Q4 2022 NCR Corp Earnings Call
Please standby.
Good day and welcome to the NCR Corporation fourth quarter fiscal year 2022 earnings Conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Mr. Michael Nelson Treasurer, and Investor Relations. Please go ahead Sir.
Good afternoon, and thank you for joining our fourth quarter and full year 2022 earnings call. Joining me on the call today are Mike Hayford, CEO Owen Sullivan, President and C O O and Tim Oliver CFO before we get started let me remind you that our presentation.
And discussions will include forward looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release, and our periodic filings with U S E.
C, including our annual report.
On today's call. We will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated February seven 2023, and on the Investor Relations page of our website a replay of this call will be.
[noise] available later today on our website NCR dot com with that I would now like to turn the call over to Mike.
Thanks, Michael.
I will begin with some of my views on the business and I will also provide an update on our previously announced intention to separate NCR into two public companies.
Tim will then review our financial performance and provide an outlook for 2023.
And then Owen Tim and I will take your questions.
Let's begin on slide four with some highlights from this past year.
We closed out 2022 with strong demand and positive momentum in the business.
Maybe a different way to say this is across all sides of our business segments. Our products are winning in the marketplace.
We continue to make significant progress against our strategic initiatives to advance our strategy of becoming a software led as a service company.
With higher recurring revenue streams.
A key part of our strategy is to run the store run the restaurant and run self directed banking. It is contingent on our ability to cross sell and upsell additional services to our clients.
The news so we have a maniacal maniacal focus on customer satisfaction, which we measure as net promoter score or NPS. When we initiated the strategy in 2018, our M. P. S was 14.
Which is not very good.
Each year, we continued to improve we went the following year two and 18.
On a M. P S score than to a 36 down to a 48 and in 2022 I'm proud to say, we improved to 52.
For years, we improved our net promoter score from 14% to 52.
That's quite a significant improvement we now have happy customers, which is a key to executing our strategy and transforming NCR into a software led as a service company.
And 2022 NCI delivered 13% total revenue growth.
Recurring revenue growth of 20% and adjusted EBITDA growth of 16% all on a constant currency basis.
These are strong we felt particularly given the extraordinary macroeconomic and geopolitical challenges that we navigated throughout the year.
Now moving to slide five I thought it would be helpful to put our strong execution in perspective.
Relative to the external macro headwinds, we endured keep in mind the headwinds in 2022 we're almost all external uncontrollable impacts our revenues on a constant currency basis held up very well and our teams did a great job addressing the cost impacts over the last three quarters of 2022.
First we began the year with the continued pandemic. This time the omicron strain for example, our N C opposite sat down in January and February of last year. Unfortunately, we were not alone in countries. We operate most businesses were shut down as well, which impacted our transaction volumes.
Second award in the Ukraine impacted our business in the region and we suspended sales in Russia and exited that country.
Third supply chain disruptions resulted in significantly higher component in transportation class, which adversely impacted our margins, particularly in the first quarter of 2022.
While the supply chain impacts are easing Haas remain elevated nonetheless.
Nonetheless, the engineering and procurement teams have adjusted by designing alternative component components and certifying more sources to reduce the impact.
Fourth inflation reached the highest levels in over 40 years. In addition to higher component in transportation costs fuel costs increase in wage inflation escalate it.
And fifth interest rates accelerated at one of the fastest rates in history.
Finally in the second half of 2022 foreign exchange rates represented an incremental headwind for the full year the stronger U S. Dollar reduced revenue growth by 300 basis points and adjusted EBITDA by 600 basis points.
Despite all these external headwinds NCR executed very well against our strategic initiatives with strong growth across our kpis.
Although some of the headwinds we faced in 2022 are beginning to abate other headwinds like interest and inflation still persist.
Looking into 2023 market expectations suggest at least a moderate recession in the U S and abroad in anticipation of potential global slowdown NCR has taken additional cost actions in the fourth quarter that we expect it to drive incremental savings in 2023.
Well 2022 we had to take many actions to offset these headwinds some of those are temporal in nature, others are permanent cost savings as we head into 2023.
During 2022 we were able to reduce our head count with attrition heading into 2023, we needed to reduce our cost even further the total impact here was what do we reduce our staffing levels by approximately 7%.
Tim will provide some more details in his section later.
Now moving to the business update on slide six we have strong momentum across all sides of our business segments in retail we continued to deliver on our strategy to be the retail platform company of choice. The consulting from RBR named NCR. The number one global point of sale software vendor for the fifth year in a row, we were also rack.
Nice by RBR as the global leader for self checkout for the 19th consecutive year.
During the fourth quarter Love's travel stops in country stores extended its partnership with NCR and it's connecting over 3000 lane to the NCR commerce platform to enhance the omnichannel experience to their customers.
Continue to have positive momentum in winning the upgrade imperative for retail point of sale software.
Trip, a regional convenience store chain with over 800 stores across the Midwest turned to MTR support their mobile ordering strategy and enhance the customer experience.
In self checkout, we continue to see strong demand across our grocery and big box retailers as well as the expansion into new vertical such as convenience and fuel.
In department and specialty retail.
In hospitality, we continued to experience strong demand across our enterprise and SMB customers Chucky cheese, a 20th customer of Ncr's committed to a new five year agreement to partner with NCR to deepen integrations.
