Q2 2021 Diebold Nixdorf Inc Earnings Call
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Yeah.
[music].
Hello, and welcome to the Depot Nixdorf, Inc, second quarter, 'twenty or 'twenty, 1 earnings call. My name is Alan I'll be operating Nicole today, if you wish to ask a question at the end of the presentation. Please press star for led by 1 on your telephone keypad. If you change your mind. Please press star followed by 2 to count for your Quest I'll now hand over to you.
Steve various debt Vice President Investor Relations. Please go ahead Steve.
Thank you Amy and welcome everyone to Diebold Nixdorf second quarter earnings call for 2021.
Joining me on today's call are Gerrard, Schmid, President and Chief Executive Officer, and Jeff Rutherford Chief Finance.
Well.
To accompany our prepared remarks about loaded slides for the Investor Relations page on Diebold Nixdorf.
Our remarks are being recorded today and cannot be re re use without the permission from the company. Later. This afternoon, we will post a replay of this webcast to the IR website.
On slide 2 we have a reminder, that today's comments will include non-GAAP financial information, which we believe is helpful. In assessing the company's performance reconciliations schedules for each non-GAAP metric can be located in the supplemental schedules of our slides as well as in the tables of today's earnings.
Financial had 3 I'll remind all participants that certain comments made today will be forward looking and that there are a number of risk factors, which could cause actual results to differ materially from these statements.
For information on these factors can be found in the company's SEC filings.
<unk> should be mindful that our forward.
On slide formation is current as of today and subsequent events may render this information to be out of date.
And now I'll hand the.
The call over to Gerard.
Good morning, everyone.
For joining us today for the.
Our updates.
The company has transformed business model.
For you to perform.
On track during the second quarter.
As customer demand for our solutions drove strong product order growth.
We're extremely pleased with the value that our customers are seeing on our propositions across hardware services and software.
While the demand environment is strong we are operating.
<unk> and the more complex and inflationary.
Environment.
That had a modest impact on our banking business late in the quarter.
Since we expect these conditions will continue.
We're adjusting our 2021 outlook for profit and cash flow.
Slide 3 highlights.
Our leveraging our competitive differentiation.
We gained market share and grow our business.
During the quarter, we delivered 6% revenue growth.
Spearheaded by our retail segment that grew 38% versus the prior year period.
Product orders accelerated this quarter.
We think 40% versus the prior year.
And reaching a full year high.
Our success was broad based with strong growth across all 3 segments on.
Our backlog increased by approximately 20% versus the prior year period.
In our banking business.
<unk> for our next generation DN series ATM was strong.
And accounted for over 70% of all orders.
I am pleased with the broad based customer adoption of DN series.
We expanded our global business partnership with Santander group to.
To deliver our customer innovation.
And operating efficiencies.
With more than 3000, new Atms, including DN series and maintenance services from the U S, Brazil, Mexico, Spain, Argentina and Chile.
Additionally, in the United States, we displaced a competitor at both a top 10.
Bank on a top 25 bank.
With orders for nearly 700 Dnc's terminals.
We also booked 2 sizable contracts with National Bank of Egypt, and Egypt National post.
Valued at nearly $27 million for DN series dynamic software licenses and maintenance.
In Indonesia, we won contracts to refresh more than 2200 legacy Atms with DN series.
On our dynamic security software at a large government owned bank.
In Brazil, we displaced a competitor with an order for more than 500 cash recyclers.
These examples clearly.
<unk> points for improving market share for Diebold nixdorf as.
As customers recognize the distinctive value of DN series to the digital agenda.
We also experienced.
Person of Atms connected to our oil for next data engine as the number of connected machines increased.
25% sequentially.
To over 90000 during the quarter.
Using advanced cloud computing and machine learning algorithms, we are mostly identifying root causes and are they more prescriptive with our spots.
This is a critical enabler of reducing the number of service calls.
Increasing our effectiveness in reducing costs.
By 2023, we expect the operational efficiencies from widespread ACD use for.
We will increase gross service margins to the 32% to 30% range.
Our retail business continued its very strong.
Long performance.
Led by our self checkout products.
During the quarter, we reached agreement to replace a competitor's self checkout solutions for.
For a multinational clothing and home products retailer based on the U K.
And we're excited by the opportunity to extend our solutions to nearly 1.
<unk> stores.
We also signed an initial award at a discount apparel and household product retailer.
Furnished more than 400, self checkout devices, and maintenance services across Spain and Austria.
And in Sweden, we booked the contract valued at nearly $4 million.
Large multinational retailer.
On to automate checkout can reduce fraud at the self checkout counter.
Using artificial intelligence and image recognition.
Slide 4 contains an overview of our growth strategy, beginning with our foundational strengths and producing market leading high quality products.
Delivering high service.
This levels and terminal software capabilities.
Across our banking and retail segments for core model accounts for a majority of our revenue and cash flows today.
Our differentiated solutions are demonstrating our ability to gain market share in small businesses.
Strength in our core offering enables HEICO.
With opportunities shown on the right for the slides.
In addition to market dynamics that support long term growth in self checkout.
And our continued market leadership in cash recycling we.
We are pursuing a lot of good vessel for recurring revenue.
Underpinned by our ability to deliver on managed services.
And value add software at scale.
And managed services, we continue to make progress with new contract wins in the quarter.
For example, we were pleased to win a 5 year managed services contract with a large Italian bank valued at $24 million.
