail in terms of what we can expect going forward.
Yeah sure, Matt So ultimately as Jeff alluded to in his prepared remarks, the divestitures that we've completed through 2019 in the first quarter accounted for roughly 4% of our revenues and we continue to look at a couple of other assets, so I'm not going to get into any specifics around timing.
Okay, but they will be up a similar nature to ones that you've seen us executing against and 2019 and we'll obviously report on those as and when they get concluded.
And then just a follow up just to the ATM market you spoke a bit to North America and with respect to AMEA. What does your market outlook for Latin America for 2020, and what expectation should we be thinking about as it pertains to your business in Asia.
I guess, what I'm trying to get out as is there's still a drag it on the top line in Asia, or we effectively anniversaried all that and maybe if you can work in some comments on what you're seeing globally with respect to recycling uptake that would be helpful as well.
Sure Matt Thanks So.
Three different questions.
As you're well aware, we have very strong market position in Latin America, we're expecting a solid activity in large markets like Brazil, and Mexico, I think the a one area where mindful of is where the Mexican economy is headed so so that's an area for watch out for us, but that aside we continue to expect decent act.
Tivity across the Big Latin American markets.
Asia Pacific I think you're spot on that we should have anniversaried, the more challenging quarters that we experienced in the past.
Consistent with our strategy last year, we continued to be very focused on markets, where there's a sustainable profit pool.
Part of the action that we undertook to Deconsolidate, our China joint venture will further and allow us to have an easier compare going forward, but from a end market demand perspective, I think things are settling down somewhat a in Asia Pacific.
On your last comment related to ROI cycling, Yeah, we continue to see an evolving.
And growing trend as banks, increasing look towards recycling that this has been a steady and consistent trend for us that Oh, we believe continues to work in our favor given our distinctive recycling capability.
And then one one last one for Jeff in your prepared remarks towards the end you talked about something you're potentially looking to do with your debt structure balance sheet can you maybe provide sort of a two year overview on what you know the broader balance sheet game plan is for Diebold Jeff.
Yeah.
But what I would say relative to long term is we are looking.
Add debt markets and and opportunities within debt markets are continually so it would be premature for me at this point to say.
What is going to look like in two years, but obviously we have.
The term me and the term anyone maturities coming in 22. So that's the top of mind, what we what we are asking for today from our concern our secured lenders.
Is the ability to two to use other.
Sources of secured debt other than just term loans.
So that the we're trying to expand the field relative to opportunities for us in capital structure.
And at this point in time.
Speculate what it's going to be in two years, but but I'm not you know I'm not really prepared to do that as as we continue to evaluate the debt markets and what opportunities are for us.
Got it thank you guys.
Our next question comes from Kartik Mehta with Northcoast research.
Just a little bit more on the balance sheet.
You talked about I think you have $388 million a cash on the balance sheet I'm wondering what's the optimal mana cash you'd like to have on the balance sheet.
Yeah, hopefully our treasury guys are listening optimal numbers zero.
But.
But.
We do have we do have certain places, where we have cash locked up.
Because of currency restrictions and so forth and we do have some operating cash as we move.
Forward and improving our financial performance and liquidity and so forth. It opens up some opportunities for us to continue to harvest cash I would say a good target for us and there is there some year end flawed you know you're on for US is is a pretty significant.
Collection period, so theres a level of flawed I would say very good target for us is in the mid two hundreds.
And then short jar short term short term I'm, telling our treasury guys. It's much lower than mid do on so the what since I know there were less.
And then toured maybe you alluded to this a little bit in some of the comps were making for 2021.
But I was wondering almost every bank talks about brands cullompton consolidation or reducing the footprint as branch traffic kind of slows and wondering what the opportunities or risk car for de Boulder as that takes shape over the next few years.
Yeah Kartik.
No that's been a theme that some folk are focused on.
And what we see globally are very different postures across many different banks and when we take look at the absolute number of.
