Q3 2022 Diebold Nixdorf Inc Earnings Call
Good morning, My name is Charlie you know your conference operator today at this time I would like to welcome everybody to the Diebold Nixdorf third quarter 2020 to come from scope.
<unk> been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
To ask a question during this time simply press star followed by the number one on your telephone keypad.
If you'd like to be truly a question. Please press star followed by Jay Thank you.
As March Heska, you'll accomplish that may begin.
Hello, everyone and welcome to our third quarter 2022 earnings call I'm, Christine <unk>, Vice President of Investor Relations for Diebold Nixdorf.
The company our prepared remarks, we have posted our press release and shareholder letter at the Investor Relations section of our corporate website.
Or would you encourage investors to review the shareholder letter as it contains additional information regarding the progress of the company.
Later this morning, a replay of this webcast will be available on the Investor Relations section of our website.
Before we begin I will remind all participants that during this call you will hear forward looking statements, including related to an update on.
Our outlook.
These statements reflect the expectations and beliefs of our management team at the time of this call.
But they are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
Additional information on these factors can be found in the company's periodic and annual filings with the SEC.
Participants should be mindful that subsequent events may render this information to be out of date.
We will also be discussing certain non-GAAP financial measures on today's call.
Reconciliation between GAAP and non-GAAP measures can be found in the tables of today's earnings release, and now I'll hand, the call over to Javier.
Thank you Christine and thanks to all of you for joining us today.
Today I'd like to cover some main points, including a recent transaction support agreement, but before that I want to spend some time talking about the consistent market demand for our banking and retail solutions during the quarter and how our backlog is positioning us for success.
We will discuss our operating model.
Progress on our savings plan and our three year financial model and then before I hand, it over to Jeff.
To discuss financials and details will share a brief update on the transaction contemplated by the TSA.
As we said throughout the year, our banking and retail solutions continues to generate consistent demand in the market as evidenced by the backlog trends.
Backlog remained near historic highs at approximately $1 4 billion in the third quarter.
We will subsequently work its way down in Q4, giving our product delivery expectations.
We also see continued strong demand for DN series.
Ship from legacy devices continues and as the M series cash recyclers continue to comprise the vast majority of our new banking orders in North America.
Momentum in our retail solution also remains strong.
And our self checkout space. This is continuing to grow.
We start to see results from our market expansion efforts in the U S and outside of Europe .
We are also seeing tangible benefits from our new streamlined operating model during.
During the past two quarters, our company has taken deliberate and strategic steps to become more lean agile customer focused and better equipped to deliver our solutions to the market.
We are continuing to focus on our operational rigor.
We have significantly improved our cost management by eliminating redundancies, we are creating more efficient processes globally.
Our considerably decreasing our indirect spend.
To date, we have executed on approximately $170 million of savings through these efforts and our modeling and additional $25 million of savings, which we are implementing as quickly and efficiently as possible.
In addition, we are taking deliberate steps to further improve key aspects of our operations.
Such a regional I think our manufacturing footprint.
And normalizing and wrapping up our supply chain to drive unit growth and revenue conversion.
From a financial modeling perspective, moving forward, we will reference unit economics.
To discuss our performance as it reflects how we measure the business. We believe unit economics provides a strong correlation to our product revenue and allows us to better highlight the relationship between volume and mix.
We have solid fundamentals as we have consistently seen stable demand for our product solution set.
As provided in our current report from form 8-K filed and updated on October 20th.
Given our elevated backlog, we have 100% coverage for product revenue in 2022.
And we expect to ship 52000, ATM 25000, self checkout units and 127 point of sales terminals. This year.
This is the basis for the model we disclosed in October as Jeff will discuss we still have work to do in the coming months to achieve this targets.
A few weeks ago as part of all of our TSA disclosures, we provided our full 2023 forecast for units.
From our backlog and the demand we are seeing to what I'm hearing from customers I am confident in our product revenues as we enter the next year.
By year end 2022 we expect our backlog to be approximately $1 3 billion.
Which secures approximately 80% of our 2023 product revenue.