U N Crs platform, which enabled chucky cheese to enhance its ability to serve their customers through digital channels.
Potbelly, a 17 year customer of NCR is revamping their kitchen, deploying aloha integrated tablets, alongside a little kitchen to improve operational efficiencies and handling online orders.
We also continue to gain traction with our integrated payments offering for our hospitality customers in the fourth quarter chicken salad Chick a 226 site operator chose NCR as its merchant payment processor for all existing and future locations.
In digital banking, we continue to have positive momentum.
In the fourth quarter digital banking activity was strong with 40 renewals, which represented one of the largest renewal quarters in the company history.
During the fourth quarter. We also had 10 new logo deals, which are all competitive wins for the full year 2022. It was a strong year for digital banking as we converted two large regional banks, where interest bank and associate the bank to lead digital banking platform. These two conversions added almost 1 million new digital.
Banking accounts.
We also had success with N T I D F B, where our digital first banking solution for retail banking, where we integrate our financial institutions retail channels using our C. S P or channel services platform.
NCR signed two of the top five banks in the U S. R. D F. B C. S. P teller platform during 2022.
And payments and network, we are making progress against both merchant acquiring and the all point network. We are continuing to have success with our integrated payment operating for our hospitality customers, including roughly 90% of our new SMB clients selecting ncr's payment solution.
The I'll point network continued its strong growth by delivering transactions to more financial institutions and cardholders than ever before in the fourth quarter NCR expanded a long term agreement with Walgreens, making NCR the exclusive provider of ATM services across the majority of Walgreens stores.
In 2020 to PNC Bank partnered with the all point network, extending surcharge free ATM access to more than $10 million of their customers.
We now have over 70 million cards on the I'll point network. We also extended our I'll point network with key merchant partners, most notably circle K one of the largest convenience store brands in the U S.
Which activate at NCR, So I'll point network and more than 4400 circle K stores across 30 states.
And self service banking, we continued the momentum in our ATM as a service solution interest in our offering is accelerating from both community banks and large F. EIS globally in the fourth quarter, we signed 10 ATM as a service deals, including Santander U K Santander extended its long standing partnership with NCR.
Selecting NCR ATM as a service to transform connect and run it self service banking network.
More than 1700 Atms across the U K.
The bank is the operational management of our self service channel, including software transaction processing cash management ATM monitoring Hep desk.
And hardware maintenance to NCR.
During 2022 we signed 46 ATM as a service deals.
Including Bank of New Zealand, and Banca Brown, which is one of the India's largest retail banks.
And he has the ability to provide the scale and capabilities of a full stack integrated ATM as a service offering when bundled with the Alpine network has given us a unique solution in the marketplace.
And lastly, we are on track to separate NCR into two public companies by the end of 'twenty to 'twenty three.
Following Tim's comments on our financial results I will provide an update on the separation activities.
With that let me pass it over to Tim.
Thanks, Mike and thanks to all of you for joining US today as Mike described our solid fourth quarter completes a year described by a determined effort to drive sequential quarterly improvement after a very difficult start to the year.
While confronting a litany of external challenges.
Last April during our first quarter 2022 earnings call. We described unexpected impacts from the Omicron Covid wave. The then new war in Russia extraordinary supply chain costs due to scarcity and modestly higher interest rates that totaled about $75 million of negative impact on Q1 EBITDA.
At the time, we forecasted that these issues would have an additional $75 million of impact over the remainder of the year for a total of $150 million.
That forecast accurately predicted the eventual full year impact of our exit from Russia, and the Covid rate wave.
But could not then anticipate worsening supply chain challenges and component availability historically rapid interest rate increases a 40 year high inflation and dramatic strengthening of the U S dollar.
In aggregate those extrinsic factors eventually impacted EBITDA by almost $500 million.
In response cost productivity and pricing actions that were launched in March were expanded and enhanced insulate the P&L against further deterioration in macroeconomic factors and allowed EBITDA margin rates to extend to 19% in the second half of the year, but 450 basis points from the difficult start in Q1.
Even more impressive than the success of the tactical grind that preserve the P&L through cost control and incremental productivity with our teams ability to simultaneously drive strategic kpis above our stretch targets.
We exited 20 twenty-two with significant momentum across our platform as a service offerings.
I'll start on slide seven with a top level overview of our fourth quarter financial performance as we guided back in October the fourth quarter reported results were very similar to those in Q3.
Starting at the top left.
Revenue was $2 billion down 1% year over year as reported and up 2% on a constant currency basis.
Occurring revenue was up 3% year over year and up 7% when adjusted for FX.
We continue to have success transitioning from one time perpetual sales into multiyear subscription based revenue streams the.
The nature of these contracts shifted roughly $83 million of high profit revenue that were previously have been recognized upfront to recurring revenue.
The very strong U S dollar had an unfavorable impact of $72 million, primarily within our retail and self service banking segments.
In the top right adjusted EBITDA increased $27 million year over year to $380 million up 8% year over year as reported and up 14% on a constant currency basis.
Foreign currency exchange rates had an unfavorable impact of $20 million.
Adjusted EBITDA margin expanded 150 basis points from the fourth quarter of 2021 to 18, 9%.
