Good day, and welcome to the Diebold Incorporated Hosted Fourth Quarter and Full Year 2018 Earnings Call. At this time, I'd like to turn the conference over to Steve Virostek. Please go ahead, sir.

Thank you, Brandon. Welcome to Diebold Nixdorf's Fourth Quarter Earnings Call for 2018. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, Chief Financial Officer. For your benefit, we have posted slides to accompany our discussion and these slides are available on the Investor Relations page of dieboldnixdorf.com. Later today we will post a replay of our webcast to this IR website. On slide 2 of the presentation, we have a reminder that our comments today will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. In the supplemental schedules of our slides, we've reconciled each non-GAAP metric to its most directly comparable GAAP metric. On slide 3, we remind everyone 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 factors in the company's SEC filings. I'd like to remind our listeners that this forward-looking information is current as of today and subsequent events may render this information out of date. And with that, I will turn the call over to Gerrard.

Good morning, everyone. I'm pleased to join you today for a discussion of our solid fourth quarter results as I mark my third full quarter as CEO. I'll also discuss the company's improved financial outlook, which is underpinned by our value-creating DN Now program. The company's fourth quarter performance is summarized on slide 3 and it demonstrates both the ability of our team to execute on our priorities as well as the stickiness of our offerings with customers. Total orders increased 10% in constant currency during the quarter versus one year ago, led by strong growth in Americas Banking and solid growth in Retail. More specifically, our success in Americas Banking was underpinned by orders for more than $100 million of Windows 10 capable machines during the quarter. Contributing to the success was a $21 million contract from a large U.S. regional bank for integrated hardware and software and a new five-year managed services contract. In Latin America, we signed an agreement with Banco do Brasil, the largest bank in Brazil, to deliver nearly 6,000 cash recyclers and maintenance services. In Mexico, we displaced an incumbent hardware provider with a $16 million contract win at Banco Azteca which extends DN's market leadership in that country. On the service front, we achieved a very strong renewal rate, including a three-year maintenance service contract with BBVA Bancomer in Mexico, covering more than 7,600 ATMs. In Eurasia Banking, orders in Asia Pacific moderated, as we continued our bidding discipline and focus on profitable opportunities. Orders in Europe, the Middle East and Africa grew modestly. Important wins in the quarter included an $11 million contract from a top South African retail bank for cash recyclers and software, an order for 2,000 Windows 10 ATM upgrades at one of the largest banks in France and…

Thank you, Gerrard, and good morning, everyone. Based on my experience over the last few months, I'm very confident about our plans to deliver significant value to investors and customers. As I discuss our financial results of the fourth quarter and 2018, please keep in mind that comments will focus on non-GAAP metrics, unless otherwise noted. On slide 7, you will see total revenue for the quarter increased 7% in constant currency, led by 19% growth in Retail and 10% growth in Americas Banking. Our focus on winning profitable business is impacting revenue in the Eurasia Banking segment, as lower volumes in Asia more than offsets the modest growth we are delivering in Europe, the Middle East and Africa. Looking at the business lines: Product revenue growth was strong in the quarter at 18%, software was 6%, and services declined modestly. Moving to slide 8: Revenue for the full year declined by 3% in constant currency. Modest growth in Retail and Americas Banking was offset by declines in Eurasia Banking, which again reflects our pursuit of more profitable business. Software revenue grew 5%, while product revenue declined by 5% on lower volume, and services declined by approximately 2%. The next three slides provide segment level information. Starting with slide 9, total revenue from Eurasia Banking declined 3% in constant currency to $493 million during the fourth quarter, as revenue declines in Asia-Pacific masked modest revenue growth in EMEA. Operating profit for the quarter increased from $36 million last year to $67 million this year, primarily due to higher product gross margin -- margins from a better solution mix and the initial DN Now savings from our new streamlined operating model. We highlight the full year variances on the bottom half of this slide. Segment revenue declined 8% in constant currency…

Thank you, Jeff. And before opening the call to questions, I'd like to echo Jeff's comments that DN Now is a clearly defined path of value creation for investors. We are fundamentally remaking Diebold Nixdorf using best practices, which are designed to leverage our market leadership position and our global scale. I see tremendous energy and commitment from our leadership team to achieve the long-term goals, which we have discussed today. The vast majority of these actions are within our control and we have demonstrated strong success in the initial stages. We are also encouraged by our product competitiveness, strong market share and stabilizing end market demand, which will provide additional confidence in our future. And now I'll ask the operator to provide instructions for our Q&A session. Thank you.