As we disclosed we are forecasting unit sales of 60000, Atms with the majority being our industry, leading DN series recyclers.
We're also forecasting 35000 self checkouts.
134000 point of sale devices for 2023.
These numbers include product revenue deferral of approximately 2500, Atms 2000, self checkouts, and 7000, plus units, which will be recognized in 2023 versus 2022.
Two supply chain velocity issues.
Looking further out to full year 2024, we provided a forecast to deliver 63000, ATM 40000, self checkouts and 134 point of sales units.
Okay.
As you know services, that's also port to our business and that's shown in our operating forecast in 2023, we expect to generate approximately $2 1 billion in revenue from this business by end of this year and we have already secured approximately $1 $4 billion roughly 70% of our service.
Through existing contract coverage.
Additionally, we expect another 10% or 200 million from product related installations.
And we have professional service work executed through the year that generates another 10% with the remainder of our service revenue coming from Billboard.
Given this insight into our expectations over the next three years, we are confident in our multiyear strategic operating model and financial forecast, especially considering the demand for our solutions.
And finally as I mentioned earlier, we announced a few weeks ago that we entered into a transaction support agreement or TSA to help us extend our near term debt maturities and obtained additional liquidity.
We conducted a rigorous due diligence process with our lenders and noteholders to reach this milestone and firmly believe that the productive conversations we have with our lenders and noteholders, especially around the execution of our savings plans and our operational initiatives for the business demonstrates the financials community's confidence in our long.
From a strategic operating model.
And reflect the progress we have made despite the challenging macroeconomic environment.
As noted in our current report on form 8-K filed yesterday I am pleased to say that the following the initial execution of the threat of the TSA additional eligible creditors have executed joined us through the agreement, which increases the percentage of the company's term loan holders and the companies.
2024, senior note holders that are party to the PSA to approximately 97% and 87% respectively.
Please see our current report on form 8-K filed with the SEC yesterday for more details we are working towards completing that transaction contemplated by the TSA in December .
And from there we will work to normalize our business and continue to execute on our model.
As always we will remain focused on our goals and maintaining our position as a leader in banking and retail technology automation and related services.
To do so we intend to accelerate market share growth in ATM products and terminals software build momentum in self checkout and next generation cloud software for repairs retailers and lead the industry evolution with our service solutions, while also pursuing opportunities to leverage our global services operation.
Okay.
I also want to reiterate what we said during our last earnings call to address questions. We often receive from investors about mergers and acquisitions, including potential divestitures and other value creating opportunities.
We remain committed to delivering on our strategy supporting our employees customers and business partners and making strategic investments in the business.
We also will continue to evaluate strategic alternatives that will benefit our shareholders as part of our constant efforts to maximize shareholder value.
We look forward to capturing all opportunities that lie ahead with our enhanced financial flexibility.
Before Jeff provides more detail on our Q3 financials I'd like to recognize our incredible employees for their hard work and dedication over the past quarter.
And I want to thank our customers for their commitments and patients as we have worked through this process.
As I have said before we remain confident in our long term strategic operating model and we will continue to execute on our goals to remain a global leader in banking and retail technology.
With that I will now turn it over to Jeff.
Thank you Octavio.
In my prepared remarks will include references to certain non-GAAP metrics such as adjusted EBITDA.
For a discussion of our third quarter performance relative to prior periods. Please see the financial summary included in our third quarter shareholder letter today I'll spend my time discussing the third quarter results relative to the full year 2022 operating forecast and.
<unk> and our current report on form 8-K filed on October October 20th relating to the TSA.
Total revenue of $805 million and adjusted EBITDA of $76 million were largely in line with our third quarter operating forecast.
As previously discussed by Octavio, our units and our unit economic model a revenue recognized units.
Which were in line with our forecast and were as follows 11823, Atms 2000, and 632 self checkout units and 32 <unk> thousand 60 point of failure.
In terms of services gross margin, we continue to see increase sequential improvement of 100 basis points to 31, 3% in the third quarter.
You will note that we did see a decline in third quarter product gross margin percentage as compared to the second quarter due to an unfavorable product mix in both banking and retail.
