Ladies and gentlemen, thank you for standing by. And welcome to the Diebold Nixdorf 2020 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Steve Virostek. Thank you. Please go ahead, sir.

Thank you, Ashley, and welcome everyone to Diebold Nixdorf's fourth quarter and year end 2020 earnings call. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, our Chief Financial Officer. To accompany our prepared remarks today, we have posted slides to the Investor Relations page of dieboldnixdorf.com. Our remarks are being recorded. And we will post a replay of the webcast on the IR website later today.

Thank you, Steve, and good morning, everyone. I'm pleased to join you today to discuss our investment thesis, our solid 2020 results and our outlook for value creation. I'll begin on slide 3 with our investment thesis. Since 2018, our focus has been on transforming our business model to generate strong free cash flow. We've been streamlining and simplifying our business through our DN Now transformation initiatives. We've owned these initiatives and increased our savings target to $500 million through 2021. With two years of solid execution in the books, our path to higher profitability is well underway. As our DN Now restructuring spend tapers off in 2021, we expect this to translate into a meaningful increase in free cash flow. The second element of our investment thesis is the ability to leverage our digitally enhanced solutions to drive sustainable top line growth and a positive mix shift. Slide 4 highlights power transforming our business model. In 2021, we will continue to enhance our productivity and anticipate delivering approximately $160 million of incremental savings. Key initiatives for this year include continued services modernization progress, driving a higher mix of our next generation self checkout retail devices, and next generation DN Series ATMs and investing in digital and cloud technologies to enhance efficiencies across IT, finance and HR enablement functions. And with DN Now transformation set to conclude by year end, our restructuring payments will also come to an end. With cash restructuring payments expected to be no more than $50 million this year.

Thank you, Gerrard, and good morning, everyone. As usual, my prepared remarks today will focus on non-GAAP metrics, unless otherwise noted. 2020 was a good year for us, especially when considering the challenges of navigating a global pandemic. The team made tremendous progress with our DN Now transformation, delivering for customers, advancing our digital enabled solutions, refinancing debt, and living our values. Before we review our operating results, I would like to discuss our non-GAAP adjustments summarized in note two of earnings release, including our transformation and restructuring activities. During the fourth quarter, we made a concerted effort to accelerate our transformation expenses and cash payments with the explicit goal to complete all expenses and payments for the DN Now transformation before the end of 2021. During that process, new projects were identified, including in our software business, which increased our total cost and payments. These incremental projects will yield longer term benefits. So there is no change to our cumulative DN Now savings target of $500 million through 2021. I need to note there will be no additional or incremental DN Now projects other than those identified as of today. For the quarter, we've spent $72 million of restructuring and transformation expenditures and paid approximately $60 million in cash. Since we are nearing the end of DN Now restructuring, we have scheduled all necessary severance spend. We are targeting a maximum of $50 million for these cash payments for 2021. Other non routine expenses in the quarter were minor and include balance sheet and contract cleanup of legacy issues and costs associated with divesting non core businesses. During the fourth quarter, non routine expenses were approximately $8 million. And we expect these adjustments have largely concluded with the exception of divestiture related costs. Slide 9 contains our financial highlights for the quarter and the full year. My comments will focus on the quarterly numbers. Before getting into the specifics, I remind everyone that the fourth quarter of 2019 was an exceptionally strong quarter for us. Despite a tough comparison, we performed exceptionally well. Revenue, adjusted EBITDA and free cash flow exceeded our prior guidance announced in October. Fourth quarter revenue of $1.1 billion declined 2.5% after adjusting for foreign currency and divestitures. Foreign currency was favorable by approximately $18 million, and the divestitures were unfavorable by $36 million. Our revenue variance was primarily due to unplanned delays of approximately $40 million, largely driven by the pandemic. We delivered product revenue growth of 1% versus the prior quarter showing a strong rebound from COVID-19.