Machines that are acquired its pretty darn stable and we as we see a growing shift towards the bank's replacing existing machines with recyclers that naturally dries, a higher revenue point for us and a higher margin for us as well so notwithstanding some of the things you might hear from one or two banks we just.
Don't see that unfolding in any material way to the downside.
And then just one last question, Jeff well I know you've done a fantastic job on net working capital and as you move forward.
Where do you think is a good percentage of revenue for networking capital.
Yeah and by the way it's the total company did an outstanding on on net working capital and and all and we can't we can't be proud or the organization to work together in an operations in treasury and and procurement and throughout the company I would say.
We we have additional opportunity, it's not a 100 basis points, but it's somewhere between 50 and honored basis points.
Over the next couple of years obviously.
Yeah.
Right.
Thank you Bobby.
I'm sorry.
No that's correct over the next few years.
Thank you very much.
Our next question comes from Justin Bergner with God Research.
Hi, good morning.
[noise] wanting Justin.
Yes. Thank you for taking my questions I guess for starters you had a very strong service gross margin for Q I guess over 28% is there a seasonal aspect to that or are you actually sort of based on the fourth quarter tracking ahead of your goals for 20, 829% service gross margin.
Okay Yeah.
Justin If you go back and take a look at our historical financials, you'll see that Q4 always generate stronger services margin than the other quarters, primarily because of the oh loading utilization of our service technicians.
So it always generally is a high point for us in the quarter that being said consistent with my earlier comments, we couldn't be more pleased with the momentum we're building in our service and modernization program and that 28.2% gross margin in 20, you fall gives us a great jump off point as we enter a 2020.
Okay. Thank you that's helpful and then on the service base the growth in 2020.
Primarily a function of the strong upgrade activity that you saw in 2019 in North America or is it.
Broader than that.
No it's definitely a broader than that Justin there is a specific initiatives that we have underway in each of our various markets related to our overall services contract base.
The Americas activity adds a little bit to that but it's actually related to to broader initiatives.
As well as we're coming to the end of some of that meaningful work to harvest the low margin contract.
Okay, Great that's helpful. Maybe.
Maybe just on the cost in margin side.
Cash flow the.
45 million in cash taxes are you see it seems like you're seeing some.
Reduction there is more of the earnings base shifts to the Americas versus the rest of the world is that.
Accurate.
How much time, we have I can I go in this.
Gerard signal and to me to get the abbreviated version of this thank you.
[laughter].
Aided by the way 8 million of that reduction is a refund and non recurring refined so we have seen a reduction in cash taxes.
But what we need to do and I've said this before is that that we need to we are paying taxes in two places we're paying it and distribution subsidiary so nine.
You asked in German.
Countries, where we sell product from Germany, you asked to those countries. They resell it so there they're effectively owned distributors.
Although they do service on the ground there. So so we are we need to optimize that relationship.
And like a distributor with do and maximize our profitability in Germany, the United States. The other issue we have.
And I've talked about this before is our capital structure is not aligned with our tax structure and we have all of our deductible third party interest in the United States, which drives the United States into a taxable loss.
Under you current U.S. taxable.
Rules by tax laws.
That's not a good place to be it's not a good place to be in our laws in your principal and profitable any other.
Countries and paying taxes, because it limits what you can do relative to foreign tax credits. So we end up paying taxes on into you us on a loss. So so those things in combination, it's a combination of our relationship and with our distribution subs and.
And their level of profitability and our capital structure relative to optimization, where we should have deductible third party interest those things in concert can get us to a point, where we could have a norm normal all booked provision and and taxes on cash tax.
Okay. Thank you and then lastly, the 25 million in growth investments against the Dia now savings is there anything in particular that's targeted towards.
Or is that just using some.
Free cash flow flexibility to.
Not much needed investments the overall business.
Oh, suggesting that there is very very concrete actions that are under putting those and as.
Hi.
Our specific initiatives in both our software services areas.
Okay. Thank you for taking my questions.
Welcome.
Our next question comes from its spot for <unk> with Sidoti and company.