Thank you. [Operator Instructions] The first question will come from Matt Summerville with D. A. Davidson. Please go ahead with your question.

Thanks. Good morning. A couple of questions. First on the $400 million of cost save target, it looks like the $160 million growth you'll realize in 2019, $80 million fall through to operating profit. Is it fair to assume 50% or $200 million on the $400 million is what you're targeting to drop through to OP? Can you walk through that please?

We're talking specifically about the three-year model here, Matt. Or are you talking about 2019?

If the flow through rate is 15% in 2019, I'm curious as to what the flow through rate is for the three-year model that you guys are laying out please.

Yeah. And the $400 million is the accumulation of the benefits over time. And again as Gerrard spoke, it's the combination of few projects. And you can put it in perspective that it's modernization of G&A, support and then taking advantage of the operating profits adjustments we have. The flow-through is offset by mainly inflation and other adjustments. So it increases as we go through the model, right? So in 2019, our guidance is $331 million to $400 million and then the target is $600 million. So it sequentially increase every year over the next two years. And it's pretty linear as far as that increase from $400 million to $600 million.

And, Matt, what makes that ratio 50% in 2019 is the $20 million headwind we have from non-recurring benefits. So that would be a unique to 2019.

And inflation.

Right.

Okay. Understood. And then, Gerrard, you mentioned that the monetization of certain assets that you've identified, or certain business lines, is taking a little bit longer than what you would have otherwise expected. Can you talk about what's happened with that process and sort of update? Are we still looking at 5% to 10% of the company's total revenue to be monetized at this point? And I guess what underlying that would be a reasonable level of proceeds that we can anticipate from that?

Yes. So nothing has fundamentally changed to the overall time lines, nor to the underlying integrity of the processes, other than the normal activities you would find in any specific transaction, which is why we remain confident that we will close on two transactions this quarter. In terms of the overall program, yes, we are still targeting divestitures in the range of 5% to 10%, probably a little bit closer towards the bottom end of that range. And in terms of net proceeds, obviously, it varies based on market conditions. And, yes, I'd say that, it will be probably a little bit lower than one times multiple of revenues, give or take, depending on the different transactions. So I think we'll hold on that until we see -- until we've got a few of these under our belt.

Thanks. I'll go back in queue.

Thank you for the question. The next question will come from Paul Coster with JPMorgan. Please go ahead.

Yes. Thanks for taking the question. First up, on the services front. Obviously, a little bit of -- you should -- it looks like you're expecting some kind of positive inflection in terms of growth. And you must have some visibility into that. So perhaps you can talk us through what's about to happen there?

Yes. So there's a few things that have been happening. I mean, you would have seen some revenue declines in our services business in 2018. When you take a look at what's actually been driving that, the biggest drivers of that have been a decent-sized contract in Asia that was extremely low margin. The second big driver was foreign exchange. And the third driver was volume declines in China specifically. So when we take a look at our core business and you take a look at the trends in 2018, 2019 rather, we're expecting a lot of those items to really be in the rear-view mirror. And when we couple that with the momentum that we're seeing in new product sales, plus our all-connect engine, plus the benefits of our services modernization program, it points towards us continuing to see some emerging strength in that business especially on the bottom line.

Got it. And Jeff we should assume I believe that the $100 million in restricted cash is reserved for the buyback of the German shares, is that correct? And is that the full obligation that's outstanding?

It is for that use and it's materially all the remaining obligation.

Okay. And then my last question is you're talking about product deflation which I think is actually very realistic. So thank you for that realism, but it's also a little unusual. Could you just talk us through what you are referring to there?

Yes, sure. So I think in prior calls I have commented on the fact that in some markets we have seen pricing be very, very competitive and very challenging. You have seen in some of those markets in Asia we have very consciously pulled back from wanting to participate in those sorts of deals, because we are very much focused on doing profitable business. But there are some markets where we do want to participate, where we do want to either expand or maintain market share, where pricing competition is still something of note. And we're simply being pragmatic to say in some markets, we would see some pricing compression. And that pricing compression is really most notable on the hardware side a lot less so on software and services. So it's really more on the hardware side in specific countries.