In banking for the quarter cash dispensers represented approximately 47% of ATM units versus approximately 42% in the second quarter.
And retail delays in delivering self checkout units resulted in an overall lower product gross margin profile.
Third quarter operating expenses dropped to approximately $139 million as we continue to harvest costs from our restructuring plan and from lower provisions for incentive compensation programs with.
We continue to believe that normalized quarterly operating expenses will be in the $155 million to $160 million range going forward.
The forecasted revenue units for the fourth quarter as per our full year 2022 operating forecasts are 22000 Atms.
9750, self checkout units and 34500 point of sale units.
Overall supply chain material availability and logistics are improving.
A R models assumed a quicker normalization of supplier relationships than we are currently experiencing.
However, it is also worth noting that this is more of a short term challenge as we seek to normalize our working capital management, including with respect to our supplier relationships.
In the fourth quarter the conversion of backlog to revenue recognition will continue to be challenging and we could see as much as a 15% risk of unit to revenue conversion and its corresponding attached services and software.
No the 15% variance in units would equate to approximately $100 million in revenue and approximately $30 million and adjusted EBITDA, depending on geography customer and product mix.
We expect that units that are not revenue recognized in the fourth quarter will shift to 2023.
Please see our shareholder letter for our operating forecast and strategic operating model.
We included our three year free cash flow and forecasted available liquidity and our previously mentioned October 20th current report on form 8-K.
Related to the TSA I would like to take a moment to discuss the full year 2022, Unlevered free cash flow use of $243 million provided in our operating forecast.
This incremental use of cash is directly related to two main areas.
First.
The normalization of working capital.
Under our previous debt capital structure, we needed to stringently manage working capital to assure certain covenant compliance, which resulted in less than favorable actions such as stretching supplier payments.
Under the revised capital structure contemplated under the TSA, including the implementation of the ABL, we will normalize our supplier relationships.
Which in turn sets us up for the best opportunity for supply chain success in 2023.
The second area is the cash usage will be for the payment of approximately $62 million of fees.
Associated with the transactions contemplated by the TSA.
And with that I will now turn the call over to the operator for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star Sorry Star followed by one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Our first question comes from Matt Summerville of D. A Davidson. Your line is open. Please go ahead.
Thanks.
Jeff If I heard you right in the fourth quarter Youre looking to ship 22000, Atms, which seems to be a pretty big number again, we don't have a lot of unit history with you guys. Its newer disclosure which of course, we appreciate but just help frame that up what has to happen for you guys to ship 22.
Atms.
Has there been a period in recent history, where diebold has shipped that many units in a given quarter.
There has been Matt and Harris, and we haven't filed a 10-Q yet.
But when we see the 10-Q youre going to see that we're carrying.
Hi number.
Relative to finished goods inventory that those are units in.
And there is approximately 14000 units that are waiting for delivery to customers at the end of the third quarter.
So we're high in inventory in finished goods inventory. So so so you begin with the.
The fact that there's 14000 units ready to be converted out of inventory into revenue recognition. So to answer your question. How do you hit 22000, and you convert a significant portion of that inventory that's already built it's waiting for delivery and.
And you deliver it to the customers and then you get back to a more normalized number of an incremental 8000 that have to be produced and delivered now that one of the one of the things about.
Any any shipment so they are coming out of Germany. The window closes fairly soon and that's why we're talking about the potential for risk and so we have to have more shipping units out of Germany to North America, we have to have them and transit.
Yes by very soon in order to hit those numbers. So the risk is associated with.
With not being able to produce that being able to revenue recognize those unit.
If that if we miss in the fourth quarter. Those revenue units that means that those units are sitting waiting for delivering just didn't get to the point of revenue recognition.
Many of our customers the revenue recognition for our customers is as installations. So that's always an area that is a variable can we get them installed before the end of the year.
Okay. Thank you.
Helpful. And then maybe just a little bit more.
Detail.
<unk>, maybe on what Youre seeing from an incoming order rate standpoint.
If you can dissect that a little bit by region and across both ATM and retail maybe just do a little bit of a deeper dive that'd be great. Thank you.
