Good day, and welcome to the Diebold Inc. Hosted First Quarter 2019 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Steve Virostek. [Ma’am] please go ahead.

Thank you, [Katy] and welcome to Diebold Nixdorf's First Quarter Earnings Call for 2019. Joining me today on the call are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, our Chief Financial Officer. For your benefit, we’ve posted presentation slides, which will accompany our prepared remarks on the Investor Relations page of dieboldnixdorf.com. Later this afternoon, an audio replay of today’s webcast will also be posted to the IR website. On Slide 2 of our presentation, we have a reminder that today’s comments will include non-GAAP financial information, which we believe is helpful in assessing the company's performance. In the supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric. Moving to Slide 3, we inform all participants that certain comments made today 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keep in mind that forward-looking information is current as of today and subsequent events may render this information out of date. And now I’ll hand the call to Gerrard.

Good morning, everyone. I'm pleased to join you today for a discussion of our first quarter results. An update to our DN Now initiatives, and the reiteration of our outlook for 2019. On Slide 3, we’ve highlighted the company’s first quarter performance. Overall, I am pleased with the results, which show our sustained execution against our priorities. Total orders decreased 1% in constant currency during the quarter versus one-year ago. We delivered strong growth in Americas banking where our success was supported by orders for more than $70 million of Windows 10 capable machines. Key wins included a multi-year agreement with Keybanc to digitally transform more than 1,400 ATMs with dynamic, with DN’s Vynamic software, a $5 million contract to provide recyclers and installation services with a top 5 financial institution in Brazil. A contract with teacher’s credit union to upgrade their entire feet of ATMs to Windows 10 in Midwestern states. This win indicates we’re seeing Win10 demand from financial institutions of all sizes and we renewed a $40 million three-year service contract with one of the top financial institutions in The United States. Eurasia Banking orders declined modestly in Q1 with very different trends across the sub-regions. Orders from European customers were down slightly, while customer orders increased nicely in the Middle East and Africa. Orders in Asia Specific declined meaningfully year-over-year as we maintained our biding discipline and focused on profitable opportunities. Important wins included an expanded partnership with the major financial institution in Belgium to upgrade more than 2,400 devices, including a large number of cash recyclers to Windows10, and averaging Diebold Nixdorf all-connect services and our DN Vynamic Software suite. Secondly, a multiyear managed services contract renewal with a top-tier bank in Western Europe, a cash recycling win at Halkbank in Turkey and Bank Pekao…

Thank you, Gerrard and good morning to everyone. During my prepared remarks today, please keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted. On Slide 7, our revenue table provides a year-over-year comparison for the segments and the business lines, both as reported and on a constant currency basis. The foreign currency headwind in the quarter was significant at nearly 6.5% points or about $66 million, due to the strengthening of the US Dollar against the Euro, the Brazilian Real, and the British Pound. For this reason, we believe the currency adjusted growth rates provide the most meaningful comparison. Total revenue increased 3% in constant currency led by 11% growth in Americas Banking, 4% growth in retail, and a 4% decline in Eurasia Banking. Looking at the business lines, product revenue increased 15% in constant currency, due to growth in banking and retail volumes. Our services revenue decline of 3% is largely attributable to our focus on more profitable contracts, particularly in Eurasia. Software revenue is down versus the prior period, due to lower retail activity, and the divestiture of our program management business in Europe. Our next three slides provide segment level financial information. Starting with the Eurasia Banking on Slide 8, revenue could decline 4% in constant currency to $383 million during the first quarter, due to four factors. Number one: Significantly lower product volumes in Asian countries due to our focus on profitable business. Two, lower service revenue resolving from our decision not to renew a low margin maintenance contract in India. Three, the impact of a divestiture. And four, modest revenue growth from customers in EMEA region. Non-GAAP operating profit for the quarter increased from $20 million last year to $34 million, due to higher gross margin for both product and…

Thank you. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson.

Thanks. A couple of questions, Gerrard, could you maybe give just a little bit more of granular overview on the Americas Banking business, the kind of order moment you’re seeing there, perhaps qualifying that? And then talk about the Windows 10 cycle in the context of whether you’re finding it to be more replacement versus upgrade heavy and perhaps tilting a bit more towards small banks versus big banks?

Good morning, Matt. Thanks for your questions. So, for the Americas, you know, we’re very pleased that we’re seeing solid order momentum or if in the double-digit plus range across the board, across Latin America, Mexico, The United States and Canada. So, it’s broad brush regionally and when we take a look at it on an institutional side basis, we’re seeing it play out across both the bigger banks and the small banks at a relatively similar momentum level. So, you know, that really is pointing to a broad-brush growth over what we’ve seen in prior periods. We expect that to, you know, continue as we look at our order activity for the next couple of quarters and obviously things will likely flatten up given the exceptionally strong result that we posted in Q4 of last year. In terms of your second question as to the mix between replacement versus upgrades, you know, I think that this is a topic where we’re seeing a relatively even balance between those two with some institutions favoring a software upgrade, others favoring a full-on machine replacement. So, it’s a relatively even mix today when you take a look at our over activity.