All right. Thank you very much.

Thank you for your question. The next question will come from Kartik Mehta with Northcoast Research. Please go ahead with your question.

Good morning, Gerrard and Jeff. I wanted to ask Gerrard a little bit on Windows 10 and the environment you're seeing maybe the U.S. and then outside of the U.S. Are you seeing more in terms of displacements or more in terms of just upgrading current machines?

Kartik would you mind just repeating your question? Your phone line just staggered up, so I just wanted to make sure I heard what you are saying. So you talked about Windows 10 then just repeat that.

Yes, I apologize. Yes I apologize, I'm in an airport so I'm sorry for the background noise. Now my question was on Windows 10 the demand you are seeing, are you seeing more in terms of displacement of machines or upgrade of existing machines?

Yes. So I think we're universally seeing a combination of both. So for example, you would have seen the most recent quarter very large new hardware up -- new buying cycle from some of the Brazilian banks where they are increasingly moving towards cash-recycling technologies. We're seeing something similar in the Philippines with the shift towards cash recycling and obviously Windows 10 capabilities go along with those. In the case of the U.S. market, it's more of a mixed bag where we're seeing both hardware upgrades plus just software upgrades. So I think it varies by market with the U.S. being more of a split whereas some of the other markets shifting towards hardware transactions.

And then in the North America you talked a little bit about why margins were lower than you anticipated. As you look at your three-year plan, how do you envision the North American market in terms of operating margins? Do you think they'll be close to what you've looked at in terms of long-term growth that you've laid out? Or is this market going to be a little bit different in terms of operating income?

Yes. When I take a look at our different product lines, at the moment we clearly have some meaningful actions underway from a services perspective. And when you take a look at the performance in Q4 there is no reason for us to believe that our services business in the Americas shouldn't be performing consistently in line with the performance that we're seeing in Eurasia as an example. The same holds true in software. And if anything I would anticipate modestly higher software margins coming out of the Americas than other parts of the globe, just given the mix of the customer base in the U.S. in particular. Right now, we are seeing some diversions in margins on the hardware front between Europe and the Americas. We certainly have a number of actions underway in terms of our product platform evolution that, we believe will normalize that. So, that all points towards us having stronger confidence in our hardware margins, more consistently across the globe. The other thing I would say is from a G&A perspective given that we’re a U.S. domiciled entity a lot of our G&A is embedded in the U.S. So when we think about all the way – or the drop through to OP and we talk about the programs that are just being laid out we anticipate the improvements on that front too.

Thank you very much. Appreciate it.

Sure.

Thank you for your question. The next question will come from Justin Bergner with Gabelli & Company. Please go ahead with your question.

Hi. Thank you for taking my questions. And thank you for the midterm plan this morning.

You're welcome Justin.

My first question relates to the services gross margin target of 27%. Maybe you could help us understand or given the seasonality of gross margin what the second half service gross margin means? Or sort of, how you view the run rate exiting 2018 versus the 2021 target? And sort of what are the biggest sources of improvement to bridging that gap?

Yeah. So I think it’s – as you pointed out Justin we operate in a seasonal business where Q4 historically and on a go-forward basis is generally the strongest quarter in the year with Q1 being the weakest. And when you look at the gross margins between Q1 and Q4 there's typically a 500-plus basis point difference between those quarters. And a lot of that is the seasonality of when a hardware gets bought and implemented. So we don't anticipate that seasonality necessarily changing going forward which is why we just want to remind investors that Q1 is likely to be coming-off the strong Q4 that we just exited. But as we look at the walk-up quarter-over-quarter on an annual basis, we anticipate moving from 2018 having gross margins of around 23% to an excess of 27%. And it's all underpinned by the Services Modernization Plan that we've talked about in the past couple of quarters.

Okay. Thank you for that. I'll try and work from that Q1 seasonal guidance to sort of come up with a run rate for current service gross margins. The second question I had is within your sort of 2021 free cash flow framework upgraded to $200 million I mean should I assume that the cash restructuring expenses are largest in 2019 and then step down materially in 2020 and are hopefully fairly negligible come 2021? Is that a reasonable way to think about cash restructuring expenses?

It's trending correctly that it will trend down into 2021. That's going to be substantial in 2019 as we talked about from a guidance perspective. It will be down in 2020 but it will still be a material number. It will be in the $80 million or more range and then it will drop-off in2021.

