Q2 2020 Diebold Nixdorf Inc Earnings Call
Good day and welcome to the de Bono Nixdorf posted second quarter 2020, <unk> earnings call.
At this time I would like to turn the conference over to Mr., Steve Ross check. Please go ahead.
Thank you Olivia and welcome everyone to do both next door second quarter earnings call for 2020.
Joining me today, our Gerard Smith, President and Chief Executive Officer, and Jeff Rutherford, Our Chief Financial Officer.
For the benefit of all of our listeners we've posted slides to the Investor Relations page of people Nixdorf, dotcom, which will accompany our prepared remarks.
Later this afternoon, a replay of our webcast will be a man made available on the same IR website.
Slide two of today's presentation contains a reminder, that her comments will include non-GAAP financial information, which we believe it's helpful in assessing the company's performance.
In the supplemental schedules of our slides and the earnings release, we've reconciled each non-GAAP metric to its most directly comparable GAAP metric.
On slide three we remind all participants that certain comments, maybe characterized as forward looking statements and that there are a number of factors, which could cause actual results to differ materially from these statements.
Additional information on these factors can be found in the Companys Fccs filings.
Participants should be mindful that are forward looking information as current as of today.
Subsequent events may rendered this information to be out of date.
Now I'll pass the Mike over to Gerard.
Good morning, everyone.
To support our recent debt refinancing we pre released results for April and May be a few weeks back into these comments will build on those.
June results reinforce a solid quarter, despite revenue headwinds primarily from corporate 19.
On slide three I'll make a few comments regarding our midyear update.
Our business showed strong resiliency this quarter reinforcing the operating rigor and transformational work done to strengthen the company.
Second quarter financial results were very good, especially when considering the widespread lockdowns from a corporate 19 pandemic and significant disruptions due to economic activity.
In this challenging environment I'm extremely pleased to say that our operations were not impacted is gonna material way <unk>.
In our profits were materially higher year over year.
Led by substantial gains in margins.
And despite difficult conditions, especially in April in early May.
Customer orders for our solutions continued with only modest year over year decline.
Additionally, our visibility into booking levels for the second half have strengthened over the past several weeks.
We are performing well and delivering essential services to our banking and retail customers.
And of course, we're continually reviewing and modifying our practices to ensure that we protected health and wellbeing employees.
Against a backdrop of complex and distinct government approaches globally.
The cadence of business activity improved as the second quarter progressed.
And we experienced a steady rebound in self service transactions.
The point, where a number of markets have returned to pre comfort levels [noise].
And we remain focused on executing I didn't know transformation initiatives and incremental cost actions.
Our results underpinned a successful capital raise debt refinancing transactions in July.
We issued 1.1 billion of secured notes to the U.S. and European investors and both offerings where oversubscribed.
We'll take you through the detailed benefits.
These transactions. However, the key takeaway is that we've extended our maturities by three years to create greater financial flexibility, while reducing our cash interest expense for 2020, and improving our tech sufficiency longer term.
Well the refinancing not completes all parties are focused on completing or do you know transformation.
And concentrating efforts and growth opportunities, while sustaining the resiliency of our workforce.
At the top of slide before we reintroduced a framework before discussing the expected impact of a pandemic 2020 results.
This was shared on our part writings coal.
We set an expectation not mild impacts to services and software revenue.
With more significant headwinds to product revenue.
And we expected Q2 results would be a disproportionate impact.
Additionally, we signaled our confidence that gross margins would be improving as result of our do you know initiatives and incremental cost actions.
Our second quarter results shown at the bottom of the slide we're squarely aligned with this framework.
Excluding the impact of currency and divestiture related activities service revenues declined 11.8% product revenue declined 30.7% in software revenue grew 2.6%.
Our services and products revenue reflects significant installation delays, resulting from the temporary closure bank branches and retail stores in April and May.
Noticeable, especially in Europe.
As we moved to me and into June installations increased nicely with far fewer delays.
Revenue growth in the quarter reflect solid demand for our software professional services activities.
Turning to gross margins on performance was strong and were modestly better than our expectations.
So services margin improved significantly by 470 basis points to 30.7% in the quarter.
Due to our continued its services modernization activities as well as reduced costs from lower spare parts utilization and lower labor costs in some markets.
Product gross margin increased in the quarter by 250 basis points versus the prior year.
Despite the drop in revenue.
This highlights the substantial progress we've made in shifting to more variable cost structure.
As well as a beneficial mix of higher margin products.