Sure sure Matt So let me start with retail so.
So during Q3 and if you see the unit comparisons clearly Q2, Q3, and our delivery source self checkout was.
Below our expectation however, order intake continues to be to be strong for self checkout.
Once again, a product of making sure we normalize supplier relationships that the inflow of raw materials is that equipment and to be honest, probably there as we were modeling.
The information that we've disclosed that we were modeling we were hoping for faster normalisation of our supplier relationships than what we've been what we've had but on the demand side, we still see ample opportunity in self checkout, then and now I feel fairly confident that as I've said before regardless of macroeconomic environments, our self checkout solutions helped.
Retail improved customer journeys and minimized costs. So there will always be I think a good chance of us continuing to grow those self checkout units.
And as you know Europe has been very strong for us, but we're now starting to have significant deployments in the U S, which will also help us demonstrate that our solutions are capable in every in probably the most challenging self checkout market in the world, which is U S groceries than we're making significant progress there.
On the ATM side I would tell you that demand across the Americas continues to be very strong.
So, but the trend to install recyclers in the U S.
I would say it's now.
Common across all major financial institutions, all large financial institutions with the and as you know once the large banks start installing a technology very quickly trickles down to the rest of the market. So we see the U S. Entering this long awaited cycle, where recycling technology would become mainstream Latin.
Erika as you know continues to be very strong in Brazil continues to be very strong so from that perspective, the Americas remained strong.
Our key market for multiple reasons, one of them being the strong service attach and the strong service profitability and volume that we have in the Americas.
I would say that Europe , we are Europe is clearly.
We continue to see the trend of consolidation across fleet, we are now seeing.
The first instance instances of that in countries like France.
So overall, we continue to see that Europe will remain a flattish market. We don't expect it to grow again, we Idaho also don't expect it to shrink so it should remain fairly flattish market and as you know Asia Pacific, where we have less than 10% up our revenues. This is a market that is filled with opportunity. So it's cut more opportunity than what we couldnt.
Currently addressed that's one of the reasons why we're redoubling sum up our efforts in India, a market that we had exited four years ago and starting some contract manufacturing in India to really address that market and start producing some some growth in that area. So that's where that's I would say the general overview.
But in general terms.
Orders remained stable.
Now our ability to turn all of that backlog into revenue that is really what's driving our our view of the future.
October .
If I can just squeeze in a follow up there to your point on re entering India can you talk a little bit more detail about the strategy is that.
Is the idea there that youre going to make in India for India or make in India for the broader Asia Pacific market.
If it's more of the latter what does that mean for your manufacturing base.
Its joint venture.
In China. Thank you.
Yes, so the first step that map and I'll be very brief and we can probably take this offline later, if you want but initially we're just going to build in India for India. As you know, it's one of our biggest ATM markets in the world and new do require a <unk>.
<unk> cost structure and a different cost product, we believe that with some of the core components of DN series. We can address some of those cross sections, but also manufacturing in India will be beneficial. So initially we are planning this to be.
But the test of the Indian market, and then that who knows but then maybe we decided that this is something that we expand elsewhere, but for the short term is just the building in India exclusively for the Indian market.
Got it thank you guys.
Okay.
Sure Matt.
Thank you next question comes from Paul Chung of Jpmorgan. Your line is open. Please go ahead.
Hi, Thanks for taking my question so.
If you could expand.
Kind of on the product mix impact you're seeing you mentioned.
Some lower margin units here in North America, and Latam in the quarter.
How do we think about the kind of product mix to kind of end the year and into next year.
Is the backlog kind of made up of higher asps.
Mix as a result.
Could you also talk about the backlog or are orders firm noncancelable, and our margins kind of locked in and the backlog.
Thanks.
Yes, yes.
Yes.
<unk> expense.
Paul.
Sorry, Paul I was looking at.
As the question queue, sorry, Paul about that.
So Paul.
I think that's how you should think about our unit makes it over the over several quarters.
That makes it stabilized itself into the appropriate and the appropriate ratios in any given quarter, we might deliver more of one type of units and the other particularly in Q3.