In the bottom left reported non-GAAP EPS was 79% up three or 4% year over year as reported and up 8% on a constant currency basis.
The strength of the U S dollar reduced EPS by about <unk> <unk>.
The non-GAAP tax rate was 29, 9% versus 26 in the prior year and.
And that impacted EPS by about five cents.
And finally free cash flow was $202 million due to the predicted and improvements in working capital, which had up until there has been a persistent use of cash for the first three quarters of the year.
I'll have more on cash flow and leverage later.
Slide eight shows our financial highlights for the full year.
Revenue was $7.8 billion up 10% year over year and up 13% on a constant currency basis, driven by strong progress across our strategic growth platforms.
Remember that 2022 benefited from the full year of legacy Cardtronics results.
Which was acquired in June of 2021.
<unk> for the inclusion of Cardtronics revenue was up 6% on a constant currency basis.
It's a very strong U S dollar had an unfavorable impact of $231 million on reported revenue.
Primarily within our self service banking and retail segments.
Adjusted for the impact of FX, all five of our reported segments contributed to our growth.
Recurring revenue again outpaced total revenue growth up 16% year over year and up 20% when adjusted for FX.
And now makes up 62% of revenue.
For the full year.
Impact of just the recurring revenue reduced revenue by $210 million also primarily in our self service banking and retail segments.
In the top right adjusted EBITDA was $1.4 billion up 10% year over year as reported and up 16% on a constant currency basis.
FX had an unfavorable impact of $60 million.
Adjusted EBITDA margin rate was 17, 5% remarkably up slightly year over year.
In the bottom left non-GAAP EPS for the full year was $2 62 sets up 2% year over year and up 12% on a constant currency basis from the year ago 2021.
Higher interest costs higher tax rate and a higher share count together caused EPS to grow less quickly than EBITDA.
And we generated $164 million of free cash flow for the year more than all of that was generated in the fourth quarter.
Supply chain challenges, they're now abating caused both non linear revenue generation and a purposeful investment in working capital to assure availability of parts for both OEM and repairs.
And the impact of our labor cost reductions and changes in employee benefit programs impacted the P&L before they were evident in our cash flow.
Both of these effects or timing issues that we benefited from in Q4 and will continue to harvest in Q1.
I'll provide more detail on cash flow on slide 14.
Moving to slide nine which shows our retail segment results starting at the top left retail for full year revenue was up 5% on a constant currency basis.
Fourth quarter revenue was down 5% year over year and down slightly adjusted for FX on lower hardware sales.
Retail full year, adjusted EBITDA was down 6% year over year and was flat on a constant currency basis full.
Full year, adjusted EBITDA margin rate contracted 140 basis points.
<unk> 18, 4%.
The full year EBITDA rate was particularly impacted by component cost inflation on P. O S devices during the first half of the year.
Fourth quarter, adjusted EBITDA declined 3% year over year and was up 2% adjusted for currency.
While the comparisons are difficult because of the slow start in Q1 retail exited the year with margin rates north of 20% a recovery of almost 800 basis points from Q1 levels.
Fourth quarter, adjusted EBITDA margin rate expanded 60 basis points over the prior year.
We continue to have success transitioning our retail business from onetime perpetual sales into multiyear subscription based revenue streams.
The strategic deals that Mike mentioned, where key wins in 2022.
The nature of these contracts shifted roughly $45 million of very high profit revenue that would previously have occurred upfront to recurring revenue that will be recognized over the next four to seven years.
Most of this shift occurred in the second half of the year, including $25 million in Q4 alone.
The bottom of the slide shows retail segment key strategic performance indicators.
On the left our platform lanes are kpis that illustrates the success of our strategy to convert our retail customers to our platform based subscription model.
We increased our number of platform lanes by more than 200%.
The platform Layton increase was driven by Rollouts at major convenience and fuel customers.
While platform lanes currently only represent less than 4% of our total lanes.
We are seeing accelerating momentum for conversion of our traditional lanes that'd be substantial lane convergent backlog.
In the center bottom is our self checkout revenue self checkout revenue for the full year increased 3% year over year.
And our our increased 1% year over year on higher ARPA generated by those new platform lanes.
Similar to the impact on revenue currency rates did reduce all of our IRR calculations and in this business by about five full points of growth.
Slide 10 shows our hospitality segment results and illustrates momentum across this business.
For the full year hospitality revenue increased $77 million or 10% adjusting for currency.
Our enterprise business was up 8% driven by new store openings technology, refreshes and services growth.
Our SMB business was driven up by 13% by the success of our platform products and payments.
Fourth quarter revenue increased $8 million or 3% year over year as reported and 5% adjusting for currency.
Full year adjusted EBITDA was up 22% adjusted EBITDA margin rate for the full year expanded 210 basis points to 21%.
Hey, Richard revenue mix with more payments and platform sales and improving indirect cost absorption drove profitability improvements.
Fourth quarter, adjusted EBITDA was up 38% year over year.
Adjusted EBITDA margin rate expanded 570 basis points to 23%.
Better mix of software and services combined with strong cost productivity drove better margin rates.
Hospitality key strategic metrics around the bottom of this slide and include platform sites payment sites and a R. R.
For the full year platform sites increased 20% payment sites increased 64%.