In our retail business, we secured a multi year.
Higher growth with Watson.
Worlds largest international health and beauty retailer.
To deliver new managed mobility software and services.
10000 inventory devices across stores in Asia and Europe.
Our partnership will accelerate as watson's offer.
Agreement plus online retail technology deployments.
In support of a great shopping experience and convenient checkout process.
1 of our softer highlights from the quarter was a multiyear agreement with net bank for more than 4000 on.
<unk> software licenses.
We were selected because of our multi vendor approach, which improved ATM availability by.
By constantly monitoring hardware and software performance.
So a single user interface.
With respect to our new Vanadic payments offering.
We're continuing to scale, our debit platform at a top 10.
Flyable Bank.
We're processing nearly 1 million transactions each day and are expanding our capabilities from a branch in IPR channels.
To include all transactions across more than 15000 Atms over the next few months.
On the end of this year, we expect to process over 5.
<unk> volume transactions per day.
We are encouraged by our progress and we'll continue to invest in.
In our advanced capabilities in order to better position the company for growth.
I mentioned earlier.
<unk> has been very strong we're.
We're experiencing a more difficult.
Difficult supply chain environment.
Slide 5 highlights some examples of what we and many other technology companies are seeing.
The chart on the left illustrates our global Maritime shipping has become less reliable due to limited container capacity.
This trend.
Combined with challenges and dock labor and trucking capacity.
Adding operational challenges for DM.
But our risk mitigation actions are currently proving effective.
Strong global demand for logistics is also driving higher freight costs and increasing the need for expedited freight solutions.
Yeah.
On the right side of slide 5 we show how strong global demand for semiconductor chips, who is running well ahead of supply.
Which is extending our procurement cycles.
Inflationary for pressure.
Demand for chips is being driven by strong economic activity across <unk>.
Multiple sectors as.
As well as a higher demand for electronic devices to support a global hybrid work environments.
Because our products are among the most sophisticated on the markets and highly digital.
Semiconductor chips are important components in our devices.
While we have detailed.
Plans to procure the citigroup conductors needed to fulfill our strong demand.
Continued execution keeps the model.
Additionally, broad brushed economic growth is driving up the cost of key input materials, such as steel plastics and other electronic components.
Jeff will discuss the financial implications of these factors for these comments.
Before I hand, the call over to Jeff.
Worth repeating that we are seeing a solid demand environment for our differentiated hardware services and software solutions.
Channel focus is managing global supply chain.
Chain complexities to fulfill customer demand.
Over to you Jeff.
Thank you and good morning, everyone I will begin on slide 6 with a more detailed discussion of our second quarter results.
And key variances versus the prior year period.
For applicable I will also make compare.
Since 2 our first quarter results for 2021.
Total revenue for the second quarter of 2021 was $944 million, an increase of over second quarter 2020 up 6% as reported and 2.5%.
Excluding a foreign currency benefit of $46 million.
And a $16 million impact from the divested businesses.
Adjusted for foreign currency and divestitures product revenue decreased 5%.
Service increased 2% and software was relative flat.
During the quarter approximately $30 million on a revenue was delayed.
Due to extended transport tons.
This primarily impacted our Americas banking segment.
And reduced total revenue growth by approximately 300 basis.
On a sequential basis total revenue was unchanged.
Non-GAAP gross profit for the second quarter was 262.
Or a decrease of approximately $2 million versus the prior year period on lower gross margins of 27, 7%.
Gross profit in the prior year included approximately $17 million benefit from non recurring cost savings.
Service margins declined 100.
30 basis points versus the prior year period, which benefited from meaningful cost benefits of lower labor and spare parts usage during the second quarter Lockdown in honey.
When compared with our expectations second quarter service margins were in line or.
For slightly higher.
And.
100, <unk> quarter of 2021.
For our gross margins were down 350 basis points versus the prior year period, due primarily to $8 million of higher freight and input costs.
And $5 million from an unfavorable geographic mix.
Banking products.
In addition, the aforementioned revenue delays contributed to the unfavorable mix.
Software gross margins increased by 170 basis points versus the prior year period, due to better contract management and resource utilization.
On a sequential basis gross profit margins.
And then frankly on 130 basis points in the quarter due to the unfavorable mix and higher freight costs.
Operating expense of $199 million for the quarter increased $33 million versus the prior year $5 million sequentially.
When compared with the prior year key variances include.
<unk> decline.
Normalization of non recurring SG&A cost savings from the second quarter 2020, lockdown of approximately $16 million.
Planned investments to support the company's growth initiatives and managed services and software of approximately $8 million.
And unfavorable.
While foreign currency headwinds net of DN now cost reductions when.
When compared with our first quarter operating expense increased slightly due to the timing of our growth investments.
The net result was operating profit of $63 million on operating margin of 6.7% in the quarter.
For the same trends drove adjusted EBITDA of $86 million on adjusted EBITDA margin of 9.1% on the floor.
Starting on slide 7 I'll discuss our segment highlights.
Eurasia banking product order growth increased 39%.
Versus the prior year.
Because we realize market share gains from.
From our next generation DN series Atms.
Segment revenue of $326 million decreased 3% versus the prior year period.
And 7% after adjusting for foreign currency benefit of $24 million and $12 million impact from this divestiture.
We experienced lower product revenue in the Mediterranean countries, which was expected.
