Hello, and welcome to the Diebold Nixdorf Inc. Second Quarter 2021 Earnings Call. My name is Emma, and I'll be operating the call today. I'll now hand over to Steve Virostek, Vice President, Investor Relations. Please go ahead, Steve.

Thank you, Emma, and welcome, everyone, to Diebold Nixdorf's second quarter earnings call for 2021. Joining me on today's call are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, Chief Financial Officer. To accompany our prepared remarks, we have uploaded Slides to the Investor Relations page of dieboldnixdorf.com. Our remarks are being recorded today and cannot be reused without the permission from the company. Later this afternoon, we will post a replay of this webcast to the IR website.

Good morning, everyone, and thanks for joining us today for our updates. The company's transformed business model continued to perform on track during the second quarter as customer demand for our solutions drove strong product order growth. We're extremely pleased with the value that our customers are seeing in our propositions across hardware, services and software. While the demand environment is strong, we're operating in a more complex and inflationary supply environment that had a modest impact on our Banking business late in the quarter. Since we expect these conditions will continue, we're adjusting our 2021 outlook for profit and cash flow. Slide 3 highlights how we're leveraging our competitive differentiation to gain market share and grow our business. During the quarter, we delivered 6% revenue growth, spearheaded by our Retail segment that grew 38% versus the prior year period. Product orders accelerated this quarter, increasing 40% versus the prior year and reaching a 4-year high. Our success was broad-based with strong growth across all 3 segments. And our backlog increased by approximately 20% versus the prior year period. In our Banking business, demand for our next-generation DN Series ATM was strong and accounted for over 70% of all orders. I am pleased with the broad-based customer adoption of DN Series. We expanded our global business partnership with Santander Group to deliver customer innovation and operating efficiencies with more than 3,000 new ATMs, including DN Series and maintenance services in the U.S., Brazil, Mexico, Spain, Argentina and Chile. Additionally, in the United States, we displaced a competitor at both a top 10 bank and a top 25 bank with orders for nearly 700 DN Series terminals. We also booked 2 sizable contracts with National Bank of Egypt and Egypt National Post, valued at nearly $27 million for DN Series, Vynamic software licenses and maintenance.

Thank you, and good morning, everyone. I will begin on Slide 6 with a more detailed discussion of our second quarter results and key variances versus the prior year period. Where applicable, I will also make comparisons to our first quarter results for 2021. Total revenue for the second quarter of 2021 was $944 million, an increase over second quarter 2020, up 6% as reported and 2.5%, excluding a foreign currency benefit of $46 million and a $16 million impact from the divested businesses. Adjusted for foreign currency and divestitures, product revenue increased 5%. Service increased 2% and software was relatively flat. During the quarter, approximately $30 million of revenue was delayed due to extended transport times. This primarily impacted our Americas Banking segment and reduced total revenue growth by approximately 300 basis points. On a sequential basis, total revenue was unchanged. Non-GAAP gross profit for the second quarter was $262 million or a decrease of approximately $2 million versus the prior year period on lower gross margins of 27.7%. Gross profit in the prior year included approximately $17 million benefit from nonrecurring cost savings. Service margins declined 130 basis points versus the prior year period, which benefited from meaningful cost benefits of lower labor and spare parts usage during the second quarter lockdown in 2020. When compared with our expectations, second quarter service margins were in line and were slightly higher than in the first quarter of 2021. Product gross margins were down 350 basis points versus the prior year period due primarily to $8 million of higher freight and input costs and $5 million from an unfavorable geographic mix of Banking products. In addition, the aforementioned revenue delays contributed to the unfavorable mix. Software gross margins increased by 170 basis points versus the prior year period due to better contract management and resource utilization. On a sequential basis, gross profit margins declined 130 basis points in the quarter due to the unfavorable mix and higher freight costs.