Thank you, Jeff. Before we conclude our prepared remarks, I'd like to comment briefly on our longer-term outlook and financial targets on slide 16. Starting with revenue, we are targeting annual organic revenue growth of 2% to 4% through 2023, supported by the areas which I discussed earlier. We are focused on high quality revenue growth, which will be accretive to the company. We also expect to deliver ongoing operational efficiencies and gross margin expansion in our services business through widespread deployment of our all connect data engine, which underpins our growth service margin target range of 32% to 33%. In addition, we will be driving continuous improvements to the use of digital tools and standard processes. Collectively, these factors contribute to an adjusted EBITDA target for 2023 in excess of 13%. Stronger profitability, substantially lower restructuring costs and more efficient networking capital and management are key levers toward our goal of improving the conversion of adjusted EBITDA to levered free cash flow. Our plans call for increasing this ratio from 12% in 2020 to approximately 30% in 2021, and approximately 50% in 2023. We expect cumulative three year levered free cash flow to exceed $600 million. Furthermore, we believe the company can generate a return on invested capital of greater than 20%. As we increase our profitability and use excess cash to pay down debt, we expect to reduce our leverage ratio to less than 3x net debt to trailing 12-month adjusted EBITDA. As part of our commitment to sustainable growth, we're also affirming our commitment to be a leader in our sector in environmental, social and governance or ESG matters. Our key initiatives are summarized on slide 17. First sustainable supply chain and operations is vital to our customers and suppliers. Our focus is on reducing our carbon…

Your first question comes from Paul Chung with JP Morgan.

Hi, thanks for taking my questions. So just on your guidance for 2021 and specifically on the DN Series, how good is your visibility for the year? I'm working to kind of drive some additional upside in the second half. And then does your guidance kind of assume the pandemic continues for most of the year? Are you baking in possible acceleration in the second half? Then I have a follow up.

Good morning, Paul. So let me answer that second question first. We are not baking in any material acceleration of economic improvements to the back half of the year. Equally, we're not taking in any major deceleration if things happen to get worse. So we're effectively assuming a steady as you go scenarios quite similar to what we saw through the fourth quarter. As it relates to DN Series, as we mentioned in our prepared remarks, we had very solid order activity through the third and fourth quarters and are entering 2021 with a very strong backlog, specifically related DN Series so our visibility to revenues through the first half the year are very, very strong. And obviously given the sales cycles around ATMs somewhat less visibility as we look to the back half of the year. So clearly the back half of the year will be more influenced by sales momentum through the next quarter or so. But at this stage based on everything we've seen in the first several weeks of 2021, we're feeling confident about the revenue guidance range that we have around products in particular.

Okay, great, thanks for that. And then on your free cash flow, nice guide for 2021 a bit more than we expected. Looks like largely driven by your EBITDA conversion. How do we think about the working cap benefit of a $50 million that kind of puts and takes there, assume you'll be investing a bit of inventory for the DN Series, which can flex side, up and down as you move throughout the year? And any other metrics that you want to call it that are big kind of swing factors, if the economy of proof improves in the second half? Thank you.

Yes, Paul, thanks. This is Jeff. And relative to working capital, I will say this that if you look at our working capital performance in 2020, it was impacted by COVID-19. And in particular in cash collections and customer behaviors. And we saw a significant release of those pent-up payments in the fourth quarter. And that's why we beat our model in the fourth quarter is that we had very, very good cash collections, we are seeing that continue but our DSOs are still higher than they were at the end of 2019 by approximately five days. So we expect through the year that will continue to come down, and we're targeting that five day reduction thing. We also carry a higher inventory level than we normally would. In particular, we didn't have a big push for revenue at the end of the quarter. In fact, we were carrying specific inventory investments for certain customers higher than we normally would carry. We don't expect that to repeat it at the end of 2021. And we also know that we have ample opportunity relative to accounts payable and terms. So in all the three major areas of working capital, we see opportunity to harvest cash in 2021. But you're right, that $50 million is a key to our free cash flow conversion in 2021. And also I'll say it again, both Gerrard said it and I said it in our prepared remarks. That $50 million of restructuring payments in 2021 is a hard number. It's all scheduled out. It's dependent upon certain issues relative to works council negotiations and so forth. But we feel very, very confident that we will not exceed that $50 million restructured payment number for 2021.

Your next question comes from Kartik Mehta with Northcoast Research.

Hey, good morning, Gerrard and Jeff. Gerrard can you maybe give a little bit more detail on the revenue growth targets you've established through 2023? Maybe just the mix of how you get to that 2% to 4%?

Yes, good morning, Kartik. And happy to, let me start with 2021 and use that to bridge to the after years. As Jeff said, as we look at 2021, we think that product activity both in retail and in banking will fuel most of the top line growth fueled by strong backlog and sales momentum that we're seeing in the first half of this year. As we start to transition into 2022 and 2023, the mix starts to shift more in favor of software and services related growth areas like manage services and Vynamic payments that I made reference to. So that's the -- there is combination of what fuels the 2% to 4% organic growth rate that we're anticipating.

And then maybe, Jeff, you could talk about the leverage you're getting this year from revenue to adjusted EBITDA, would you expect the same type of leverage as we move forward? Or do you think that leverage increases after 2021?

Yes, we certainly believe that it will increase. We have given that longer-term guidance for EBITDA percentage. So what the key process and when we built the model, right is to leverage the enablement function. What we don't want to get into is, as we grow the business that we grow enabling function. So the key to what we've done with finance and IT and HR is making those functions leverageable to absorb growth without increasing costs. And, in fact, I'll even go as far to say is with the systems, the digital systems implementations that we're going through now, our expectation would be that we would see a decline in the percentage of enablement cost to revenue as we move forward to 2023. That would be our goal.

And then just one last question, Gerrard. Now there seems to be a pretty good demand for self checkout. And I'm wondering what you're witnessing, what kind of growth you had in 2020 on that, and what you're witnessing, and what you didn't anticipate in 2021? And if that solution is be able to be brought over to the US.

Yes, Kartik. So in my prepared remarks, I mentioned that from a shipment perspective, 2020 was a very, very good year. We grew self checkout shipments by 2% year-on-year, as we take a look at 2021; we're expecting very solid, very strong growth in the first half of the year, with perhaps a little bit of a moderation in the back half of the year, but still very strong growth. So net-net, we think we're in an interesting period of self checkout expansion across multiple customer bases. As you're well aware, our customer base more heavily skews towards Europe and Asia at the moment. But we're optimistic that with the launch of our new EASY range of DN Series self checkout that that'll position as well in other markets, including North America.

Your next question comes from Matt Summerville with D.A. Davidson.

Thanks. Good morning. Couple questions. First, maybe Gerrard, can you address how you guys are framing up the TAM for Vynamic payments? And you mentioned a couple of customer wins, top 10 banks globally, and I think a Credit Union here in the US. Can you talk about what the go forward funnel in that product line looks like for you guys?

Yes, sure. So let me answer this a few different ways, Matt. payments, as I'm sure you're well aware of sits at the heart of any large financial institutions operations. And therefore, technology investments in those areas tend to have a relatively long sales cycle to it. So these are big bets by financial institutions, not rapid sales cycle events. So I'm starting with that comment just to manage everyone's expectations around that the pace of customer wins. The second thing I'd say is when we think about the spanned by bank for these opportunities, they run in the 10s of millions of dollars from a software perspective. So this is not inconsequential software, this is very, very robust, sophisticated technologies. So when we think about the TAM, we think about it in three broad groupings. Our initial core target market would be the largest banks on the planet with very, very sophisticated needs to meet the needs of multiple payment types, whether it's credit, debit, Alipay, Venmo, Zelle, across multiple channels, and then in due course, we expect to be able to offer a similar offer to the large processors that solve, serve the needs of smaller banks and then in due course to smaller institutions. So I think that's how we anticipate the TAM evolving. And as we get into the year, we'll gladly share more details as we experience growth in that area.

And then as a follow up, Gerrard. In the past you've commented kind of where you're at with the DN Series certifications on the ATM side of the business, maybe can you give an update there and when you expect actual out the door volumes to really reach critical mass for you guys?

Sure, Matt. So we exited 2020 with north of 150 banks having completed certifications. And as I mentioned in our prepared remarks from an order perspective, DN Series are now a very material part of our order activity and as we move through 2021 we would expect DN Series to be the majority of shipment debt levels from an ATM perspective. So 2021 is the tipping point for us as relates to DN Series volumes.

And Matt on projects as well. So previously we had communicated 550 projects, we're well north of 600 projects right now. So I think that speaks to the attractiveness of the offering.

Perfect. And then if I can just sneak one in real quick for Jeff. You talked about kind of the first half second half revenue EBITDA cadence for Diebold in 2021. Can you also talk about how we should be thinking about free cash flow linearity, given the timing of cash severance payments working capital that you're looking to harvest? Can you kind of flush all that out?

Yes, and that's an area of continued focus for us. We will have, as you know, in the first quarter with incentive comp, payments, and so forth that will be our expected to be our lowest free cash flow, which would be a slight spin, right in the first quarter. We want to even out then, the other thing to take into consideration when I say that Matt is that our interest payment cadence has changed. It used to be that we paid the bond interest in second quarter and fourth quarter, now we're paying it in the first and third quarter. So that's going to have an effect on us. So the first quarter is going to be a use of cash. We're working hard to get the second and third quarters to at least flat, we will be positive on the operating side and being able to leverage the cash payments, interest payments we have in the second and third, and then the fourth quarter at all releases, especially now that we don't have a big bond payment in the fourth quarter. So it'll be a similar cadence, we're trying to level that out. And it's really swings on working capital. So we have a focus on working capital. But it'll be a use in the first half and then generation of cash in the second half.

Your next question comes from Jeff Hallett with Barclays.

Hi, good morning. Just with the significant growth in product orders in 4Q in DN Series. Can you just maybe talk about some of the dynamics there in terms of, do you see this, with DN Series, sort of an acceleration of the refresh that will level out over time, is it sort of catch up from weakness during the early parts of COVID. And then on self checkout, are you seeing significant growth you're seeing is it more market growth? Or is the company gaining share?

Good morning, Jeff. It's Gerrard. So let me talk about the DN Series ATMs first, I think we're seeing a few phenomena. So in multiple markets that would generally be characterized as developing markets, markets in the Middle East, et cetera, we're seeing market expansion by those financial institutions as they look to drive up financial inclusion. So we're seeing an expansion of the number of ATMs per institution in those markets. Second of all, I think we are seeing some catch up from the weakness of Q2 of 2020, as we're starting to see spanned accelerate from several institutions. And thirdly, from a cash recycling perspective, we're seeing much more heightened interest from banks in the Americas, in particular, for our fourth generation cash recycling technology. And I commented earlier on some of the new logo wins that we secured on that end. And as relates to self checkout, I know both ourselves and others have talked about the strength of the self checkout market. So there's no doubt that we're benefiting from strong market expansion for the collective opportunity set as consumers look for more self serve options. In addition, we are seeing some competitive takeaways in our favor, and we've commented on those in the past.

Okay, great. And Jeff, just in terms of the balance sheet, you've talked about wanting to simplify the capital structure over time. You have a good amount of time for the term at pretty attractive rates, but then you have high coupon global bonds in 2022. Are you looking at doing as you look at things now, are you looking at a wholesale refinancing sometime in 2022. Or could you look at parts of the structure before that.

Oh, well, we always monitor the market, right, but based on where the model is, we're looking more toward 2022. And we'll have the B -- we will become current at the end of 2022 mature in 2023. So that would be a catalyst for us looking at the markets very intently in 2022. But that doesn't rule out that will continue to monitor the marketplace. It's, as we all know, it's much stronger now than any of us anticipated. When we did the refinancing, obviously, we were right on the issues relative to the pandemic and the election disruptions. Where we miss it was on just the amount of capital that would be available in the marketplace and the markets function as well as they did. So will can -- we did that specifically, we did the refinancing in 2020 specifically to give us the time to mature the model to show growth in the model to get some movement of the rating agencies to make refinancing more attractive. So certainly that should happen by the end of 2021 and early 2022. But we'll monitor all the way through and the catalyst as I said before is the term B, which is very attractive from a rate perspective, going current and in the back half of 2022, and then maturing in 2023.

Your next question comes from Justin Bergner with G. Research.

Good morning. Thanks, Gerrard and thanks Jeff. I guess first off, I just want to delve into a when you spoke to at the tail end of your prepared remarks, Gerrard, you mentioned I think a top 10 us financial institution that had been ordering from a competitor for the last couple of years is that when selling DN Series equipment or other equipment, is it ATM or other equipment in your portfolio?

Justin it was DN Series cash recycling.

Okay, got it. So it's not sort of at this point, a replacement of their existing ATM, just sort of a product offered.

Well, as I mentioned in the past, Justin, cash recycling has certainly been growing in popularity across the world. And when we take a look at our mix between cash dispensing and cash recycling machines, we're seeing a greater and greater shift towards cash recycling. And as we've also commented in the past, the US has lagged the rest of the world around the adoption of cash recycling. And we were quite encouraged by this most recent move by a top 10 US Bank, as they're signaling a strong appetite to consider cash recycling.

Got it. Shifting gears in regards to the tax discussion that was very helpful. The 25% to 30% estimate effective tax rate and $35 million in cash tax payments against higher income seem quite manageable. Are those numbers representative of normal conditions under your current capital structure going forward? And are there changes when you are able to change your balance sheet that will lower those numbers further?

Yes, I would say, Justin that those are normal rates based on our statutory rates of the jurisdictions we're in. Here's what I say on taxes. And I'm going to be a bit -- it's bit of a sensitive topic, right when you're talking about 62 plus jurisdictions around the world and as they fight for the income of the organization, and for the ability to tax and collect tax payments. And you probably picked up from my prepared remarks. The imbalance between our distribution subsidiaries and our principals, right and that's why we reference market dynamics of the transactions. It makes little sense that the principals would be in a consolidated loss position, mainly due to the capital structure of the company, while the distribution subsidiaries make money and pay taxes. So we need to work on that balance between distributions, subsidiaries and principals. And then you're right, we need to align our deductible interest payment with the principal profitability, the adjusted principal profitability. So we need to align our capital structure between the two principals, the US and Germany. Now it's heavily centered in the US which drives the US in the loss. The combination of foreign source income and a loss generated by interest payments is the definition right? That the tax code is looking for charging an excise tax relative to profit shifting. So we -- that's what we're working on. Rebalancing the income levels between distribution subs and the principals that will help on the tax side on the payment side. But we're sticking with that provision side of 25% to 30%. We think that's a reasonable number.

Your next question comes from Ana Goshko with Bank of America.

Hi, thanks very much. It was great to see the guidance and in particular, the free cash flow competence, both for 2021 and into 2023. So I've two questions. So one just to put a finer point on the discussion on the debt pieces. The company does have an 8.5% bond that becomes callable next month, which I believe could be refinanced at a much lower rate. So is that something you are considering refinancing or based on your comments is that something that you would prefer just to call out and pay down with free cash flow? So those are the first question and then secondly, with the strong free cash flow outlook, to what extent does that open you to think about things like tuck-in acquisitions that might supplement the growth areas, which I think you've been constrained from in the recent past because of the free cash flow performance?

Yes, those are great questions. Obviously, we have been monitoring the unsecured market, right and looking at what potential opportunities would be, and fitting that into our priorities right now. And as I said earlier, that we don't have anything that we absolutely need to do until probably the back half of 2022. But we'll continue to monitor opportunities between now and then and the unsecured market is something that we have discussed. And I think maybe even your bank gave us some calls about that, and have advised us on that. So it's something on the table that we'll continue to look at and determine what's in the best interest. We have -- we do have a high interest in. Our weighted average cost of capital is high. Let's admit that, you know our capital structure, it's on the high end of the range. Fortunately, we have the return on invested capital that's greater than it. So we are creating value, but we are always going to be looking at opportunities to lower weighted average cost of capital. So we are monitoring that situation. And we don't want to lock ourselves into something today, because we can, that could be much better nine months from now. So that's what we're looking at. And then as far as investments, that's not built into that free cash flow forecast that we provided. But certainly, relative to value creation, it's not off the table, but we're not announcing anything today and like capital structure our strategy groups are very good. And they are continually monitoring what's available for us that could help us in our strategy relative to value creation.

Your last question comes from Marla Backer with Sidoti.

Thank you. Switching topics here. Can you talk a little bit about your product backlog? You certainly have enough growth there at the end of 2020. Can you remind us what the average time is revenue?

Marla, good day. It's Gerrard Schmid. I didn't quite hear you. You might have broken up a little bit. Could you mind repeating that?

Sure. I said could you please remind us what the average decline is for converting backlog, product backlog to shipments and revenue?

Yes, I can take that Marla, thanks for your question. So typically, we look at a product backlog is that would generate revenue in the new in the next 12 to 18 months time period.

So given the strong growth of the backlog I'm wondering, in terms of the conversion in your guidance, your revenue guidance seems a little -- there seems to be sort of disconnect there between the backlog growth and the revenue guidance. And I'm wondering if you could help me understand that better.

Yes, Marla, as I said in my prepared remarks, we have very good visibility for the first half of the year. And some of that revenue in the first half, we'll see as a result of the backlog converting, others will be related to selling activity. And quite frankly, we think it's very, very prudent for us to be somewhat conservative as we think about the back half of the year. And we're anticipating that we continue to manage through this pandemic, but we also want to leave ourselves a little bit of room, if there's any surprises on that. And so I think we're being a little bit circumspect with regards to our outlook through H2. Until we see and get more visibility around how lockdowns unfold and how accessibility to a broad vaccine plays itself out because, we have to keep reminding ourselves that this pandemic continues to be a very, very complex situation that can change outcomes fairly quickly.

So I just like to thank everybody for your participation in today's earnings call. And of course, if you have follow up questions, please give us a shout over at Investor Relations. Everybody have a great day.

That concludes today's conference. Thank you for your participation. You may now disconnect.