Segment gross profit decreased to $94 million year over year and included foreign currency benefits of $10 million and divestiture impact of 4 million.
Gross margin of 28, 8% was down 150 base.
Period.
Certain cost savings from the prior year did not recur as previously stated in our revenue include a higher mix of lower margin geography.
Over on slide 8 Americas banking product growth order product order growth was very strong and increased 44% versus.
As the prior year.
Led by market share gains.
DN series segment revenue decreased 6% to $313 million, primarily because of lower product revenue in North America.
Which included the aforementioned $30 million delay.
When compared with our expert.
Spectation American banking.
Proportionally affected because of the physical distance between our customers and our primary manufacturing facilities for DN series Atms.
They are located in Europe and Asia.
Backlog in Americas banking grew 45% year over year.
Segment gross profit of $89 million was down $18 million due to cost savings from the prior year period, which did not recur.
An unfavorable geographic mix and higher freight and input costs, which I mentioned previously.
The unfavorable mix reflects a larger revenue contribution contribution from south.
Moving on slide 9 our retail segment delivered a very strong performance prior to order growth of approximately 40%.
It was led by our self checkout solutions.
Retail revenue of $305 million increased 38 percentage reported and 28% after adjusting for $19 million foreign currency benefit.
And the Divesture headwind of $1 million.
Sales of our point of sale and safe checkout products, both increased significantly versus the prior year period.
As our installed base increases we are also generating growth from our services and software business.
Retail gross profit increased 45%.
And $5 million.
Due primarily to revenue growth gross margin.
For 140 basis points.
<unk> increased revenues and a more favorable mix of self checkout solutions.
On slide 10, I will summarize our free cash flow performance and update our leverage and debt.
The Saturday schedules.
Unlevered free cash flow use in the first half of $62 million increase versus the prior year period due to the decline in EBITDA higher inventory investment needed to support strong demand and increased safety stock.
Partially offset by reduction in transformation and restructuring.
Debt maturity.
The increase was slightly higher than our expectation.
The companys cash balance as of June 30 reflects seasonal cash use the company ended the quarter with $500 million of total liquidity.
<unk> $238 million on cash and short term investment.
At the end of the quarter the company's leverage ratio was 4 times well below our covenant maximum of 6 times.
On the right side of this slide we updated our gross debt levels as of June 30 note. We have no material debt maturities until November of 2023.
Slightly.
<unk> 5 and contains our updated outlook for 2021.
Revenue of 4.2 for $1 billion.
Is unchanged because of our strong order book.
And for foreign currency benefits working to offset longer logistics schedules, which drove growth.
Sure.
Slightly we are modifying our adjusted EBIT from us.
By approximately $25 million to a range of $455 million to $475 million to reflect an inflationary pressure.
On materials and in particular higher freight costs.
Our free cash flow outlook is 1.
$1.8 million to $140 million and includes our revised profit outlook.
Plus investments, we are making our safety stock as global supply chain as tight.
Our outlook continues to reflect a material improvement in the company's EBITDA to free cash flow conversion rate from 12% in 2000.
22 of approximately 30% from 2021.
For our concluding remarks, I'll hand, the call back to Gerrard.
Thanks, Jeff I'll close our call with slide 12 in 2 key messages.
Our growth strategy is showing strong progress.
And we're experiencing solid customer demand for our digitally enabled and differentiated solutions for.
For the product orders up 40% and backlog increasing 20%.
We are realizing broad based market share gains with our DN series Atms.
As for adoption of our all connect data.
Is accelerating.
We are winning.
Contracts and adding to our payments capabilities.
Our retail business continues to deliver strong growth from self checkout solutions and high service attach rates.
Collectively these accomplishments give us a high level of confidence.
And the enduring value of our solutions and on <unk>.
<unk> transformed business model.
The second key message is that Diebold nixdorf and many other technology based companies.
Are confronting a more challenging supply chain environment globally.
Procurement manufacturing and operations teams.
<unk> are doing exceptional work.
To mitigate longer lead times on semiconductors and other components.
Prolonged transportation schedules.
Inflationary pressures on direct materials, such as steel plastics and other electronics.
And we will continue to work diligently with our suppliers to manage.
Same volatility.
These conditions for higher freight costs on.
On leading the company to adjust our 2021 alcohol.
For profit and cash flow.
However in closing we are pleased with the company on the team's progress.
In executing our strategy of providing differentiated solutions.
<unk> <unk>.
That are yielding strong order growth.
As well as our ongoing efficiency gains in our business model.
Our improved cost discipline through our DN now program on.
All of which are leading to strong free cash flow growth.
Our return on invested capital.
This concludes our prepared.
Remarks, and I will hand, the call back to the operator for our Q&A session.
Thank you Vishal for your question you can do so by pressing star for led by 1 on your telephone keypad.
If you change your mind Presto, well I'd like to cancel your request.
Our first question.
Comes from Matt Summerville from D. A davidson.
Please go ahead. Your line is now open.
Thanks, excuse me good morning couple of questions first.
First on the negative side of things the $25 million EBITDA take down it sounds like.
You're instituting some app.
Actions to try and mitigate that so I guess I'm curious, maybe what that gross number looks like if the $25 million is a net number and what are you doing in terms of mitigation and what can you do with price capture as well to help offset some of that.
Yes, good morning, Matt.
So at a high level, let's break it down into 2 components direct material inflation as well as deflation on the.
