Q2 2019 Earnings Call

July 25, 2019

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Ladies and gentlemen, good day and welcome to the deals next door.

Operator: Ladies and gentlemen, good day, and welcome to the Diebold Nixdorf-hosted Q2 2019 Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Steve Mrozek. Please go ahead, sir.

We're clean energy earnings conference call.

At this time I would like to turn the conference over to Mr., Steve Virostek. Please go ahead Sir.

Thank you David and welcome everyone to the people next door.

Steve Mrozek: Thank you, David, and welcome everyone to Diebold Nixdorf Q2 earnings call for 2019. Speakers on today's call also include Gerhard Schmid, President and Chief Executive Officer, and Jeffrey Rutherford, Chief Financial Officer. For your benefit, we've posted slides to accompany our prepared remarks today. You may access those slides at investor relations page on dieboldnixdorf.com. Later this afternoon, audio replay of today's webcast will also be posted to the IR website. Slide one contains a reminder that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. We have reconciled each non-GAAP metric to its most directly comparable GAAP metric in the supplemental schedules of our slides.

Earnings call for 2019.

Speakers on todays call also include Gerard <unk>, President and Chief Executive Officer, and Jeff rather for Chief Financial Officer.

For your benefit we posted slides to accompany our prepared remarks today.

You may access the slides that Investor relations page on people next door Dot com.

Later this afternoon audio replay of todays webcast will also be posted to the IR website.

Slide one contains a reminder that today's comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance.

We have reconciled.

Yes, that's true to its most directly comparable GAAP metrics.

In the supplemental schedules of our slide.

Steve Mrozek: Over on slide two, we inform our participants that certain comments may be characterized as forward-looking statements, and that there are a number of factors that could cause actual results to differ materially from these statements. You may find additional information on these risk factors in the company's SEC filings. Also, please keep in mind that forward-looking information is current as of today, and subsequent events may render this information out of date. Now I'll hand the call over to Gerrard Schmid.

Over on flight to inform participants that certain comments, maybe characterized as forward looking statements.

And that there are a number of risks.

Number of factors that could cause actual results to differ materially from these statements.

You may find additional information on these risk factors in the company's yet you see filings.

Also please keep in mind that forward looking information is current as of today and subsequent events may render this information out of date and now I hand, the call over to Gerardo.

Gerrard Schmid: Good morning, everyone, and thanks for joining our presentation. I'm pleased to report that our Q2 results demonstrate strong improvements to profitability and cash flow, which are directly linked to our execution of the DN transformation initiatives. H1 progress provides us with the confidence to improve our 2019 outlook today. Before I comment on our results, I'd like to highlight one of the more exciting developments, the launch of our next generation banking solutions branded as DN Series, which we announced about a month ago. We believe the DN Series further extends our position as market leader by enabling advanced capabilities which benefit consumers and support financial institutions' efforts to transform their branch environment. Initial feedback from customers has been very strong on the capabilities and performance of the DN Series. Key highlights of our Q2 are contained on slide three.

Good morning, everyone and thanks for joining our presentation.

I'm pleased to report second quarter results demonstrate strong improvements to profitability and cash flow.

Which are directly linked to our execution on the you know transformation initiatives.

Uh Huh program provides us the confidence to improve 2019 outlook today.

Before I comment on our results I'd like to highlight one of the more deliveries.

Oh the D N series.

Key highlights of our second quarter contained on slide three.

Total orders during the quarter increased 5% in constant currency versus one year ago.

In the Americas banking segment orders were stable versus the prior year and included more than $90 million for Windows and Italy machines.

The contracts to upgrade <unk> Congress ATM fleet with seven other categories like there was no run cash dispensers in Mexico.

Hey product in Saudi contract you got regional bank located in the Midwest.

Gerrard Schmid: Total orders during the quarter increased 5% in constant currency versus one year ago. In the Americas Banking segment, orders were stable versus the prior year and included more than $90 million for Windows 10 capable machines, a contract to upgrade BBVA México's ATM fleet with 750 cash recyclers, and over 100 cash dispensers in Mexico, a product and software contract at a regional bank located in the Midwest US for full function ATMs, as well as our DN Vynamic Connection Point and security licenses. A new account win at a credit union in the US operated by a Fortune 50 IT services company for ATMs, Vynamic Connection Point software, and a three-year managed services contract.

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When you account win credit Union in the U.S. operated by watching the IP services company.

Right Yeah.

Fanatic connection point in software and a three year managed services contract.

17 million dollar win.

Got you know when you bought it go.

Transform their branches and increase automation by recycling.

Oh, yeah and maintenance services.

And they win with another top Brazilian financial institution.

Oh three on cash recyclers.

To your maintenance services contract.

Oh, you raise your banking orders increase versus the prior year after adjusting for currency.

Gerrard Schmid: A $17 million win at Banco Itaú Unibanco to transform their branches and increase automation via cash recyclers, full function ATMs, and maintenance services, and a win with another top Brazilian financial institution for 300 cash recyclers and a 2-year maintenance services contract. For Eurasia Banking, orders increased versus the prior year after adjusting for currency. We experienced strength from our customers in Europe, the Middle East, and Africa. In Asia Pacific, orders improved from a modest decline as we began to anniversary our decision to exercise greater bidding discipline and focus on more profitable market segments. Noteworthy contracts in Eurasia Banking included a new frame agreement at Commerzbank in Germany for several hundred ATMs and a multi-year software and services maintenance contract.

We experienced strength from our customers in Europe .

The middle East and Africa.

In Asia Pacific orders improved modestly valued at $5 million to provide cash terminals and ATM as a service.

In contrast to the top three bank in Saudi Arabia valued at more than $10 million to take the next step in the right transformation journey.

Yeah exactly dispensers.

And you mentioned buying software.

And you're right the development bank in Singapore.

So you got these hikers server monitoring and maintenance.

An $8 million.

Largest financial institution in Kazakhstan.

Well you know, it's like there's more than 100 past dispensers and about 40 driver.

And when the three leading banks in Africa valley to $15 million on cash recyclers.

The sensors and software.

Gerrard Schmid: A new multi-year contract with a German financial institution valued at $5 million to provide cash terminals and ATM as a Service. A contract with a top three bank in Saudi Arabia valued at more than $10 million to take the next step in their branch transformation journey with cash recyclers, dispensers, kiosks, and Connection Point software. A new contract with DBS Bank for about 150 cash recyclers, self-service monitoring and maintenance. An $8 million win at the third largest financial institution in Kazakhstan for more than 300 cash recyclers, more than 100 cash dispensers, and about 40 drive-up ATMs. Wins at three leading banks in Africa valued at $15 million for cash recyclers, cash dispensers, and software. Two of these banks are new accounts for Diebold Nixdorf.

Two of these bags on new account would be built next door.

Switching over to retail orders, we delivered meaning chain based in Germany.

In addition, we signed in remotely Dod contract.

<unk> next generation point of sale software.

<unk> hundred fuel and convenience stores in Germany.

Absolutely feature greater security measures being added by the government.

As well as enhancements to the customer experience.

To summarize current market conditions demand for our banking solutions is solid in nearly all regions.

In retail, we see growing demand for our self checkout solutions.

Coupled with an easing up demand for point of sale solutions.

Revenue increased by 8% in constant currency versus one year ago.

Excluding approximately four percentage points of foreign currency headwinds $41 million.

Gerrard Schmid: Switching over to retail orders, we delivered meaningful constant currency growth during Q2, fueled by the strength of our self-checkout solutions in EMEA and Asia, where we experienced record shipments in self-checkout. During the quarter, DN signed a $7 million contract with UK-based Co-op for more than 400 self-checkout terminals and related services. We also secured a $12 million agreement to deploy comprehensive point-of-sale solutions at a leading supermarket chain based in Germany. In addition, we signed a $3 million contract to deploy next-generation point-of-sale software to more than 1,200 fuel and convenience stores in Germany. Our solutions feature greater security measures being mandated by the government, as well as enhancements to the customer experience. To summarize current market conditions, demand for our banking solutions is solid in nearly all regions.

Growing product revenue enable these segments to deliver constant currency growth.

14% for America's banking.

The change in your range of banking and 6% from retail.

non-GAAP gross profit improved by 54 million versus the prior year.

Despite significant gross margin expansion across all segments and business lines.

As well as the contribution from growing product revenue.

Adjusted EBITDA for the second quarter increased by 162%.

For $66 million year over year against an easy comparison.

As we realize.

<unk> expense reductions from our D N O initiatives.

I'm, particularly pleased with our free cash flow performance.

Improved profitability, along with strong that working capital management.

Enable <unk> to reduce its use of cash in the second quarter.

Gerrard Schmid: In Retail, we've seen growing demand for our self-checkout solutions, coupled with an easing of demand for point-of-sale solutions. Moving on to our revenue performance in the quarter, total revenue increased by 8% in constant currency versus one year ago, excluding approximately four percentage points of foreign currency headwinds of $41 million. Growing product revenue enabled all three segments to deliver constant currency growth, 14% for Americas Banking, 4% in Eurasia Banking, and 6% from Retail. Non-GAAP gross profit improved by $54 million versus the prior year, led by significant gross margin expansion across all segments and business lines, as well as a contribution from growing product revenue. Adjusted EBITDA for Q2 increased by 162%, or $66 million year over year against an easy comparison as we realized both productivity enhancements and expense reductions from our DN Now initiatives.

$509 million versus the prior year.

For the first half 2019.

I love it.

With a positive $30 million, which is approximately $246 million or better than last year.

These achievements.

The five times on June Thirtyth.

Even though we paid $87 million during the second quarter.

Squeeze out the remaining minority shareholders you bought think so AG.

These financial results illustrate the commitment.

And the <unk> of our management team.

I'm encouraged by the way our team has responded over the past year.

On slide four we provide a timeline all right you know next Oh, we have very good visibility towards approximately 800 million in gross savings in 2019.

Thank you Mike <unk> savings.

30 million of savings 2020.

Second we are talking about 50 million of savings from simplifying our ATM product portfolio and optimizing our manufacturing footprint.