Then maybe can you spend a minute perhaps talking a bit about the new product pipeline you have, more specifically in the ATM business as we think about the balance of 2019? And then Jeff, can you comment based on where currency rates are today, how much top and bottom-line headwind that you expect related to FX? Thank you.

You know Matt, I think I’ve already provided the comments vis-à-vis the Americas in terms of new order activity. We are continuing to see very strong pipeline and sales momentum in the Americas and expect that to continue on a go-forward basis. You know, in Europe, what we’re starting to see, and we mentioned this in a couple of quarters ago, that we’re starting to see Europe show some early signals of momentum in particular in Western Europe. Middle East is showing very strong momentum for us right now, and as we’ve pointed out, for the past several quarters, we’ve maintained a very, very disciplined focus upon Asia, and as a result, we’re willing to concede market shares in favor of profitable business. So, we’re seeing our order activity moderate in that market.

And then Matt, as far as currency, obviously the euro is the most impactful currency for us. We expect, based on where the euro is trading today that there’ll be an impact in the second quarter. We are actually modeling it somewhere between 3% and 4% impact on the topline and then it will level up as we go into the third and fourth quarter as the levels will be less. It'll be, you know, less than 1% in the third and fourth quarter, based on the current euro level trade.

Thank you, guys.

Thank you. Our next question comes from Justin Bergner with G. Research.

Hi, good morning, Gerrard. Good morning, Jeff.

Good morning.

Good morning, Justin.

My first question just related to non-core asset sales, I think you gave a brief synopsis, could you just remind us what was completed in the first quarter? I heard the mention of the 10 million sale this month, and, you know, progress towards remaining asset sales and where do you ultimately intend to end up versus your initial goals on asset sales?

Yes. So, Jus, let me start with the latter part and then back into the actions in the quarter. We’re still tracking towards divesting around 5% of our revenues. There’s obviously a number of assets in that mix, and as I said in my prepared remarks, the broad range of those are tracking in line with our expectation. There’s one slightly larger one that’s taking a little bit longer than we had expected. In the specific quarter for Q1, we exited Venezuela. We also divested our banking cash and transit business in Europe, as well as a retail cash and transit business in Europe. And further more in April, we concluded the divesture of our IT consulting business geared towards European financial institutions.

Okay, that’s helpful. And then, were the first quarter proceeds pretty minimal? Or could you quantify what the proceeds were in the first quarter?

There were $10 million.

I’m sorry, they were 10.

Yes, don’t forget Justin, as I – yes, they were 10 and as I believe I’ve said in the past as well, if you were to think about the sequence of divestures that we’re executing against, not only are we targeting proceeds, but also divesting businesses that have a drive on earnings, so a number of those that we exited in the quarter. We’re a drag on earnings, so we’ll increase our EBITDA on a go-forward basis given that we exited those.

Okay, great. Did I hear correctly in the opening comments that the April divestiture was another 10 million?

No, it’s $10 million accumulatively across that, plus the once I mentioned.

Okay, great. Shifting gears, I just wanted to dig a little bit deeper into the service performance. You know how should we think about the trajectory going forward for service gross margins? And I know you mentioned a 30% plus gross margin figure in the Americas, I'm not sure sort of what to reference that to and is that's indication that the service gross margin improvement is more pronounced in the Americas or sort of there’s more to be gained in the Americas than the rest of the world?

So, if you look at Diebold before the Wincor acquisition, Justin, we were doing, you know, 30% service margins in North America. So, we raised this to simply make reference to the fact that we really have made up a bunch of lost ground in prior quarters, while still delivering very strong service levels for our customers. And if a step that up to a more global level, you know, last quarter we provided, you know, a three-year outlook on where we saw our services margins heading to, to north of 27% and we’re still on the view that that’s the right way to think about this business on a global basis. Obviously, we’re seeing some very good momentum and we’re pleased with the fact that for three consecutive quarters we’ve started to see some real process coming out of that services business, but – and we’re still holding firm that on a consolidated basis globally, we’re targeting north of 27.

Okay, thank you.

And that was by the year 2021, so we’ll make steady progress in 2019.

Thank you for taking my questions.

Sure, welcome.

Thank you. [Operator Instructions] Our next question comes from Kartik Mehta with Northcoast Research.