The direct material side <unk> worked very aggressively with our supplier base.
To look for various mitigates I would tell you that we can mitigate a meaningful amount of.
Basically pressure on that.
Materials.
It's more of a challenge for US right now is on the free side, there just given the massive demand for seat capacity in particular.
We're seeing more pressure on that front.
In terms of the second part of your question.
Yeah, we continue to look at our.
Our entire portfolio of solutions on a continued to execute on.
Adjusting our value to our customers to reflect clearly increasing inflationary environment.
Yes.
Matt I'm sorry.
Matt This is Jeff.
A majority of on.
<unk>.
Our adjustments related to logistics, we have time and we have the people that are on our working on the inputs and the other aspects of cost increases.
Nothing we can do relative.
We're going to have to pay debt to get the product.
Especially the norm, Okay, we're going to have we're.
It's a paid on the right cost to do that.
Got it.
Obviously orders up against I would assume based on what easy comparison relative to 2020 with that 40%. So maybe I was wondering if you could put that into context, maybe what the comparison would've looked like.
Versus the second quarter of 19, and then relative to.
I guess.
What kind of outgrowth do you feel youre delivering relative to underlying demand in both banking and retail to help illustrate your share gains. Thank you.
Yes.
We're going to add on I would say the most important comment I made in my earnings script today related to the absolute dollar value of sales activity relative to all prior periods. This was the highest level of sales activity and for years.
While the comp against last year was easier.
More important is where we're standing.
Yes.
B the best for using this cash.
On the higher than any other quarter.
And it was broad based across Americas banking, Eurasia banking and retail.
Cases, each of those segments, delivering roughly 40% growth from higher some a little bit below the limit on that.
Net range.
And we can.
Key clear evidence that on the banking side, we're winning market share because where we're seeing the growth coming from is from the New York and our installed based on also net new customers at the start we bought there.
Atms elsewhere, and we're seeing it broad based across.
As I mentioned earlier on at the top 10 bank in the U S.
At the top 25 bank in the U S.
Several examples in Eurasia Latin America.
And then elsewhere.
The retail side, while we are benefiting from abroad.
Spansion for self checkout adoption, we're also seeing market share takeaways and you mentioned earlier.
Earlier on.
Very.
Important win for us with a large UK based retailer with 1000 stores, where we displaced a competitor. So I think there's meaningful evidence emerging that our products are.
<unk> very very well on adding value for our customers.
Yes, the other thing I would add to that Matt would be when we're looking at when we look at order.
Inventory for the second quarter don't forget we had strong product revenue in the back half.
Of 2020.
So and we're comping against that and we're also seeing a very strong conversion in the DN series.
The product <unk>.
Right.
The equation is strong which.
Which increases the.
The issues relative to supply chain and moving logistics.
But also don't forget that debt market share gains contributed to services contract base.
Then.
After the 3 month lag.
Service contracts.
Order and so so strong.
Unit growth results in strong services contract base.
I appreciate that thank you guys.
Thank you on next question comes from.
Paul Chung from Jpmorgan. Please go ahead.
Hi, Thanks for taking my question. So can you talk about the DN series win at the top 10 bank in the U S.
What kind of drove that way and if you could expand on pricing, there as well and how that impacted the win and what.
Particular features of the DN series is attracting customers and displacing competition.
On a follow up.
Yes, good morning, Paul so the predominant our capability to execute.
Security win for that top 10 bank was not pricing it was cash.
Pricing capability.
Fourth generation technology, there and feel that we are distinctively market leaders in cash recycling given that we own our own inc. In that space.
Particularly on top 10 bank is looking to reduce their overall cash handling costs and cash recycling gives them an important enabling.
To do that.
What we signaled in this quarter was on <unk>.
That was several hundred machines and scale, we expect that to expand quite substantially with a top 10 bank.
So I think we're very very well positioned on that particular institution was not a historical.
Customer Opdivo nixdorf.
Ashley from and as I said pricing was not a meaningful factor in the equation.
Gotcha and then.
Just on gross margins, how should we think about.
The second half of the year, the pushout of 30 million and revenues.
Does that provide.
Benefits in the second half and any comment on seasonality of gross margin would be helpful. Assume for freight costs go away in the second half and maybe start to normalize maybe in 'twenty..2 is that the right way to think about it.
Yes, I would say.
Did you take a break for us first.
We expect that to continue through for.
The balance of 2021.
On the.
Especially after we need to get through the holidays, right and Thats whats clogging.
On the.
Especially from Asia.
And we think it's going to last some time through the Chinese new year, and then we'll get some relief and hopefully it'll add on.
Normalized and we expect it to continue through the balance.
Of 2021.
From from a margin.
We do anticipate and based upon the strong order entry.
Andre receiving.
And we're going to see strength in product revenues in the back half of the year.
Even comparing to the strong back half in product revenue, we had last year and it's twofold, it's banking.
Banking and it's also the strong profit growth in <unk>.
Retail.
So.
1 of the things to remember in the back half of the year, we do have a headwind in logistics, but we are a tailwind and conversion to DN series.
From legacy ATM.
And our expectation is that debt, we will see a lift.
<unk>.
And back half margins of <unk>.
Prior year margins.
Cause of that mix into self checkout from.
On Pos and from.
Legacy Atms into the DN series.
Okay, great for that last question.