Gerrard Schmid: I am particularly pleased with our free cash flow performance. Improved profitability, along with strong net working capital management, enabled DN to reduce its use of cash in Q2 by $109 million versus the prior year. For H1 2019, unlevered cash flow was +$13 million, which is approximately $246 million better than last year. These achievements also had the effect of reducing our leverage ratio from 5.7x on 31 March 2019 to 5x on 30 June 2019, even though we paid $87 million during Q2 to squeeze out the remaining minority shareholders of Diebold Nixdorf AG. These financial results illustrate the commitment, focus, and the cohesion of our management team. I'm encouraged by the way our team has responded over the past year. On slide 4, we provide a timeline of our key DN Now initiatives.

During the quarter, we took a big step forward by announcing a new product family. The D N series.

A third initiative is to generate at least $70 million the savings from our services modernization plan.

For the year 2021.

We've executed well on this initiative as demonstrated by the 490 basis points year over year gains.

Our non-GAAP gross service margins.

The fourth initiative is to reduce selling general and administrative expenses by about $150 million.

21.

I'll provide more context on these initiatives on subsequent slides.

Atlanta that halfway through the year, we're tracking to Atlanta.

We want to focus on improving our net working capital by approximately $900 million in 2019.

We are tracking well towards this goal in the second quarter the company would use.

Capital.

As a percentage of trailing 12 month revenue.

Gerrard Schmid: Most of you have seen this slide before, and it reiterates our goal of generating $400 million of gross savings through the year 2021, while simplifying our operations and enabling our employees to increase their focus on our customers. We are nearly complete with the first initiative, streamlining our operating model, in which we have reduced management layers and clarified roles across the organization. As a result, we have very good visibility towards approximately $100 million in gross savings in 2019 and cumulative savings of $130 million of savings through 2020. Second, we are targeting about $50 million of savings from simplifying our ATM product portfolio and optimizing our manufacturing footprint. During the quarter, we took a big step forward by announcing a new product family, the DN Series. Our third initiative is to generate at least $70 million of savings from our services modernization plan through the year 2021.

17.7% from 22.8% in the prior year period.

Our second quarter performance marks the second quarter, which is a metric.

<unk> by more than 250 basis points year over year.

Finally, we continue to work on divesting non core assets amounting to about 5% of annual revenue that you reduce the number of ATM configurations, we were selling in 2018.

We're targeting a reduction of 31 cents or 2019.

That's enabled the company to streamline our supply chain, we have really benefited from a reduction in lead times.

We continue to optimize our manufacturing footprint by consolidating skilled facilities.

Shifting production to lower cost locations.

Those actions along without doing that went along with that being said.

I'm driving meaningful product gross margin expansion for the quarter and year to date.

Well each that future, we always use yardstick about delivering the next generation banking solutions.

Gerrard Schmid: We've executed well on this initiative, as demonstrated by the 490 basis point year-over-year gains to our non-GAAP gross service margins. Our fourth initiative is to reduce selling, general, and administrative expenses by about $150 million through 2021. I'll provide a bit more context on these initiatives on subsequent slides, but I'll add that halfway through the year, we are tracking to our plan. We are also focused on improving our net working capital by approximately $100 million in 2019. We are tracking well towards this goal. In Q2, the company reduced net working capital as a percent of trailing 12 months revenue to 17.7% from 22.8% in the prior year period.

Brad is the D N series.

This product family is the culmination of meaningful investments in consumer research design.

Engineering resources and tooling.

He benefits and features of the D. N series include.

Improving the ATM availability performance using advanced sensor technology machine learning and connectivity to the D.N. all connect engine.

Facilitating automating patent management by next generation asset recycling technology.

Integrating the dynamic software suite, which includes integration with mobile devices and support for biometrics.

Providing a clear modular upgrade for our customers and evolve.

Okay, fine and streamlining our supply chain and offering along the path to substantially standardizing on platforms globally.

Gerrard Schmid: Our Q2 performance marks the third consecutive quarter in which this metric has improved by more than 250 basis points year-over-year. Finally, we continue to work on divesting non-core assets amounting to about 5% of annual revenue. During Q2, we divested our cash-in-transit business for banking customers in Europe, and we continue to action several other projects, which will likely reach resolution through the end of 2019 or the early 2020. Moving to slide 5, I'll discuss the progress being made on simplifying our product portfolio. Those of you who participated in prior calls know that we reduced the number of ATM configurations we were selling in 2018, and we're targeting a further reduction of 30% for 2019. This enables the company to streamline our supply chain, and we have already benefited from a reduction in lead times.

I think food security in a smaller footprint.

The the industry's most offices increased flexibility.

Personalization and branding.

We have received strong positive feedback from 18 different customers talk customers and the financial benefits to do yet.

We were automating against and reporting and response by connecting more terminals to the D. and connect data engine.

That's the only reason gaza's intelligence from a number of sensors in the ATM and not lose performance information to the cloud where the data is that right.

Based on activity to date.

We believe the old connect data engine.

Would enable the company to reduce <unk> by approximately 20%.

As a result of these initiatives, we are improving service levels in many countries.

Gerrard Schmid: We continue to optimize our manufacturing footprint by consolidating sub-scale facilities and shifting production to lower cost locations. Those actions, along with our bidding discipline, are driving meaningful product gross margin expansion for the quarter and year to date. Looking to the future, we are enthusiastic about delivering the next generation of banking solutions, which we've branded the DN Series. This product family is the culmination of meaningful investments in consumer research, design, engineering resources, and tooling. Key benefits and features of the DN Series include improving ATM availability and performance using advanced sensor technology, machine learning, and connectivity to the DN AllConnect Data Engine. Facilitating automated cash management via next-generation cash recycling technology. Integrating the Vynamic software suite, which includes integration with mobile devices and support for biometrics. Providing a clear modular upgrade path for our customers as their needs evolve.

Additionally, we are rolling off value based pricing policies.

The age of the ATM.

Our key performance indicators across the services business on fracking wells.

During the second quarter, we continued to maintain its services renewal rate solidly above our 95% target.

I contract base of 80 items declined modestly to approximately 622000.

As we exit.

Margin account.

A key financial metrics in the gross services margin.

Which increased 480 490 basis points year over year.

We saw strong year over year gross margin gains in Germany, the United Kingdom, Italy, Spain, Brazil, Mexico and several other countries.

This is the fourth consecutive quarter of year on year service margin expansion.

Q2 margin was the second highest level since be bold and next door combined.

Our results coupled with a strong engagement from a services team is highly encouraging.

It provides the confidence.

To increase 2021 target.

Gerrard Schmid: Simplifying and streamlining our supply chain and offering a longer-term path to substantially standardizing our platforms globally. Increasing node capacity, processing power, and improved security in a smaller footprint. The DN Series also offers increased flexibility for personalization and branding. We have received strong, positive feedback from 18 different customers who are piloting these terminals in 13 countries. On slide 6, we've provided an update of our services modernization plan. Since launching this initiative in Q3 2018, we have upgraded more than 20,000 customer touchpoints, which were generating a higher volume of service calls and required more spare parts. Our actions are driving a performance benefit to our customers and a financial benefit to DN. We are automating incident reporting and response by connecting more terminals to the DN AllConnect Data Engine.

The range of 28% to 29% gross margins.

On slide seven I will describe our progress to further reduce selling general administrative expenses.

Yeah, Hi, its organization, we continue to lay the groundwork for centralizing, our accounting processes, making greater use of shared services and increasing automation.

Our information technology leaders, signing new agreements during the quarter to deploying you cloud based solutions.

We've also reduced spend on those value discretionary projects and legacy applications.

Using analytics, we have identified significant savings opportunities from consolidating and reducing the company's spend with third parties.

About 18 years within the company and ownership of this initiative.

And we are methodically tracking our progress on the bottom of this slide you can see the steady improvement and asked you name it both in absolute dollars and as a percent of revenue over a trailing 12 month period.

Gerrard Schmid: The solution gathers intelligence from a number of sensors in the ATM and uploads performance information to the cloud where the data is analyzed. Based on activity to date, we believe the AllConnect Data Engine could enable the company to reduce call rates by approximately 20%. As a result of these initiatives, we are improving service levels in many countries. Additionally, we are rolling out value-based pricing policies linked to the age of the ATMs. Our key performance indicators across the services business are tracking well. During Q2, we continued to maintain a services renewal rate solidly above our 95% target. Our contract base of ATMs declined modestly to approximately 622,000 as we exit low-margin accounts. Our key financial metric is the gross services margin, which increased 490 basis points year-over-year, reaching 26% in Q2.

The chart shows that we brought down non-GAAP <unk> expense.

By about $40 million versus this time last year.

Which equates to nearly a full percentage point about annual revenue.

Our progress and our clients give us confidence.

Your name adoptions, and we're maintaining our target of 13% to 14% revenue 2021.

In summary, our second quarter results demonstrate solid execution from the leadership team and good alignment on our priorities.

Based upon our year to date performance, we are raising our outlook.

Ian about prior ranges.

Revenue and adjusted EBITDA.

We're also increasing.

So a lot of positive.

Which Jeff will detail in a few minutes.

And now I'll hand, the call over to John .

Thank you Ryan and good morning, everyone.

During the second quarter, we made substantial progress towards value creation.

Gerrard Schmid: We saw strong year-over-year gross margin gains in Germany, United Kingdom, Italy, Spain, Brazil, Mexico, and several other countries. This is the fourth consecutive quarter of year-on-year service margin expansion, and our Q2 margin was the second highest level since Diebold and Nixdorf combined. Our results, coupled with the strong engagement from our services team, is highly encouraging and provides the confidence to increase our 2021 target to a range of 28% to 29% gross margins. On slide seven, I'll describe our progress to further reduce selling, general, and administrative expenses. In our finance organization, we continue to lay the groundwork for centralizing our accounting processes, making greater use of shared services, and increasing automation. Our information technology leaders signed new agreements during the quarter to deploy new cloud-based solutions, which will upgrade a number of our fragmented legacy systems.

[noise] played by our second quarter resolved.

That progress to date gives us the confidence to raise our outlook for 2019.

For my prepared remarks today, I will center on a non-GAAP metrics unless otherwise noted.

On slide eight we provided a year over year revenue comparison for our three segments.

And business lines.

Well Thats reported and on a constant currency basis.

Collectively foreign currencies, where that led to revenues of approximately four percentage points during the quarter or about $41 million.

Revenue growth.

Yeah delivered revenue gains of 14% and American banking sectors that retail.

With respect to our business line product revenue increased 25% in constant currency.

He like Ross in banking and retail.