Hi, guys.
John you briefly touched on the on this in the last question and that's the components of the D. and now our targets.
It's increased a you know from your prior global stuff a 400 million.
Others in software and services is there anything else to read into Oh in terms of the where does source of savings it's coming from on the didn't know initiatives.
Yeah, just to be clear hedge fund the prior question related to $25 million of incremental investments in future growth initiatives, those do not factor into the $440 million or do you now savings.
The underpinnings behind why we increased the range was primarily driven by our execution confidence at a number of initiatives that are shaping up very nicely areas like our services modernization program bus the finance transformation that Jeff referred to add a couple of other so that's.
The primary driver behind.
Why we feel confident upping our targets things that we've talked about in the past its really just execution confidence at this stage.
Got it okay and in terms of a you know you commented about it briefly in your prepared remarks.
That is the sealed spite Brian.
Of the D N series.
No it looks like there's a lot more customers than previous it's like 240 customers do you have a sense for like you know what some of the order trends might be after the certification process is completed.
Yeah, we don't at this stage, yet dish <unk>, primarily because of you certification processes, our customer specific and country specific and therefore have arrangement duration patents related to them.
So once we get further through the certification process will be able to write all commentary rounded what I would say, though is there remains very strong interest so that gives us the hoffman's to frame the remarks that we have.
Great all right now John.
Any do you have any any specific remarks I read.
Regarding Brexit on your retail segment I'm going to it wasn't a little light the retail revenues coming out of your room.
Yeah, we're not seeing any meaningful impact from from Brexit as far the retail revenues that we talked about directly relates to a very difficult comparing Q4, all 18, where there were some substantial point of sale deliveries a in a couple of markets in Europe.
When we take a look at the underlying performance of retail were very very encouraged by the momentum were seeing in our self checkout business. You know last year, we grew self checkout the units by 50% and we actually.
Back to substantially better than that in 2020, and that's offset by some moderation and point of sale demand in Europe, but at this stage, we don't see Brexit, having a meaningful impact on our European patents.
Alright, alright. Thank you guys. That's all from me.
Thanks, Thanks Buck.
We have time for one more question. Please.
Final question comes from Todd Morgan with Jefferies.
Thank you Gotta could slip in you guys have spoken about the managed services opportunity I wanted to ask you to drill down a little bit more I would assume for example that it's a long sales cycle in a fairly long implementation cycle can you give us any sense of where you are in the very sales cycles and I'm sure you're engaged in and then if you wouldn't business the kind of timeline it would take to reach.
The ramp that and for example, do you have existing resources, you can leverage or how many new staff would you need to hire and train and lastly is the margin profile. That's similar to what you have currently in the services business or is there kind of a ramp is a new business comes on to get to that thanks.
Thanks, Todd It does that a lot of granularity in your questions. Let me try to give us some high level comments around those.
This is the good news is that many services is not a new capability for the company, we're enhancing it but it's not brand new and in fact, when you take a look at some of our prepared remarks, and we want a reasonably sized deal in Belgium for a you know ATM as a service managed services business.
So the sales cycle is somewhat longer than a typical sales cycle. You know we're looking at the depending on the size of institution in the complexity of the transaction in these six to 12 month timeframe.
Implementation is not materially more difficult than some of our existing services businesses it and different aspects of the managed services proposition will have different implementation timelines. So we are adding some additional resources part of the $25 million that I alluded to as incremental investments gets direct.
Towards capabilities, all that very nature that you just made reference to.
Your last comment related to two margins.
From the transactions that we secured to date, we're seeing higher margins coming out of our managed services business than we would see out of a broad services business, which points an attractive profile for us if we can build momentum around that business.
That's good then thank you very much.
Good I went just wanted to thank everybody for joining us for today's fourth quarter earnings call. Yeah follow up questions. Please contact me and Investor relations. Thank you.
Thank you everyone. This concludes today's call. Thank you for your participation you may now disconnect.
[noise] [noise].
[music].