We have significant shipments of cash dispensers, both two different just across the global cash dispensers versus recyclers that we've turned into revenue.
And again this is a product of cash dispensers coming primarily from from our Asian manufacturing and hitting the hitting the different markets that during Q3, and our high value recyclers coming basically from Germany that have a different cycle time.
A little bit slower in converting into revenue.
Over time, the mix should should return to the what we think is the trend that we're seeing where.
<unk> 40, <unk> cash dispensers high.
Low 50, mid 50 pieces cash recycler satisfy thank our gulfport.
The normalized mix in any one quarter it might go up or down one of those variables that you should think about it in the long term.
It's fairly stable as far as the law.
After the orders.
Remember, we don't manufacture anything without a firm customer appeal. The biggest challenge that we've had right now is working with our customers. That's why I wanted to thank all our customers at the end of my prepared remarks, because to be honest <unk> been very patient with us working up.
We normalized our supply chain.
<unk> units to them on accommodating to us their installation schedules their delivery schedules I think that everybody is very happy once they have our DN series Atms or self checkout devices.
And again I'm thankful that our customers have continued to work with us adjusting their schedules to meet our delivery schedule. So.
We haven't seen any order cancellations. We've worked we continue working very closely with our customers adjusting our schedules and and we continue and we will continue doing that but to date, we have seen no no cancellations in our backlog, yes, Paul I think it is just for me to reiterate that.
So did I just wanted to say that just just the thing to remember is that bid.
That there is risk in the supply chain not in demand.
So if we do not hit our unit projections for the fourth quarter, it's not because of demand, it's because we could not produce and get them to revenue recognition and time to recognize them. In 2022. There is still there the lineup in inventory and then and then in revenue in 2023, probably very hurt.
Early in 2023.
Okay got you thanks for that and then to follow up just talking about.
Where the firm can find incremental areas for cost cuts here of being your cost cutting initiatives have been quite aggressive over the past five years.
<unk> core acquisitions, so where are you kind of thing.
Lingering redundancies and just any comments there and then.
As we start to think about kind of the longer term operating model you've laid out what's the right level.
Absolute Opex and also kind of normalized gross margins in the longer term model.
Yeah, Let me, let me start and then Octavio can fill and so on on the Opex side. I mean, we always wanted to be looking for opportunities and where we're headed from a operational perspective, especially in transactional areas has been digital first and get it.
Digital solution versus.
Outsourced manual processes, and that's going to that's going to significantly help us and that relates back to what we're doing for indirect spend we have some we put incremental rigor and relative to indirect spend.
Third party spend bid process has.
And looking at and eliminating waste. So we have some we have continued opportunity in indirect spend and then from from a people person.
You know people perspective, it's about being efficient with the use of our systems and process.
That all being said, where we think we will be.
Yes.
When we reach our goal our goal is a little more aggressive than our model and Opex. We are we are targeting a $600 million opex number.
The annualized 159, a quarter, we haven't identified that so it's not in that operating strategic operating model, but that's our ultimate goal and then once you get into those digital processes right you don't experience wage inflation.
So that's important to us as we go forward. So so to answer your question directly we're looking for $600 million of Opex, a year or $150 million per quarter.
Okay. Thanks, that's very helpful and then lastly.
<unk> go.
Go ahead.
Hello go ahead, sorry go ahead, yeah, just on free cash flow outlook longer term I mean, where are you kind of finding efficiencies in working cap I know you have a large backlog and conversion of that inventory is very key but you have this big jump in Unlevered free cash flow in 23, how do you get there.
I know, there's also some moving pieces on cap structure, but any estimates for leveraged from Tesla.
Yeah, So I'll start with Unlevered.
So when we get to 'twenty three our goal is by mid 2023 to be done with restructuring transformation.
We still have modeled.
78 about $80 million you can see it in our disclosed information in our free cash flow in the climbing documents approximately $80 million of restructuring transformation are still modeled for 2023 that would be through.
Mid year 23 at the latest third quarter, then we want to be out of the restructuring transformation.