Our or was up 6% year over year on the higher ARPA at both new platform and new payment sites.
We continue to see strategic momentum in this business as enterprise quiet shift to the platform and add services and SMB clients attach payments.
Turning to slide 11, which shows our digital banking segment.
Full year digital banking revenue increased $30 million or 6% year over year, driven by client wins strong renewal momentum and cross sell success at tariff Pheno and channel service platform.
Fourth quarter revenue increased $6 million or 5% year over year.
Full year, adjusted EBITDA was up 6% year over year with an adjusted EBITDA margin rate increasing to 42%.
A richer revenue mix and improving indirect cost absorption drove profitability improvements.
Fourth quarter, adjusted EBITDA was up 4% year over year.
With an adjusted EBITDA margin rate of 39%.
Digital banking is key strategic metrics on the bottom of this slide include registered users active users and annual recurring revenue.
Both registered and active users, which drive about two thirds of the revenue in this business increased 5% year over year, having outgrown two consolidation driven deconversion that impacted results in mid year 2022.
And <unk> was up 3% year over year.
Let's move to slide 12, this is our payments and network segment.
Starting at the top left payments and network revenue for the full year increased $611 million or 91% and 96% when adjusted for FX rates.
Most of the effect of the addition of the full year of legacy Cardtronics results occurred in this segment.
Normalizing for the inclusion of Cardtronics revenue was up 12% on a constant currency basis.
Fourth quarter revenue increased $24 million or 8% year over year and 11% adjusted for FX.
Full year payments and networked adjusted EBITDA increased 70% year over year and 76% when adjusted for FX.
While the inclusion of full year Cardtronics results strong revenue mix and cost productivity all benefited comparative profitability.
Short term interest rates that are the primary driver of our cash rental costs significantly impacted 20 twenty-two results and will further impact 2020 three results.
The cost of renting cash in our ATM fleet.
It goes through EBITDA as cost of goods and would have reduced EBITDA by approximately $50 million in 2022, and an incremental $95 million in 2023.
That said the combination of our hedging program operational optimization and price protections will result in a net effective interest rates of $40 million in 2020, two and another $45 million in 2023.
Adjusted EBITDA margin rate was 32% for the full year.
Fourth quarter, adjusted EBITDA declined 9% year over year and 5% when adjusted for FX adjusted.
Adjusted EBITDA margin rate contracted 550 basis points in the fourth quarter to 30% down from the prior year, primarily due to those higher cash rental costs.
The bottom of this slide shows payments and network key strategic metrics.
On the bottom left endpoints increased 24% year over year. These access points to the all point network in merchant acquiring terminals are expanding as we migrate them to a N C. Our installed base.
In the center bottom our transactions the kpis it illustrates the payments processed across our all point network and our merchant acquiring networks.
Transactions were up 27% for the full year.
Annual recurring revenue in this business increased 8% year over year.
Slide 13 shows our self service banking segment results self service banking full year revenue was flat year over year as reported and up 4% on a constant currency basis.
Fourth quarter revenue was down 2% as reported and up 2% on a constant currency basis.
We continue to have success transitioning our self service banking business from onetime perpetual sales into a multiyear subscription based revenue streams.
In the fourth quarter, we shifted roughly $37 million of high profit revenue. They would previously have occurred upfront software licenses to recurring revenue.
For the full year the impact of the shift to recurring revenue per self service banking was $100 million we.
This effect to be closer to $150 million in 2023 as our ATM as a service business accelerates.
This future impact will defer less profit per dollar of revenue as the ATM hardware has lower margins than the accompanying software.
Full year, adjusted EBITDA declined 3% year over year and was up 1% on a constant currency basis adjusted EBITDA in the fourth quarter increased 9% year over year and was up 13% on an ethics consistent basis.
Full year adjusted EBITDA margin rate was 22% in the fourth quarter rate was 23%.
Very strong cost productivity was able to overcome significant cost pressures, particularly in the first half of the year.
The bottom of the slide shows self service banking segment key strategic metrics on the left our software and services revenue mix was similar to last year at 68%.
ATM as a service units increased 226% year over year to over 14000 units.
We experienced significant growth in India and incremental growth in the United States.
The shift to recurring revenue continues to gain traction with our are up 4% year over year.
Slide 14 describes free cash flow net debt and adjusted EBITDA metrics to facilitate leverage calculations.
As I said earlier, we generated $202 million of free cash flow in the quarter.
Which represented more than all of the cash we generated in 2022.
While the quarter results were solid full year results were insufficient.
Looking forward the combination of higher profitability further working capital improvements, particularly in inventory and.
And the lapse of the timing issues in compensation and benefits, we expect $400 million to $500 million of free cash flow generation in 2023.
With a significant proportion of that cash coming in the first half of the year.
We've been clear about our intention to reduce total company leverage by at least $500 million before we complete our contemplated spin transaction later this year.
Beyond the operating activities described in the segment discussions we're looking at other ways to generate cash that can aid in reducing leverage and.
In Q4, a concentrated effort to repatriate overseas cash was action and delivered some early results.
We also importantly completed our first non recourse financing arrangement for ATM as a service, which is crucial to funding this growth strategy.
And finally, we made a $50 million voluntary contribution to the U S pension program to address underfunding and push out any mandatory contributions.