Sounds good margins expanded by 940 basis points versus the prior year.
Reflecting strong performance from a software excellence program.
Well as a favorable mix shift.
Non-GAAP operating profit gross and operating margin expansion, we're both very strong for the second quarter.
Oh, Pete increased by 24 million year over year to 98 million.
An increase of 32%.
The company's Oki margin was the best ever 11% for the quarter.
This isn't a significant increase of 460 basis points versus the prior year.
[noise], how strong performance illustrates how I do you not transformation initiatives are hitting their stride.
Both our business and our employees exemplifying high degree of resiliency is challenging environment.
As a result, we are reiterating 2020 outlook for revenue and adjusted EBITDA.
And increasing free cash flow outlook range of $20 million to $30 million.
Slide five illustrates weekly transaction data for more than since 2018 times located in more than 20 different countries.
While there was no doubt that the government quarantines in March and April had a dampening effect on cash transactions.
Bitumen, we saw transaction levels improve in most countries to pre Coca levels as these economies we opened for business.
Equally important is that third party research expects cash withdrawals to recover from 2020 levels.
Grow 2% annually through 2020 fives.
The continued growth cash over the long term is a favorable indicator for a banking solutions.
New business in the quarter was resilient as we experienced modest declines in Eurasia banking and retail orders in a much more mild impact in the Americas.
Key wins in the quarter included initial orders for our next generation D. N series 18 wins at a top 10 and the top 25 financial institution in the United States.
In Egypt, we sold it bundle of 350 D N series with remote monitoring and cash deposits software.
While the sales funnel for D. N series is building nicely.
Opened 19 has slowed down some of the certification work occurring in customer labs.
We are continuing to scale up of certification activities and that increase the number of customer projects from 240 at the beginning of the year to 400 by the end of March and 475 as of today.
On the retail side of our business. We were pleased to win a three year contract for managed services and products contract with I guess Watson.
One of the world's largest health and beauty retailers in support of the company's digital transformation strategy.
We also secured a new 17 million dollar managed services contracts to expand self checkout solutions at one of Europe's largest home furnishing retailers.
Continued business wins like these provide confidence in the long term strategic importance of self service solutions.
On slide six we highlight key components of our value creation journey.
Turning on the left side, our initiatives to drive operating margin expansion as we've articulated in the past are well underway.
And include services modernization software excellence, simplifying the product portfolio and manufacturing footprint.
Adjusting chicken efficiencies.
And transforming and digitizing our back office functions of ice tea HR finance.
Over the past 18 months, we have demonstrated how these initiatives are driving higher profits and cash flow.
Even as we've experienced a challenging business conditions due to covert.
So far we've realized about 60% of the didn't know targeted savings of $470 million.
Our team remains keenly focused on realizing the remaining hundred 90 million of savings between now and the end of 2021.
Our cash payments for restructuring and do you know transformation actions.
Tracking to about $100 million for 2020.
We expect total program payments will be substantially complete by year end.
We will be realizing a higher conversion rate of adjusted EBITDA to free cash flow starving 2021.
Moving to the middle of the page, we continue to optimize the company's capital structure.
Q3, 2018, we've reduced our leverage from 6.5 times to the mid falls.
We remain focused on achieving a long term targets of three times net debt to adjusted EBITDA.
As previously mentioned, we've extended over a billion dollars of maturities from 2022 hours to 2025.
A recent refinancing included euro denominated debt, which improves our tax efficiencies through improved deductibility of interest.
Which lowers our medium term cash tax payments.
Coupled with our cash on hand, we leave the company has sufficient liquidity to complete how do you know transformation.
Increasingly differentiated solutions and pursue growth opportunities.
Going forward, we will continue to monitor the capital markets for additional opportunities to further optimize our capital structure.
Looking forward into 2021, we're very focused on the differentiation and enhancements, we are making two offerings to meet evolving customer demands.
Within services, we have largely completed the work to eliminate lower margin services contracts and we're focusing on leveraging our market leading product related services.
Hi, our Aiotv enabled will connect data engine.
Our managed services capabilities to grow services revenues.
Well products, we are well equipped to gain share at attractive Economics Guardian series and self checkout solutions.
Industrywide self checkout penetration remains in the mid to low single digits, you know key markets.
And there is significant runway in front of us for growth.
To this point the company's shipped more self checkout units in the first half of 2020 than we did in all of 2019.
We're also looking to build on the recent softness success as we see opportunities to increase our share of wallet with off I NAMIC software offering.