Gerrard Schmid: We've also reduced spend on low-value discretionary IT projects and legacy applications. Using analytics, we have identified significant savings opportunities from consolidating and reducing the company's spend with third parties. About 80 leaders within the company have ownership of this initiative, and we are methodically tracking our progress. Our focus is yielding results as we reduce third-party spend by about $60 million in the last six months, with meaningful reductions in logistics, temporary labor, and consulting services. Additionally, we continue to consolidate our real estate footprint. During Q2, we made progress in Asia by closing offices in Sydney and Bangkok.

The decline in service revenue of 1% is largely attributable to the divesture of our cash in transit.

And very modest reductions in banking.

Software revenue was down 3% versus the prior year.

Virtually all of the decline stemming from the divestiture of a European project Manger managing that.

Sure.

On slide nine.

We're showing that financial highlights for all three segments.

Starting with the range of banking revenue increased 4% in constant currency to $430 million during the second quarter due primarily to strong product growth.

Gerrard Schmid: On the bottom of the slide, you can see the steady improvements in SG&A, both in absolute dollars and as a percent of revenue over a trailing 12-month period. The chart shows that we've brought down our non-GAAP SG&A expense by about $40 million versus this time last year, which equates to nearly a full percentage point of annual revenue. Our progress and our plans give us confidence in further SG&A reductions, and we're maintaining our target of 13% to 14% revenue by 2021. In summary, our Q2 results demonstrate solid execution from the leadership team and good alignment on our priorities. Based upon our year-to-date performance, we are raising our outlook to the high end of our prior ranges for revenue and Adjusted EBITDA. We are also increasing our free cash flow outlook to modest positive, which Jeff will detail in a few minutes.

Services revenue was down slightly due to higher or lower contract revenue and a divesture in New York.

Software revenue was down slightly.

Primarily due to the previously mentioned divestiture.

non-GAAP operating profit increased from $18 million last year to $39 million.

And ER or.

Virtually all of these improvements can be attributed to our D N out initiatives.

Which were partially offset by modest headwinds from inflation.

A $3 million in foreign currency of $2 million when compared with the prior year.

Revenue in the quarter decline modestly year on year on year, due primarily to a slightly lower contract base.

Gerrard Schmid: Now I'll hand the call over to Jeff.

Jeffrey Rutherford: Thank you, Gerhard, and good morning, everyone. During Q2, we made substantial progress towards value creation, as displayed by our Q2 results. That progress to date gives us the confidence to raise our outlook for 2019. For my prepared remarks today, I will center on the non-GAAP metrics unless otherwise noted. On slide 8, we've provided a year-over-year revenue comparison for our three segments and business lines, both as reported and on a constant currency basis. Collectively, foreign currencies were a headwind to revenue of approximately 4 percentage points during the quarter or about $41 million versus the prior year, primarily due to the US dollar strengthening against the euro, and to a lesser extent against the Brazilian real, and the British pound. I'll speak to the currency-adjusted growth rates unless otherwise noted, as they provide a more meaningful comparison.

Jeff Rutherford: Thank you, Gerhard, and good morning, everyone. During Q2, we made substantial progress towards value creation, as displayed by our Q2 results. That progress to date gives us the confidence to raise our outlook for 2019. For my prepared remarks today, I will center on the non-GAAP metrics unless otherwise noted. On slide 8, we've provided a year-over-year revenue comparison for our three segments and business lines, both as reported and on a constant currency basis. Collectively, foreign currencies were a headwind to revenue of approximately 4 percentage points during the quarter or about $41 million versus the prior year, primarily due to the US dollar strengthening against the euro, and to a lesser extent against the Brazilian real, and the British pound. I'll speak to the currency-adjusted growth rates unless otherwise noted, as they provide a more meaningful comparison.

Product revenue growth, coupled with significant product margin expansion, resulting from favorable mix of cash recyclers and lower freight costs versus the prior year.

Gross service margin expansion from our services modernization plan.

In the year ago period.

The lower operating expenses, resulting from our D N O initiatives.

Our retail segment generated revenue growth of 6% in constant currency to $300 million in the second quarter with solid contributions from products and modest contributions from services and software.

We are growing retail revenue in both EMEA and Asia.

Operating profit increased from $6 million to $16 million.

Due to a combination of product revenue growth as well as higher service and software margins.

Currency and inflation provide a modest offset to operating profit versus the prior year.

We provide a euro.

Jeffrey Rutherford: Revenue increased 8% in constant currency during the quarter. Factoring in our previously disclosed divestitures, revenue growth would've been about a point higher versus the prior year. DN delivered revenue gains of 14% in Americas Banking, 6% for retail, and 4% for Eurasia Banking. With respect to our business lines, product revenue increased 25% in constant currency, fueled by growth in banking and retail. The decline in service revenue of 1% is largely attributable to the divestiture of our cash-in-transit business and very modest reductions in banking. Software revenue was down 3% versus the prior period, with virtually all of the decline stemming from the divestiture of a European project management services business. On slide nine, we are showing the financial highlights for all three segments.

Jeff Rutherford: Revenue increased 8% in constant currency during the quarter. Factoring in our previously disclosed divestitures, revenue growth would've been about a point higher versus the prior year. DN delivered revenue gains of 14% in Americas Banking, 6% for retail, and 4% for Eurasia Banking. With respect to our business lines, product revenue increased 25% in constant currency, fueled by growth in banking and retail. The decline in service revenue of 1% is largely attributable to the divestiture of our cash-in-transit business and very modest reductions in banking. Software revenue was down 3% versus the prior period, with virtually all of the decline stemming from the divestiture of a European project management services business. On slide nine, we are showing the financial highlights for all three segments.

But also as a result of higher service and delivery costs recorded in the second quarter of 2018, which did not recur.

Foreign currency headwinds were approximately $8 million versus the prior year.

non-GAAP gross margin increased approximately 390 basis points to 24.4%.

Which is our best performance since the third quarter of 2017.

Product gross margin exceeded 20% for the second consecutive quarter and reflects a mix benefit as well as the value of our highly automated and robotic plant in pad aboard.

This is a side note that our planned padded born as a.

Critical asset too.

To our operating model and they've done a great job.

Jeffrey Rutherford: Starting with Eurasia Banking, revenue increased 4% in constant currency to $430 million during Q2, due primarily to strong product growth from customers in Europe, the Middle East, and Africa. Services revenue was down slightly due to lower contract revenue and a divestiture in Europe. Software revenue was down slightly due primarily to the previously mentioned divestitures. Non-GAAP operating profit increased from $18 million last year to $39 million in the current quarter as we delivered higher gross margins for services, products, and software and reduced our operating expenses. Virtually all of these improvements can be attributed to our DN Now initiatives, which were partially offset by modest headwinds from inflation of $3 million and foreign currency of $2 million when compared with the prior year.

Jeff Rutherford: Starting with Eurasia Banking, revenue increased 4% in constant currency to $430 million during Q2, due primarily to strong product growth from customers in Europe, the Middle East, and Africa. Services revenue was down slightly due to lower contract revenue and a divestiture in Europe. Software revenue was down slightly due primarily to the previously mentioned divestitures. Non-GAAP operating profit increased from $18 million last year to $39 million in the current quarter as we delivered higher gross margins for services, products, and software and reduced our operating expenses. Virtually all of these improvements can be attributed to our DN Now initiatives, which were partially offset by modest headwinds from inflation of $3 million and foreign currency of $2 million when compared with the prior year.

And continued to do a great job.

As mentioned during his segment level comments, Vietnam initiatives were the primary driver of lower operating expenses.

The $14 million reduction versus the prior year includes about $3 million of increased expense from a legacy Wincor stop stock option plan.

On a bad bottom half of the slide real estate, we illustrate the terrific progress we've made to increase profitability.

Operating profit increased $69 million during the quarter to $74 million and operating margin increased 590 basis points to 6.4%.

Adjusted EBITDA increased by $66 million to $107 million, while the adjusted EBITDA margin expanded by 560 basis points to 9.3%.

These results reflect.

Good execution of our D N now initiatives.

Jeffrey Rutherford: For Americas Banking segment, revenue increased 14% in constant currency to $420 million, led by strong product growth from Windows 10 upgrades, continued demand for cash recyclers, and the resolution of supply chain issues, which impacted Q2 2018 results. Service revenue in the quarter declined modestly year-on-year, due primarily to a slightly lower contract base. Operating profit increased from a loss of $3 million one year ago to $33 million in the quarter, due to the following factors, product revenue growth, coupled with significant product margin expansion resulting from favorable mix of cash recyclers and lower freight costs versus the prior year, gross service margin expansion from our services modernization plan and favorable comparison resulting from a one-time expense of approximately $6 million in the year ago period, and the lower operating expenses resulting from our DN Now initiatives.

Jeff Rutherford: For Americas Banking segment, revenue increased 14% in constant currency to $420 million, led by strong product growth from Windows 10 upgrades, continued demand for cash recyclers, and the resolution of supply chain issues, which impacted Q2 2018 results. Service revenue in the quarter declined modestly year-on-year, due primarily to a slightly lower contract base. Operating profit increased from a loss of $3 million one year ago to $33 million in the quarter, due to the following factors, product revenue growth, coupled with significant product margin expansion resulting from favorable mix of cash recyclers and lower freight costs versus the prior year, gross service margin expansion from our services modernization plan and favorable comparison resulting from a one-time expense of approximately $6 million in the year ago period, and the lower operating expenses resulting from our DN Now initiatives.

Product revenue growth as well as higher service and delivery costs.

Incurred in the prior year period, which did not recur.

Moving to slide 11.

We summarize our actions and progress on harvesting networking capital.

With respect to receivables, we are centralizing, our governance and improving our processes.

With regular account reviews and past due accounts.

These actions are producing favorable were favorable results our collections increased 7% during the second quarter when compared to the prior year period, and I have to say that that the big piece of this is the coordination we're getting between our.

Segment groups, and our financial groups and they've done a great job for the company over the last.

Six to nine months.

I would have to say nine months team has revamped our inventory management program by establishing clear accountability and targets for finished goods and raw materials and spare parts.