World and all of the GAAP to non-GAAP reconciliation world, where that leaves us as well.
We'll pick up 80 million there when we get to 'twenty four and then we want to be more normalized relative to working capital.
We have by necessity stressed accounts payable days were going to get back to normalized what in conjunction with finalizing the TSA and that's what's hitting 22. So as we go into 'twenty three we expect to be more normalized relative to working capital you can see it in our <unk>.
<unk>.
We will have a little bit of an increase in inventory in 'twenty, three but but we believe that going into 24 will be normalized in working capital will be out of the restructuring transformation business and that gets us to an unlevered free cash flow as a percentage of of EBITDA modeled it.
Greater than 70%.
From a from an interest payment perspective, obviously rates are going up.
And we are we will take on some level of incremental debt, including what the TSA.
Were modeling somewhere in.
210.
Interest payments as we as we move into 'twenty four.
Thanks very helpful.
Thank you. Our next question comes from Kartik Mehta of Northcoast Research. Your line is open. Please proceed.
Good morning, everybody. This is Jack Boyle with Northcoast research, calling on behalf of Kartik.
Some questions answered already for us, but I just had a question regarding back to that backlog I believe you folks. It stated that by the end of the year you'd plan on working through about $100 million of that could you give us a little bit more color about around maybe kind of the future cadence of that is that kind of the rate you expect to work through that backlog going forward or.
How quickly do you expect to be working through that or how should we view that.
Yeah. So.
So so so let me try.
Interesting question that you posed but let me let me walk you through how I want the business to be run.
And why we why we're making some of the changes and decisions that we're making in the short term in order to solidify the long term all of our companies. If you think of what would be the ideal way to for us to manufacture and deliver a poor planning 60000 units next year, we should be manufacturing in delivered bringing 15000 units every quarter.
That would be an ideal.
Ideal world It would help with our cash flow it would help with our.
Planning of installations. It makes like more predictable the reality is that based on our past capital structure, we were always a little constrained.
Working our inventory stand at the end of the year ramping up at the beginning of the year. So that made for slower start to the year and then I think somebody asked us.
We'll then bigger numbers at the end of the year My goal is to start to normalize that.
Will it be 50000 units every quarter from now on is probably not it will probably still need some work to be done, but if we start getting into that state and it's very easy to start working the backlog down and working it down predictably. So my goal. This if you listen to what we said right now we have 80% of.
Next year.
We will end the year with roughly 80% of our product revenue in house that has a very high so that is a very high number.
One once we normalize things rather than having almost three quarters of backlog Michael is that we have a quarter.
Or.
A little over a quarter of backlog in our books at any given time that that would be the normalized rate I would say that for the foreseeable future probably we.
Start going from having.
Three quarters of revenue and backlog to probably having.
5% to six months and keep working our way down as we improve velocity in our supply chain remember the demand is there what we need to accelerate the velocity to get it into the hands of our customers.
Okay.
Hope that was helpful.
Yes, sorry, I was muted there and I appreciate that additional detail maybe you can go into little more detail.
Perhaps I missed it as to why it was flat was that just an issue of.
Supply chain continuing to be an issue.
What why was backlog flat.
Again remember backlog.
Yes so.
So again.
It just meant that we didn't convert as much revenue as we were hoping for.
During the quarter and we have more orders than it is a combination of orders coming in and revenue being converted so the math around that they didn't allow us to ramp down the backlog. So yes, it's a combination of more orders and less and less ability to accelerate the conversion of backlog into into revenue yeah for every every quarter.
And in.
In 2022 order entry has exceeded revenue recognition for units. So that's what's been building the backlog and that's why we have modeled in that and that's why we're carrying 14000 units in inventory so.
What needs to happen in the fourth quarter is to convert those inventory units the revenue and haven't.
Plus an 8000 units coming through is produced and revenue recognized that's what the model has and that would work down a certain amount of that backlog. So that's why we are projecting for the backlog to be down, but the demand remains high and and.
Has exceeded our ability to two.
To produce and revenue recognized units.
Alright. Thank you both appreciate it.
Sure.
Thank you. Our next question comes from Anna <unk> of Bank of America. Your line is open. Please go ahead.
Hi, Thanks, very much so yes.
Just from listening to your comments.
Yeah, and just to set expectations correctly I think the takeaway from.
What I'm hearing is the new base case for the fourth quarter and EBITDA is really the 263 million.
Maybe the 293 is kind of aspirational now is that fair.
So the $2 93, as our operating forecast, what we provided and.
And the cleansing documents with the TSA was.
It wasn't guidance it was our operating forecast. So that's what we're operating two we're operating to the $2 93, what we provided today was I'll look at there is potential risk and units conversions.
As the Windows closed relative to where we're shipping product. So we haven't changed our targets, but we're saying that there's the potential for rest and it could be as high as 15% and that really relates to the unit RASK in Atms.
Is what we're providing there is still time to achieve those targets, but the window is closing so we're providing the <unk>.
Attach arrest of those units in today's call.
Okay.
Thank you and then so theres a lot of.
Okay.
Usage of that term supplier relationships with regard to the conversion problems or kind of headwinds you're facing in the fourth quarter. So can you be more concrete about it is it a couple of supplier relationships is it a specific component.
What is really the issue.
Tissue.
Behind that.
The issue the issue is under our.
Old capital structure and this is something we've talked about for probably close to a year now is.
We wanted to get to an ABL, we wanted to get to a point, where we didn't have restricted covenants that put us in a position even in one we had liquidity of not being able to access liquidity. So when that happened to us, especially in a situation where now so so think of the situation. We're in now is that because.
Of increasing inventory right it puts pressure on liquidity.
Which is why we really need to move those 14000 units out, but but increasing inventory puts.
Historically would've put significant.
Pressure on our our covenant compliance and the the last.
The last leverage point, we have is really related to accounts payable.
So what we ended up doing that as stretching.
Supplier payments historically, we pay we would pay.
Twice, a month mid month, and a month and our <unk> would be an ATM, maybe as high as 90 dependent on timing.
But under the current restraints as the old credit facility, we would push those up into the one hundreds even higher rate and a 120.
We put a lot of that pressure on indirect spend but but.
And when we're really pushing supplier payments it starts hitting critical vendors and that's that's component suppliers. So when component suppliers were getting hit right than then they get to a point, where they're limiting shipment are requiring payment before shipment. So we want we need to get out of that and thats, what the TSA allows us to do.
Is to get back to a normalized payment process.
We get back to that 80 to 90 D. P. L and we don't have these.
Critical supplier interruptions in components.
Key components interruptions that were that were and it's not just one I mean, it's it's it's all of our electronic component suppliers.
If we do that that has caused issues within supply chain.
Okay got it so it's less of a sort of industry supply chain.
Issue and really much more related to the relationships that you have with your suppliers that youre trying to improve.
With the improved.
So.
We put it.
Yeah, and let me expand on what Jeff said, so throughout the year, we battled different different challenges. So if we go back to the beginning of the year. We were we're still constrained on.
The ability of core components, just just the same as everybody else in the world as the year has progressed, we've been proved that availability of components. However, as we as we work with our suppliers.
We need to normalized payment terms, we need to normalize those relationships. So that is that is a steady flow of product in our bridge of raw material in a predictable way and in order to achieve that we have to have two conditions won't.
The availability of material sits there, which it is now there and the other condition is that we have a steady cadence with them around shipments payment shipments payments. Those are the things that we're trying to normalize and that's why it's so important for us to to conclude all of our refinancing efforts because as we conclude that that allows us to normalize those relationships. So.
The first part of the equation, which is overall availability in the market is starting to solve itself now we need to solve our internal unique situation of normalizing those relationships with suppliers.
And again.
We have multiple suppliers some of them as they exceed our disclosures our R. R.
Or are now in a steady state others, we're still working with them to get them to a steady state.
Okay, Great and then.
Finally, so I.
I know that the Unlevered free cash flow came in below what the target was for the third quarter you still have the same target for the full year.
Are any of these issues that we're discussing especially with with the pesos sorry.