Okay.

And that's all needed right to support our transformation from where we're at today to where we want to be. As Gerrard said, we want to take Diebold Nixdorf into a more modern era of things like G&A support.

Yes. Let me just comment on that and add to that briefly, Justin. At the end of the day I understand from investors that they've seen this sector go through wave upon wave of cost programs as the markets -- the companies have reacted to slowdowns in overall end market demand. Now what we're talking about here is actually a much, much more structural transformational change of how we operate as an organization. So we're not looking at one-time changes. We're looking at structural changes to how we operate. And Jeff pointed obliquely to some of the programs that we have underway from a G&A perspective. Now our expectation coming out of the back end of 2021 is a sustainable organization. And that's what we're focusing on. We're not trying to focus on one-time gains. And therefore, while I understand the preference to be minimizing restructuring we actually think it's the right long-term answer for the organization's health.

Okay, thank you for that detail. And then lastly as you think about the 2021, EBITDA margin could you sort of tell us where retail will fall out? And maybe how we should rank order the profitability of the three segments? It seems like you've kind of made some inferences there but just to gain any additional clarity would help?

In our models right, retail will have the highest level of profit of the three segments and has the potential for the greatest margin expansion of the three. We're not giving individual segment guidance at this point. But those trends should continue. And with the new leadership we have in retail that's the expectation we have.

Thank you, Jeff and Gerrard, for taking my questions.

The next question will come from Rob Jost with Invesco. Please go ahead.

Hi thanks. I just wanted to touch on, you're taking a lot of costs out of your supply chain, your working capital and I think your forecast is for another $100 million out. Is there -- as an investor, the concern I have is, you're potentially taking too much out it might impact your service levels. Can you speak to where you want to go versus historical levels? And how you get comfortable with that level of working capital?

Yes sure. So the first thing I'd say is that in particular on the net working capital side this is an extremely collaborative exercise with our leaders in our manufacturing plants, our leaders in our spare parts depots, as well as our leaders in dealing with finished goods. And when you take a look at what we do -- what we've been doing? We've been consolidating increasingly our manufacturing footprint down to a fewer number of manufacturing entities. That allows us to more optimally leverage our raw materials. Secondly as we are simplifying our product line which we talked about earlier this year, it drives a much smaller simplified way to deal with our supply chain. And thirdly, if you take a look at our balance sheet and look at the spare parts trajectory we've been optimizing that quite steadily over the past several quarters as we've been applying analytics to run our spare parts inventory on a more global basis rather than having spare parts sitting resident in any one given country trying to leverage our global centers more effectively. So those are the real operational underpinnings around what allows us to get to the improved working capital. And we are very mindful that, what we don't want to be doing is introducing adverse risk where we will be slowing down deliveries to our customers. And I'm pleased to say that notwithstanding the very important progress that we saw in Q4, we actually had the best quarter in terms of our delivery cycles to our customers too. So we're seeing the manufacturing teams and the spare part teams manage the interplay between those two appropriately. And it's really been driven by a bottoms-up view rather than a top-down view. So we're feeling quite confident that we can keep yielding these gains.

And then if I could just add, Gerrard. We've mentioned earlier in accounts payable that we have opportunity. That's blocking and tackling. And sometimes we don't do the blocking and tackling as well as we can. We've got that in order. We feel good about our opportunities to harvest capital out of accounts payable. And I wanted to say that the segment people do a tremendous job working with our receivables groups and -- on collections. And the last thing, I would say just to augment what Gerrard said is, our sales and operational planning people do a really good job. And they have some really good automation that they brought into their process to help assure that we're always going to be able to meet to the best of our abilities our customers' demands.

Okay. I really appreciate that color. Thank you. My follow-up is on the pressure from Asia. We've heard about that for some time as some of these contracts roll-off. That's impacting the, I believe, on the services side. So can you talk about when we can expect to have that abate? Is that more in 2020?

Yes. I would have a difficult time answering that question at this stage, because it's largely driven by actions from our competitors where we're seeing pricing that quite frankly, we're not sure is sustainable in those markets. I'll remind everyone that our Asia banking, which is the area that's primarily experiencing this, is now less than 10% of our overall revenues. So while we continue to anticipate some declines, our primary focus is on maintaining and winning profitable deals. And I'd say, the good news is that when Asia is a complex market, it's a very broad market, and it starts to bifurcate into different markets where we continue to see pricing stability. And those are the markets where we're putting more of our attention and energy. But I'm not going to at this point guess when does pricing behavior change on our competitors' side.