Jeffrey Rutherford: Our retail segment generated revenue growth of 6% in constant currency to $300 million in Q2, with solid contributions from products and modest contributions from services and software. We are growing retail revenue in both EMEA and Asia Pacific. Operating profit increased from $6 million to $16 million due to a combination of product revenue growth as well as higher service and software margins. Currency and inflation provide a modest offset to operating profit versus the prior year. On slide 10, we provide a year-over-year comparison of our profit metrics. Non-GAAP gross profit increased $54 million year over year due primarily to the DN Now productivity gains and cost reductions. Also as a result of higher service and delivery costs recorded in Q2 of 2018, which did not recur.

Jeff Rutherford: Our retail segment generated revenue growth of 6% in constant currency to $300 million in Q2, with solid contributions from products and modest contributions from services and software. We are growing retail revenue in both EMEA and Asia Pacific. Operating profit increased from $6 million to $16 million due to a combination of product revenue growth as well as higher service and software margins. Currency and inflation provide a modest offset to operating profit versus the prior year. On slide 10, we provide a year-over-year comparison of our profit metrics. Non-GAAP gross profit increased $54 million year over year due primarily to the DN Now productivity gains and cost reductions. Also as a result of higher service and delivery costs recorded in Q2 of 2018, which did not recur.

Inventory was a source of cash in the second quarter.

And that's another area, where the combination of manufacturing services and the segments have done a fabulous job of managing our inventory investment.

Both our capital Committee and our indirect spend decision making.

Our $60 million reduction in cash disbursements during the second quarter.

Up to now 2019 is a key indicator of our progress.

It impacts the level of our accounts payable, but certainly helps on the cash flow from.

The main takeaways are meaningful changes are building a sustainable net working capital process and are delivering results more quickly than we envisioned.

Net working capital as a percentage of revenue declined from 22.8% in the year ago period to 17.7% in the second quarter of 2019.

Jeffrey Rutherford: Foreign currency headwinds were approximately $8 million versus the prior year. Non-GAAP gross margin increased approximately 390 basis points to 24.4%, which is our best performance since Q3 2017. Product gross margin exceeded 20% for the second consecutive quarter and reflects a mixed benefit, as well as the value of our highly automated and robotic plant in Paderborn. Just as a side note, that our plant in Paderborn is a critical asset to our operating model, and they've done a great job and continue to do a great job. As mentioned during the segment level comments, DN Now initiatives were the primary driver of lower operating expenses. The $14 million reduction versus the prior year includes about $3 million of increased expense from a legacy Wincor stock option plan. On the bottom half of this slide, we illustrate the terrific progress we've made to increase profitability.

Jeff Rutherford: Foreign currency headwinds were approximately $8 million versus the prior year. Non-GAAP gross margin increased approximately 390 basis points to 24.4%, which is our best performance since Q3 2017. Product gross margin exceeded 20% for the second consecutive quarter and reflects a mixed benefit, as well as the value of our highly automated and robotic plant in Paderborn. Just as a side note, that our plant in Paderborn is a critical asset to our operating model, and they've done a great job and continue to do a great job. As mentioned during the segment level comments, DN Now initiatives were the primary driver of lower operating expenses. The $14 million reduction versus the prior year includes about $3 million of increased expense from a legacy Wincor stock option plan. On the bottom half of this slide, we illustrate the terrific progress we've made to increase profitability.

This is our best performance since the combination of the companies.

Slide 12 describes our improvements in free cash flow for the second quarter free cash use was $16 million a decrease from $109 million versus the prior year period.

The most meaningful contributions to free cash flow our stroke, our strong growth in adjusted EBITDA and continued harvesting of networking capital.

Lower integration payments in the quarter were essentially offset by higher restructuring payments.

Interest expense was about $20 million more than the prior year period.

On an unlevered basis, the company produced positive cash flow of $34 million in the second quarter.

On a year to date basis free cash use decreased by $200 million in the first half of 2019.

An unlevered cash flow improved by approximately $246 million versus the prior year.

On a trailing 12 month basis, we delivered positive free cash flow of $37 million.

Jeffrey Rutherford: Operating profit increased $69 million during the quarter to $74 million, and operating margin increased 590 basis points to 6.4%. Adjusted EBITDA increased by $66 million to $107 million, while the adjusted EBITDA margin expanded by 560 basis points to 9.3%. These results reflect good execution of our DN Now initiatives, product revenue growth, as well as higher service and delivery costs incurred in the prior year period, which did not recur. Moving to slide 11. We summarize our actions and progress on harvesting net working capital. With respect to receivables, we are centralizing our governance and improving our processes with regular account reviews and past due accounts. These actions are producing favorable results. Our collections increased 7% during Q2 when compared to the prior year period.

Jeff Rutherford: Operating profit increased $69 million during the quarter to $74 million, and operating margin increased 590 basis points to 6.4%. Adjusted EBITDA increased by $66 million to $107 million, while the adjusted EBITDA margin expanded by 560 basis points to 9.3%. These results reflect good execution of our DN Now initiatives, product revenue growth, as well as higher service and delivery costs incurred in the prior year period, which did not recur. Moving to slide 11. We summarize our actions and progress on harvesting net working capital. With respect to receivables, we are centralizing our governance and improving our processes with regular account reviews and past due accounts. These actions are producing favorable results. Our collections increased 7% during Q2 when compared to the prior year period.

Which is the first time, a cot accomplishments since diebold and mix or nixdorf combined.

As we stated in the past the leadership team is proactively managing our liquidity and capital structure.

So the last slot left of slide 13.

You will see key liquidity metrics as of the end of December and as of the end of June .

Year to date that the client decline in cash is primarily the result of $97 million of restricted cash paid to the D. bold Nixdorf AG minority shareholders.

88 million of free cash use and reduce borrowings on the revolver.

Our net debt is approximately 1.9 billion, which translates to a leverage ratio ratio of approximately five times net debt to trailing 12 month adjusted EBITDA.

We have reduced this ratio by a half churn over the past six months.

Jeffrey Rutherford: I have to say that the big piece of this is the coordination we're getting between our segment groups and our financial groups, and they've done a great job for the company over the last six to nine months. I would have to say nine months. The team has revamped our inventory management program by establishing clear accountability and targets for finished goods, raw materials, and spare parts. Inventory was a source of cash in Q2, and that's another area where the combination of manufacturing, services, and the segments have done a fabulous job of managing our inventory investment. On the payables front, we've implemented new processes and centralized both our capital committee and our indirect spend decision-making. Our $60 million reduction in cash disbursements during Q2 of 2019 is a key indicator of our progress.

Jeff Rutherford: I have to say that the big piece of this is the coordination we're getting between our segment groups and our financial groups, and they've done a great job for the company over the last six to nine months. I would have to say nine months. The team has revamped our inventory management program by establishing clear accountability and targets for finished goods, raw materials, and spare parts. Inventory was a source of cash in Q2, and that's another area where the combination of manufacturing, services, and the segments have done a fabulous job of managing our inventory investment. On the payables front, we've implemented new processes and centralized both our capital committee and our indirect spend decision-making. Our $60 million reduction in cash disbursements during Q2 of 2019 is a key indicator of our progress.

Even as a nonrecurring payment to Deanne AG shareholders additive about 0.3 times to this ratio.

By executing our D. N now initiatives. The company is is on a much stronger footing.

The same time, we held a number of constructive conversations with their lenders about our business, Dan now and our outlook.

With the added benefit of favorable capital market conditions.

This is an opportunistic time to begin the process of amending and extending our revolving credit facility and our term loan anyway.

Which mature in December of 2020.

Last week, we launched the private side discussions with our banks.

And we are very satisfied with the commitments we have received today.

We want to publicly thank our banks for their continued support.

Jeffrey Rutherford: It impacts the level of our accounts payable, but certainly helps on the cash flow front. The main takeaway is that our meaningful changes are building a sustainable net working capital process and are delivering results more quickly than we envisioned. Net working capital as a percentage of revenue declined from 22.8% in the year ago period to 17.7% in Q2 2019. This is our best performance since the combination of the companies. Slide 12 describes our improvements in free cash flow. For Q2, free cash use was $16 million, a decrease of $109 million versus the prior year period. The most meaningful contributions to free cash flow are strong growth in Adjusted EBITDA and continued harvesting of net working capital. Lower integration payments in the quarter were essentially offset by higher restructuring payments.

Jeff Rutherford: It impacts the level of our accounts payable, but certainly helps on the cash flow front. The main takeaway is that our meaningful changes are building a sustainable net working capital process and are delivering results more quickly than we envisioned. Net working capital as a percentage of revenue declined from 22.8% in the year ago period to 17.7% in Q2 2019. This is our best performance since the combination of the companies. Slide 12 describes our improvements in free cash flow. For Q2, free cash use was $16 million, a decrease of $109 million versus the prior year period. The most meaningful contributions to free cash flow are strong growth in Adjusted EBITDA and continued harvesting of net working capital. Lower integration payments in the quarter were essentially offset by higher restructuring payments.

Today, we have scheduled a call with qualified public lenders for noon eastern time.

Interested parties should contact our agent JP Morgan.

To request an invitation to join.

On slide 14, we update our outlook for 2019 and the key drivers.

We now expect to generate revenue of $4.5 billion, which is at the high end of our prior range and reflects a modest year on year decline due to currency headwinds moderate declines in Eurasia banking.

As well as modest growth in Americas banking and retail.

Our updated range for range for adjusted EBITDA is $400 million to $420 million, which is at the high end of our prior range and includes approximately $175 million of DNL savings.

Large partially offsetting those savings or about $60 million of inflation and normalized comp compensation net of expected benefits from divestitures.

Jeffrey Rutherford: Interest expense was about $20 million more than the prior year period. On an unlevered basis, the company produced positive cash flow of $34 million in Q2. On a year-to-date basis, free cash use decreased by $200 million in H1 2019, and unlevered cash flow improved by approximately $246 million versus the prior year. On a trailing 12-month basis, we delivered positive free cash flow of $37 million, which is the first accomplishment since Diebold Nixdorf combined. As we stated in the past, the leadership team is proactively managing our liquidity and capital structure. To the left of slide 13, you'll see key liquidity metrics as of the end of December and as of the end of June.

Jeff Rutherford: Interest expense was about $20 million more than the prior year period. On an unlevered basis, the company produced positive cash flow of $34 million in Q2. On a year-to-date basis, free cash use decreased by $200 million in H1 2019, and unlevered cash flow improved by approximately $246 million versus the prior year. On a trailing 12-month basis, we delivered positive free cash flow of $37 million, which is the first accomplishment since Diebold Nixdorf combined. As we stated in the past, the leadership team is proactively managing our liquidity and capital structure. To the left of slide 13, you'll see key liquidity metrics as of the end of December and as of the end of June.

