Q4 2020 Diebold Nixdorf Inc Earnings Call
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Okay.
Ladies and gentlemen, thank you for standing by and walk on to the depot Nixdorf 'twenty 'twenty earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that.
Today's conference is being recorded if you require any further assistance. Please press star zero value I would now like turn the conference over to your Speaker today, Steve Ross Day. Thank you. Please go ahead Sir.
Thank you Ashley and welcome everyone to Diebold Nixdorf fourth quarter and year end 2020 earnings call. Joining me on today's call are Gerrard Schmid, President and Chief Executive Officer, and Jeff Rutherford, Our Chief Financial Officer, Joe.
To accompany our prepared remarks today, we have posted slides to the Investor Relations page of Diebold Nixdorf Dot com.
Our remarks are being recorded and we will post a replay of the webcast on the IR website later today.
Slide two of todays presentation contains a reminder, that our comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance.
We have posted reconciliations schedules for each non-GAAP metric.
We're reconciling to the most directly comparable GAAP metrics in the supplemental schedules of our slides and in the tables of today's earnings release.
On slide three we remind all participants that certain comments may be characterized as forward looking statements and that there are a number of risk factors, which could cause actual results to differ materially from these statements additional information on these factors can be found in the company's SEC filings.
<unk> expense should be mindful that our forward looking information is current as of today and subsequent events may render this information to be outdated.
And now I will hand, the call to Gerard.
Thank you, Steve and good morning, everyone.
I'm pleased to join you today to discuss our investment thesis our solid 2020 results on our outlook for value creation.
I'll begin on slide three with our investment thesis.
Since 2018, our focus has been on transforming our business model to generate strong free cash flow.
We've been streamlining and simplifying our business through our DN now transformation initiatives.
Leave all of these initiatives and increased our savings target to $500 million through 2021.
With two years of solid execution in the books on a path.
The higher profitability is well underway.
As our DN now restructuring spend tapers off in 2021.
We expect this to translate into a meaningful increase in free cash flow.
The second element of our investment thesis is the ability to leverage digitally enhanced solutions.
To drive sustainable topline growth on a positive mix shift.
Yeah.
Slide four highlights how we're transforming our business model.
In 2021, we will continue to enhance our productivity and anticipate delivering approximately $160 million of incremental savings.
Key initiatives for this year include continued services modernization progress.
Driving a higher mix of our next generation self checkout retail devices on next generation DN series Atms.
On investing in digital and cloud technologies.
Enhance efficiencies across.
Finance and HR enablement functions.
And what's the DN now transformation set to conclude by year end.
Our restructuring payments will also come to an end.
Cash restructuring payments expected to be no more than $50 million this year.
The net result of our efforts will drive a strong sequential step up on free cash flow.
Which is anticipated to be in the range of 140 to $170 per year.
In addition to enhancing the free cash flow generation from our operating model.
Our targeted growth in areas, where we have competitive differentiation.
Within banking, we are well positioned to support the accelerating digital transformation agenda.
Our customers across the globe.
As they enhance the value proposition for their end customers.
And seek greater operating efficiencies.
Our momentum with DN series, Atms and fourth generation cash recycling technology is promising.
We have seen customer enthusiasm for the advanced feature set Inc.
<unk> connectivity through the old connect data engine.
Later modularity support.
Support for advanced software capabilities and improved security features and a small footprint.
For our services business, we are leveraging the Iot and machine learning capabilities of our old connect data engine.
Enhance availability for customers and improve our own efficiency.
Early deployments with legacy Atms suggests that acte, Ken recall can reduce call rates by approximately <unk> 20 per cent.
In addition, we are supporting our customers' efficiency agendas through offering pre configured.
On a services solutions for those customers, who want the most comprehensive ATM solutions performance levels and capabilities.
But you're on self service channels, we're also investing in software offerings for financial institutions.
I will shortly describe a cloud native dynamic payments offering on.
On the market opportunity on the next slide.
Within retail consumer journeys, continuing to evolve and shift towards more digital and self service solutions.
We're seeing strong momentum through our differentiated suite of self checkout solutions.
And we further enhanced our position in January.
When we announced the DN series easy.
Which is a new family of self checkout products designed to be more modular more reliable and flexible.
Because if it's open architecture.
2020 was a very strong year for Diebold nixdorf from our self checkout shipments perspective.
And as we delivered growth of approximately 19% in the fourth quarter and.
And just over 200% for the full year.
The highest service attach rates of approximately 90% is another reason to like this business.
Yeah.
We also see opportunity to expand our software reach with retail customers.
And are investing in our cloud based finance make retail offerings.
In December.
Launched a cloud based software offering for free.
Inconvenience customers.
As more technologies proliferate within a retail customer environments, they're also Tony to Diebold nixdorf to support them with our comprehensive managed services offering.
Generate greater operating efficiencies and more integrated store operations.
On slide six I'd like to highlight an exciting new software offering.
We are bringing to market.
We have dynamic payments platform.
That's the payments landscape rapidly evolves banks are facing a proliferation of new payment types.
And rapidly growing payment volumes.
They are cumbersome legacy payment platforms limit their ability to offer a consistent and optimize consumer experience across multiple channels.