On the retail side very nice self checkout.
Contribution how.
How do we think about the seasonality for this business as well do you still have expectations for seasonal secular <unk>.
Your order growth was quite strong with the timing of that recognition.
For that business as well thank.
Yes, I would say it's the same on what we've just talked we've continued to see strong demand in self checkout, but I.
I think we can say that it's a little above our expectations for.
For both Pos and self checkout, we anticipate that the self checkout.
<unk> will continue.
For.
For some time.
And thats not only new self checkout, we are also seeing.
Market share gains share.
And self checkout has the same unit.
Total debt.
<unk>.
As we install.
Self checkouts extremely.
Hi.
Conversion to services contract base.
So we continue to see as we grow and as we rollout self checkout, we're seeing.
High 90% attachment to service contract.
Okay, great. Thank you.
Thank you Paul our next question today comes from Justin Bergner from G Research Justin. Please go ahead.
Good morning, Gerrard good morning, Jeff.
Alright, good morning, Justin.
Couple of questions.
Uh huh.
The reduction in the EBITDA guide due to supply chain pressures is that essentially all within the Americas banking segment for us.
Is there a modest piece of it that's relevant to the Eurasia banking and retail.
Yeah, so let's break it down into different pieces.
So you've heard us say earlier that we're seeing inflationary price growth.
Cereals.
Well as logistics direct materials was pretty evenly spread across all 3 segments. However, it is a smaller part of the inflation pressure given that we have cash.
Procurement levels to offset some of that.
In terms of logistics costs, we do move goods around the world.
But in that particular case.
Sorry, Americas banking small disproportionate share.
Free.
And the other 2 segments because of the.
Key obtain a capacity constraints between Europe and.
U S.
Close.
Okay understood.
Now with respect to the shipments I mean, you talked about having to some cases pay for expedited freight.
I mean can you delay some of these shipments with customers.
In order to.
To avoid having to pay for expedited freight I mean is that feasible option for.
Not so much.
Adjusted as Jeff said earlier based on everything we're hearing from the market we anticipate the.
Logistics constraints globally to be there likely to be the Chinese new year.
So we clearly continue to work with customers to make sure we meet their needs, which softening most important part here.
In some cases, we will use expedited shipping for spare parts and other activities anywhere minimizing expedited shipping for wholesale Atms, given the weighted Atms, but.
We have some flexibility to move things around but.
Wouldn't say, we're aiming to push things out too.
Each new year.
Okay.
And then.
With respect to the guide on the revenue side.
I mean, what.
Well.
What can happen at this point to sort of allow you to hit the high end of the guide.
I mean is it effectively.
You know.
The case that the volume of shipments is a little bit lower because you know there is an inflationary price offset.
Aiding your revenue or just just help me understand sort of the contours of debt.
Interchange revenue guide.
Yes.
Revenue guide we are we are seeing a little bit of a tailwind from FX and that's built into the model, but to achieve the revenue guide and this is why we are very highly confident we can do this it's all based on.
On demand.
And the ability to.
To deliver that product to the customer base and our segments do a great job of managing.
That process once we manufacture our products.
Apple B the plant it belongs to the segments.
And the segments do a wonderful job.
<unk> in there and some to do this you have to think through that to get those.
On those products, whether it's retail or banking to the customer for revenue recognition.
So we feel strongly for the only thing price that we are really dealing with here is what we've already talked about is.
The lead time.
And logistics, especially for the U S.
Yes, both broad based supply chain volatility is really the only inhibitor to hitting our revenue guidance because the demand is X on it.
Okay.
Just 1 last 1 any sort of.
Update on share of your debt financing priorities given the.
A favorable interest rate environment, I know you've talked about it on a couple of past calls.
Yeah, Yeah yeah.
Yes.
As a reminder.
And our secured notes there is a.
Our provision may come in.
<unk> expensive to do anything before.
July 22, now Thats based off of interest remaining interest for July 22, So every day that number decline.
We monitor the markets there are some things we've talked about.
We will be.
We will be having discussions with lenders and potential investors over the next 12 months timing, we're not ready to announce anything relative to timing, but we certainly are interested in the market.
We are we will be rebalancing, obviously interest purposes per.
Talk about that AD nauseum and prior from prior periods.
So this will be both with.
U S banks and investors and European banks and investors. So we'll be no on the groundwork over the next 12 months and when it's time to.
To pull the trigger we will pull the trigger.
Great. Thank you.
Sure.
Thank you on next question comes from Karl take net Huh.
Northcoast research. Please go ahead.
Thank you Hey, good morning, Gerrard and Jeff.
Chart or Jennifer Inc.
Morning, Inc.
At all debt these delays could cause a loss on orders it doesn't sound like to belabor that much but as we move out this year through.
For the year and as we get into the fourth quarter and any concern that the orders could be delayed into 2022, where you could lose them.
No.
Got it if we don't see any risk.
For risk at this stage on leasing orders, yes, we work very very closely with our customers our customers are acutely aware of.
Logistics constraints were not interest on a road relative affecting every other day you look at the front page of the business section of the Wall Street Journal today talked about debt as well on it so.
Concerned I don't see that as being a likely outcome a net is a material change in circumstances.
Okay.
Thoughts about potentially moving some manufacturing to the U S or do you think this is temporary and really no reason to kind of change where you're manufacturing of high.
For your manufacturing.