As well as approximately $25 million of benefits, which occurred in 2018.

Our free cash flow outlook for 2019 as improved from breakeven to a modest modest positive includes the following expectations.

Net working capital cash flow of about $100 million.

Net interest expense of approximately $190 million, excluding any impact from our refinancing.

Restructuring payments of approximately $120 million.

Approximately 70 million of capital expenditures $60 million of cash taxes.

And $40 million of other cash uses.

Well, we do not provide quarterly guidance I would like to comment on the seasonal trends in our business.

Specifically, we anticipate third quarter revenue will decrease modestly on a sequential basis and adjusted EBITDA to be slightly more than our second quarter results.

Jeffrey Rutherford: Year to date, the decline in cash is primarily the result of $97 million of restricted cash paid to the Diebold Nixdorf AG minority shareholders, $88 million of free cash use, and reduced borrowings on the revolver. Our net debt is approximately $1.9 billion, which translates to a leverage ratio of approximately five times net debt to trailing 12-month adjusted EBITDA. We've reduced this ratio by a half turn over the past six months. Even as our non-recurring payment to DNAG shareholders added about 0.3 times to this ratio. By executing our DN Now initiatives, the company is on a much stronger footing. At the same time, we've held a number of constructive conversations with our lenders about our business, DN Now, and our outlook.

Jeff Rutherford: Year to date, the decline in cash is primarily the result of $97 million of restricted cash paid to the Diebold Nixdorf AG minority shareholders, $88 million of free cash use, and reduced borrowings on the revolver. Our net debt is approximately $1.9 billion, which translates to a leverage ratio of approximately five times net debt to trailing 12-month adjusted EBITDA. We've reduced this ratio by a half turn over the past six months. Even as our non-recurring payment to DNAG shareholders added about 0.3 times to this ratio. By executing our DN Now initiatives, the company is on a much stronger footing. At the same time, we've held a number of constructive conversations with our lenders about our business, DN Now, and our outlook.

During the fourth quarter, we expect both revenue and adjusted EBITDA will reach the high watermark for 2019.

Additionally, our free cash flow cadence is expected to follow normal seasonal trends.

And that the company will generate significant free cash flow in the fourth quarter.

And now I'll hand, the call back to the operator, and we can begin our Q an acre.

Thank you, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad now if you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.

We'll pause for just a moment to allow everyone an opportunity to signal for questions.

And our first question will come from Matt Summerville with D.A. Davidson.

Well good morning couple of questions first I was a little surprised to the positive side of things to see your Eurasia banking business re accelerated here in Q2 as well as seen decent order intake do you feel that this is a sustainable inflection and can you dig a little deeper in terms of what you're seeing in the business will what's driving.

Jeffrey Rutherford: With the added benefit of favorable capital market conditions, this is an opportunistic time to begin the process of amending and extending our revolving credit facility and our Term Loan A, which mature in December 2020. Last week, we launched the private side discussions with our banks, and we are very satisfied with the commitments we have received to date. We want to publicly thank our banks for their continued support. Today, we have scheduled a call with qualified public lenders for 12:00 p.m. Eastern Time. Interested parties should contact our agent, JP Morgan, to request an invitation to join. On slide 14, we update our outlook for 2019 and the key drivers.

Jeff Rutherford: With the added benefit of favorable capital market conditions, this is an opportunistic time to begin the process of amending and extending our revolving credit facility and our Term Loan A, which mature in December 2020. Last week, we launched the private side discussions with our banks, and we are very satisfied with the commitments we have received to date. We want to publicly thank our banks for their continued support. Today, we have scheduled a call with qualified public lenders for 12:00 p.m. Eastern Time. Interested parties should contact our agent, JP Morgan, to request an invitation to join. On slide 14, we update our outlook for 2019 and the key drivers.

Turning to the upside there.

Yeah, Good morning, Matt and thanks for the question.

Well I think there's two drivers unfolding as I mentioned in my prepared remarks as it relates to Asia Pacific. It really was quite a headwind for us over the past few quarters as we adopted a more disciplined approach to pricing and as that calendar rises in washes through were seeing less headwind in less impact from that in Asia.

The more positive side for us is the sequence of events unfolding.

In EMEA, specifically Western Europe , Middle East and Africa, we're continue to see.

Broad and decent demand starting to emerge from those markets specifically around Windows 10 upgrades. If you think back to some of the comments I've made in prior quarters, Matt We had signaled that we anticipated Europe to lag the Americas and we're now starting to see that growth to emerge.

Jeffrey Rutherford: We now expect to generate revenue of $4.5 billion, which is the high end of our prior range and reflects a modest year-on-year decline due to currency headwinds, moderate declines in Eurasia Banking, as well as modest growth in Americas Banking and retail. Our updated range for Adjusted EBITDA is $400 to $420 million, which is at the high end of our prior range and includes approximately $175 million of DN Now savings. Partially offsetting those savings are about $60 million of inflation and normalized compensation net of expected benefits from divestitures, as well as approximately $25 million of benefits which occurred in 2018. Our free cash flow outlook for 2019 has improved from break even to a modest positive and includes the following expectations. Net working capital cash flow of about $100 million. Net interest expense of approximately $190 million, excluding any impact from our refinancing.

Jeff Rutherford: We now expect to generate revenue of $4.5 billion, which is the high end of our prior range and reflects a modest year-on-year decline due to currency headwinds, moderate declines in Eurasia Banking, as well as modest growth in Americas Banking and retail. Our updated range for Adjusted EBITDA is $400 to $420 million, which is at the high end of our prior range and includes approximately $175 million of DN Now savings. Partially offsetting those savings are about $60 million of inflation and normalized compensation net of expected benefits from divestitures, as well as approximately $25 million of benefits which occurred in 2018. Our free cash flow outlook for 2019 has improved from break even to a modest positive and includes the following expectations. Net working capital cash flow of about $100 million. Net interest expense of approximately $190 million, excluding any impact from our refinancing.

In markets like Germany in markets like.

The Middle East Africa, and I think that those look like they are starting to take hold in a nice way. So overall were feeling fairly confident around our medium term outlook around.

Demand from from those markets in particular.

And then as a follow up you mentioned in your prepared remarks on the services side that you're launching.

A sort of a.

A different pricing strategy can you talk about what sort of customer feedback you've received on that strategy and ultimately is it should we view this essentially as you being able to go out with pricing power and in fact to get better.

Better pricing.

Yeah. So mass. These are actually said several initiatives that we launched a few months back and we're waiting to see what sort of feedback we were going to get from the market.

And we were looking at what we consider a value based pricing.

Jeffrey Rutherford: Restructuring payments of approximately $120 million. Approximately $70 million of capital expenditures, $60 million of cash taxes, and $40 million of other cash uses. While we do not provide quarterly guidance, I would like to comment on the seasonal trends in our business. Specifically, we anticipate Q3 revenue will decrease modestly on a sequential basis and Adjusted EBITDA to be slightly more than our Q2 results. During Q4, we expect both revenue and Adjusted EBITDA will reach the high water mark for 2019. Additionally, our free cash flow cadence is expected to follow normal seasonal trends and that the company will generate significant free cash flow in Q4. Now I'll hand the call back to the operator and we can begin our Q&A period.

Jeff Rutherford: Restructuring payments of approximately $120 million. Approximately $70 million of capital expenditures, $60 million of cash taxes, and $40 million of other cash uses. While we do not provide quarterly guidance, I would like to comment on the seasonal trends in our business. Specifically, we anticipate Q3 revenue will decrease modestly on a sequential basis and Adjusted EBITDA to be slightly more than our Q2 results. During Q4, we expect both revenue and Adjusted EBITDA will reach the high water mark for 2019. Additionally, our free cash flow cadence is expected to follow normal seasonal trends and that the company will generate significant free cash flow in Q4. Now I'll hand the call back to the operator and we can begin our Q&A period.

Tied broadly to the age of the machines and the amount of service calls that we incur by age and machine.

We've seen very good market receptivity to that approach specifically in the Americas.

In Europe , it's been a little bit more mixed depending on the different markets in which we operate but we do see it as a net positive for us as we drive towards higher services margins.

And I think that what we're trying to do and I think we've been sharing this quite a openly with the streets, we'd be looking to expand our services margins and in light of the momentum that we've seen over the past four quarters hitting a high watermark of 26% gross margins in Q2, we are feeling.

Confident that we're going to increase our longer term outlook to 28% to 29% in part due to the the pricing initiative as well as other productivity initiatives that we have in flight.

Operator 2: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing *1 on your telephone keypad now. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from Matt Summerville with D.A. Davidson.

Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing *1 on your telephone keypad now. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from Matt Summerville with D.A. Davidson.

Thank you I'll get back in queue.

Thank you.

Our next question comes from Josh Beck with Keybanc.

Thank you for taking the question I know that you talked about the order growth.

It looks like it accelerated nicely from Q1 any other color you can share.

On things like book to Bill or backlog and maybe how that impacts your visibility as we think about the 2021.

Matt Summerville: Morning. Couple questions. First, I was a little surprised on the positive side of things to see your Eurasia Banking business re-accelerated here in Q2, as well as seeing decent order intake. Do you feel that this is a sustainable inflection, and can you dig a little deeper in terms of what you're seeing in the business? What's driving the turn to the upside there?

Framework, you provided on 2% to 4% growth over that period.

Yeah, Good morning, Josh.

The first thing I'd say is that.

This is not an industry that has long term visibility into.

Order activity, so I wouldn't be in a position to give you a perspective on 2021 at this stage. So my comments are going to be more near term focused.

Gerrard Schmid: Yeah. Good morning, Matt, and thanks for the question. I think there's 2 drivers unfolding. As I mentioned in my prepared remarks, as relates to Asia Pacific, it really was quite a headwind for us over the past few quarters as we adopted a more disciplined approach to pricing. As that calendarizes and washes through, we're seeing less headwind and less impact from that in Asia. The more positive side for us is the sequence of events unfolding in EMEA, specifically Western Europe, Middle East, and Africa. We're continuing to see broad and decent demand starting to emerge from those markets, specifically around Windows 10 upgrades.

As it relates to backlog I'd say our backlog.

Tapered off modestly in the quarter, but not anything that would give us any cause for.