Our cloud native solution offers a powerful banks to address these pain points.
We are currently deploying our dynamic payments platform at our first client.
A top 10 global financial institution.
The solution will scale to support billions of debit transactions across multiple channels.
We also recently announced a win at one of the largest credit unions in the United States.
Our solution our solution Leverages on API enabled micro services approach.
Which provides distinct competitive advantages for our company.
Including the ability to transform our banks payment operations.
<unk> flexible and future proof approach to support multiple payment types and channels.
Giving banks the flexibility to adapt to changing regulations schemes payment types and channels.
And the ability to quickly scale to billions of transactions.
These characteristics place Diebold nixdorf in a position to offer a distinctive solution versus less flexible more expensive legacy platform providers.
Moving to slide seven I will recap our financial performance in 2020 and growth outlook for 2021.
We are experiencing strong demand for our differentiated and digitally enabled solutions.
Despite the continued complexities of the COVID-19 pandemic product orders increased 17% in the fourth quarter.
With banking growth of 34%.
In fact order activity across the full year exceeded our performance in 2019.
We were also pleased that our customers are further validating our progress as customer satisfaction further improved as net promoter scores from our banking customers increased substantially for a third consecutive year.
Yeah.
At the same time, we enhanced our execution of the DN now transformation initiatives.
Delivered approximately $165 million against our savings targets during the year.
These achievements were the main driver behind meaningful year over year increases to profit and profit margins.
Even as we experienced revenue impacts from the pandemic.
With respect to free cash flow, our fourth quarter result of $186 million was the strongest we've experienced an eight quarters.
Fueled by solid profitability and strong collections.
For the full year, the company generated $57 million from free cash flow.
Which exceeded our outlook by $27 million.
In addition to our strong financial performance I am gratified by the multiple ways on which our team adapted to the dynamic and highly uncertain macro environment.
We are entering 2021 with a strong order book differentiated and well positioned solutions.
On a detailed operating plan for bringing our DN now transformation efforts to a successful conclusion.
While we have confidence in our outlook for 2021.
We also recognize that we must continue to manage a number of pandemic related uncertainties include.
Including the pace of easing of Lockdown restrictions.
Why do they have the ability and access to vaccines.
And the impact on business activity.
Both in customer buying patterns, and then our supply chain.
Against this backdrop, our 2021 the outlook is for revenue of approximately four to $4 $1 billion or 3% to 5% growth.
Adjusted EBITDA of $480 million to $500 million, which translates to 6% to 10% growth.
And significant free cash flow growth to a range of $140 million to $170 million.
Yeah.
On slide eight I'll provide some more details underpinning our strong 2020 financial results.
Strength in product orders during the quarter drove our product backlog, 23% higher versus the prior year.
In our retail business.
Customers are investing in automation and self service capabilities to improve the in store experience, while lowering operating costs.
During the fourth quarter, we received initial orders from our milestone agreement with a pan European grocer.
Who is refreshing the second largest fleet of self checkout devices in the world.
In Poland, we procured a $7 million contract for self checkout products and.
And <unk> I scan software licenses with another large grocery store.
In our banking business I am pleased to report that for the first time.
Ian series Atms contributed meaningfully to the order book.
Success in the Middle East included two sizeable deals.
In Saudi Arabia, we booked an order with a top three bank to refresh 1800, Atms with DN series.
We also book the new logo in Egypt for 500 DN series.
In support of the Spanx expansion initiatives.
Notably both agreements included multi year contracts for security monitoring and marketing software.
In the Netherlands, we secured two new contracts valued at approximately $11 million to provide DN series Atms.
And indoor lobby cash recyclers.
In the Americas, we expanded our existing partnership with Citibank.
For additional DN series Atms.
A full dynamic software suite and maintenance services across 15 countries.
Which will help standardize the customer experience, while reducing complexity cost and security risk.
We also want on new contract to install 1000, new DN series cash recycling modules.
Our Iot enabled all connect data engine with.
With the largest private bank in Brazil.
During the first quarter of 2021, we're seeing continued success with an initial order for cash recycling DN series units.
And maintenance services at a top 10 financial institution in the United States.
When you consider this win as a new logo because for many years. This bankers purchased ATM solutions from others.
Turning to revenue trajectory steadily improved as the year played out.
Reflecting on how both the company on our customers adapted to the challenges of the pandemic.
We reported sequential growth in the third and fourth quarters of more than 10 per cent.
Our fourth quarter revenue was about 5% better than our recent outlook.
Full year revenue of $3 9 billion.
Declined by 11% as reported.
On an 8% when one removes the effect of divestitures and currency fluctuations.
With most of that decline attributed to Covid delays.
In the face of revenue headwinds, we continue to execute our DN now initiatives and deliver greater profitability.
Adjusted EBITDA increased 13% to $453 million for the full year.
Our adjusted EBITDA margin of 11, 6%.
Leased by 250 basis points versus the prior year.
And I previously mentioned, our strong fourth quarter free cash flow performance and on.
Total $57 million for the year.
Let me now hand over to Jeff Rutherford, who will discuss our financial performance.
Thank you Gerard.