Thanks, Jeff. I'll close our call with Slide 12 and 2 key messages. First, our growth strategy is showing strong progress, and we're experiencing solid customer demand for our digitally enabled and differentiated solutions with product orders up 40% and backlog increasing 20%. We are realizing broad-based market share gains with our DN Series ATMs. Customer adoption of our AllConnect Data Engine is accelerating. We're winning business contracts and adding to our payments capabilities. Our Retail business continues to deliver strong growth from self-checkout solutions and high service attach rates. Collectively, these accomplishments give us a high level of confidence in the enduring value of our solutions and our company's transformed business model. The second key message is that Diebold Nixdorf and many other technology-based companies are confronting a more challenging supply chain environment globally. The procurement, manufacturing and operations teams are doing exceptional work to mitigate longer lead times on semiconductors and other components, prolonged transportation schedules, inflationary pressures on direct materials such as steel, plastics and other electronics, and we will continue to work diligently with our suppliers to manage the volatility. These conditions plus higher freight costs are leading the company to adjust our 2021 outlook for profit and cash flow. However, in closing, we are pleased with the company and the team's progress in executing our strategy of providing differentiated solutions that are yielding strong order growth as well as our ongoing efficiency gains in our business model, our improved cost discipline through our DN Now program, all of which are leading to strong free cash flow growth and return on invested capital. This concludes our prepared remarks, and I'll hand the call back to the operator for our Q&A session.

Our first question today comes from Matt Summerville from D.A. Davidson.

A couple of questions. First, on the negative side of things, the $25 million EBITDA takedown. It sounds like you're instituting some actions to try and mitigate that. So I guess I'm curious maybe what that gross number looks like if the $25 million is a net number. And what are you doing in terms of mitigation? And what can you do with price capture as well to help offset some of that?

Matt, so at a high level, let's break it down into 2 components: direct material inflation as well as freights inflation. On the direct material side, we continue to work very aggressively with our supplier base to look for various mitigants. I'd tell you that we can mitigate meaningful amounts of inflationary pressure on our materials. Where it's more of a challenge for us right now is on the freight side, where, just given the massive demand for sea capacity, in particular, we're seeing more pressure on that front. In terms of the second part of your question, yes, we continue to look at our entire portfolio of solutions and are continuing to execute on adjusting our value to our customers to reflect a clearly increasing inflationary environment.

Yes. And the other thing I would add, Matt -- sorry, Matt, so this is Jeff. A majority of our adjustments are related to logistics. We have time and we have the people that are working on the inputs and the other aspects of cost increases. There's nothing we can do relative to increases. We're going to have to pay the -- to get the product especially to we're going to have to pay the rate cost to do that.

Got it. Obviously, orders up against, I would assume, a somewhat easy comparison relative to 2020 with that 40%. So maybe I was wondering if you could put that into context maybe what the comparison would have looked like versus the second quarter of '19. And then relative to -- I guess what kind of outgrowth do you feel you're delivering relative to underlying demand in both Banking and Retail to help illustrate your share gain?

Yes. Matt, I would say the most important comment I made in my earnings script today related to the absolute dollar value of sales activity relative to all prior events. This was the highest level of sales activity in 4 years. And while the comp against last year was easier, what's more important is where we're standing relative, frankly, the past 4 years and potentially higher than any other quarter. And that was broad-based across Americas Banking, Eurasia Banking and Retail, in all cases, each of those segments delivering roughly 40% growth, some higher, some a little bit lower but in and around that range. And we can see clear evidence that on the Banking side, we're winning market share because where we're seeing the growth coming from is from renewals in our installed base but also net new customers at the start who brought their ATMs elsewhere. And we're seeing that broad base across, as I mentioned earlier on, at the top 10 bank in the U.S., a top 25 bank in the U.S. as well as several examples in Eurasia, Latin America and elsewhere. And on the Retail side, while we are benefiting from a broad expansion for self-checkout adoption, we're also seeing market share takeaways, and we mentioned earlier on a very important win for us with a large U.K.-based retailer with 1,000 stores where we displaced a competitor. So I think there's meaningful evidence emerging that our products are showing very, very well and adding value to our customers.

Yes. The other thing I would add to that, Matt, would be when we look at order entry for the second quarter, don't forget, we had strong product revenue in the back half of 2020. So -- and we're comping against that. And we're also seeing a very strong conversion in the DN Series. So the product side of the equation is strong, which increases the issues relative to supply chain and moving logistics. But also don't forget that market share gains contributed to services contract base and after 3-month lag to our service contract. So strong product unit growth results in strong services contract base.

Our next question comes from Paul Chung from JPMorgan.

So can you talk about the DN Series win at the top 10 bank in the U.S.? What kind of drove that win? And if you could expand on pricing there as well and how that impacted the win. And what particular features of the DN Series is attracting customers and displacing competition? And I have a follow-up.

Yes. Good morning, Paul. So the predominant capability that secured the win for that top 10 bank was not pricing. It was our cash recycling capability. Yes. We're on a generation technology there and feel that we are distinctively market leaders in cash recycling given that we own our own IP in that space. Yes, that particular top 10 bank is looking to reduce their overall cash handling costs, and cash recycling gives them important enabler to do that. What we've seen in this quarter was an order that was several hundred machines in scale. We expect that to expand quite substantially with that top 10 bank. So I think we are very, very well positioned, and that particular institution was not a historical customer of Diebold Nixdorf. And as I said, pricing was not a meaningful factor in the equation.

Got you. And then just on gross margins, how should we think about the second half of the year? The push-out of $30 million in revenues, does that provide you some scale benefits in the second half? And any comments on seasonality of gross margin would be helpful. I assume that freight costs still weigh in the second half and maybe start to normalize maybe in '22. Is that the right way to think about it?

Yes. I would say, let's take the freight cost first is we expect it to continue through the balance of 2021, especially as we -- we need to get through the holidays, right? And that's what's clogging the -- especially from Asia. And we think it's going to last sometimes through the Chinese New Year, and then we'll get some relief. And hopefully, it will normalize, but we expect it to continue through the balance of 2021. From a margin perspective, we do anticipate and based upon the strong order entry we're receiving, that we're going to see strength in product revenues in the back half of the year even comparing to the strong back half in product revenue we had last year. And it's twofold, it's Banking and it's also the strong product growth in Retail. So one of the things to remember in the back half of the year, we do have a headwind in logistics, but we have a tailwind in comparison to DN Series from legacy ATMs. And our expectation is that we will see a lift in back half margins off of prior year margins because of that mix into self-checkout from POS and from legacy ATMs in the DN Series ATMs.

Okay. Great. And then last question. On the retail side, very nice self-checkout contribution. How do we think about the seasonality for this business as well? Do you still have expectations for seasonal second 4Q. And your order growth was quite strong with the timing of that recognition for that business as well.

Yes, I would say it's the same as what we just talked. We continue to see strong demand in self-checkout. But I think we can say that's a little above our expectations for both POS and self-checkout. We anticipate that the self-checkout demand will continue for some time. That's not only new self-checkout. We are also seeing market share gains in self-checkout. And self-checkout has the same unit model that ATM has. As we install self-checkouts, there's an extremely high conversion to services contract base. So we continue to see -- as we roll out self-checkout, we're seeing high 90% attachment to service contract.

Our next question today comes from Justin Bergner from G Research.

A couple of questions. The reduction in the EBITDA guide due to supply chain pressures, is that essentially all within the Americas Banking segment? Or is there a modest piece of it that's relevant to Eurasia Banking and Retail?

Yes. So let's break it down into a few different pieces, Justin. You heard us say earlier on that we're seeing inflationary pressure both in direct materials as well as logistics. So Direct materials is pretty evenly spread across all 3 segments. However, it is a smaller part of the inflationary pressure given that we have their procurement leverage to offset some of that. In terms of logistics costs, we do move goods around the world. But in that particular case, Eurasia -- sorry, Americas Banking, it's more than just reported than any other 3 -- than the other 2 segments because of the sea container capacity constraints between Europe and U.S. loads.

Okay. Understood. Now with respect to the shipments, I mean, you talked about having to, in some cases, pay for expedited freight. I mean can you delay some of these shipments with customers in order to avoid having to pay for expedited freight? I mean is that a feasible option or not so much?

Justin, as Jeff said earlier, based on everything we're hearing from the market, we anticipate the logistics constraints globally to be there likely through the Chinese New Year. So we clearly continue to work with customers to make sure we meet their needs, which often is the most important part here. In some cases, we will use the expedited shipping for spare products and other activities. Clearly, we are minimizing expedited shipping for wholesale ATMs given the weight of ATMs. But we have some flexibility to move things around, but I wouldn't say we're aiming to push things out to Chinese New Year.

Okay. And then with respect to the guide on the revenue side, I mean, what can happen at this point to sort of allow you to hit the high end of the guide? And I mean, is it effectively the case that the volume of shipments is a little bit lower because there's an inflationary price offset aiding your revenue? Or just help me understand sort of the contours of the maintained revenue guide, if you can.