Concern whatsoever.

I think it's just more of a seasonal pattern that weve been working through.

And as we take a look at the.

Large markets, where we see very large dollar volume.

Orders our pipeline is looking very very healthy and as we look at.

Activities through the back half of the year and into the early part of 2020.

Book to Bill ratio is pretty consistent and broadly stable. So I don't think there's anything incremental I'd add on that comment.

Gerrard Schmid: If you think back to some of the comments I've made in prior quarters, Matt, we had signaled that we anticipated Europe to lag the Americas, and we're now starting to see that growth emerge in markets like Germany, in markets like the Middle East and Africa, and I think that those look like they're starting to take hold in a nice way. Overall, we're feeling fairly confident around our medium-term outlook around demand from those markets in particular.

Okay. Thank you and.

Following up on the <unk>.

The last highlight that you made around services gross margin, we're confident to kind of review and quantifying that.

The 20 829 range.

Does that also fall through to operating margin and EBITDA margin long term or are there other offsets when we think about the.

Longer term margin model.

No no Josh when we model that out that that comes right down to EBITDA.

Matt Summerville: As a follow-up, you mentioned in your prepared remarks on the services side that you're launching a different pricing strategy. Can you talk about what sort of customer feedback you've received on that strategy? Ultimately, should we view this essentially as you being able to go out with pricing power and in fact get better?

Directly out of gross margin, there's nothing there's nothing offsetting that.

Okay and then just last question if I could just.

The state of Windows 10, and obviously, that's been a I think a positive.

Cycle in a nice tailwind this year.

Do you feel like it's.

It has legs to it to or maybe you could just describe the.

Gerrard Schmid: Yeah. Matt, these were actually several initiatives that we launched a few months back, and we're waiting to see what sort of feedback we're going to get from the market. We were looking at what we consider value-based pricing tied broadly to the age of the machines and the amount of service calls that we incur by age of machine. We've seen very good market receptivity to that approach, specifically in the Americas. In Europe, it's been a little bit more mixed, depending on the different markets in which we operate. We do see it as a net positive for us as we drive towards higher services margins. I think that what we're trying to do, and I think we've been sharing this quite openly with the streets, we've been looking to expand our services margins.

Tender of discussions.

Be rehabbing bus.

Bakes in Americas or in Europe .

Brown that cycle.

Yeah Josh.

I am going to rewind a listeners of the broader answer I generally give on this when we're having conversations with banks big conversation seldom if ever is purely around when 10 only.

Yes, there are a number of demand factors driving the demands for ATM. So what we are seeing is a very noticeable shift in banks shifting from relying on historical cash dispensing machines towards higher IP more expensive cash recycling machines and the reason what in terms of that particular demand is they're looking to shift more complex small business transactions from the tailored to the ATM at Additionally, looking to use that to reduce their cash and transit costs. So that really is independent from from when 10 activity, but certainly as relevant to dialogue as I wouldn't turn itself. The other key driver. We're seeing is the demand from banks for higher feature function capability, especially as they look to integrate their mobile channels with their ATM channel looking for things like Cardless withdraw transaction. So.

Gerrard Schmid: In light of the momentum that we've seen over the past four quarters, hitting a high-water mark of 26% gross margins in Q2, we're feeling confident that we can increase our longer-term outlook to 28% to 29%, in part due to the pricing initiative as well as other productivity initiatives that we have in flight.

Matt Summerville: Thank you. I'll give it back. Thank you.

Operator 2: Thank you. Our next question comes from Josh Beck with KeyBanc.

Operator: Thank you. Our next question comes from Josh Beck with KeyBanc.

Josh Beck: Thank you for taking the question. I know that you talked about the order growth, and it looks like it accelerated nicely from Q1. Any other color you can share on things like book-to-bill or backlog, and maybe how that impacts your visibility as we think about the 2021 framework you've provided on 2% to 4% growth over that period?

I I'd be very careful around drawing too many conclusions around when 10 alone I think it's it's much more broader demand drivers than just when 10.

Taking a step back from everything I've, just said here that's really why.

We said in our prepared remarks that as we look out over the.

Medium term, we're feeling fairly positive about the banking outlook given that we're seeing ongoing strength in the Americas from the regional banks in particular as well as in Latin America and in Europe , We're seeing strengthening demand in a number of markets in Western Europe , and the Middle East Africa.

Gerrard Schmid: Yeah. Good morning, Josh. The first thing I'd say is that this is not an industry that has long-term visibility into order activity. I wouldn't be in a position to give you a perspective on 2021 at this stage. My comments are going to be more near-term focused. As relates to backlog, I'd say our backlog tapered off modestly in the quarter, but not anything that would give us any cause for concern whatsoever. I think it's just more of a seasonal pattern that we've been working through. As we take a look at the large markets where we see very large dollar volume orders, our pipeline is looking very healthy as we look at activities through the back half of the year and into the early part of 2020.

Thanks for the context I was sure I really appreciate it.

Thank you. Our next question comes from Justin Bergner with the GE research.

Good morning, Gerard good morning, Jeff.

Good morning, Justin.

Nice performance this quarter.

And just to start I guess I wanted to just look at the adjusted EBITDA Bridge.

It seems like the Dia now savings were up by $15 million.

The nonrecurring benefits, which if you could sort of explain a little more that would be helpful were up by 5 million.

Gerrard Schmid: Book-to-bill ratio is pretty consistent and broadly stable, so I don't think there's anything incremental I'd add on that comment.

And the overall midpoint was up to like 20 million. So.

I guess shows upped by I'm, sorry, it was up by 10 million on a slightly higher revenue base. I was just curious what were some of the offsets to those tailwinds.

Josh Beck: Okay. Thank you. Following up on the last highlight that you made around services gross margin and more confidence and kind of raising and quantifying that in the 28 to 29 range, does that also fall through to operating margin and EBITDA margin long term, or are there other offsets when we think about the longer-term margin model?

That might have allowed you know.

Perhaps a higher.

Adjustment to your adjusted EBITDA Guide.

Yeah, So you're asking specifically, what what is the offset that's coming through and.

In a migration of 2018 EBITDA to 2019 and there are some offsets in there and that what we have is when you when you roll that forward, there's going to be a small piece of FX and some level of inflation, that's going to offset.

Jeffrey Rutherford: No, Josh. When we model that out, that comes right down to EBITDA, directly out of gross margin. There's nothing offsetting that.

Jeff Rutherford: No, Josh. When we model that out, that comes right down to EBITDA, directly out of gross margin. There's nothing offsetting that.

Josh Beck: Okay. Just last question, if I could, just on the state of Windows 10, obviously, that's been, I think, a positive cycle and a nice tailwind this year. Do you feel like it has legs to it? Or maybe you could just describe the tenor of discussions that you're having with new banks in Americas or in Europe around that cycle.

And every quarter, we have and it's not substantial but it isn't there. The other thing that's going on in the second quarter is we have a.

The Wincor stock option plan.

That gets adjusted as a cash plan. So it gets adjusted every quarter and and as the stock price moves.

Positively we get hit on the EBITDA line, because that that cost goes up now I hope those guys make a ton of money this year.

Gerrard Schmid: Yeah, Josh. I'm going to remind listeners of the broader answer I generally give on this. When we're having conversations with banks, the conversation seldom, if ever, is purely around Win 10 only. There are a number of demand factors driving the demands for ATMs. What we are seeing is a very noticeable shift in banks shifting from relying on historical cash dispensing machines towards higher ASP, more expensive cash recycling machines. The reason in terms of that particular demand is they're looking to shift more complex small business transactions from the teller to the ATM, and additionally, looking to use that to reduce their cash-in-transit costs. That really is independent from Win 10 activity, but certainly as relevant to dialogue as Win 10 itself.

Between all of US right because when they make a ton of money that means we've done extremely well for our shareholders. So it's a little bit of a barometer of hovered on shareholders. That's one of the pieces of the offset.

But generally speaking what the only things that offset our inflation a little bit about opex and.

Any of these compensation related or.

Programs, we have in that may be tied to the stock.

Okay. That's helpful and then just the nonrecurring benefits.

Help me understand what they are and.

Do they just benefit 19.

Oh, we were when we were talking about the nonrecurring benefit said those are things that came through in 18.

Right that we are and we have an anniversary going on in the first half of this year.

Gerrard Schmid: The other key driver we're seeing is demand from banks for higher feature function capability, especially as they look to integrate their mobile channels with their ATM channel, looking for things like cardless withdrawal transactions. I'd be very careful around drawing too many conclusions around Win 10 alone. I think it's much more broader demand drivers than just Win 10. Taking a step back from everything I've just said here, that's really why we've said in our prepared remarks that as we look out over the medium term, we're feeling fairly positive about the banking outlook, given that we're seeing ongoing strength in the Americas from the regional banks in particular, as well as in Latin America. In Europe, we're seeing strengthening demand in a number of markets in Western Europe, the Middle East, and Africa.

Some adjustments in insurance accruals, the opposite effect of what we just talked about what the what the stock option plan.

Those things occurred last year and didn't recur this year.

Okay, we don't have any.

Yeah. Those are 2018 items did benefits that didn't recur in 2019.

So the 25 versus a 20 is just sort of an updated look back.

For those nonrecurring benefits it.

Yes for the nonrecurring benefits of prior year, we what we do is we do when we model we modeled all of a unabridged modeling basis, we pick up that items from the prior year that don't recur this year, whether positive or negative they happen to be.

Positive from 18 negative for 19, when we roll forward. So we're overcoming those items to get to the 107 million of EBITDA.

Josh Beck: Thanks for the context, Gerhard. Really appreciate it.

Operator 2: Thank you. Our next question comes from Justin Bergner with Gabelli Research.

Operator: Thank you. Our next question comes from Justin Bergner with Gabelli Research.

Okay. That's helpful.

Thinking more about the general business drivers I guess, the Americas orders were flat year on year.

Justin Bergner: Good morning, Gerhard. Good morning, Jeff.

Gerrard Schmid: Good morning, Justin.

In the second quarter and I was just wondering if that meant that some of the win 10.

Justin Bergner: Nice performance this quarter.

Gerrard Schmid: Thank you.