And good morning, everyone.
As usual my prepared remarks today will focus on non-GAAP metrics unless otherwise noted.
2020 was a good year for us, especially when considering the challenges of navigating a global pandemic.
The team made tremendous progress with our DN now transformation delivering for customers advancing our digital enabled solutions refinancing debt.
And living our values.
Before we review our operating results I would like to discuss our non-GAAP adjustments summarized in note two of our earnings release.
Including our transformation and restructuring activities.
During the fourth quarter, we made a concerted effort to accelerate our transformation expenses and cash payments with the explicit goal to complete all expenses and payments for the DN now transformation before.
Before the end of 2021.
During that process, new truck new projects were identified including in our software business, which increased our total cost and payments.
These incremental projects will yield longer term benefits. So there is no change to our accumulative DN now savings target of $500 million through 2021.
I need to know there will be no.
Additional or incremental do you know projects other than those identified as of today.
For the quarter, we spent $72 million of restructuring and transformation expenditures and paid approximately $60 million from cash.
Since we are nearing the end of DNR restructuring, we have scheduled all necessary severance bad.
We're targeting a maximum of $50 million for these cash payments for 2021.
Other non routine expenses in the quarter were minor and include balance sheet and contract cleanup of legacy issues and costs associated with divesting noncore businesses.
During the fourth quarter non routine expenses were approximately $8 million and we expect these adjustments have largely concluded.
With the exception of divestiture related costs.
Slide nine contains our financial highlights for the quarter and the full year.
My comments will focus on.
On the quarterly numbers.
Before getting into the specifics I remind everyone that the fourth quarter of 2019.
It was an exceptionally strong quarter for us.
Despite the tough comparison, we performed exceptionally well.
Revenue adjusted EBITDA and free cash flow exceeded our prior guidance announced in October.
Fourth quarter revenue of $1 1 billion declined two 5% after adjusting for foreign currency and divestitures.
Foreign currency was favorable by approximately $18 million and divestitures divestitures were unfavorable by $36 million.
Our revenue variance was primarily due to unplanned delays of approximately $40 million largely driven by the pandemic.
We delivered product revenue growth of 1% versus the prior quarter, showing a strong rebound from COVID-19.
And we are encouraged by robust order entry growth during the second half of 'twenty 'twenty supporting a stronger rebound well ahead.
Continued strong gross margin results in the quarter were offset by the revenue decline.
<unk> and a $7 million decline in gross profit versus the prior year period.
Progress on our services modernization and software excellence initiatives drove a 50% basis point increase or 50 basis point increase to total gross margin versus the prior quarter.
Software margins expanded 850 basis points services expanded 120 basis points.
In products declined 230 basis points due to a less favorable geographic customer mix and our banking segments.
Operating profit increased $4 million or 4% versus the prior quarter, while operating margins increased 80 basis points to nine 5% for the quarter.
We continue to show progress in reducing SG&A expense during the quarter. However, R&D expense was slightly higher as we continued to invest in future solutions.
We delivered adjusted EBITDA of.
$128 million, which exceeded our prior outlook by $13 million.
Adjusted EBITDA margin expanded 20 basis points year over year to 11, 6%.
Fourth quarter free cash flow was $186 million outside the free cash flow versus our model was higher profitability and significantly stronger cash collections.
Which dropped our day sales outstanding by eight day sequentially.
Our cash performance also included.
Previously referenced higher restructuring and transformation payments.
As Gerrard mentioned.
We see opportunities for cloud native software growth.
In the interest of greater transparency.
We are disclosing capitalized software development in our free cash flow reported.
We will include capitalized software development and capital expenditures expenditures in our free cash flow definition going forward.
While continuing to exclude the impact of M&A related activities and cash settlement of non operating hedging derivatives.
The next three slides contain financial highlights for our three segments adjusted for currency and divestitures.
My my comments will focus on fourth quarter trends.
On slide 10.
Eurasia banking revenue for the quarter increased 1% to $419 million after adjusting for $36 million from divestitures net.
Net of a $20 million benefit from foreign currency.
Total gross profit was down $4 million year over year, reflecting a stable margin on lower revenue.
We realized gross margin improvements to services and software to our transformation initiatives on.
Set by lower product margins due to a less favorable mix.
Moving to slide 11, Americas banking revenue of $375 million declined 7% versus the prior quarter, excluding a $13 million foreign currency headwind, primarily reflecting nonrecurring projects in North America as well as COVID-19 related.
Delays.
Segment gross profit of $100 million was down $8 million year over year due to the revenue decline, partially offset by gross margin expansion of 90 basis points due to our DN now transformation initiatives and a more favorable product mix.
On slide 12 retail revenue of $312 million was 1%.
Lower year over year after adjusting for $12 million foreign currency benefit gross profit increased to $73 million during the quarter as our mix of products was more favorable due to the rising self checkout shipments and on.
Our DN now initiatives positively impacting services and software margins.
Retail gross margin expanded by 80 basis points during the quarter.
On slide 13, we provide information about leverage and debt maturity.
At the end of 'twenty 'twenty, the company's net leverage ratio of 4.4 times was unchanged from the end of 2019.