Is that going to put additional pressure on your ability to meet the full year unlevered free cash flow target.
Uh huh.
Whats built into the Unlevered free cash flow target is normalizing those payable positions through.
The liquidity provided by the <unk>.
Transactions of.
The TSA. So so our goal is by year end being back to normalized.
Supplier positions relative to payment.
And that will put us in the best possible position moving into 'twenty three.
To achieve those goals relative to unit conversions.
Okay, Okay, great well, thank you very much.
Sure.
Thank you and our final question today comes from Peter <unk> of credit sites Pizza. Your line is open. Please go ahead.
Hi, Good morning, I, just wanted to follow up on the quarter.
And the most recent I guess the person second quarter gave a product order entry numbers.
Could you share that will possibly the holdco.
Comparable to last year.
For the for the third quarter, you're asking for order entry for the third quarter I'm just trying to understand the question.
Yes.
Because I don't think we've provided in order entry. We provided we provided the backlog information, so theoretically and backend order entry.
Got it so I guess in the first and second quarter I have.
Right.
Two 6 million the second quarter.
I guess it was down 6% in the second quarter. So.
The revenue decline.
I guess, you had said that yes I would.
Okay.
Okay.
So you see I know, we did not provide order entry and in this third quarter filings.
So.
It is.
As I said, we provided the backlog information that effectively provides the order entry information and get well, let's take this offline and Christina can walk you through that.
Fair enough and the EV charging.
Update is that no longer a focus for the company.
Okay.
So so Peter.
EV charging continued one of those areas, where we are focused on leveraging our service footprint of our service footprint. We will end the year with the 30000 units that we that we set up to have.
Under contract I think that we're on track on that.
Yes.
My goal this EV charging famous other industries, where you require high availability and strict service level sort of distributed technology footprint remain areas, where we want to continue leveraging our services footprint there.
So I just don't want to continue making everything about EV charging thats clearly a very attractive opportunity as that market continues to evolve, but we want to make sure that we're thinking about what we do is based on how do we leverage our service footprint better across different industries. If you.
If you go to our shareholder letter on page five we did we did mentioned some of the wins that we had in EV. So we're preparing for services in 63 European countries now without <unk>.
We are working on a service contract with a pan European petrol station and.
And we remain on track to meet the 30000 Chargers Thunder under contract by end of 2022. So that's so that's that business is going as we had forecasted.
We clearly still have a lot of work to do in that market and it's an industry that's shaping itself. So.
I would really we want to be a part of this EV charging company starts developing their service model for the future we want to be a part of how they define the service models. So that we can actually be a more strategic partner to them, but yeah. You can see that in our shareholder letter and in page five and if you want more details we know Christine can gladly walk you through.
Details on what we're doing there, but keep in mind that.
Our service businesses.
Very unique assets that we have.
$2 1 billion dollar business, 70% of the revenues are recurring and we want to leverage that infrastructure. Another in other areas. Besides just banking and retail ordering with other technologies. Besides safety excellence self checkout. So we're looking for those options EV charging is one but we're also looking at other alternatives in the market.
If we're thinking walk you through some of those ideas with you if you're interested in.
And my last question if I may.
What other conditions do you need to meet.
Close the transaction do you have a target date.
Clothing <unk> home.
Financing.
Okay.
Yeah from the financing perspective I would.
I would draw your attention to the 8-K filings.
So there we are we need to be careful what we say relative to to the TSA based upon that.
Uh huh.
The FCC regulations, so what we what we would do there is just point you to the 8-K.
Thank you for your time, but as we said in our remarks.
By the end of December to the end up and you'll see you'll see that in the documents.
Okay.
Thank you at this time, we currently have no further questions. So I'll turn the call back over to Octavio Marquez see depot Nixle door to begin.
Thank you operator, and thanks to everyone, who listened and participated in today's call.
We look forward to seeing you at our upcoming Investor Conference and during our next earnings call. Thank.
Thank you again.
Ladies and gentlemen. This concludes today's call you may now disconnect your lines.
Okay.
Yeah.
[music].
Okay.