This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of three eight times down from four one times in Q4, 2021 due to higher profitability.
We remain well within our debt covenants and have significant liquidity with over $750 million available under our revolving credit facility.
We have a strong balance sheet ample liquidity and the financial strength to support our growth strategy.
On slide 15, we present, our first quarter and full year 2023 guidance.
After three straight years of multi varied uncertainty we have proven that our forecast or guidance are only as good as the macro assumptions that underlie them.
And that they can become dated very soon after they're issued.
That said for this guidance we have assumed the following.
That interest rates are correctly described by the forward curve on January the first.
The currency exchange rates are also accurately described by the forward rates as of January the first.
That the global economy will experience a modest consumer led recession that may constrain growth in our nonrecurring revenue streams.
And that our ATM as a service business differs $150 million of ATM revenue at the accompanying hardware margin rates from 'twenty twenty-three into future years.
These assumptions mean that the pernicious effect of interest rates and currency exchange rates will drive tougher reported comparisons in the first half of the year, which should ease in the second half.
They also mean that our efforts to reduce cost and drive productivity needed to be extended.
While price and cost actions taken in the first half of 2022 allowed a significant recovery in profitability in that second half.
Further actions are necessary to offset the wrap effect of 2022s challenges and to preemptively address the dis synergies that we anticipate from the spin transaction.
In the fourth quarter, we initiated additional cost takeout actions that are expected to drive sufficient incremental savings in 2023 to more than offset any dis synergies, resulting from the contemplated spin.
Before I walk you through the guidance page I want to highlight that we intend to change our calculation of non-GAAP EPS to exclude the impact of stock based compensation expense.
This change will result in better alignment of our calculation with both our post spin pure play peers and with our own calculation of adjusted EBITDA that already excludes stock based compensation.
After reviewing the intended change with our board. It was determined that the change should be made at the start of the new fiscal year concurrent with annual guidance rather than waiting until the spin transaction occurs.
Because many of you have existing models based on our prior convention.
Provided guidance, both with and without this change.
The impact of stock based compensation was about 70 cents in 2022 and is expected to be about 75 in 2023.
So for the full year 2023 we expect revenue of $7.8 billion to $8 billion. After the impact of the ATM as a service shift of $150 million and on a constant currency basis.
While forward rates would suggest only very modest full year impact from FX. It will be a notable drag in the first half of the year and will impact calendar <unk>.
We expect adjusted EBITDA to be 1.45 to 1.55 billion adjusted EBITDA margins are expected to expand to roughly 19% I'll provide more detail on EBITDA in the next slide.
non-GAAP EPS is expected to be $3 30 to $3.50 under our new convention.
That range is comparable to $2 55 to $2 75 under our prior methodology.
In calculating EPS guidance for 2023 we assumed interest expense of $330 million, an increase of $45 million or 29 cents a share.
We also assumed a tax rate of 29% versus 28% in 2022, and a share count of 155 million shares.
The 150.4 million shares in 2022.
A combination of these two.
Impacts reported EPS by another 11 cents. Obviously these assumptions have a range of potential outcomes and we will provide update quarterly as necessary.
Reported revenue of $1.8 billion to $1.9 billion up $50 million on a currency neutral basis from the last few one.
We expect adjusted EBITDA of approximately $300 million.
We expect non-GAAP E. P. S of 55 to 60 cents and.
Expect to generate free cash flow between 100 and $200 million.
With a quarter, we have assumed a tax rate of 29 per cent a share account of 152 million shares an interest expense of $85 million.
For the remainder of 2023, we expect relatively linear sequential quarterly improvement across most financial metrics ultimately aggregating to the results described in our annual guidance.
Slide 16.
Finally, slide 16 provides a high level of illustration of our EBIT drivers juxtaposing 20, twenty-two realized impacts against our 20 twenty-three expectations for the same buckets.
I will walk you through the relative impacts for 2022 and our outlook for 2023.
And the first Red bar, we've aggregated the discrete items that we had talked about prior under external impacts, including an order of magnitude component costs, an expedited freight.
Exchange rate translation interest expense or in the.
Ukraine and finally, the last wave of the pandemic.
Taken together these effects totaled about $200 million in 2022.
The next Red bar labelled inflation includes both material and labor cost increases across our global cost structure that was nearly six per cent.
<expletive> It includes NCR labor contractor labor fuel and commodities plant freight parts, Ross et cetera to address these two bars together that we're close to $500 million of impact.
We launched similarly sized actions and cues two and three the reduced our overall spend improve pricing.
An aggregate our actions totaled about $400 million.
Most of these actions targeted indirect cost offset are uncontrollable effects and our direct costs.
About 40% of these actions were permanent.
The remaining 60% were fast but temporal <unk>.
I have since been replaced with more permanent actions that will benefit 2023.
Bringing down the page and 20 twenty-three those same external impacts will be far less impactful.
We will have residual wrap effect from interest costs.
The other items are either built into the 20 twenty-two base like our exit from Russia or have swung to a net positive like premium freight and chip costs.
And we expect excess inflation to ease to a more manageable level.
Q for we launched another round of cost actions that are more sustainable and anticipate the dissynergies from the plants been transaction.
These actions were more than sufficient to both replace the 20 twenty-two temporal actions.