As the increase in EBITDA and our positive free cash flow was offset by payments associated with our debt refinancing.
M&A activities.
And an unfavorable exchange rate on foreign net debt balances.
Over the next three years.
We'll generate stronger free cash flow due to the elimination of restructuring payments.
Continued strong management from net working capital investments.
And incremental profitability.
We expect to use free cash flow to pay down debt.
And we are targeting a reduction in leverage ratio to less than three times net debt to adjusted EBITDA by 2023.
On the right side of the slide we provide details for all of our outstanding debt.
You can see that the next maturity material debt maturity date is November of 2023.
Which provides the company with ample time to complete our transformation strengthening our credit profile and execute on our growth initiatives.
In response to Investor questions I will discuss our income tax structure.
Any consideration in.
And cash tax payments.
As disclosed on slide 14.
Our company's tax structure consistent two tax principles of the United States and Germany.
The tax first of all is to provide products and related support the distribution subsidiaries in approximately 60 countries.
Due to high restructuring transformation and interest payments.
Combined tax principles reported a pretax loss, but paid approximately $7 million from income taxes.
Due primarily to tax loss pertaining to.
The U S foreign source income alignment.
Or on tax jargon, if you prefer that the global intangible low tax income guilty provisions and sub part up provisions on the U S tax form.
And also due to U S limitations on.
On the deductibility of interest payments.
The distribution subsidiaries paid the principles from products and related services and as appropriate these entities generate taxable income.
On a collective basis, the distribution subsidiaries paid approximately $30 million from cash income taxes during 2020.
Bringing total company cash income taxes to approximately $37 million.
Looking to 2021, we expect to report pre tax income on a consolidated basis due to continued operating profit growth.
And a significant reduction of transformation and restructuring expenses.
Taking into account all the factors listed on this slide we expect cash tax payments in 2021 will be approximately $35 million.
While targeting an effective tax rate of 25% to 30%.
We have implemented tax planning initiatives designed to benefit our tax efficient efficiency going forward.
For the two principles, we seek to better align foreign sources of taxable income.
With appropriate market consideration well on proving that the deductibility of interest payments.
With principal taxable income.
For our distribution subsidiaries.
The main opportunity is to rebalance the distribution of income based on true transaction economics.
On slide 15, I will discuss our 2021 outlook.
We are expecting revenue in the range of four to $4 $1 billion, which translates to 3% to 5% growth.
Based on our order book as well as the challenges of 2020, we're expecting product revenue growth to lead the way and for banking growth to modestly exceed retail growth.
Divestitures, which have already been completed are expected to result in a headwind of approximately $50 million to services revenue.
With the majority impacting our first half results.
Our adjusted EBITDA range is $480 million to $500 million or 6% to 10% growth. He contributions are expected.
From top line growth and $160 million on DN now savings primarily from higher mix of DN series software excellence.
And greater efficiencies from our service organization and the all conduct data engine.
Offsetting these benefits are approximately $40 million of incremental growth investments in.
In growth areas, which drive discussed today.
A $40 million reversal of one time savings and services gross margin benefits, which occurred in 2020.
And investments, we are making in people, which primarily relate to the timing and magnitude of merit increases and also inflation.
The net effect of revenue growth DN now savings and offsetting expenses generates the EBITDA relative previously referenced.
For operating expenses, the net effect will be approximately $20 million of higher expenses in 2021 versus 2020.
In terms of seasonality, we expect our first half will account for approximately 45% of annual revenue and approximately 40% of annual adjusted EBITDA.
Moving on to our free cash flow outlook, we expect to generate $140 million to $170 million in 2021.
Presenting on EBITDA to free cash flow conversion rate of approximately 30%.
From 12% in 2020.
We expect net working capital to be a $50 million source of funds in 2021.
As accounts receivable dsos and inventory investments.
Normalized from COVID-19 impacts.
Uses of cash include the following approximate amounts $170 million on interest and interest payments.
$50 million of restructuring payments.
$85 million of Capex and software development payments.
And $75 million from from cash taxes pension and other items.
The sequential increase in our capital expenditures is driven primarily by payments associated with accelerating our digital capabilities and moving work streams to the Oracle cloud from.
HR finance and sales support.
Modernizing our enabling functions and tools will facilitate future efficiency gains.
To provide better analytics, enabling the company to leverage growth and we're on a more efficient and agile business.
Additionally on investments in capitalized software are supporting development of our cloud native software offerings dynamic payments and next generation dynamic retail.
We believe our 2021 outlook reflects the proper balance of topline and profitability growth.
Free cash flow conversion and investments for the future as we continue to generate long term value for our stakeholders.
And now I will hand, the call back to Gerrard for comments on our 2023 financial targets and our ESG initiatives.
Thank you Jeff.
Before we conclude our prepared remarks I'd like to comment briefly on our longer term outlook and financial targets on slide 16.
Starting with revenue, we are targeting annual organic revenue growth of 2% to 4% through 2023.
Supported by the areas, which I discussed earlier.
We are focused on high quality revenue growth, which will be accretive to the company.
We also expect to deliver ongoing operational efficiencies and gross margin expansion in our services business.
Through widespread deployment of our old collect data engine.
Which underpins our gross service margin target range of 32% to 33%.
In addition, we will be driving continuous improvements through the use of digital tools and standard processes.
Collectively these factors contribute to an adjusted EBITDA target for 2023 in excess of 13%.
Stronger profitability substantially lower restructuring costs and more efficient net working capital management.
Key levers toward our goal of improving the conversion of adjusted EBITDA to Levered free cash flow.
Our plans call for increasing this ratio from 12% in 2022, approximately 30% in 2021.
<unk>, 50% from 2023.
We expect cumulative three year levered free cash flow to exceed $600 million.
Furthermore, we believe the company can generate a return on invested capital of greater than 20%.
As we increase our profitability and use excess cash to pay down debt.
We expect to reduce our leverage ratio to less than three times net debt to trailing 12 months adjusted EBITDA.
As part of our commitment to sustainable growth. We're also affirming our commitment to be a leader in our sector.
And environmental social and governance or ESG matters.
Our key initiatives are summarized on slide 17.
First sustainable supply chain on operations is vital to our customers and suppliers.
Our focus is on reducing our carbon footprint from.
Boating recycling and using environmentally sustainable materials.
And we are applying all of these principles in the design and production of our new product lines.
Such as DN series Atms.
<unk> EZ and people point of sale.
Since 2015, we have systematically reduced carbon emissions by 16500 metric tons.
And we report our results in the carbon disclosure project.
And as we have discussed on prior calls we continue to prioritize the health and safety of our employees through the pandemic.
Through educational personal protection equipment.
And specific initiatives supporting employees in the hardest hit countries.
Yeah.
As a global company operating with customers in over 100 countries.
On employees and more than 60 countries.
We also take our role as a global citizen and seriously.
With respect to diversity and inclusion we have formed a care council.
To promote inclusive values, where we are considerate aware responsible and empathetic toward one another.
And we are holding one another accountable to create a great working environment for our diverse and global work force.
Our impact on local communities is also important to us.
As part of our global citizenship actions day.
<unk> Nixdorf Foundation has committed to half a million dollars to expand financial literacy and underserved populations through an organization called operation Hope.
We invite you to learn more about our overall efforts by reviewing our recently released corporate sustainability report.
A link of which is available through our slide deck on our website.
This now concludes our prepared remarks, I'll hand, the call back to our operator Ashley to begin our question and answer session.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And your first question comes from Paul Chung with Jpmorgan.
Hi, Thanks for taking my questions.
Just on your guidance for 'twenty one.
And specifically on the DN series, how good is your visibility for the year.
You know what can kind of drive some additional upside in the second half.
Does your guidance kind of assume the pandemic continues from most of the year are you baking in possible acceleration in the second half.
No follow up.
Good morning, Paul So let me answer that second question first yes, we are not baking in.
Any material acceleration of economic improvement through the back half of the year.
Equally we're not baking in any major deceleration if things happened to get worse. So we're effectively assuming a steady as she goes scenarios quite similar to what we saw through the fourth quarter.
As it relates to DN series, you know as we mentioned in our prepared remarks, yes, we had very solid order activity through the third and fourth quarters and are entering 2021 with a very strong backlog.
Specifically related DN series, so our visibility to revenue through the first half of the year are very very strong and obviously given the sales cycles around Atms somewhat less visibility as we look to the back half of the year.
So clearly the back half of the year will be more influenced by sales momentum through the next quarter or so but at this stage based on everything we're seeing in the first several weeks of 'twenty 'twenty one.
Feeling confident about the revenue guidance range that we have around products in particular.
Okay, great. Thanks for that and then on your free cash flow Nice guide for 'twenty, one a bit more than we expected.
It looks like largely driven by your EBITDA conversion.
How do we think about the working cap benefit.
50 million that kind of puts and takes there soon you'll be.
Investing a bit on inventory for the D series Watson can flex that up and down as you move throughout the year and any other metrics that you want to call it that or big kind of swing factors if the economy improves in the second half. Thank you.
Yes, Paul Thanks, This is Jeff.
Relative to working capital I will say this that the.
But if you look at our working capital performance in 2020, it was impacted by COVID-19, and in particular in and.
Cash collections and customer behaviors, and we saw significant release.
Of that pent up payments in the fourth quarter and that's why we beat our.
Our our model in the fourth quarter is that we had very very good cash.
Cash collections.
We're seeing that continue.
Our dsos are still higher than they were at the end of 19 by approximately five day. So so we expect.
Through the year that that will continue to come down and we're targeting that that five day reduction. We are also carrying a higher inventory level than we normally would.
In particular, we didn't have a big push for.
Revenue at the end of the quarter.
In fact, we were carrying specific inventory investments for certain customers higher than we normally would carry we don't expect that to repeat it at the end of.
2021, and we also know that we have ample opportunity relative to accounts payable and and in terms. So in all of the three major areas of working capital we see opportunity.
Book to harvest cash in 2021, but you are right that $50 million is key to our free cash flow conversion in 2021, and also I'll say it again, both Gerrard said, it and I said it in our prepared remarks that $50 million of restructuring payments in 'twenty and 'twenty one.
It's a hard number.
It's all scheduled out.
It's dependent upon certain issues relative to works council negotiations and so forth, but we feel very very confident that we will not exceed that $50 million restructuring payment number for 2021.
Okay, great. Thank you.
Your next question comes from Kartik Mehta with Northcoast research.
Hey, good morning, Gerrard and Jeff two or can.
Can you maybe give a little bit more detail on the revenue growth targets you've established through 2023, just the mix of how you get to that 2% to 4%.
Yeah, good morning, Kartik and I'm happy to.
You know, let me start with 2021 and use that to bridge to the outer years.
As Jeff said as we look at 2021, we think that product activity both in retail and.
In banking will fuel most of the top line growth fueled by strong backlog and sales momentum that we're seeing in the first half of this year.
As we start to transition into.
22, and 23, the mix starts to shift more in favor of.
Software and services related growth areas like managed services on banana make payments that I made reference to so that's the combination of what feels the 2% to 4% organic growth rate that we're anticipating.
And then.
Maybe.
You could talk about the leverage youre getting this year from revenue to adjusted EBITDA would you expect the same type of leverage as we move forward, where do you think that leverage increases.
After 2021.
Yeah, we certainly believe that it will increase.
Have given that longer term guidance for EBITDA.
On a percentage so what what what the key for us as and when we built the model right.
As to leverage the enablement functions.
Well, we don't want to get into is as we grow the business that we grow enabling functions. So so the key to what we've done with financing it and HR is make those functions Leverages bowl to absorb growth without increasing costs and in fact.
I would even go as far to say is with the.
On systems, the digital systems implementations that we're going through now our expectation would be that we would see a decline in the percentage of.
Enablement costs two to revenue as we move forward through 2023 that would be our goal.
And then just one last question Gerard.
There seems to be a pretty good demand for self checkout and I'm wondering.
What you're witnessing what kind of growth you had in 2020 on that and what you're witnessing and what you would anticipate in 2021 and if that solution is able to be brought over to the U S.
Yeah Kartik.
So in my prepared remarks, I mentioned that from a shipment perspective 2020 was a very very good year. Yeah. We grew self checkout shipments by 200% year on year.
As we take a look at 12.
'twenty 'twenty one.
We're expecting very solid very strong growth in the first half of the year.
With perhaps a little bit of a moderation in the back half of the year, but still very strong growth. So.
Net net we think we're in a interesting period of self checkout expansion across.
On multiple customer basis, you know as you're well aware, our customer base more heavily skewed towards Europe and Asia at the moment.
But we're optimistic that with the launch of our new.
Easy range of DN series self checkout that that'll position us well in other markets, including North America.
Thank you very much appreciate it.
Your next question comes from Matt Summerville with D. A Davidson.
Thanks, Good morning couple of questions.
First maybe George can you address how you guys are framing up the Tam for dynamic payments and you mentioned a couple of customer wins top 10 bank globally, and I think our credit Union here in the U S. Can you talk about what the go forward funnel in that product line looks like for you guys.
Yeah sure so low.
We answered a few different ways, Matt yeah payments as I'm sure you're well aware sits at the heart of any large financial institutions operations and therefore <unk>.
Acknowledged the investments in those areas tend to have a relatively long sales cycle to it. So these are big bets by financial institutions, not rapid sales cycle event. So I'm, starting with that comment just to manage everyone's expectations around the pace of customer wins.
The second thing I'd say is when we think about the.
Spend by bank for these opportunities they run in the tens of millions of dollars from a software perspective. So this is not inconsequential software. This is very very robust.
<unk> technologies.
So when we think about the Tam we think about it in three broad groupings.
Our initial core target market would be.
The largest banks on the planet with very very sophisticated needs to meet the needs of multiple payment types, whether it's credit debit aldi pay venmo and zelle.
Across multiple channels and then in due course, we expect to be able to offer.
Similar offered to the large processors that solve serve the needs of smaller banks.
And then in due course to smaller institutions. So so I think that's how we anticipate the time evolving.
And as we get into the year, we'll gladly share more details as we.
<unk> experienced growth in that area.
And then as a follow up Gerard in the past you've commented kind of where you're at with the D. M series certifications on the ATM side of the business. Maybe can you give an update there and when do you expect actual out the door volumes to really reach critical mass for you guys.
Yeah sure Matt So yeah, we exited 2020 with north of 150 banks, having completed certifications.
As I mentioned in our prepared remarks from an order perspective, DN series amount a very material part.
Our order activity and as we move through 2021, we would expect DN series to be the majority of our ships.
Shipping debt levels. So from an ATM perspective, so 2021 is the <unk>.
Big point for us as it relates to DN series volumes.
And then adjusted.
Jack says well. So previously we had communicated 550 projects, we're well north of 600 projects right now so I think that speaks to the attractiveness of the offering.
Perfect and then if I can just sneak one in real quick for Jeff you talked about kind of a first half second half revenue EBITDA cadence for Diebold in 'twenty. One can you also talk about how we should be thinking about free cash flow linearity, given the timing of cash severance payments working capital.
Looking to harvest can you kind of flush all that out.
Yeah.
And that's the area of <unk>.