All right. Thanks.

Thank you. The next question will come from Russell Higgens, Barings [ph]. Please go ahead. Q – Unidentified Analyst: Hi, guys. Thanks for the call and taking my questions. I just have a couple more on restructuring. The 160 that you guided -- sorry the 150 that you guided to could you just break that out between the spend on FTE reduction and the product portfolio optimization? I had $160 million in my head. And then following on to that, are you still intending to pay $50 million worth of pension contributions in the year? Or has that been paid? And then just final question is that the $20 million reversal that you mentioned was that occurring in Q4?

I think I caught most of that. And the first question was regarding the restructuring payments and whether they relate to the TAM reduction.

FTE versus other.

And here is what it is. It's primarily FTE, but there is also some costs in there related to third-party payments on restructuring-type assistance, but the majority of it is going to be FTE.

And the majority of that has also been due to actions that we have already taken, right? So, a lot of the cash payments associated with that restructuring are from actions undertaken in 2018 as we exit the individuals and the associated payment terms associated with their contracts.

And could you repeat the second question?

The second question was the pension contribution do we expect to make it this year. I think the answer is yes. Unequivocally, we don't see any change to that. And then there's a third question related to the timing of the $20 million benefit that won't reoccur in 2019. What -- when will it happen?

Yes, most of that will happen in the third quarter. We had mark-to-market adjustments in all quarters of the year, but the compensation reversal was a third quarter event.

Third quarter.

And so that $50 million pension contribution that's not included in the $130 million guidance?

When you say pension contribution I'm -- you were breaking up. I didn't hear the question, if you could ask it again.

I think last year, sort of, mid-year, you guided to $50 million contribution to pay down the pension deficit. I was wondering if that was included in the $130 million one-off costs for 2019.

So, any sort of pension contributions would be captured in the EBITDA number and so they would be fully reflected in our free cash flow outlook.

Yes, our pension contributions were minimal in 2019. Now, we did have a benefit from a German shift plan which would have been -- more -- would have been a benefit not a contribution, would have been in the third quarter, but pension contributions are not significant.

All right. Thanks.

Thank you. The final question will come from Matt Summerville with D.A. Davidson. Please go ahead.

Just a couple of follow-ups. First can you talk a little bit about the ROIC framework that you're putting in to the company Jeff as well as how management maybe incentivized around not only ROIC and potentially free cash going forward? So, talk about the management incentives as well as the ROIC framework please.

Yes, it's not in management incentive as of this point in time. Cash flows are in the management incentive. We're using it more as an educational tool at this point to push down within our organization, within things like our capital committee and so forth that we give a tool to people to understand how that is created. And the framework is simple, right? We're taking non-GAAP, so adjusted operating profit. We're taxing affected -- affecting it for probably a conservative rate 30% a statutory rate, which is high for the entities we're in or the countries we're in but we feel it's the right number to use. And we're just dividing by our fully affected invested capital, which is just a little over $2 billion. So if you do that you're going to generate mid-single digits for 2018. And, obviously, we have a relatively high weighted average cost of capital, especially since our interest is not deductible in the U.S. at this point in time. So it helps us provide targets for where we need to get the model. And when we look out in that 2021 time period, we hit to a point where we're creating real value for shareholders. So it's more of a tool to help guide as to what we need to do from a value creation perspective.

And then just as a follow-up, Gerrard you've talked about Windows 10 order activity over the course of 2018. Maybe just to use a baseball analogy where do you think we're at right now innings-wise in Windows 10 in the U.S. as well as Western Europe please?

Yeah, sure. The difficulty with that baseball analogy is just that one person's version of where they're in the six innings might be somebody else's version of the fourth innings. But if you'd just work within the framework of some margin of error there from my frame of reference in the U.S. we're likely in the let's call it the fifth to sixth innings, and I think we're in the roughly second innings in Europe.

Got it. Thank you guys.

Thank you. Speakers, I'll turn the conference back over to you.

Great. I want to thank everybody for joining us for the earnings call today. And if you have a follow-up please send an e-mail to our e-mail address at Investor Relations. Have a great day.

Thank you, everyone.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines.