Good day, and welcome to the Diebold Nixdorf hosted First Quarter 2020 Earnings Call. At this time, I would like to turn the conference over to Steve Virostek. Please go ahead, sir.

Thank you, Serge, and welcome, everyone, to Diebold Nixdorf’s first quarter earnings call for 2020. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, Chief Financial Officer. For the benefit of our participants, we have posted slides which accompany our discussion and these slides are available on the Investor Relations page of dieboldnixdorf.com. Also we will post a replay of our webcast to the IR website later this afternoon. Slide 2 contains 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. On Slide 3, we remind all participants that certain comments may be characterized as forward-looking statements. And there are a number of factors, which could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company’s SEC filings. Participants should be mindful that our forward-looking information is current as of today, and subsequent events may render this information to be out dated. And now I’ll pass the microphone to Gerrard.

Good morning and thank you to everyone for joining earnings call. Due to the widespread and global implications of the COVID-19 pandemic, I will spend most of my prepared remarks discussing our response plans, the resiliency of our model and customer validation of our value proposition. We were very pleased with our results this quarter and Jeff will get into the details. From our perspective, we are executing in line with our strategy. We delivered stronger than expected orders, especially in Eurasia Banking and retail, while revenue was in line with our pre-COVID expectations and we continue to deliver strong year-over-year improvements in profitability. Starting on Slide 3, I’ll describe our near-term priorities. From the earliest stages of the crisis in January, our first priority has been on protecting the health and wellbeing of our employees. A second priority is on our mission to deliver essential services as designated by the U.S. government and many other governments around the world. Almost 100% of our banking revenue and around 65% of our retail revenue is generated from customers that are essential businesses. I’m extremely pleased that we’ve consistently delivered strong service levels. Banks, grocery stores, pharmacies and fuel convenience locations, which facilitates critical day to day commerce. Thirdly, we are committed to strengthening Diebold Nixdorf during this crisis. This means leveraging the operational rigor we have forged over the past two years to drive efficiencies in our business. It also means we are taking further steps to maintain adequate liquidity and ensure financial flexibility. Our response to the pandemic is guided by our company values shown on the right side of the slide, which have been in place and have underpinned our progress for the past two years. Starting with collaboration, our employees are using technology to collaborate on an unprecedented…

Thank you, Gerrard, and good morning, everyone. During my prepared remarks, my comments will focus on non-GAAP metrics, unless otherwise noted. Beginning on Slide 7. First quarter revenue of $911 million was in line with our pre-COVID-19 expectation and reflects the actions we are taking to drive higher-quality revenue. In order to make useful comparisons to the prior year, we have provided a table to explain five different factors. Our work stream for divesting noncore businesses accounted for approximately $13 million of revenue variance versus the first quarter of 2019. Next, you can see a $17 million variance from our efforts to reduce our exposure to low-margin business with most of the impact relating to our actions to call our portfolio of lower value services contracts. On the borrowing line, you will see a $31 million variance, which includes nonrecurring volume from the prior year period, partially offset by incremental activity in the current quarter. These items were fully known and planned for as part of our 2020 operating plan. We have previously communicated our expectation for year-over-year revenue declines in the first half followed by gains in the second half of the year. With respect to foreign currency, we experienced headwinds of $23 million in the quarter as the U.S. dollar strengthened primarily against the euro and Brazilian real. COVID-19 is the last factor on this table. Approximately $33 million of revenue, which we expected to recognize in the first quarter of 2020, will be recognized in future periods. This effect was predominantly in our retail and Eurasia Banking segments. Transitioning to the right of this slide, you will see the combined efforts of higher-quality revenue and our DN Now initiatives, as non-GAAP gross profit increased $7 million year-over-year. We achieved this positive result despite the effects of COVID-19…

Thanks, Jeff. I’d like to conclude on Slide 16 with a few reminders about why we believe Diebold Nixdorf is well positioned to persevere through this crisis and emerge as a stronger company. I’ll also provide a few color comments regarding April. First, we’ve been designated as an essential service provider to financial institutions and retailers. Our customers are counting on us to keep their businesses running. And during this crisis, the criticality of the ATM channel, point-of-sale and self-checkout channels have been reaffirmed strongly. Next, our position as a trusted technology partner produces strong recurring revenue streams, which underpins a resilient business model. Furthermore, our leadership team has demonstrated resiliency and an ability to execute complex transformation initiatives over the past three years. Considering DN’s operational rigor and our incremental cost actions in place, we are confident in our ability to navigate the current environment and emerge as a strong company. Before we turn over to Q&A, let me offer a few thoughts on what we saw in April. From an order entry perspective, we are seeing a moderate slowing in hardware decisions from customers in Eurasia Banking and retail, where projects are being delayed and not canceled. Within Eurasia Banking, these delays tend to be mostly evident within smaller Tier 2 banks. Within Americas Banking, order activity has remained largely in line with our pre-COVID expectations. Regarding installations, we have seen some hardware installations push out, typically by several weeks as customers focus on other priorities. In April, our factories shipped more volume than in the same period of 2019, reflecting the backlog as we entered Q2, even though we may see some implementations pushed out of Q2. From a services perspective, we continue to be fully engaged with customers in delivering strong service levels. And from a software perspective, we’ve not seen any delays in professional services projects from larger customers, but the only delays observed among Tier 2 and Tier 3 customers. Overall, employee morale remains strong as we rally around our customers’ needs and implement incremental actions to strengthen Diebold Nixdorf. In closing, while the current operating environment is dynamic, we remain confident in our people, our mission and in the resiliency of our business. We stand ready to support our customers as the global economic economy recovers. Our confidence is based on the DN Now foundation we’ve built over the last two years, the robust plans we’re executing and the tremendous response we’re seeing from Diebold Nixdorf employees who are living out at company values. With that, I’ll now turn it back to the operator, Serge, to support our Q&A.

[Operator Instructions] Your first question comes from Matt Summerville of D.A. Davidson. Please go ahead.

Thanks. A couple of questions. First, Gerrard, can you maybe talk about how COVID-19 may be impacting the timing of the commercial availability of the DN Series? And if there’s any sort of difference between the regions? If you could provide color around that as well?

Yes. Good morning, Matt. Thanks for the question. So I think there’s two parts to the question. COVID-19 is having no impact on our R&D or engineering capabilities to ensure that the full range of DN Series is available for the market. I’d say that where we are seeing some impact is not as notably in Eurasia unsurprising. We’re seeing a little bit of a slowdown of customers undertaking their certification processes, primarily due to the fact that they can’t access their own customer labs as they work remotely. So we’ve not seen any change in customer appetite, more somewhat of a modest delay in the execution of the certification series due to their inability to access their labs.

And then with respect to the incremental $80 million to $100 million of cost-out actions you guys are discussing this morning, should we assume that that’s a pretty one-for-one sort of drop-through rate down to operating profit? And then how much of the $80 million to $100 million is more structural in nature? Thank you.

Yes, Matt, this is Jeff. A large percentage of those savings are going to be one-time. We talked about the reduction in bonus. We talked about the deferral of merit increase we have some other actions we’re taking that have made – have been made available to us government programs, subsidy programs, and we also are participating in the government bat and payroll and income tax deferral programs. So all those things make up a majority of that $80 million to $100 million. But there are also some permanent items in there related to acceleration of finance transformation, what we talked about relative to real estate, some other areas of functional cost reductions that we didn’t get in any detail about. So it’s a mixed bag, but a large portion of that is going to be one-time.

Got it. Thank you guys.

We will now move to our next question from Paul Coster from JPMorgan. Please go ahead.

Yes, thanks Gerrard. My question is really slightly long term. And I’m sure you can anticipate this, but it feels like the world’s changed, that contactless retail behavior may be involved moving forward. Are you seeing any evidence of a change in behavior? Maybe there’s two ways to address it. One is in terms of the mode with which people will be behaving in retail and banking and the volume of activity moving forward, whether you see any change to your long-term prospects from any changes induced by COVID?

Good morning, Paul, and thanks for your question. So let me start by saying that there’s been a long-standing debate around the relevancy of the ATM channel. And there’s no doubt that COVID-19 has reaffirmed in spades the strategic relevancy and criticality of the ATM channel as banks contemplate their long-term needs. So I’d say if anything, we see that as a structural reaffirmation of the strategic relevancy of the channel. So I’ll make some comments on banking, and then I’ll shift towards retail. As we think about what does that mean due to changing consumer behaviors, and we’re starting to see growing interest from our customers for more tactical antimicrobial coatings on the ATMs. We’re also seeing, obviously, unsurprisingly, heightened interest in pre-staging of cash withdrawals from mobile phones. But I’d say that as banks contemplate the long-term relevancy of bank branches. We’re seeing emerging interest, but it’s still early days for banks to think about more sophisticated kiosks where they can use those to embed more IP rather than depending on a manned bank branch. So I think those are some of the factors that are on our mind as we look at banking going forward. I think that from a volume perspective within banking, during the steepest part of the lockdown phases, we certainly saw a material drop in cash withdrawals, unsurprisingly as people stayed at home. As markets have started to open up, we’ve seen the vast majority of those volumes rebound. Although clearly, one of the questions out there is whether there will be a slight dampening longer term effect? From a retail perspective, there’s no doubt that interest in self-checkout continues to grow. That was certainly a strong conversation set for us pre-COVID in Europe and post-COVID. As markets are opening up, we’re seeing that level of interest continue to heighten as retail shift towards more unmanned checkout devices. And certainly, there certainly seems to be some growing interest in touchless versions of self-checkout. But I would say, more broadly, from a volume perspective, we’re not doing our retailers anticipate depressed volumes. And when I say those comments, they’re primarily viewed around our essential retailers like grocery stores, which make up the majority of our retail business. I think that – the other thing that I expect to see across both retail and banking is heightened interest in managed services. As banks and retailers think about their total cost structure going forward, we believe that we will see heightened interest in broader outsourcing opportunities and some of the wins that Jeff talked about or evidence of that growing interest.

Well, thank you. One quick follow-up, perhaps for Jeff. And that is, do you see any credit exposure, any risk and not so much in the accounts receivables, but perhaps in your backlog and pipeline?

No, we’re not seeing anything right now. But I can assure you we spend a lot of time looking for it. And what we’re running is – one of the advantages of where people mix or and the experiences we had in 2018 and 2019 as we are very acutely engaged in working capital management, we run some very detailed direct cash flow models. And we are now meeting on a weekly basis with Gerrard and the finance team, and we are reviewing DSOs and DPOs and DIOs in a very detailed manner. And we are very acutely aware of what’s going on relative to working capital and cash flow. But to answer your specific question, we have not seen anything yet of any material nature.

Okay. Thank you.

We will now move to our next question from [indiscernible]. Please go ahead.

Thank you very much for this useful presentation. I have just a couple of questions. So first one is how much of the Q1 2020 revenue was non-recurring in nature?

When you say – the first quarter revenue non-recurring, you mean relative to just a more short-term purchase order?

Yes, exactly, yes. So it’s kind of – I’m trying to basically think about – so I was going to say, I’m trying to think about when you described, Q1 2019 had a decline of $31 million due to non-recurring revenues. I was just thinking in the same way, is there any non-recurring on short-term Q1 2020?

Yes. So just remember what our revenue, and it lines up with the resiliency discussion Gerrard had is that our services revenue is generally longer-term contract oriented. So that is a longer-term resilient revenue base. And the same is true of software. That’s why those two areas are deemed to be more resilient. Hardware tends to be based on purchase orders and refreshment needs of either retail or banking customers. So they’re non-recurring. So it’s based on the individual retailer or banking customers, refresh cycles, so what happens is if we have very large refresh cycles like we had in the first quarter of 2019 that do not recur, right, we’ll get an effect like we had in the first quarter relative to non-recurring refresh. Now what we have is – and based on Matt’s earlier question, we have the DN Series coming out in the back half of this year or was planned to come out in the back half of this year. So we’re going to see some shift, as we talked about earlier from the first quarter – under normal times from the first quarter to the second half in large refresh cycles. Gerrard, anything to add on that?

Yes. I could just add a couple of comments. If you think back to the comments we’ve made in prior quarters, one of the key themes we observed in 2019 was very, very strong order activity coming out of the Americas due to Windows 10 upgrade activities, with first part of 2019 being particularly strong with larger banks. And we’ve been quite clear and we’ve been expecting a slowdown in those activities as we enter 2020. So when you take a look at what was unfolding in Q1 of 2020, there were very few big one-time events unfolding, and there’s a spread more uniformly over our customer base. So I don’t think we’ll see as much of a concentration in Q1 of 2020 versus the same period last year.

Okay. That makes sense, yes. And then my second question is in terms of the services division and servicing ATMs, if we see maybe a slightly reduced usage, if people are kind of staying at home and not really going out to ATMs or bank branches, do you foresee a reduced need from your customers to have servicing? Are your contracts based on – can you remind me if your contracts are based on a number of levels of service in terms of frequency? Or they’re just general servicing agreement that covers their footprint?

The vast majority of our services contracts are related to the units being serviced, not the underlying transactional activity. Yes, so clearly, during the steep lockdown periods, we saw a moderation in transaction activity in some markets. But in other markets, we saw an increase in transactional activity. So our contracts don’t expose us to their variability as they’re tied to two units.

Great. Thank you.

We will now take our next question from Ishfaque Faruk from Sidoti & Company. Please go ahead.

Good morning, Gerrard and Jeff. Firstly, on the DN Now initiatives, it seems like you guys are stepping up your cost-cutting on the DN Now initiatives. Is that what you’re seeing is like leading to the step-up in the gross margin?

Ishfaque, good morning. The primary driver of our gross margin improvement certainly has been the sustained execution of our DN Now program, primarily across our services improvement plan, plus the emergence of momentum out of our software excellence program. Those are the two big good drivers within our gross margins. And then obviously, the second equally important part of our DN Now initiative has been the reduction in our G&A cost base, primarily led by Jeff’s efforts in the finance transformation program.

Got it. And in terms of certification – I’m sorry, I joined the call a few minutes late. Did you mention how many banks are certifying now?

There’s been an increase in the number of certifications underway relative to our last reporting period. I don’t have those numbers off the top of my head right now, but we can certainly share those at a subsequent period. But what I had said, Ishfaque, is that in some markets, especially those that went through more pronounced lockdowns. We have seen a slight elongation of the certification process, and banks have been unable to get to their own customer labs. There’s been no degradation whatsoever in terms of customer interest in the DN Series, but a slight elongation of the certification process.

Got it. And when it comes to shipments of banking products as well as retail products, do you expect like most of the planned shipments in Q2 to get pushed out to the back half of the year, is that how you guys are viewing it internally?

I don’t think that we expect the majority of shipments to get pushed out. It’s – you don’t forget that we – our shipments are impacted based on how the virus has been moving around the world. So the Americas have felt less delays than some parts of Europe and as certain parts of Asia open up getting that positive effect. So this is done on a customer-by-customer basis. We do expect and are seeing some push out into Q3 for units that are being produced in our factories right now, which is in part why we expect a slightly more challenging Q2. But we don’t expect all of our units to get pushed out at all, Ishfaque. I think it will be spread and will be unique to customer by customer.

Got it. Thank you, guys.

Thank you. We will now take our next question from Kartik Mehta from Northcoast Research. Please go ahead.

Hi. This is Basel for Kartik. Gerrard, I just want to ask you a quick question. Just your perspective of which segment do you think is going to recover the first? And which region do you think will rebound the quickest between the global market based on your opinion?

Yes. I certainly have no better a crystal ball gazer than anybody else. And clearly, the big unknown is whether there’s second wave of infections that causes a subsequent lockdown in different markets. So I think that’s the big caveat that frames everything we’re about to see. But if we go back and take a look at the financial crisis of 2008 as one data point to think about, we saw less impact on banking than we saw in retail. And we’re seeing a similar pattern play out this time around where retail gets a little bit harder hit than banking. So when I think about that, and I mentioned that in my comments, too, our banking segment has a higher proportion of services and software than retail, which is why I would expect it to be more resilient and potentially to rebound a little bit faster. But it’s all going to be a function, quite frankly, of what happens in the next wave as different markets go through their own lockdown in reopening phases. So until we all have a better handle on that, all I could say is provide those qualifying comments.

Great. Thank you. And do you think this will create a chance for you guys to grow market share as other players are facing more pressure and may exit the market?

I can’t kind of comment on the actions about this. What I would say is we’re feeling very good about where we’re at in terms of our competitive differentiation. There’s no doubt that our services business is standing very toll right now. And we’re extremely pleased with the service levels we’re delivering, that proves the operational strength of our business model. We’re seeing, again, from customers no degradation in their interest in our DN Series machines. And in fact, recently, we’ve picked up some more purchase orders from banks that historically haven’t bought hardware from us, which is a testament to their interest in the DN Series. And our software business is also showing some momentum. So net-net, we’re feeling good about the progress we’re making. And I think that positions us well once we’re through this.

Great. Thank you so much.

Thank you. We will now move to our next question from Barry Haimes from Sage Asset Management. Please go ahead.

Thanks very much for taking the question. I had a question about just sort of reconciling the free cash flow guide of about breakeven compared with the prior number of $100 million – $130 million. And it seems like you’re actually doing more on the cost side, and the margin is okay. So is it fair to assume that most of that difference is expecting a lower top line compared to what you thought prior? Anything – any color there would be great. Thanks.

Yes. We’ve – this is Jeff. We run multiple models and we run bottoms up, we run analytical models, we run black swine models, we run them all, right? And then we look at it from a cash flow perspective and what levers we can pull. So what the expectation would be is there’s going to be some impact to the top line based upon the discussions we had relative to products being moderately impacted. And then the margin fall through from that. And then we offset that with some of the actions we’re taking and cost reductions. And then from a cash flow perspective, we’re being very aggressive relative to reducing capital expenditures. We’re going to only spend critical capital expenditures that impact customer contracts or customer obligations. And then what we’re going to be doing is monitoring very closely our working capital and assuring as from a previous question that we don’t have slippage in DSOs, that we maintain our DPOs, and that we – in particular, we don’t build inventory, right? That’s where we have a primary focus. So all those things in concept and all the models we run, we see a path to at least breakeven free cash flow. So that’s what we’re talking about here in our various modeling scenarios, continuing to monitor working capital, continuing to monitor capital spending to continue to pursue either long-term or short-term expense reductions. All those things in concert give us the confidence of breakeven free cash flow.

Got it. So it sounds like just to – just one quick follow-up. It sounds like the breakeven free cash flow is an expectation in most of the scenarios, and it could be possible to do better than that. Is that a fair read?

Yes, that’s right. We’re going to pull the levers to preserve liquidity and to expand free cash flow wherever we can. That’s the focus of – and as I said earlier, the good thing is this management team is completely focused on that. And we don’t have to build that muscle. That muscle exists because of where we’ve been for the last two years.

Great. Thanks very much. Appreciate it. Good luck.

Thank you. We will now move to our next question from Rob Jost from Invesco. Please go ahead.

Hi. Thanks. Wanted to follow-up actually on that last question and just make sure I understood the free cash flow expectation. On Slide 15, there’s a footnote that it excludes non-GAAP, right? So what I guess I’m wondering what the add backs, what the magnitude of add-backs would be free cash flow to get to like a real free cash flow?

Oh, no, no. That’s the real free cash flow. What’s included in there from a non-GAAP perspective, is it picks up any – anything that’s non-GAAP that we take out, and we supply the schedule showing the non-GAAP adjustments, right, anything in there that’s cash flow is included in that free cash flow. The only thing that’s not included in that would be any cash effect, gain or loss from divestitures. And yes, so it does say it’s non-GAAP. But for example, let me give you an example, is – we will – from finance transformation, you’ll see in the reconciliation of non-GAAP that under the restructuring accounting rules, we recognize now for expense purposes, the severance costs associated with the headcount reductions that we’re executing on, and also the costs associated with the process of moving some of those – or those processes to third parties. So we incur those costs, too. Those types of costs, although we take them out as non-GAAP, we do include the cash effect in our free cash flow. So free cash flow on operations – yes, the only thing that’s not in free cash flow, and we also disclose it is anything outside of what we define as free cash flow, but we included a change in net debt, and that change in that debt schedules in there. What – and as I went through in the prepared remarks, what’s in there is currency adjustment on cash and any effect from divestitures.

Okay. Super helpful. Okay. And then my second question is around the DN Series. And I know the environment is causing a bit of delay in, I guess, the uptake. Could you put some numbers around that, help me to understand? So if you’re going into the year and your expectation was, say, 100% of whatever number, what are you looking at today in terms of that given some of the pushouts and especially with the certifications taking longer than expected?

Yes, Rob, I think I’ll frame it primarily by saying, if you go back and look at our prior comments, we always had a view that the DN Series was going to be more of a back end H2 event for us as customers have worked through their certification processes. So as some of those certifications are delayed, we may see some of those orders tip into 2021. I will tell you that we’re not overly uncomfortable with that outcome. Earlier on, both Jeff and I commented that there were select work streams as part of our DN Now initiative that are seeing modest delays and DN Series happens to be one of those. So the full year impact on 2020 is actually quite modest given the staging of how these orders were lining up.

Okay. Appreciate that. Thanks.

Thank you. And we will now take our last question today from Matt Summerville from D.A. Davidson. Please go ahead.

Just two quick follow-ups. Gerrard, can you maybe talk about the sustainability of the improvement you saw in software margins in Q1, I think, up almost 1,300 basis points year-over-year. And then also, I believe on your last call, you had commented that the company was budgeting some $25 million, I believe. Is it related to incremental growth investments? How you’re sort of thinking about that as well? Thank you.

Yes, Matt. So as it relates to software, as you’re well aware, large licenses in any given quarter can move the mix around. So I would just start with that comment. That being said, when you look at the timing of our various DN Now initiatives, our software excellence program is one of the key ones that we expect to ramp throughout 2020. And we do expect it to drive increased margins in our software business, largely, as we look at billable utilization of our professional services resources and where and how we deploy our software capabilities. So it’s a while – I don’t want to use any one quarter as a data point, we are fully expecting an improvement in our software margins due to those factors. In terms of the incremental growth initiatives, as I mentioned in my earlier comments, we do believe that coming out of COVID-19, banks, in particular, will have a heightened interest in managed services-related activities. And we continue to invest in those actions to make sure that we’re well positioned for COVID-19. We have trimmed the investment level modestly. But as Jeff said earlier on, we continue to focus on protecting the customer-oriented growth initiatives. And where we have trimmed up capital investments, it’s been primarily on internal systems.

Got it. Thank you.

Thank you. I would now like to turn the call back to Steve Virostek for any additional closing remarks.

Good. I just want to thank everybody for participating in today’s call. And if you have follow-up questions, encourage you to contact me at Investor Relations. Thanks, everybody, and have a terrific day.

Thank you. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.