And a cover the follow on impact of last year's shocks.
We entered 20 twenty-three with almost seven per cent fewer head count then we started with in 2022.
About half of those reductions were from attrition and the remainder were reductions in force.
And finally as you read across the remaining columns you can see that in both ears volume growth is muted by an acceleration in our shift to recurring revenue and increased pricing is around $150 million with that I'll turn it back to you Mike.
Thanks, Tim.
Moving to slide 17, let me provide an update on your thoughts and separating NCR into too.
Public companies.
We intend to separate ncr's existing payments in network and self service banking businesses to form a new entity V. A tax free spinoffs and district and distribution of shares to existing shareholders.
N P. R. A T M co includes ntis self service banking.
In other words are traditional ATM hardware software and services business and.
And all of our payments in network business, except for the emergency services payments, which is integrated tightly into the retail and hospitality segments of N C. R.
<unk>. It will include a retail hospitality digital first banking and our mission services payment business NCI will continue its transformation to a softer led as a service grilled company.
These businesses operate in markets, where we expect to see continued spending on technology to run the store when the restaurant and delivered digital first banking solutions.
We believe <unk> continue to be positioned to win the business for those upgraded imperatives.
Moving to slide 18 N.
N C. R has made significant strides over the past five years to transform our company and our customer <unk> as a services company. The accident, we have taken to a liner organization, our customers and markets will help us move into two organizations.
We believe we are number one in the markets we serve they represent enormous opportunity for us and our goal is to make sure. We continue to take advantage of our market leading position.
N C. R. R. M C. I remain cope in the left side of page 18 will be the number one provider apply yourself software in the world and the number one provider herself checkup.
N N T R will be the leading provider of D. F. B, a digital first banking solutions.
N C. I remain co is anticipated to be higher growth company, serving markets that have growing demand for integrated platforms to serve retailers restaurants, and banks and enable them to serve their clients with a differentiated experience.
N P. R. A T M code, which is labeled spin call on the right hand side of page 18 will continue to be the number one provider of multi vendor ATM hardware.
A T M soft applications and a T M middle there in the world and will have the largest surcharged tree network.
We will continue our shift as a service with our a T M as a service offering.
We believe that we will have a differentiated offering that will continue to drive growth and expanding margins as we capture more share of wallet for delivering ATM solutions.
N C. R. A T M. Co is expected to be a stable recurring revenue business with solid cash flow generation that can allow us to deliver cashback to shareholders to a dividend payment.
We believe that spinning off Ncr's ATM co in a taxi transaction is the best path unlocked shareholder value.
But should alternative options become available in the future that could deliver superior value such as a whole or partial company sale events. Yeah. The board remains open to considering alternative scenarios.
Slide 19 provides an overview of our separation roadmap, we have put together a separation management office in a defined our business separation plant.
Operationally the majority of our teams are organized by industry under a general manager business unit.
These teams are ready for the spin.
Additionally, there are areas of shared services functions, such as legal tax HR Treasury I T. In real estate that we are in the process of preparing for separation.
We are working on submitting a form 10 registration statement and then the timing of separation will be largely dependent on S. C. C approval and the state of the capital markets, we intend to the lab or through the generation of free cash flow between now and separation.
<unk> took her by the end of 2023. However, we are working to be in a position to execute the spin as early as late third quarter.
This of course is dependent on receiving approvals from the S. A C and a favorable capital markets environment in closing on slide 20, we're looking forward to a key priorities are clear first we have made significant progress executing our strategic growth initiatives are strategic kpis are trending in the right direction.
And we will continue to build upon the positive momentum in the business.
N T I was winning and we expect to continue to win in the marketplace.
Second we will continue to execute a strategy of transforming NCR to a softer led as a service company with higher recurring revenue streams, we continue to have momentum in the business.
Third we have focused on improving our cost structure, we have identified efficiencies for cost accident streamline across in 2023.
For these cost takeout actions, along with positive operating leverage should drive margin expansion.
Fifth we expect to generate strong cashflow as Tim had reference in his section and finally, we are focused on separating NCR into two public companies. We are working through the legal and organizational structures and expect to execute the separation by the end of 2023 and be in a position to execute this.
<unk> earlier, if the opportunity arises.
This concludes our prepared remarks for the day.
With that we will open the cough of questions.
Operator, please open the line.
Thank you.
If you would like to signal with questions. Please press start one on your Touchtone telephone.
Joyous today use a speaker phone. Please make sure new function is turned off to allow your signal to reach our equipment again that will be star. One if you would like to signal star one for questions.
And our first question will come from Paul chunk with J P. Morgan.
Hi, Thanks for taking my question so.
Just on the free cash flow guard can you talk about some of the puts and takes there.
Where do you expect capex levels expectations for working cap.
And what if that there'll be somewhere to more outside benefit on no working cap after heavy investment here and then.
You know you guys did a good job of more uniform castle over the course of the year back in 20th 21, 2022, sorry version back to the kind of back end loaded free castle, how do we think about cash.
Cash flow kind of.
No.
Yeah this year.
Yeah, a lot of questions and their cat back so I would expect it to be about $400 million. This year I think it's gonna be on $400 million just slightly higher.
Oh, I do expect the cash flow to be much more linear this year.