Yes, Kartik, we are actually well underway in terms of increasing our operational capacity in the U S to create some additional flexibility on our end to offset some of this pressure and we expect those operational gains to start to support us as we move through.
For the year, so that certainly will be a little bit.
And that should help in 2022 as well right Gerard.
That's right, but in 2020, we also expect on logistics, so simone could be easing as well so.
But absolutely.
Okay and then just 1 last question on 1 of the slides you talked about.
The net and the success you're having there.
If you could talk about maybe the financial success that could have if it's already happening or right. Now you are still in investment mode for that and it will take.
Next year on year after to really start seeing the benefit.
Yeah.
Yes kartik.
We are already starting to see some of the benefits of it.
I said in my prepared remarks, we saw 25% growth sequentially in the connection to our engine. So we now have over 90000 devices connected.
Call, though that we have a install contract base, that's north of 500000 machine. So we.
Both reorient activity, yes that being said for every device that we can.
Immediately start to see the benefits so what you start to see us.
The improvements happen somewhat slowly just given that it's machine by machine, but they absolutely are starting to happen as well, we're seeing a reduction in calls for each share device connected.
And that's what gives us the confidence behind that.
Earlier comments around longer term expansion of our services margins as machine net.
Right.
Thank you very much I appreciate it.
Yes.
Thank you on next question comes from Anna <unk> from Bank of America.
We're still always go ahead your line is open.
Hi, good morning, Thanks very much.
For your question on.
Items impacting cash flow or free cash flow so.
Free cash flow guide was revised down in tandem with the EBITDA, but and there is reference to working capital use.
For inventory purchase at the retail clinic on longer lead time.
And.
Is that expected to rebound.
And given the second half because I would think that that would yes.
Potentially continue to be a drag on free cash flow in the second half of the year and then also different update on what Youre expecting for.
Total restructuring and other kind of DN now.
Alright, and transformation costs for the year.
Yeah Anna.
From our transformation and restructuring payments, it's still $50 million.
That we anticipate.
Spending in 'twenty 1.
Yes, we're going to be we're going to be up in inventory.
We anticipate that.
Mainly because we have in certain areas we have lifted.
Restrictions on.
On safety stock.
We won't have that inventory and we more than likely because of high demand and have more in transit inventory.
At year end than we would normally have.
So so.
When we are modeling today is to be up somewhat in inventory.
There are other traders we will Paul.
To offset that to get to where we where we have guided relative to cash flow I mean, we haven't gone through all the detail, but bigger portions of it are they were anticipating lower EBITDA.
Yes.
For our guidance an increase in.
Inventory working capital by the way that inventory working capital obviously.
As short term.
And will reverse.
And in the model in 'twenty 2.
So increased 22.
Where we're.
Right now instead.
There will be slight deterioration in EBITDA again.
And inventory, we stick with the $50 million on us.
Restructuring payments and all other.
Contributors flow.
Somewhat a net positive impact again.
Dennis on the 1 to the guidance we provided.
Okay, Okay, well, thank you for that.
Sure.
Thank you. Our next question comes from Marla backer from for that.
Kim K. Please go ahead your line is open.
Thank you.
On.
So you talked earlier about.
On 1 of the characteristics you see on the banking side.
In terms of driving some market share gains that you're experiencing being the cash recycling.
Capability can you talk a little bit about what youre seeing in terms of projected consumer.
On a customer uptake on the video enabled.
<unk> ability of of the Atms.
Good morning Marla.
Video capability is certainly an attractive feature.
It seems to be predominantly focused on the U S.
And consumer demand.
On more notably amongst some of the midsized U S banks.
Don't see broader adoption.
Frankly due to different consumer preferences in Europe on other parts of the market.
Certainly a less material contributor than we've been crucial recycling will.
For our business.
Yes.
Customer interest.
In the U S market for that product.
Mhm.
Okay and in terms of.
Okay.
This call on I think over the last call you've talked about.
Inc service contracts growing in terms of the percentage of new product revenue can you give us a sense direction Directionally you know what you're seeing in terms of that conversion like what percent of contracts for products being written today are also included.
On service component versus let's say over the past 2 years.
Yes, So let me start the answer there sure Jeff they add to it as well so tomorrow.
Okay.
On a market, where we have our own direct services organization.
The swaps rate for service easily deploy hardware sales.
From the hot typically north of 90%.
Even higher recurring renewal rate for our services on site. So yes.
Jeff was saying earlier on about why we're so.
By our very high product order growth is debt.
Yes.
For the fuels on our services revenues.
Seeing the model will be pretty consistent in the ecosystem for.
The several quarters.
Which is what's giving us confidence as we look into future quarters that our services revenue will flow. Once these machines are deployed.
And it's even higher in self checkout in South Dakota.
We just reviewed that in fact.
<unk>.
Point of sale is more less complicated device.
And our attachment rate for it services and point of sale is somewhere around.
And it's.
Yeah.
And would you say that those those metrics are higher today than they were.
2 let's say 2.3 years ago because service. The service component is just becoming a more important part of the overall business.
Yes.
<unk> put a lot of focus on making sure that services is 1 of our differentiated propositions.
But as I said earlier.
Sure.
Tax rate in banking is generally always been India.
<unk>.
We've seen that largely be stable, sometimes a little bit higher.
As.
We've been on the retail front, we've seen a very very strong uptick in attach rate on self checkout for more color.
A device.
On steady around 30%, so I wouldn't say for all of it has been a material change on the attach rate for that.
For years, it depends by product, but the trend has been pretty consistent.
Okay. Thank you.
Jim. Thank you on next question comes from Matt <unk> from Wedbush Securities. Please go ahead. Your line is now open.
Good morning, and thanks for taking my questions.
2.
The backlog growth number of 20% and the order growth rate of 40%.
For both really impressive metrics.
But I mean, obviously.
Other than retail, which is not flowing through in current revenues.
When youre looking for 3% to 5% growth for the year is not from 'twenty to 'twenty..1 I guess typically I would think about that at some point certainly.
Yeah.
Product revenue growth.
Revenue is growing at something like that right.
Once you start to converge.
Those orders into revenue I guess, that's on weight, we think about things.
And what's the timing on that.
We are seeing and you see that conversion.
Yes.
Let me lead off for us for a couple of higher level comments.
So as Matt.
Pointed out debt next 40% was against the like 2020.
What's more important for us is the absolute level of orders were strong.
We fully expect to.
So very strong product.
This year as we fulfill these orders and Youll see those flow in in Q3 and Q4 on.
Honestly I.
I can tell you as Jeff said earlier on we have a day.
Very very high degree of confidence in our revenue guide for this year.
And we can fulfill on the audience.
Revenue growth.
Yes.
The supply chain complexities.
Yes, I agree.
And it's.
And as I said earlier, we don't forget we've had strong, especially fourth quarter last year, we've had strong product.
And because of our lead times and the relationship.
To your question relative to order entry and delivery.
We track that by customer.
Byproduct, so we have high visibility and <unk>.
All of those orders as to when Theyre going to be delivered.
We get to a certain point in the in the.
Segments will remind.
Mind us debt.
Basically we've got all of ours, we're going to have for the year.
And so when we look at our order entry, we can directly relate that to.
Revenue recognition so we.
We track that we track it monthly they track it daily.
Your level of confidence Girard point, that's why we can call out $30 million for the second quarter.
Because we had that.
For revenue recognition in the second quarter when it didn't happen.
It is adjusted out of our forecast.
We track.
Debt conversion of.
As a heart revenue recognition very closely as we track the conversion of.
Install Atms and self checkout in the contract basis as the base of this model is aerie.
The unit economics are in.
Orders for.
For for different question, Jeff I think as much on the call.
We shipped over to DN series, you see some benefit on the on the product gross margin side.
<unk>.
Component costs notwithstanding.
I guess.
My question there is you talked about 70%.
Percentage of.
Alright, I think mentioned on call it 70% of orders are for the DN series products.
I guess can you give us some color on what.
The percentages in terms of shipments and when timing wise, we might expect.
Shipment.
Per se.
Manages to reflect that that 70% order percentage and then lastly.
Just in terms of the magnitude of benefit or how we should be modeling the benefit any any color at all in terms of how that flows into the gross margin line. When you are.
Getting closer to.
Fully transitioned to.
For the DN series parts.
Yes.
We're in the middle of very high turnover from.
Legacy Atms to the DN series.
The reason being is driving.
Discussed earlier, it's it's better.
Equipment.
It's a better ATM.
It's more efficient.
Yes.
It's very self diagnostic all the reasons, it's connected on our connect debt edge.
It's very efficient and it's more efficient to manufacture that's what we will say I mean, we have competitive issues here.
And we're not we're not going to give all.
Formation, but let's just say.
It's a better.
On ATM that is is more economical to.
Yeah, and I would say just to give a little more color on that.
Jeff mentioned debt from those as Inc.
Right.
As you start to look to.
<unk>, you'll start to see that unfold on a product gross margins.
Pnc's becomes a bigger and bigger percent of.
What were shipping.
That's certainly forms from around the year around our confidence on our EBITDA range and our gross profit for agents and.
We've made the statement that.
<unk>.
<unk> is going to be in excess of 50% of shipments this year and you can imagine with the percentage of the order book in the first half.
On that it's going to flow through.
Product revenue on product gross margin in the second half and then has.
An incremental benefit as a.
It reaches a higher level in 2000.
Thanks for the color.
Sure.
Thank you on next question comes from Rob Jost from Invesco. Please go ahead, Rob Your line is now open.
Hi, Thanks, I wanted to follow up on that last.
Last question.
Have you quantified the marginal growth.
Yes.
Legacy ATM.
For competitive reasons, we have not done so.
Obviously for internal modeling purposes, we have all of that information we're just.
It's just not.
Not something we want to discuss.
Wanted to discuss the unit cost of our Atms.
Sure.
Okay.
I wanted to make sure I didn't miss it.
Okay.
When you talked about checking on that.
The comment on the slide was that this was not an higher software and services.
But in the follow up it sounded like service business, depending on I guess I just wanted to see if I could dig in a little bit here and I understand the growth.
Mr. Self checkout is there something unique about.
What you're selling now that is.
Driving I.
I guess higher software it sounds like service margins are.
Got it.
Ravi you broke up there a little bit so I'll take a crack at answering.
To come back on it.
So.
Historically, if you go back a couple of years self checkout was a much smaller part of our retail portfolio was for.
That's a strong tailwind for us.
So historically services attach rates on point of sale were low in the 30% range self checkout as a substantially more complex device, which is what's driving.
On a much higher service attach rate in our favour the attach rate is typically north of 95 per.