Opportunities include our Multivendor software for ATM.
Cloud native debit platform.
Marketing cash management and forecasting modules.
In the near term, we continue to monitor the evolution of cobot 19 across the globe.
And while there may be some further country specific contractions in business activity.
Rock look contemplates a gradual recovery of economic activity through the ended the year.
Confident in the resilience of our model and anticipate somewhat stronger topline momentum in 2021.
I remain confident in our ability to create value for investors over the long term.
With that I'll hand, the call over to Jeff Rutherford.
Thank you Gerard and good morning, everyone.
In my prepared remarks today.
My comments will focus on non-GAAP metrics.
Unless otherwise noted.
On slide seven <unk>.
We provide a table, which explains our year over year revenue performance for the second quarter.
Revenue of $890 million was impacted by the cobot 19 pandemic.
Foreign currency and actions, we have taken to drive higher quality revenue.
Specifically the company experienced unplanned revenue delays of approximately $108 million during the quarter.
Which is primarily the result of delays in product installations from the pandemic.
We did not experience any material cancellations and fully expect this revenue will be recognized in future periods.
Economic disruption of cold and further strengthen the U.S. dollar, which resulted in an unplanned foreign currency headwinds of approximately $39 million in the quarter.
Other factors were in line with our pre Cobot plan included approximately $75 million for nonrecurring volume in the prior year period.
Partially offset by incremental business in the current period.
Approximately $23 million from noncore divestitures, and approximately $15 million from our proactive efforts to reduce low margin business.
Our efforts to reduce low margin business.
I've been underway for several quarters and primarily involves our services contracts.
We have reached a point, where the vast majority of these actions are behind them.
And we expect this will be less than a factor during the second half on 2020.
On the right.
On the right of the slide we show the significant gross margin expansion from our do you know initiatives.
500 basis points more than the prior year period.
Our best ever gross margins of 29.6%.
Were made possible by significant gains across all three business lines.
Well services, increasing by 470 basis points products 250 basis points and I software gross margin increased by 940 basis point.
That's right mentioned our service gross margin expansion was underpinned by the state sustainable benefits of our services modernization actions as well as some interim benefits from lower economic activity.
The product and software gross margins in the quarter benefited from Dia now actions and a favorable mix.
Gross profit in the quarter was $264 million.
The year over year variance reflects lower revenue contributions approximately $7 million to currency headwinds and approximately $3 million from divestitures.
On slide eight the company is showing good progress from our idea now transformation initiatives to harvest operating operating efficiencies from functional Gina cost.
Our non-GAAP operating expenses declined by $43 million or 21% when compared with the prior year.
We have made real progress on our finance transformation to regionalize and centralized workstreams, well, making greater use of automation within our core functions.
Other enablement functions of the H.R.I.T. and sales support our also leveraging technology and process improvements to become more efficient.
As a result, we have reduced our internal junaid headcount by just over 300 and trimmed our external support headcount by another 100 through the first happen 20 Twond.
With respect to real estate.
A successful transition of many employees to work from home environments is enabling the company to accelerate our consolidation activities to a more efficient real estate model.
During the quarter Diebold Nixdorf announced an important enhanced partnership with Accenture to accelerate our digital transformation for ice tea finance human resources and sale support.
Over the next three years, we will deploy common cloud solutions across our business that generate savings of approximately $50 million by rationalizing legacy applications migrating workloads to the cloud in consolidated data centers.
Slide nine contains the somewhere of arc <unk> second quarter results and provides a comparison to the prior year period.
Since we have already discussed revenue and gross profit.
I'll focus my comments on the profitability metrics, which exceeded our internal model.
Operating profit of $98 million improved by $24 million or 32% versus the prior period.
Driven by higher gross margins and meaningful reductions in operating expense.
Operating margin expanded by 460 basis points in the quarter to 11%.
This reflects the continued progress of our idea now initiatives approximately $18 million a cost actions, which we do not expect to recur in 2021 as well some mix benefits.
Our performance over the past 12 months has steadily improved.
We have doubled operating profit to $328 million since 2018.
Even as the top line declined by approximately $500 million.
Adjusted EBITDA of $122 million increased $15 million or 15% over the prior year period, the company's adjusted EBITDA margin expanded by 440 basis points in the quarter to 13.7%.
Second quarter gross margins.
Operating profit margins and adjusted EBITDA margins.
All right record levels for Diebold Nixdorf, the study demonstrating very strong execution commitment and resiliency from our employees.