As we said in the script there was some as we took a cost out over the organization the piano benefit outstrip the cash.
Cash will benefit and we'll see that benefit come back in the first half of this year from a timing perspective, we harvested some of the investment in working capital Q for it you can see that in a casual performance and I think they were gonna make more progress on inventory in the first quarter.
I I think our cash flow guide interest very consistent with what we described a quarter ago right that we're gonna have a very good fourth quarter. We're gonna have a strong first quarter and then we'll get back on a more linear path after that so I I <unk>.
It started you perfectly easy to predict to the dollar, but I'd I'd guess it were closer.
To the high end of the range I described and the guidance page four Q.
One, which will give us a nice headstart and the full year.
Gotcha, and then just to follow up on.
Check out so you had a very strong performance in 21, and then you know some monitoring pace here and 22.
About the expectations for twenty-three and longer term and where you're seeing momentum across regions vertical and then can you talk about Halo product. You were you were showcasing in our <unk>.
So you should be kind of near term longterm. Thank you.
All it might take the product questions on the three per cent growth in school. This year was on it as reported basis, there's actually three full points of growth that went to currency. So on a constant currency basis. That's six per cent growth is very much in line with what we would have expected that.
Made the high single digit growth that's go and next year.
I'd expect about the same.
Yeah on the on the Halo project, which you saw at.
And a rash, we're pretty excited about it you know it does it kind of does the best of both worlds that has the.
You know the the vision based ability to scan items and and identify what they are but it also has the capability for those said they can't scan appropriately which is one of the challenges that that technology has.
You can still scan the U P C code so.
It's easy to use a lot of the grocery scene in self checkout is inconvenient stores and fast food restaurants, and it's a perfect fit for that environment.
And our next question will come from Matt Somerville with D. A Davidson.
<unk> excuse me a couple of questions.
<unk> your banking and it sounds like some level of moderate recession into your outlook for 423 can you talk maybe about incoming order rates and what you may be seen their relative to your guidance framework are you seeing things indicative of a slowdown or your go for.
<unk> you know look at at the finals, suggesting something perhaps becoming more pronounced in that regard and then I have a follow up.
No I think the order book it is strong it's about as strong as we would hope we'd be at the beginning of the year. The uptake on her as a service efforts have been very strong. So we've not yet seen any any rollback of of the order book.
Let me give you some color on the total growth for the year because I think.
You think about a two per cent growth rate across the total total company has reported self service banking is likely to be down 4% reported now that's up two per cent. If you add back the shift the recurring revenue, but we're accelerating ship the recurring revenue in that business and so it's gonna be a 4% decline, we think we'd really nice Mar.
When expansion I think there's probably.
Three to four point margin expansion in that business.
We've got two businesses payments in network and digital banking that are both gonna grow nearly 10%.
Both of those businesses are going to invest back into growth and so their margin rates are likely to come down a little bit maybe a couple of points there as they invest in growth.
Which then leaves the retail inhospitality businesses that will grow it low single digits, each hospitality come off coming off a rip roaring year in retail really when you think about building in a consumer led.
Recession into a model.
We took a little bit of you think about where the nonrecurring revenue streams occur it's in hardware it's.
It's M P O S and self checkout, and it's an a T m's and so we moderator expectations or hardware revenue in the year.
If we're wrong and there isn't a recession and our customers aren't affected by it or don't adjust for it there could be upside to this plan.
Yeah, I mean, it just to just to add a comment so specifically.
We seen moderation in demand today, the simple answer is no.
And as you look at Tim walking through the numbers so.
Some of the you know some of the gross impact is literally the ability for us to execute our strategic plan and to shift our revenue streams to subscription and so where it's taken off the fastest a little faster than maybe we anticipate it was a T. M's of service in that backlog. The sales success in 2022 was very.
Drawing the backlog continues to be very strong into 2023.
And so that will pretend for the future to have a very very strong business there, but we've got it you'll get through 28 23.
Three.
Jim said payments in network strong business outlook digital banking had a had an extremely strong fourth quarter, a lotta renewals a lotta new logos continues to have a very strong.
Backlog in terms of.
Pencil.
Say backlog sales pipeline.
And then recent hospitality the migration too.
Platform lanes platform site. So we haven't seen that yet you know we look at the outlook for the marketplace, probably a little more concerned about banking just as banks.
Taken advantage of some margin spread interest interest margin spread and 22 I think they're all looking at the same risk.
And so later later on in the year will they start to slow down and capital spending, but again to date, we haven't seen that and I think I'll look for the year is just trying to be cautious based on the economic outlook that we are reading.
Got it and then just as a follow up and I only had a quick second to look at there's just giving the timing and a call but in.
In payments in network it looked like on a quarter over quarter basis. So it's not in your current slide deck I had to go back and look at Q3, but it looked like and points were down a little bit quarter on quarter transactions appeared to be down a little bit quarter on quarter as was a R. R. I realized there's enough dynamic perhaps driving a R. But if you can just kind of <unk>.
<unk> to that that would be helpful. Thank you.
Yeah, that's a that's a typical seasonality and what we do is you're gonna see a nice pick up in Q1 as a tax season comes around so the.
The endpoints are moving in the right direction Angela I don't know if there's a modest downdraft in queue for I can't remember the the transaction numbers are higher they will go higher if there's a seasonality to them. That's why we moved it the key the transaction numbers to a full year because it takes it seasonality out but.
Good good transaction drove and and the fact that we're gonna be able to deliver that 9% top line growth in that business is heavily dependent.
More and points and more transactions.
Thank you guys.
And our next question will come from Charles Snap-on with students.
Hi, good afternoon, and thank you for taking my question just wanted to drill into the segments a little more first of all with skin within payments. If you were to take out Liberty ask what would be what would the organic growth rate look like for the fourth quarter and then secondly, as far as digital banking goes.
I know in the past you refer to it as a double digit grower is it fair to still think of that as a as a trajectory for that business on the top line.
Yeah, Let me start with did your banking absolutely it was a little little light in the fourth corner, we again we had.
Extremely high renewal corridor, which drove.
You know extending our terms with our customers, which may be impacted rebel a little bit in the fourth quarter.
But I don't I don't think that there's anything in the trends too cause is concerned I do think is Tim reference high single digit low double digit in 2023 based on what we're seeing for digital banking I think the overall without Liberty X. What did what did you get my Liberty exited about $15 million to $20 million a quarter.
Got it.
Got it.
And just as a quick follow up if I could refer back to some of your guidance from the prior quarter. When you talked about 200 million in cost cost Takeouts for twenty-three and 80 to 100 million of Dissynergies is that still a ballpark range of thinking about the thinking about 23.
Yeah, I think if you got your ruler out in that EBIT, it's supposed to be causal walk into his casual walk it caused a walk in the in the deck on page 16.
I tried to kind of rule all of these different efforts it cost take out as they played out across this year and next because they don't necessarily calendar is to any one fiscal year, we did see $500 million or so of pressure from both the discrete items, we called out external forces and inflation in aggregate and we got about 400 million.
Of cost actions are permanent actually a total actions done in 2022.
About 60 per cent of those words more temporal in nature.
The reigning in discretionary spending hard knock back filling positions that if it had been opened.
We need to add back some cause they're in about 40% of that cost out was permanent moving into 23 then since.
Since we expect the external impacts in the inflation to moderate really considerably and in fact, a couple of the items turnaround in our net benefits too is this year.
We simply need to then cover the $100 million or so of rap effect from the negative impacts last year, and and <unk> and cover those temporal action. So if you add those together it looks like an aggregate about $350 million a permanent actions in 2023.
Which will then allow us to hit the numbers on this page. If there's we have talked about $80 million to $100 million of let's call. It negative synergies dissynergies associated with the spin transaction, we presumed across this model that it will be one when we split it will be $80 million about $40 million on each side of the of the of the new car.
So.
We think as we <unk> your plays out will be able to keep that cost down and offset it across the years. We found several opportunities for efficiency beyond the actions that we've described here to help keep that from being a negative at the time of the launch of the two companies.
And we'll take a question from Eric would rink with Morgan Stanley .
Hey, guys. Thanks for for taking the question.
Looked at 2023 and it.
It looks like your plan to do to do more with less I guess, meaning you know your revenue guide is flat top two per cent and we talked to some of the factors there ebitdas all as a as a much nicer kind of around 9% at the mid point can you maybe just talk us through Tim I know, you've talked about kind of like high level, but but maybe maybe walk us through how you're thinking about.
Gross margins in the puts and takes there in 2000 twenty-three versus Opex, Oh, just to help us, maybe where where the leverage and the model come from next year, and then I have a yeah cause <unk>.
Yeah. That's a good question because you know you'll remember that this year most of the the savings came at Opex writing it came from indirect costs because that was more quickly act there.
It's gonna be nearly entirely gross margin savings. This year. The actions that we took to requalify hearts add to diversify our supply chain. The efforts, we've made to reduce our transportation costs and other direct cost efficiencies are gonna help payback nicely in 2023, So I would expect most of the <unk>.
Coverage to be in gross margin rather than opex.
Okay Super that's really helpful. And then as a follow up Uhm I just wanted to make sure I get some of these items right. So I'm, obviously going to some nice year over year improvements in EBIDTA free cash flow you know EPS is held back a bit more regardless of the kind of change and and disclosures.
Is that mostly tax rate interest rate ER, sorry tax rate interest expense and share count was there anything else that that I'm missing I just wanted to make sure I kinda understand why why that you're exactly right maybe as much as the other you're exactly right. There's there's 29 cents associated with interest expense.
A little more than a dime associated with both share count.
[noise] and tax rate.
Okay perfect. Thank you guys.
What's at 40 40 cents an aggregate.
Thank you and that does conclude the question and answer session. How now turn the call back over to Mister Mike hatred for any additional for closing remarks.
Thank you thanks, everybody for joining us today.
I think our team is pretty excited about a strong finished 20 twenty-two obviously we had some.
Challenges at the start of the year and this is a great big Thank you to our whole team for working through the less three quarters and delivering a very solid 20 twenty-two we look forward to 2023, we expect it to be again, a modestly challenging environment.
Going on out there, but we feel very good about our products, we feel very good about.
Strategic initiatives and we're looking forward to executing the spinoff later in 2000 twenty-three again, thank you for joining us today.
Well. Thank you and that does conclude today's conference will do thank you for your participation have an excellent day.
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