Justin Bergner: Just to start, I guess I wanted to just look at the Adjusted EBITDA bridge. It seems like the DN Now savings were upped by $15 million. The non-recurring benefits, which, if you could sort of explain a little more, that would be helpful, were upped by $5 million, and the overall midpoint was upped by $20 million. I guess it was upped by $10 million on a slightly higher revenue base. I was just curious, what were some of the offsets to those tailwinds that might have allowed perhaps a higher adjustment to your Adjusted EBITDA guide?

You know product momentum, we saw in the quarter might taper a bit or you know it's hard to know what type of order absolute number you were lapping based on the detail you provide any sort of color there would be helpful.

Yeah. So.

Justin I don't anticipate a tapering off of demand in the Americas here, you will see from for any given quarter or some timing issues that unfold.

For some of the larger banks in the United States in particular some of their refresh activity is certainly nearing the end of its maturity cycle that being said, we still think there is a long way to go for a number of very large institutions in Latin America. We continue to see strong activity from the regional bank. So I don't you from where we're sitting today, we don't see its tapering off I think it's more just a.

Jeffrey Rutherford: Yeah. You're asking specifically what is the offset that's coming through in the migration of 2018 EBITDA to 2019? There are some offsets in there. What we have is, when you roll that forward, there's going to be a small piece of FX and some level of inflation that's going to offset in every quarter we have. It's not substantial, but it is in there. The other thing that's going on in Q2 is we have a Wincor stock option plan that gets adjusted. It's a cash plan, so it gets adjusted every quarter, and as the stock price moves positively, we get hit on the EBITDA line because that cost goes up. Now, I hope those guys make a ton of money this year between all of us, right?

Jeff Rutherford: Yeah. You're asking specifically what is the offset that's coming through in the migration of 2018 EBITDA to 2019? There are some offsets in there. What we have is, when you roll that forward, there's going to be a small piece of FX and some level of inflation that's going to offset in every quarter we have. It's not substantial, but it is in there. The other thing that's going on in Q2 is we have a Wincor stock option plan that gets adjusted. It's a cash plan, so it gets adjusted every quarter, and as the stock price moves positively, we get hit on the EBITDA line because that cost goes up. Now, I hope those guys make a ton of money this year between all of us, right?

In quarter event that we're seeing but the pipeline is looking very very healthy at the moment.

Okay, Great and then on the service margins you know that's very.

Promising that you're able to extend or improved.

Gross margin outlook for service modernization at 20, 829% from 27% I guess, you've discussed price on a previous question. Maybe if you could just discuss what's tracking better than you anticipate on the productivity front to allow you to increase that margin that would be helpful.

Yes, certainly so.

As I said in my prepared remarks that we are automating incident response and really.

The team is doing a great job of deploying common CPI is in common processes in each market and the deployment of these globally common processes is giving us a lot of.

Central visibility to practices that may not be as effective as they could be in local markets and really that that awareness is shining a spotlight on the regional differences is really bringing tremendous cohesion into the different local teams and causing us to more effectively deploy best practices.

Jeffrey Rutherford: Because when they make a ton of money, then it means we've done extremely well for our shareholders. It's a little bit of a barometer of how we're doing with shareholders. That's one of the pieces of the offset. Generally speaking, the only things that offset us are inflation, little bit of FX, and any of these compensation-related programs we have in that may be tied to the stock.

Jeff Rutherford: Because when they make a ton of money, then it means we've done extremely well for our shareholders. It's a little bit of a barometer of how we're doing with shareholders. That's one of the pieces of the offset. Generally speaking, the only things that offset us are inflation, little bit of FX, and any of these compensation-related programs we have in that may be tied to the stock.

Around measurements like the number of times that technician touches a machine each day the number of times, we roll a truck successfully the first time those are some of the key operating metrics that we focus on driving consistency across all by global markets and that's where we've seen the biggest some of the biggest lift.

Justin Bergner: Okay. That's helpful. Just the non-recurring benefits. Help me understand what they are, and do they just benefit 2019?

Since the program began.

Jeffrey Rutherford: When we were talking about the non-recurring benefits, those are things that came through in 2018, right? That we have an anniversary going on in H1 of this year. Some adjustments in insurance accruals, the opposite effect of what we just talked about with the stock option plan. Those things occurred last year and didn't recur this year.

Jeff Rutherford: When we were talking about the non-recurring benefits, those are things that came through in 2018, right? That we have an anniversary going on in H1 of this year. Some adjustments in insurance accruals, the opposite effect of what we just talked about with the stock option plan. Those things occurred last year and didn't recur this year.

Okay. Thank you.

Thank you. Our next question comes from Paul Coster with JP Morgan.

Hi, Thanks. This is Paul Chung on for Coster. Thanks for taking my question. So just to follow up on the.

On services.

Business and margin. So you had some contracts roll off.

Justin Bergner: Okay. The 20-

In India in Fourq, you kind of based on pricing and you did mention that Youre you know your.

Jeffrey Rutherford: Yeah, those are 2018 items, benefits that didn't recur in 2019.

Jeff Rutherford: Yeah, those are 2018 items, benefits that didn't recur in 2019.

Exiting kind of these lower margin contracts and your margins are improving as a result so.

Justin Bergner: The 25 versus the 20 is just sort of an updated look back for those non-recurring benefits that benefited.

I'm just thinking about the trade off here will you continue to kind of walk away from some of these lower margin.

Jeffrey Rutherford: Yeah. For the non-recurring benefits of the prior year. What we do is, when we model, we model all on a bridge modeling basis. We pick up items from the prior year that don't recur this year, whether positive or negative. They happen to be positive from 2018, negative for 2019 when we roll them forward. We're overcoming those items to get to the $107 million of EBITDA.

Jeff Rutherford: Yeah. For the non-recurring benefits of the prior year. What we do is, when we model, we model all on a bridge modeling basis. We pick up items from the prior year that don't recur this year, whether positive or negative. They happen to be positive from 2018, negative for 2019 when we roll them forward. We're overcoming those items to get to the $107 million of EBITDA.

Renewals to kind of drive that marched higher or are you willing to take some hits on margin that kind of drive the top line driven it is your.

Higher margin segment kind of relative to products and then as we move through the year any kind of big renewals, we should be aware about in the coming quarters.

So Paul what I'd say is a lot of our activity around exiting lower margin accounts was.

Justin Bergner: Okay. That's helpful. Thinking more about the general business drivers, I guess the Americas orders were flat year-on-year in Q2, and I was just wondering if that meant that some of the Windows 10 product momentum we saw in the quarter might taper a bit, or it's hard to know what type of order absolute number you were lapping based on the detail you provide. Any sort of color there would be helpful.

More pronounced in 2018 that it is now I think we're seeing the tail end of those effects and as we look out over the next few quarters I don't expect that to be immaterial.

Driver, one way or the other there might be a support few small pieces, but I don't think its material.

I think we're at a point right now where we flew where we feel we've got a very strong competitive mix and to your point.

Gerrard Schmid: Yeah. Justin, I don't anticipate a tapering off of demand in the Americas. You will see for any given quarter some timing issues that unfold. For some of the larger banks in the United States, in particular, some of their refresh activity is certainly nearing the end of its maturity cycle. That being said, we still think there's a long way to go for a number of very large institutions in Latin America. We continue to see strong activity from the regional banks. From where we're sitting today, we don't see it tapering off. I think it's more just an in-quarter event that we're seeing. The pipeline is looking very healthy at the moment.

If there is a specific market that we consider a very strategic and there's a particular opportunity that we think relevant we will evaluate that on a case by case basis, but we're not feeling any pressure to have to be price makers. In this market. We believe we've got one of the worlds better services value propositions.

In terms of the second part of your question around a large contract renewals to the back end of this year, we have very little concentration exposure in our services business. We've got a large number of contracts that cycles through over a period of time, we do see a higher number of contracts that renew in the November December timeframe, but nothing that we would call out as a material risk from where we sit today.

Justin Bergner: Okay, great. On the service margins, that's very promising that you're able to extend or improve the gross margin outlook for service modernization to 28% to 29% from 27%. I guess you discussed price on a previous question. Maybe if you could just discuss what's tracking better than you anticipate on the productivity front to allow you to increase that margin, that would be helpful.

Okay. Thanks for that and then how does it how has been the.

The pricing.

In services can you just kind of expand on that.

Competitive environment there.

Yes, so as I believe I already talked about when we look to the new contracts, we're factoring in a broad conversation with our customers around their quality and service expectations. We're also introducing different pricing constructs and.

Gerrard Schmid: Yeah. Certainly. As I said in my prepared remarks, that we are automating incident response and really the team is doing a great job at deploying common KPIs and common processes in each market. The deployment of these globally common processes is giving us a lot of central visibility to practices that may not be as effective as they could be in local markets. Really that awareness and shining a spotlight on the regional differences is really bringing tremendous cohesion into the different local teams and causing us to more effectively deploy best practices around measurements like the number of times a technician touches a machine each day, the number of times we roll a truck successfully the first time.

From my perspective, those conversations have been very constructive we're not seeing.

A tremendous amount of pricing pressure in our services business, it's actually would appear to be broadly stable at a global level they might be pockets in some markets, where we see a more local provider being more aggressive but.

At the moment I don't see pricing is a key consideration for our services business.

Okay. Thanks, and then on asset sales are there any kind of no no additional kind of non core areas.

You think you can monetize in the near term or are we mostly done there.

Gerrard Schmid: Those are some of the key operating metrics that we focus on driving consistency across all of our global markets, and that's where we've seen some of the biggest lift since the program began.

Yeah.

Yeah, I think what I'd say is that just reiterate what I said on prior quarters. There are several processes underway there are various stages of maturity pull so.

Justin Bergner: Okay. Thank you.

Operator 2: Thank you. Our next question comes from Paul Coster with JP Morgan.

Operator: Thank you. Our next question comes from Paul Coster with JP Morgan.

Once they are completed we obviously we'll update.

Our shareholders around those.

Paul Chung: Hi. Thanks. This is Paul Chung on for Coster. Thanks for taking my question. Just to follow up on services business and margins. You had some contractual loss in India in Q4, kind of based on pricing. And you did mention that you're exiting kind of these lower margin contracts and your margins are improving as a result. Just thinking about the trade-off here, will you continue to kind of walk away from some of these lower margin renewals to kind of drive that margin higher? Or are you willing to take some hits on margin to kind of drive the top line, given it is your higher margin segment kind of relative to products? And then as we move through the year, any kind of big renewals we should be aware about in the coming quarters?

As I said in my prepared remarks, we expect them to mature and get over the goal line through 2019, and perhaps straggling into early 2020, but yeah. We're still of the view that we're tracking towards delivering net proceeds of round about $150 million from those non core assets.

So the bulk of the uptick from those is still in front of us not behind us.

Okay and then my last question is on on free cash to Q was you know.

Very nice and then I did see or know your inventory days come down material materially so.

If you could kind of expand on the drivers of that improvement there and so.

If we should kind of expect any inventory build ahead of seasonally strong for Q.

And then just thinking about the seasonality I know you mentioned that for Q would be youre kind of strongest as it is and has been in the past but.

Gerrard Schmid: Paul, what I'd say is a lot of our activity around exiting lower margin accounts was more pronounced in 2018 than it is now. I think we're seeing the tail end of those effects. As we look out over the next few quarters, I don't expect that to be a material driver one way or the other. There might be a few small pieces, but I don't think it's material. I think we're at a point right now where we feel we've got a very strong competitive mix. To your point, if there is a specific market that we consider very strategic and there's a particular opportunity that we think relevant, we will evaluate that on a case-by-case basis. We're not feeling any pressure to have to be price makers in this market. We believe we've got one of the world's better services value propositions.

Is it going to be similar pronounce step up from Threeq to Fourq. Thank you.

Sure.

The up from from an inventory perspective.

And I believe we've said this on prior quarters, but but it's worth saying because.

The teams have done such a great job in managing inventory.

So we've divided inventory up into its component parts the manufacturing group.

Is responsible for.

Raw material and web services group is responsible for.

Spare parts and then we divide finished goods.

Between the segments and let's start with finished goods and work backwards.

We only allow finished goods to be manufactured in transit for delivery or installation.

Gerrard Schmid: In terms of the second part of your question around large contract renewals to the back end of this year, we have very little concentration exposure in our services business. We've got a large number of contracts that cycle through over a period of time. We do see a higher number of contracts that renew in the November, December timeframe, but nothing that we would call out as a material risk from where we sit today.

Applicable to a specific customer order, we hold strongly to that the segments I understand that and are managing that so when you see finished goods inventory for us know that that is inventory on route to be delivered to a customer for future sale. So it's really about timing of order to fulfillment and the segments are doing a great job of managing that on on the spare parts perspective, it's a spare parts for for our services organization for.

Paul Chung: Okay, thanks for that. How's been the pricing in services? Can you just kind of expand on the competitive environment there?

Gerrard Schmid: Yeah. As I believe I already talked about, when we look to renew contracts, we're factoring in a broad conversation with our customers around their quality and service expectations. We're also introducing different pricing constructs. From my perspective, those conversations have been very constructive. We're not seeing a tremendous amount of pricing pressure in our services business. It actually would appear to be broadly stable at a global level. There might be pockets in some markets where we see a more local provider being more aggressive, but at the moment, I don't see pricing as a key consideration for our services business.

For use in repair and maintenance of of equipment, they've done a great job of managing that on a regional basis only having the required based on algorithmic logic, the only having the required spare parts and and.

In any specific location and as as we roll out our new equipment will be even more precise with that so both ends of that we don't expect to see unless we.

Unless we get tremendous sales revenue backlog I mean, we don't.

We expect to see significant change and then on the manufacturing side. The manufacturing group has done a tremendous job of managing their inventory.

Paul Chung: Okay, thanks. On asset sales, are there any kind of additional kind of non-core areas you think you can monetize in the near term, or are we mostly done there?

And as always I'll invite anybody who who has a trip to Germany to the planning come to see our plan. Our plan is tremendous they do a great job. It's extremely efficient. It's one of the reasons we can releverage.

Gerrard Schmid: Yeah. I think what I'd say is just reiterate what I said on prior quarters. There are several processes underway that they are at various stages of maturity, Paul. Once they are complete, we obviously will update our shareholders around those. As I said in my prepared remarks, we expect them to mature and get over the goal line through 2019 and perhaps straggling into early 2020. We're still of the view that we're tracking towards delivering net proceeds of around about $150 million from those non-core assets. The bulk of the uptick from those is still in front of us, not behind us.

The model the way we are because we have that plan in Germany, So and they've done and just back to your question they've done a tremendous job of managing inventory. So I would say that that our inventory performance is team wide between those three groups and they've done a great job.

Paul Chung: Okay. My last question is on free cash. Q2 was very nice. I did see your inventory days come down materially. If you could kind of expand on the drivers of that improvement there and if we should kind of expect any inventory build ahead of seasonally strong Q4. Just thinking about this seasonality, I know you mentioned that Q4 would be your kind of strongest as it has been in the past, but is it going to be kind of a similar pronounced step up from Q3 to Q4? Thank you.

Jeffrey Rutherford: Sure. From an inventory perspective, and I believe we've said this on prior quarters, but it's worth saying because the teams have done such a great job in managing inventory. We've divided inventory up into its component parts. The manufacturing group is responsible for raw material and WIP. The services group is responsible for spare parts. Then we divide finished goods between the segments. Let's start with finished goods and work backwards. We only allow finished goods to be manufactured and in transit for delivery or installation applicable to a specific customer order. We hold strongly to that. The segments understand that and are managing that.

Jeff Rutherford: Sure. From an inventory perspective, and I believe we've said this on prior quarters, but it's worth saying because the teams have done such a great job in managing inventory. We've divided inventory up into its component parts. The manufacturing group is responsible for raw material and WIP. The services group is responsible for spare parts. Then we divide finished goods between the segments. Let's start with finished goods and work backwards. We only allow finished goods to be manufactured and in transit for delivery or installation applicable to a specific customer order. We hold strongly to that. The segments understand that and are managing that.

Jeffrey Rutherford: When you see finished goods inventory for us, know that that is inventory en route to be delivered to a customer for a future sale. It's really about timing of order to fulfillment, and the segments are doing a great job of managing that. On the spare parts perspective, it's spare parts for our services organization, for use in repair and maintenance of equipment. They've done a great job of managing that on a regional basis based on algorithmic logic, to only having the required spare parts in any specific location. As we roll out our new equipment, we'll be even more precise with that. Both ends of that, we don't expect to see, unless we get tremendous sales revenue backlog coming, we don't expect to see significant change. Then on the manufacturing side, the manufacturing group has done a tremendous job of managing their inventory.

Jeff Rutherford: When you see finished goods inventory for us, know that that is inventory en route to be delivered to a customer for a future sale. It's really about timing of order to fulfillment, and the segments are doing a great job of managing that. On the spare parts perspective, it's spare parts for our services organization, for use in repair and maintenance of equipment. They've done a great job of managing that on a regional basis based on algorithmic logic, to only having the required spare parts in any specific location. As we roll out our new equipment, we'll be even more precise with that. Both ends of that, we don't expect to see, unless we get tremendous sales revenue backlog coming, we don't expect to see significant change. Then on the manufacturing side, the manufacturing group has done a tremendous job of managing their inventory.

Jeffrey Rutherford: As always, I'll invite anybody who has a trip to Germany to plan and come to see our plant. Our plant is tremendous. They do a great job. It's extremely efficient. It's one of the reasons we can re-leverage the model the way we are, because we have that plant in Germany. Just back to your question, they've done a tremendous job of managing inventory. I would say this, that our inventory performance is team-wide between those three groups, and they've done a great job.

Jeff Rutherford: As always, I'll invite anybody who has a trip to Germany to plan and come to see our plant. Our plant is tremendous. They do a great job. It's extremely efficient. It's one of the reasons we can re-leverage the model the way we are, because we have that plant in Germany. Just back to your question, they've done a tremendous job of managing inventory. I would say this, that our inventory performance is team-wide between those three groups, and they've done a great job.

Thank you. Our final question comes from Rob you announced with Invesco.

Operator 2: Thank you. Our final question comes from Rob Yust with Invesco.

Operator: Thank you. Our final question comes from Rob Yust with Invesco.

Hi, Thanks, just two for me.

Rob Yust: Hi, thanks. Just two from me. On slide six, where you go over the service renewal rates, I guess I just wanted to kind of tease out, you've got this target rate of greater than 95%, which is kind of below historical the last four quarters. Is this just a bit of conservatism here, or is this signifying something that we should expect to be seeing down the road?

Rob Jost: Hi, thanks. Just two from me. On slide six, where you go over the service renewal rates, I guess I just wanted to kind of tease out, you've got this target rate of greater than 95%, which is kind of below historical the last four quarters. Is this just a bit of conservatism here, or is this signifying something that we should expect to be seeing down the road?

On slide six where you go over the service renewal rates.

I guess I just wanted to kind of tease out you've got this target rate of.

The greater than 95%, which is kind of below historical last four quarters.

Is this just a bit of conservatism here or is this too is this signifying something that we should expect to be seeing down the road.

Rob, it's nothing but conservatism right.

Jeffrey Rutherford: Rob, it's nothing but conservatism, right?

Gerrard Schmid: Rob, it's nothing but conservatism, right?

Rob Yust: Okay.

Rob Jost: Okay.

Jeffrey Rutherford: We don't expect our renewal rates to drop to that level where we're simply making sure that our investors take away. I mean, the real message here is that we have a very, very sticky services business with exceptionally high renewal rates. That's really the only message here. There's no signal I can flag by that.

Gerrard Schmid: We don't expect our renewal rates to drop to that level where we're simply making sure that our investors take away. I mean, the real message here is that we have a very, very sticky services business with exceptionally high renewal rates. That's really the only message here. There's no signal I can flag by that.

Okay, we don't expect our renewal rates to draw up to that level, where we're simply making sure that.

Our investors take away the real message here is that we have a very very sticky services business with exceptionally high renewal rates.

That's really the only message here now there's no.

No.

Okay great.

Rob Yust: Okay, great. On the new product, with the reference base you have, I'm not seeing some of the larger banks. Maybe if you could comment on that, and then secondarily, with this AllConnect engine, is this going to be a number

Rob Jost: Okay, great. On the new product, with the reference base you have, I'm not seeing some of the larger banks. Maybe if you could comment on that, and then secondarily, with this AllConnect engine, is this going to be a number

Yes.

Good.

A couple of years.

With the reference base inherent I'm not seeing some of the larger banks. So maybe comment on that and then secondarily with its okay.

[laughter].

Yes.

[laughter].

Yes.

Okay.

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