<unk> focus for US we will have.
As you know in the first quarter with.
Incentive comp payments and so forth that will be are expected to be our lowest free cash flow would you be.
Slight spend right in the first quarter, we want to even out then.
The other thing to take into consideration when I say that Matt is that our interest payment cadence has changed.
It used to be that we paid the bond interest in second quarter on fourth quarter now we're paying it in the first and third quarter. So that's going to have an effect on us.
So the first quarter is going to be a use of cash.
We are working hard to get the second and third quarters to.
At least flat will be positive on the operating side and being able to leverage the cash payments interest payments, we have in the second.
Third and then.
The fourth quarter at all releases, especially now that we don't have a big bond payment in the fourth quarter. So it'll be a similar cadence we are trying to level that out it.
It really swings on working capital. So we have a focus on working capital, but it'll be used in the first half and generation of cash in the second half.
Got it thank you guys.
Your next question comes from Jeff <unk> with Barclays.
Hi, good morning.
First with the.
Second growth in product orders in <unk> and DN series.
Can you just maybe talk about some of the dynamics there in terms of do you see this is DN series.
Sort of an acceleration of the refresh that will level out over time.
Is it sort of catch up from weakness during the early parts of Covid.
Then on self checkout are you seeing.
Terrific growth Youre seeing is it.
Is it more market growth or is the company gaining share.
Good morning, Jeff pits Gerard.
So let me talk about the DN series Atms first I think we're seeing a few phenomena so in.
Multiple markets that would generally be characterized as developing markets markets in the middle East et cetera, we're seeing market expansion by those financial institutions as they look to drive up financial inclusion. So we're seeing an expansion of the number of Atms per institution in those markets.
Second of all I think we are seeing some catch up from the weakness of Q2.
2020, as we're starting to see spend accelerate from several institutions.
And thirdly from a cash recycling perspective, we're seeing much more heightened interest from banks in the Americas in particular for our fourth generation cash recycling technology.
I commented earlier on some of the new logo wins that we secured on that end.
And as it relates to self checkout, you know I know both ourselves and others have talked about the strength of the self checkout market. So theres no doubt that.
We're benefiting from.
Strong market expansion for the collective opportunity set as consumers look for more.
Self serve options. In addition, we are seeing some competitive takeaways in our favor on that and we've commented on those in the past.
Okay, great and and Jeff just in terms of the balance sheet you've talked about.
You know wanting to simplify our capital structure over time.
You know you have.
A good amount of time for the term loans at pretty attractive rates, but then you have you know.
On high coupon callable bonds and 22.
Are you looking at doing.
As you as you look at things now or are you looking at.
Wholesale refinancing sometime in 'twenty, two or could you look at.
Parts of the structure before them.
Oh well.
We always monitor the market right, but based on on.
Where the model is.
We're looking more towards 22.
And we'll have the b.
It will become current at the end of 'twenty two mature in 'twenty three so that would be a catalyst for us looking.
At.
The market's very intently on 22, but but that doesn't rule out that we will continue to to.
Martin on the marketplace.
As we all know it's much stronger now than any of us anticipated.
When we did the refinancing obviously, we were right on the issues relative to the pandemic and the election disruptions.
Well, we missed it was on just the amount of capital that would be available on the marketplace and the market's function as well as they did.
So when we did that specifically we did the refinancing in two.
2020, specifically to give us the time.
To mature the model to show growth on the model to get some movement on the rating agencies to make.
Refinancing more attractive so.
Certainly that should happen by the end of 'twenty one into early 'twenty, two but we'll monitor it all the way through.
On the catalysts as I said before is it.
Is that the term b, which are very attractive from a rate perspective.
Going current in the back half of 'twenty two in a maturing in 'twenty three.
Got it.
Thanks very much.
Your next question comes from Justin Bergner with G Research.
Good morning.
Good morning, Justin.
Thanks, Gerard and thanks, Jeff.
I guess first off.
Just wanted to delve into when you spoke to.
At the tail end of your prepared remarks Gerrard you mentioned I think a top 10 U S financial institution.
Been ordering from a competitor for the last couple of years is that win.
Selling DN series equipment or other equipment.
These new Atms for other equipment in your portfolio.
Justin It was DN series cash recycling.
Okay.
Got it so it's not.
Uh huh.
At this point and replacement of their existing Atms.
Sort of a product offering.
Well as I mentioned in the past just in cash recycling has certainly been growing in popularity across the world and when we take a look at our mix between cash.
Cash dispensing and cash recycling machines, we're seeing a greater and greater shift towards cash recycling and.
As we also commented on the past the U S has lagged the rest of the world.
And the adoption of cash recycling and we.
And we were quite encouraged by this most recent move by a top 10 U S Bank.
They're signaling a strong appetite to consider cash recycling.
Got it.
Shifting gears.
In regards to the tax discussion that was very helpful.
On the 25% to 30% estimated effective tax rate and $35 million in cash tax payments against higher.
Income seems quite manageable are those.
You know numbers representative of normal conditions under your current capital structure going forward.
And are there changes when you are able to change your.
Balance sheet debt will lower those numbers further.
Yeah, I would say just on that those are normal rates based on our statutory rates in the jurisdictions we're in.
Here's what I'd say on taxes, and I'm going to be.
A bit.
It's a bit of a sensitive topic right. When you were talking about 60.
62, plus jurisdictions around the world and as they fight for the income on the organization.
The ability to tax.
And collect.
Tax payments.
Can you probably picked up from my prepared remarks.
The imbalance between our distribution subsidiaries and our principles.
And that's why we reference market dynamics of the transactions.
It makes little sense.
The principles would be on a consolidated loss position.
Mainly due to the capital structure of the company, while the distribution subsidiaries make money and pay taxes. So so we need to work on that balance between distribution subsidiaries and principles and then you're right we need to align on.
Our deductible interest payments.
The principal profitability the adjusted principal profitability. So so we need to align our capital structure between the two principles to the U S in Germany and now it's heavily centered in the U S, which drive the U S and the lawsuits.
The combination of foreign source income in.
And our loss generated by.
Sure.
Interest payments is the definition right.
The tax code is looking for for.
Charging.
And excise tax relative to profit shifting so we.
That's what we're working on.
Rebalancing the income levels between distributions thoughts on the principles.
That will help on the tax side on the payment side.
But we're sticking with that provision side of 25% to 30% and we think that's a reasonable number.
Okay. Thank you that's very helpful. I appreciate the question.
Your next question comes from Anna <unk> with Bank of America.
Hi, Thanks, very much it was great to see the guidance.
In particular with that free cash flow confidence.
For 'twenty, one and into 'twenty three so on.
I had two questions. So one just to put a finer point on the discussion on the on.
On the debt pieces on.
The company does have an eight 5% bond net debt becomes callable next month, which I believe could be refinanced at a much slower rate. So is that something you are considering refinancing or.
Based on your comments. It is is that something that you would prefer just to kind of call out and pay down with free cash flow. So that was the first question and then secondly, with the strong free cash flow outlook to what extent does that open you to think about things like tuck on acquisitions that might supplement the growth areas switch.
I think you've been constrained from an.
In the recent past because of that.
The free cash flow performance.
Yes, those are good questions.
Obviously, we have been monitoring the unsecured market right.
Looking at what the potential opportunities would be.
And fitting that into our.
Our priorities right now.
And as I said earlier that we don't have anything that we absolutely need to do until probably the back half of 'twenty two but we will continue to monitor opportunities between now and then and the unsecured market is something that we have discussed.
And I think maybe even your bank gave us some calls about that.
And they have advised us on that so it's something it's something on the table that will continue to look at and determine what's in the best interest. We have we do have a high.
Interest in our work our.
Our weighted average cost of capital top let's admit that you know our capital structure.
It's on the high end of the range.
Fortunately, we have the return on invested capital that's greater than that so we are creating value, but we are always going to be looking at opportunities to lower our weighted average cost of capital. So we are monitoring that situation.
And we don't want to lock ourselves into something today, because we can there could be much better.
Nine months from now so that's that's what we're looking at on that as far as.
<unk>.
That's not built into that free cash flow forecast that we provided.
But certainly.
Relative to value creation.
Not off the table, but but.
You know, we're not announcing anything today and.
Like.
Capital structure.
Our our strategy group is very good and they are continually monitoring what's available for us that could help us in our strategy relative to value creation.
Okay, great. Thank you very much.
Your last question comes from Marla backer with Sidoti.
Thank you.
<unk> Capex here can you talk a little bit about your product backlog you certainly have some net growth.
Sure.
At the end of 2020 can you remind us what the average time on.
Thanks.
Revenue.
Marla and good day, it's Gerrard Schmid I didn't quite hear you you might have broken up a little bit could you mind repeating that.
Sure I've had could you please remind us what the average line is for converting backlog product backlog to shipments and revenue.
Yeah, I can take that mark but thanks for your question. So typically we look at our product backlog as that would generate revenue in the next 12 to 18 months.
Time period.
Okay.
So given the strong growth of the backlog.
Hi, I'm wondering in terms of the conversion in your guidance.
Two guidance.
A little seems there seems to be a seller.
Next there between the backlog growth on the revenue guidance and I'm wondering if you could help me understand that better.
Yeah on Marla.
As I said in my prepared remarks, we have very good visibility for the first half of the year.
Some of that revenue in the first half we will see as a result of the backlog converting.
Others will be related to selling activity and quite frankly, we think it's very very prudent for us to be somewhat conservative as we think about the back half of the year on you know we're anticipating that.
We continue to manage through this pandemic, but we also want to leave ourselves a little bit of room, if there's any surprises on that and so I think we're being a little bit circumspect with regards to our outlook to H two.
Until we see and get more visibility around how lockdowns unfolds and how.
Accessibility to abroad vaccine plays itself out because.
We have to keep reminding ourselves that this pandemic continues to be a very very complex situation that can change outcomes fairly quickly.
Okay. Thanks, so much.
So I'd just like to thank everybody for your participation on today's earnings call and of course, if you have follow up questions. Please give us a shout over at Investor Relations everybody have a great day.
That concludes today's conference. Thank you for your participation you may now disconnect.
Operator are we disconnected.