So every incremental self checkout machine, we sell increasingly drives up our recurring services revenue. So we fully expect to see ongoing strong growth in our self checkout services revenue line.
Software also gets dragged along.
Customers look to deploy both.
<unk> for the sale.
Checkout technologies, they rely on us for software to power those devices. So.
Again, this is a model where strong activity on the hardware front full stream.
<unk> on services and software.
Okay.
The incident.
Both okay.
And then my last question was just around some of the pressures you faced in both on the logistics.
On the call materials.
I heard you say that you expected to last for precision.
Rubin.
Thank you.
Around where you.
Secondly.
Mitigate a little bit but.
On what.
Or are things trending at this point or are they still go on our unit payable environment I'm, just trying to get a feel for.
How to think about.
The next 1.
Yeah, So let me break it into 2 different.
Yeah on the.
On the freight side, the inflationary pressures are high.
Modeling a modest uptick above what we saw in Q2 through the balance of the year on freight costs.
I wish operating quite high.
And then are anticipating them to abate.
Hopefully.
For the around the Chinese new year.
That's 1 factor the other factor, which I commented on in my prepared remarks is yes.
Semiconductor demand is exceptionally.
High right now.
Anticipate that that may tighten further through the year debt rather than debate on that.
On may.
<unk> tightened somewhat further into 2022.
Yes, it's a much smaller inflationary for.
Sure on US that's 1 of an availability question for us on inflationary pressure, especially for us so.
While a lot of this call is focused on the logistics side.
Broadly state the overall.
For all supply chain environment is for.
Well, not probably definitively more complex than we've seen in years.
Okay. Thank you.
Thank you. Our final question today comes from Barry Haimes from Sage asset management. Please.
Go ahead, Barry Your line is now open.
Great. Thanks for taking my questions for.
First 1 just.
It's not clear to me on these additional freight and other cost is too.
Whether on how aggressively you're trying to raise price or put in surcharges to offset so could you.
Comment on that and to the extent you are trying to do that.
For a point in time, where you think.
On the catch up on a dollar space for us on price costs left for the first question.
Yes, Barry.
Obviously for competitive reasons, so it would be a little bit circumspect on that particular question, but.
But I can tell you that.
Across the board across all services.
Services and software we have implemented.
Yes, various measures to offset.
A bunch of this pressure that we're seeing.
The flow through effect of those measures started to be felt more notably.
In 2022.
Timing of orders when they were priced when things have been built and when revenue is being recognized so.
More broadly we're bearing some of the inflationary Brent for the <unk>.
After the year, where continued to take net incremental cost measures to offset debt.
I don't know pricing front desk tends to flow through into the following year.
Got it.
Second question is.
Im just getting some of the.
Free cash flow pieces for next year, and so without forecasting earnings from getting into any kind of an earnings forecast, but just in terms of.
Other.
Other changes so the $15 million on the restructuring costs.
As I recall doesn't repeat next year, so that would be a 50 benefit and the.
$25 million reduction we've seen in EBITDA.
Given that you think things might normally.
<unk> earlier in the year.
Moving on everything else equal would that come back next year, and then are there any other free cash flow pieces that we should be thinking about.
Yeah.
Yes.
That's a good question.
We are not only assuming that.
And in 'twenty 2 at some point in time the availability of.
Of cargo capacity will.
In Peru.
Cost will adjust also so based on that yes, it would come back.
Right and then and then from a cash flow.
Cash perspective, we talked about will be a little heavy in inventory than we originally modeled.
That should come back right and also with <unk>.
Gerrard said relative to DN series.
Anil assembly capabilities closer than the U S that would help relieve some.
On the pressure on.
On on inventory, so we would assume that.
EBITDA for it.
Benefit that.
And we would see a reduction then from.
For long position, we're taking and certain inventory categories.
We will get that back.
Right the restructuring goes to zero.
<unk>.
And then.
All of the mentally and this is the question I received earlier.
As.
We would anticipate if the debt markets hold that we'd be able to do something.
2.
Reduce.
Interest payments going forward sometime in.
Sometime in 'twenty, 2 but thats yet to be determined and is dependent on market conditions.
Availability within the markets.
Got it.
That's very helpful. Appreciate it.
Laugh.
So 2 questions..1 is you've alluded a couple of times for the extra inventory.
This year that you had to put on could you quantify what that number is.
And then.
Lastly.
If not for the supply chain issues based on the strong order book.
Or would your sales guide has actually gone up instead of.
Staying flat on the re forecast or is a lot of the order strength more for delivery in 2002, and it's really more of a 'twenty 2 impact thanks very much.
Yeah.
So.
So.
The amount of inventory.
And give it to you is that second quarter was in the $20 million range right at.
2020, $5 million of index up higher in price.
Sure.
And we would anticipate that debt level may continue through the end of the year.
Yes.
On the other question is a very interesting question.
And I'm not going to match I'm, not going to say I'm not going to answer it.
You asked is the way I'm going to answer.
If we didn't have any supply chain issues.
We would anticipate them, having a very good points.
They are above our own expert.
Got it fair enough. Thanks, very much appreciate all the insights.
Okay.
Thank you for him to say thanks to everybody for joining today's call and if you have follow up questions. Please reach out to.
Esther relations.
Good day.
Thank you for joining today's call you may now disconnect your lines.
Yes.
Okay.
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