Hi, good morning, Gerrard and Jeff. Gerrard, I wanted to get your perspective on Asia and what you think the long term – thank you. I wanted to get your perspective on Asia and what you think the long-term perspective – you know what the long-term business model could be there for you? Is this a market that you see yourself kind of just continuing to divest? Or are there opportunities to have a bigger impact in those markets?

Hi, Kartik. So, I think at the end of the day, you know, we need to split Asia into a more nuanced view than simply one macro market. You know, I’d tell you that from our vantage point, markets like China and India are incredibly challenging to generate a reasonable, return and therefore, you know, it’s not clear to us that over the medium term that those markets improve substantially. You know when we look at other markets in Asia, I think there are markets in the Southeast Asia region, plus further south, there are certainly markets where margins remain very robust. We have banks who are buying not only on price, but also buying on services, machine quality and the depth of the software portfolio. So, those are markets that we see as remaining attractive. So, I think – what I broadly say, Kartik is, we’re going pick and choose where we choose to compete in Asia. And as I’ve commented on past, we have a number of competitors out there with just a very, very different perspective on pricing and we’re just not willing to, you know, participate in deals of that nature. So, we’re being selective in where we choose participate, and those markets that are attractive for us, we think are likely to remain attractive over the medium-term.

And then, Gerrard, as you look into the U.S., as far as the retail business is concerned, I know one of the goals was to try to expand the retail business in the U.S. You know where do you stand as far as getting more traction in the U.S.? Are you targeting maybe different retailers anywhere previously?

Yes. So, Kartik, I think in prior management teams, there was a view that we could pursue the U.S. in broad brush terms across the full range of our retail portfolio. You know I’d say that we’re taking a much more targeted approach focusing on those products where we believe we have a strong competitive advantage and that would be most notably in our self-checkout area where we’re seeing very, very strong growth in Europe, and on a, you know, feature function basis, we believe we actually stand tall. So, I think we’re being much more selective on our opportunities. By that very nature, it will take more time for us to show that momentum. If I take a step back though, you know, I definitely am not on the view that, you know, our retail growth is purely predicated on accessing the U.S. market. There’s no doubt that there remain interesting opportunities for us in our existing core market of Europe, as well as in Asia, and that's why I think it's worth calling out that we look at the competitive dynamics between banking and retail very differently in the Asia-Pacific market, and we think that Asia remains an attractive area for us to grow into.

And then just one last question for you Jeff, you know, I know that the next set of maturities for you, really the big maturities are 2020 and the Term Loan A and the credit facility, and I’m wondering how do you – the opportunity to maybe reduce interest expense with those – with those debt maturities coming up?

Yes. You know, when we look at our maturity’s debt, we have a short-term opportunity and a long-term opportunity. The short-term opportunity is to address the revolver and Term A stack and move it out toward the Term A1. It's not feasible to move those stacks beyond the Term A1. So, that’s the first step. The second opportunity then will be once that is accomplished and addressed and as we move through this model, and you know, we’ve given long-term goals, we’ve given three-year goals and you can think about what the potential is for refinancing, and are qualified by saying it all depends on the capital market still, but there are going to be opportunities that are not available to us today as we progress through the maturity of the model and realize higher levels of EBITDA and free cash flow. So, we actually look at it as two tranches, a short-term tranche, and opportunities to address the revolver and Term A in the short-term and in the long term. So, to answer your question, the ability to reduce our weighted average cost of capital is really going to come in the long-term addressing of our capital structure, not necessarily in the short-term.

Okay. Thank you very much, Jeff. Appreciate it.

Sure.

Thank you. Our next question comes from Rob Jost with Invesco.

Hi, thanks. Going back to the retail segment, I guess a couple of things. You know you pointed of the profits being down for a number of reasons. If we were to strip out some of these one-time things, is there a way to see what that would have looked like on a year-over-year basis? Would have it been up?

Good morning, Rob. So, as we said in our prepared remarks, retail was down due to slightly higher software delivery expenses in the quarter, plus some headwinds due to a non-core business that’s underperforming in that area. So, when you look at our outlook for retail profitability for the balance of the year, we remain very encouraged that our retail profitability will show meaningful momentum year-over-year. So, you know, I think there’s a bunch of one-off items in the quarter that are not symptomatic [indiscernible] upper trend in our retail business.

Okay. And in the past, you’ve talked about investing in that business, I think the – it was on a sales capacity, and I wanted to say it was probably more of a North American than a European thing. I guess first of all, can you just clarify if what I'm remembering is correct? And secondly, are you still investing there or have you reached a level that you’re comfortable with?

So, I’ll go back to the comments I made to the prior question. The heavier investment in sales was certainly something that was done quite frankly before I joined the organization. As I said in my prior comments, we’re taking a more targeted view towards our retail focus in the Americas, and by definition, you know, we don't see ourselves facing higher investment expenses in that market.