We have also reached an important milestone with respect to value creation and that our return on invested capital has reached the low teens and is greater than our weighted average cost of capital of approximately 10%.
The next three slides provide segment level financial information, which is just prior year metrics to normalize for the effects.
Foreign currency and divestitures.
Moving to the Eurasia banking highlights on slide 10 second quarter revenue of $338 million was significantly impacted by lower activity as our customers taking action to protect their employees and slow the spread as a grown of ours.
This resulted in an unplanned revenue delivery delays of approximately $40 million from products and services during the quarter.
Additionally, our divestitures and reduction of low margin business impacted segment revenue by $23 million and $4 million respectively.
With most of this impact coming through services.
Based on a gradual reopening up branches and stores, we expecting proving services and product revenue trends for you raise your banking in the second half of the year.
Non-GAAP gross profit of $102 million into quarter in a gross margin of 30.3% reflects good progress on idea now initiatives as well as an interim benefit from lower service activity. During initial phases of called <unk> and a favorable product in software mix.
Slide 11, America's banking revenue was $331 million for the cord.
Compared with the prior year segment revenue includes approximately $60 million a planned reductions, resulting from strong product revenue performance in the second quarter of 2019 in North America in Brazil.
Lower product volume offset professional services software growth.
The quarter at large U.S. customers.
In addition, we experienced approximately $18 million a foreign currency headwinds ussix million dollars reductions from actions as we we are taking to become more profitable.
Approximately $5 million of delayed revenue.
Pertaining to the colder 19 pandemic.
Despite revenue headwinds segment gross profit increase versus the prior year period to $107 million since we continued to benefit from our didn't know initiatives.
Lower service costs in the favorable product and software it back.
Segment gross margins expanded by more than 900 basis points to 32.4% with meaningful contributions from all three business lines.
Advancing to slides wall.
Retail segment revenue of 2200 $21 million, primarily reflects approximately $63 million unplanned products and services delays pertaining to pull that 19.
Which is masking growth in our self checkout business.
Foreign currency headwinds were approximately $9 million in the quarter, while the reduction of low margin business was approximately $5 million and nonrecurring projects from the prior was nominal as expected.
Despite lower revenue our retail retail team continue to expand gross margins by approximately 200 bait 70 basis points to 24.7%.
This improvement reflects solid progress with our services modernization and software excellence programs.
Well revenue mix of self checkout solutions, and intra interim service cost benefits from lower economic activity.
On slide 13, we highlight our continued progress and that working capital efficiency.
During the second quarter net working capital as a percentage of revenue over the past 12 months declined 230 basis points to 15.54% down from 17.7% a year ago.
Due primarily to tighter controls are not accounts payable.
Although we are trying to trending towards greater net working capital efficiency, we did see some impact from the pandemic and current economic environment Lane, mainly from the lengthening of inventory turns.
And an increase in days sales outstanding.
From a free cash flow perspective, we exceeded our three covert plan for the first half a 2020, which was the use of $138 million.
It is the prior year free cash flow benefited from stronger operating profit and mild benefits from lower cash taxes deferred cost cash interest and capital expenditures.
We ended the quarter with sufficient liquidity liquidity of approximately $457 million and debt net debt was approximately $2 billion.
On slide 14.
I will discuss our debt maturities and leverage ratio within the lines of our refinancing transaction, which closed on July 20.
We raised $1.1 billion from our senior secured notes offering consisting of approximately 700 million of U.S. dollar denominated notes.
And 350 million of Euro denominated notes.
Well the offerings are oversubscribed, especially in the U.S.
As we received broad interest from current and new investors.
Net proceeds were used to pay down our term loan a term loan a one and 69 million or the revolving credit facility, which was set to expire in December.
Since two sounds just were scheduled to mature and 2022, we have significantly extended our debt maturities by three years to 2025.
The same time, we amended and extended approximately $330 million a revolving credit facility from April 2022 to July 2023.
This transaction significantly improves our financial flexibility.
From a modeling perspective, we're now expecting lower cash interest of approximately a $150 million in 2020.
Due to the timing of their interest payments on the new notes.
And 2021 interest is expected to be approximately $180 million, which is inline with our 2019 interest resolves.
Hi, raising debt minerals, we also expect greater tax efficiency relating to the deductibility of cash interest.
Cash taxes should be approximately 40 million for 2020 down slightly from 42 million and 29 team, but note that 2019 included in approximately 8 million dollar tax refund.
Most importantly, this transaction transaction, coupled with current cash on hand provide sufficient liquidity and time to complete our do you now transformation in 2021.
So the right of the slide we've provided a pro forma maturity schedule.
As you can see the company has no much material scheduled maturities until 2023.
That's drive stated we will continue to monitor the capital markets and where appropriate we will take opportunistic steps to further optimize our capital structure and weighted average cost of capital.
There's a bottom right Oh this slide you'll see a leverage ratio of net debt to trailing 12 month adjusted EBITDA was 4.6 times at the under the second quarter.
We have steadily improve this ratio over the past year and it remains well below our covenant maximum of 6.5 times.
Moving to slide 15, I will discuss the outlook for 2020.
With respect to generate revenue of $3.7 billion to $3.9 billion, reflecting a modest impact to product revenue.
In a mild impact and services and software revenue.
Excluding the impact to divestitures in 20 children, which created a headwind of approximately $110 million.
We're maintaining our updated range for adjusted EBITDA of $400 million to $440 million, which we believe reflects an appropriate balance of opportunities and some rest of further macroeconomic uncertainty.
We will continue to execute our deal now initiatives, which are targeting approximately $130 million the savings plus our incremental actions, which include reduce bonus expense deferred merit increases and the freeze on hard.
Approximately $50 million so the incremental savings are unlikely to recur beyond this year.
Offset to these savings include the margin on revenue delays from called the 19 and installation.
We have improved our free cash flow outlook for 2020 from breakeven to a range of $20 million to $30 million and includes the of the following approximate amount.
Net interest payments $150 million.
Restructuring and transformation payments of $100 million.
$40 million from unfavorable timing.
Certain balance sheet items, such as compensation accruals.
Another prepaid items.
$40 million of cash taxes $25 million of capital expenditures $20 million than that working capital cash use.
And $20 million for pension contributions.
Given our first half results and our outlook.
Investors should expect revenue and adjusted EBITDA for the third and fourth quarters to be proportionate to our 2019 results.
In conclusion, the company has risen to the challenge of managing our business through a challenging period.
Our crop in the <unk>, our accomplishments you know initiatives and company values provide us with a high degree of confidence in our value creation journey.
Now I will hand, the call back to the African operator to begin or question answer session.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
You can speakerphone. Please make sure your mute function, it's turned off to love your signal to retire Clinton it.
Again press Star one to ask a question we will cause for just a moment hello, everyone and opportunity to signal.
We will now take our first question, Matt Summerville with D.A. Davidson. Please go ahead.
Thanks, Good morning couple of questions.
First with respect to D. N series can you talk a little bit more granular in terms of where you're at with the certification in sales process in other words when do out the door volumes really begin to ramp up for that new product line.
Good morning, maximum and thanks to the question. So just as a reminder for the benefit of everyone. You know what we commented on this quarter as being the.
Really remarkable in steady improvement in the number of certification projects underway, which really reflects longer term market demand for the product. We also mentioned that some customers have difficulty accessing their own customer labs, which is slow down certifications by about three months in some markets.
Prior to cope with it you know our view is that we're going to start to ship more meeting for volumes out the door in Q4, I think in light of Cobrand. We're now looking at or early in 220 21 to start seeing those volumes pick up and that's not to say that volume isn't going off the goal, but just given the pacing of certifications with more likely to see a much woman.
Good luck tick and it would be 2021.
Got it and then with respect to some of the I'm more temporary a benefit your seem to service gross margin I I think for the quarter. It was up 470 basis points, if I'm not mistaken how much of that improvement would you say is sort of temporary in other words, what is the kind of the current more.
We realized run rate of services profitability.
Yeah, Matt this job, we believe that it's approximately 200 basis points above what we would consider normal and what we would internally model.
Got it and then and maybe just one final one I'll get back in queue, you talked about self checkout shipments being up the first half severe more than they were for all of 19, what's sort of momentum do you still have in that business in the back half and are you seeing incremental interest being born.
Now to co bid is retailers look to move to and increasingly to more low touch type of a environments. Thank you.
Yeah, Matt we've seen very very sustained momentum as we move into H. too and we would be very surprised to see momentum we saw in each one doesn't carry through to reach to show.
Quite frankly, the overall volume expectations that we're looking at now with this year.
We're pretty close to deplete cobot levels, which is a reflection of city the market to really showing strength and interesting or self checkout devices.
You know as I've mentioned or when we did our debt road show with strong to see a material pickup in interest in European markets that were perhaps lagging.
The European markets will self checkout, Sam in particular large population markets like Germany that have historically lag.
Markets like the UK are showing extremely heightened interest in self checkout. So we would say that that points to a very very strong period of momentum for us and self checkout as we move into 2021 as well.
Great. Thank you.
Our next question comes from Paul Coster with JP Morgan. Please go ahead.
Hi, guys. This is Paul Chung on for costs are thanks for taking my questions. So first up just what's been the feedback on demand I know some to regional banks in the U.S. are you seeing.
And different behavior from the regionals kind of relative to the tier ones.
And you know are they seeking some of these ah contactless type functionality as well.
No small oh, good morning, Paul Yeah sure.
So the regional banks, if actually being pretty steady in terms of their behaviors. All the way through Koby you would've heard me talk about Oh order entry or being much much more mild in terms of the declination in the Americas and that was certainly reinforced by some ongoing salt.
Order activity from the regional banks.
So they've been a really quite a robust.
In terms of their appetites and interest in contactless solutions no I wouldn't describe their behaviors as being profoundly different from what we're seeing from the tier one global banks. Yeah. We are rolling out a anti microbial solutions to enhance the cleaning of machines a there.
Enhanced interest in mobile.
Staging and withdrawal of cash from machines, but that's been a pretty consistent train and we've just seen heightened interest from quite frankly banks of all sizes for solutions like that.
Got it thank you.
And then just on free cash flow, where do you see more.
Opportunities on maybe some working cap conversion.
Like you have a you know 20 million drag. This year you know your near peer has been pretty aggressive on the.
Our collections can you do the same there or was that more kind of a benefit for you in 2019. Thanks.
Yeah, that's a it's a good question, let me cover all.
Free cash flow.
I'll start with working capital a we.
We harvested the $110 million, so cash out of working capital in 2019.
Well, we [laughter] pretty much a flat plateau relative to inventory a we take inventory down much further than it currently is that we could affect service levels and obviously, we want to be sensitive to that.
Payables, we always have opportunity.
Right and receivables, we always have opportunity so.
Going forward, we believe we're gonna be able to harvest.
Working capital dollars, but it's not going to be anything suit as significant as what we saw 2019 <unk> our working capital as its two officials to to believe that we're gonna harvest.
Anything to that level, when we get back to to the growth.
Oh the of the model as we transition and 2021 right, we're going to see some probably use and then our expectations would be to be flat working capital the real opportunities in our free cash flow conversion is to get through the restructuring transformation as we've talked about on the call.
Paul that'll be approximately $100 million upside and 2020.
We do have some supplemental information and the deck that will explain the the the a reconciliation between the costs of restructuring transformation in the spend but it'll be $100 million.
And then our expectation and our target for 2021, we have to get through our finding process, but we're targeting 25 million and then the cash will be done for the for the DNL initiatives that we currently have.
Cash taxes as an opportunity.
We're inefficient relative to cash taxes, we talked about it on the call I'll tell you that are.
Tax deductibility efficiency the ability to utilize.
Interest against operating profit in 2019 was less than 50%.
Ah you can do the math you if you assume that we can get closer to 100% and interest deductibility efficiency at even a low tax rate of 25% you can see that we could impact cash taxes $20 million now we're gonna be tax consolidated tax income.
Starting next year, so there won't be some increase in cash taxes, just because it's a continued expansion of the operating profit as the company.
And then Capex is always going to be around on a on a stable basis around $20 million to $25 million.
Right.
And then the last the last thing and that would be before any projects are relative to our ERP is internal systems expansions and implementation to the clubs so for.
And then that leaves entrust, there's a path with EBITDA growth as in our internal models that with the reduction and.
The payments for.
Transformation and restructuring.
Eliminate that get tax.
Cash taxes, where they need to be there is a path with wouldn't break even working capital to gets a model to a.
Approaching a 50% EBITDA free cash flow conversion.
I was very helpful. Thank you.
Sure.
We will need to our next question and that comes from Kartik Mehta with Northcoast research.
Uh huh.
Hi, good morning.
Sure I'm wondering if you look at the geographies you as Asia Europe, if you're seeing any difference in demand on the banking side, and obviously retail you're more tied to Europe. So maybe if there's any differences in demand in Europe.
As well for the retail side.
Good morning, Kartik Q2 was was interesting for us because from a revenue perspective, you raise your banking was much much more impacted by coated and Americas banking and from an order entry perspective, and we saw more modest declines in your.
Sure and much more mild declines in the Americas. So yeah for Rob you know that particular quarter, yeah slightly lower demand in Eurasia.
However, I don't think that's indicative of.
You know what we're seeing more structurally if you go back to Q1, we saw extremely high demand in Eurasia banking and as we look out and look it up sales pipeline to the back half of the year, both Americas banking in Eurasia banking, showing some some nice improvements and we'll start to see some sequential improvements in revenue growth.
On the retail sorry, you know as you rightly pointed we've got more exposure to Europe than anywhere else in the world and you know as we've commented in the past, we're seeing very very strong demand for self checkout.
With moderating demand on the point of sale side of things.
And then Jeff I guess, what's the next step for that.
Our debt side, obviously, extending the maturities really is hopeful kinda gives you some.
Room to breed I'm wondering maybe the next steps on the debt.
You know Cardica the next step on on capital structure, right and by the way all all options are on the table.
Right.
But we really need to keep continue to.
[noise] to perform relative to operations and then and then our opportunities will expand.
You know.
We already talked about the continued expansion in operating profit in the continuing expansion.
Cash flow in the free cash flow a conversion for me, but Uh huh.
But we won't we will monitor all capital structures.
Or or markets.
And we're not committed to anything right now relative to capital structure will like what I will sell you guys were at right now isn't our optimal capital structure.
Right. Our our are based on our current EBITDA that is high art.
We're probably a I think everyone would would admit that we are a turn high.
Relative to debt to EBITDA, we need the we need to address that either through operations or some other me. So we'll continue to monitor.
Capital structure and markets, but we're not obviously, we're not going to commence anything today, but you could be assured we're continually monitoring that what we have done and we said this during our non deal Roadshow and deal Road show on the refinancing what we have done is give ourselves the flexibility to get through the D. and then I'll turn.
It's formation in 2021.
We now have the space that we aren't worried about a debt maturities and 2020 to become current and 2021. So it gives us all kinds of option.
But but the real focus of the company is the continued to operate and then all of that.
Opportunities to drive sorry.
What we would all admit is a deficient capital structure will open up to us.
Hey, Thank you Jeff Thank you both.
Thank you. Our next question comes from Jeff Heartland with Barclays. Please go ahead.
Hi, good morning.
So for the year covert delays and deferrals as you look across the company do you see those.
The visibility on those being or you know implemented in the next quarter or two quarters from now or is it still unclear how does that factor into your revenue expectation.
Yeah, Good morning, Jeff.
As Jim commented, we haven't seen any cancellations of orders. So what we're starting to see use an up tick in installation activity. You know obviously, that's a counterbalanced by some ongoing conservatism from some of our other customers that might have begun placing orders in Q3. So so our expectation is that you know under.
The assumption that the world continues to steadily improve we'll start to see a steady sequential increase in revenues, but we're not expecting a rapid snapped back or southern surge of incremental revenues, but more of a steady improvement over the next few quarters.
Okay.
You know sort of.
Independent of Coke bid or once we get through Cobra, how do you see the upgrade cycles you look at banking America's Bank in Europe, or with respect to win 10 upgrades and also on on the retail side, where I know there have been some you know upgrades over the last couple of years.
Yeah. So.
If you go back and look at the commentary from Q1, we sold very very strong order activity in Eurasia, which was you know reflective of what we saw is strengthening <unk> end market demand on the banking side of things have given that your ranger was lagging the Americas from a win 10 perspective.
However, we're still seeing decent order activity from the regional banks and banks in Latin America.
As evidenced by you know the order activity we saw in Q2, so as I've said on multiple occasions, no. We're not of the view that when 10 by itself pros is immaterial surge or material drop in demand at all.
I'd been slow somewhat but there's much more fundamental reasons for upgrade cycles in the banking segment, driven by increasing shifts towards cash recycling capability, driven by increasing shifts towards a software upgrades a in the contact the space. So when 10 is a it's a much more more modest.
Factor.
On the retail side, you know there have been a number of upgrades, but quite frankly, we think with that as an opportunity for us not not correct.
As more upgrades or do you.
In Europe, but we think that there will be a fairly material.
Upgrade cycle in front of us in self checkout in particular, plus grow or an increase penetration. So we think those industry dynamics are attractive over the next several quarters.
Okay and last for me just some of the D. N O a initiatives what are the initiatives that are still sort of ahead of you you know looking into second half and then for 21 I know you talked about a century is one way or what else so you're looking to do.