Okay, great. And then, my last question is, is on the Eurasia Banking. We’re talking to different people who are familiar with the ATM markets. We’ve been led to believe that the ATM refresh in Europe will be a slight delay behind the U.S. I’m just curious, is that what you're seeing? Would you expect the European markets – are you seeing European markets going a slower pace and perhaps, you know, will serve as a bit of a tailwind after the U.S. market close-off?

Yes, Rob. If you take a look at our comments through most of last year and even this year as well, there was no doubt that North America and broad Americas led the refresh cycle and we weren’t seeing the same growth momentum in Europe as we were seeing in the Americas last year. Nearing the back end of last year, and now as we start to more into Q1, we’re starting to see European activity pickup. So, we do see a lag in the Americas, and as I’ve commented in the past, you know, our sense is that that will add some tailwind to our European activity as we look out over the next several quarters.

Okay, thanks.

Thank you. Our next question comes from Ishfaque Faruk with Sidoti & Company.

Hi, good morning. Just piggybacking on the – on a prior question that was asked, in terms of the digital transformation work that you did for – that you’re going to do for Keybanc, do you like similar pipeline of work outside of the Americas?

We absolutely do. So, when we take a look at software pipeline and some of the comments that we made in our prepared remarks, there have been software wins in most of our markets. In my prepared remarks, I talked about a large Western European financial institution that included hardware sales, service sales, as well as a very large software deployment, as well as other markets in EMEA. So, it’s pretty consistent across the board in terms of our pipeline of opportunities.

Got it, got it. Okay, and another one for me. In terms of – in your – the DN Now modernization plan, you highlight around like a 230 basis points jump in your services gross margin. Could you give a little more color on how you're going to get there?

Well, so we realized a 230-basis points improvement in the quarter over last quarter, and if you go back and look at our prior releases, we have targeted a goal of over 27% services gross margins. We’re seeing now three consecutive quarters of momentum flowing from our service and modernization program, and the key drivers around how we do that are: simplifying our contract base, introducing more automation in our [indiscernible] dispatch capabilities, as well as automating other aspects of our services business. So, there’s a -- there are eleven different initiatives underpinning our service modernization program, all really focused on driving out the precision with which we deliver services to our customers. And we started this work in Q2 of 2018, and are seeing very solid progress towards our multi-year goal of 27% margins at 2021.

Alright, thank you for taking my questions.

Thank you. Our next question comes from Ash Thomas with Bybrook Capital.

This is just a question on the balance sheet. It looks like there's $172 million there about the lease liability, which appeared this quarter. Would you be able to talk about what that’s in relation to?

Well, that is the adoption of the new GAAP requirement to capitalize leases effectively, and that’s – so that – we basically take in all of our leases, which are generally our fleet for services and then any leases associated with offices and buildings. And the U.S. GAAP now requires you to basically capitalize that and put it on the balance sheet. So, there's an offsetting asset and liability that’s grossed up our balance sheet. You'll see it in the Q, which should be filed today or early tomorrow, and it has no real effect on our operations or any other metrics that we talked about today.

Okay, great. Thank you.

Thank you. Our last question will be from Justin Bergner with G. Research.

Thank you for the follow-up. I just wanted to ask if the order activity in the first quarter met your expectations or fell fairly short of your expectations? And it seems like you’re, you know, reaffirming your revenue guidance despite somewhat stronger currency headwind, so is there something that's a tailwind that's not a positive offset to that?

Yes, Justin. So, you know, obviously order activity moves around a little bit quarter-over-quarter, so we try not to pay too much attention to any one quarter, but look at it over a trending basis, and we are encouraged by the momentum we’re seeing in our order activity. As I said, if you take a look at our operating performance in the Americas and match that to what we’re seeing in our pipeline, that's really fueling the growth in our order book coupled by ongoing strength in our retail business with Eurasia being more of mixed view. So, I would its broadly in-line with our expectations, and – you know, and as we look forward to Q2, you know, we’re very encouraged with the order activity to match against what we hoped to achieve for our plan.

Great, that’s good to hear. And then secondly, the SG&A initiatives that were listed on Slide 6 seems like some good initiatives there, is any of that incremental to the DN Now program as it was updated last quarter or is that just more spelling out some of the individual initiatives? These would be the reduction in SG&A.

It’s spelling out the additional initiatives. So, we [indiscernible]. Yes, it’s a subset of the 400 million that we talked about Justin. We’re just adding more color so that you can get a sense of how it [indiscernible].

Alright, thank you.

Thank you. This does conclude today’s teleconference. You may now disconnect. Thank you for joining us.