Complete be an issue.
Yeah, I mean, if you look at the the sequencing all.
How we executed or idea not programs from 2018 people now.
The early wins came to us through material improvements in that net working capital. We then spent a lot of time focusing on gross profits in gross margin initiatives. For example services modernization work on our manufacturing footprint and 2020 is primarily in year, that's been heavily focused but not exclusively focus.
On June eight efficiencies. So we're right in the midst of some fairly profound group and synergy in a cost base led by our finance transformation. So those are in flight and will largely be a complete through the back into 2020, yeah. As we look into 2021, there's a.
So fairly substantial transformation in flight cutting our HR function as well as a REIT T systems with a accenture.
Great. Thanks very much.
Our next question comes from Rob, Yes, with Invesco. Please go ahead.
Hi, Thanks, good morning.
What did you you've talked a bit about self checkout strength, but thinking about the point of sales as well some of the retail in any pick your expose more to the bigger retail customers.
I've seen a lot of strengthen in this cobot here are you seeing any strength in point of sale at this point or is it still that.
Kind of declining environment that you talked about in the past.
Just one Rob.
Point of sale over the past several years has shown.
Modest top line strengths are.
We saw a little bit of a weakening in Q1. That's certainly played itself out in Q2. So no I think we're still in the covert induced weakness period for <unk> point of sale.
I think it's too soon to say Oh, we feel about point of sale as we look into 2021, they may still be a little bit of softness there.
But as I said, that's been nicely offset impart by what we're seeing in self checkout and I think Thats My Franke driven more by a strong consumer preferences for contact list Tuxtla solutions, but as far other interact with the self checkout device, then teller assisted <unk> point of sale.
Okay, Great and I made my follow up is the software margins I called out a few reasons why are they were.
They were very substantially kind of similar to the question you've got on services, where.
You know how much of this should we think about as a more normalized gross margin given all the improvements you've done again, though.
Yeah, the the gross margin improvement and software as a not tied so much to two coal, but it's a actually true.
We had some change in management and.
We are we're doing a much better job in particular relative to.
Professional services and utilization of technicians I, we still we still think that we are a little above what we would internally model and we've talked about 100, daughter 50 basis points above our current modeling level for software.
Okay perfect. Thanks.
Our final question comes very time with Sage asset management. Please go ahead.
Hi, Thanks, so much for taking my question I have one question on the T.N. now savings you know you talked about the run right now and the remainder over the next 18 months, but if we look on a year over year basis 21 persist 20.
How much incremental savings will there be in 21, and then at the end of 21.
Wow, you'll be essentially complete you'll have carried over 22 at the same question incremental save 22 versus 21, I know that would be very helpful. Forget a flavor for that thanks.
Yeah, and what we've said is a <unk> and.
We've targeted $470 million the savings.
And we realise 175 million.
And.
29 team and we've talked about 130 million in 2020.
Uh Huh, [laughter], which leaves 165 million for 2021.
But we've also talked about publicly when we when we came out with the April and May results that we talked about $100 million.
Of incremental benefits.
And we talked about 50 million or those feed nonrecurring. So so essentially we've added $15 million.
And to 2020.
Oh, we haven't called at that but but but.
Whether it would do is take 20 $20 million to $180 million.
We are working internally on our 2021 modeling.
And the question as when are we going to not and not yeah. One we're gonna take up our targeted savings for do you have now.
And so essentially we're sticking with 2021.
165 million.
And so we're still calling that incremental 50 million in 2020.
Got it you know incremental savings, we haven't attributed to two d. and not all but but well have a well have a further update on the full range of the deal now savings.
And it unless I mean, I'll, just say now that it's not.
If we take it up it's it's one we take it up officially and and I guess I just did that by $50 million. So we're looking at something over 55, I'm, sorry, 500 million a in total savings for do you know.
Okay and.
Just to clarify that make sure I understand the.
The 175 for 19.
130.
20, and one looks tier 130, plus 50 of incremental right. Those are those are individually or run rates as opposed to actually I know, that's let's say anything and those are actual savings. That's those are actual savings in those years got it. Thank you. So much further clarification appreciate it.
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Thank you.
That concludes today's question and answer session. Mr. Prospect at this time I will turn the conference back to you for any closing remarks.
Yeah, I just want to thank everyone for participating in today's call. If you do have follow up questions. Please feel free to reach out to me via phone or email. Thanks, so much and have a great day.
Thank you all for your attention. This completes today's conference you may now disconnect.
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