Yes. The revenue we are seeing a little bit of a tailwind from FX, and that's built into the model. But to achieve the revenue guide, and this is why we are very highly confident we can do this, it's all based on demand and the ability to deliver that product to the customer base. And our segments do a great job of managing that process. Once we manufacture a product and couple the plant, it belongs to the segment, and the segments do a wonderful job and they're incented to do this, you have to think through that, to get those products, whether it's retail or banking to the customer for revenue recognition. So we feel strongly. The only thing, right, that we are really dealing with here is what we've already talked about, is the lead time and logistics, especially for the U.S.

Yes. broad-based supply chain volatility is really the only inhibitor to hitting our revenue guidance because the demand mix is for it.

Okay. Just one last one. Any sort of update on sort of your debt financing priorities given the favorable interest rate environment? I know you've talked about it on a couple of past calls.

Yes. Yes. And a reminder in our secured notes, there is an overall provision, making it expensive to do anything before July of '22. Now that's based off of interest -- remaining interest on July 22. So every day, that number declined. We monitor the markets. There are some things we've talked about. We will be having discussions with lenders and potential investors over the next 12 months. Timing, we're not ready to announce anything relative to timing. But we certainly are interested in the market. We will be rebalancing, obviously, for interest purposes. You've heard me talk about that ad nauseam in prior periods. So this will be both with U.S. banks and investors and European banks and investors. So we'll be doing the groundwork over the next 12 months. And when it's time to pull the trigger, we'll pull the trigger. Sure.

Our next question comes from Kartik Mehta from Northcoast Research. .

Any concerns at all that these delays could cause a loss in orders? It doesn't sound like the delays are that much. But as we move out through the year, as we get into the fourth quarter, any concern that the orders could be delayed into 2022 or you could lose them?

No, Kartik, we don't see any risk at this stage of losing orders. Yes, we work very, very closely with our customers. Our customers are acutely aware of these logistics constraints. We're not in this on our own, right? It's impacting every other company. Look at the front page of the business section of the Wall Street General today talk about that as well, right? So no, I don't see that as being a likely outcome, unless there's a material change in circumstances.

And any thoughts about potentially moving some manufacturing to the U.S.? Or do you think this is temporary and really no reason to kind of change where you're manufacturing or how you're manufacturing?

Yes, Kartik, we are actually well underway in terms of increasing our operational capacity in the U.S. to create some additional flexibility on our end to offset some of this pressure. And we expect those operational gains to start to support us as we move through the second half of the year. So that certainly will ease a little bit.

And then to help in 2022 as well, right, Gerrard?

That's right. But in 2022, we also expect the logistics scenario to be easing as well. So -- but absolutely.

And then just one last question. On one of the slides, you talked about the off-net and the success you're having there. I'm wondering if you could talk about maybe the financial success that could have, if it's already happening or right now, you're still in investment mode for that and it will take next year or the year after to really start seeing the benefits?

Yes, Kartik, we have already started to see some of the benefits of it. As I said in my prepared remarks, we saw 25% growth sequentially in the connections to our engine. So we now have over 90,000 devices connected. Recall, though, that we have an installed contract base that's north of 500,000 machines. And we're still relatively early in that . That being said, for every device that we -- we immediately start to see the benefit. So what you're starting to see is the improvements happened somewhat slowly just given that it's machine-by-machine, but they absolutely are starting to happen as well. We're seeing a reduction in calls for each device connected. And that's what gives us the confidence behind our earlier comments around longer-term expansion of our services margins as we're seeing that ready.

Our next question comes from Ana Goshko from Bank of America.

I have a few questions on items impacting cash flow or free cash flow. So the free cash flow guide was revised down in tandem with the EBITDA. But there is reference to working capital use for inventory purchases as a result of the longer lead times. And is that expected to resolve in the second half? Because I would think that, that would potentially continue to be a drag on free cash flow in the second half of the year? And then also just an update on what you're expecting for the total restructuring and other kind of DN or transformation costs for the year?

Yes. Hi, Ana. The -- from a transformation restructuring payments, it's still $50 million that we anticipate spending in '21. Yes, we're going to be up in inventory. We anticipate that mainly because we have -- in certain areas, we have lifted our restrictions on safety stock. We will have that inventory. And we more than likely, because of high demand, have more in-transit inventory at year-end than we would normally have. So in all, what we are modeling today is to be up somewhat in inventory. There are other traders we will pull to offset that to get to where we have guided relative to cash flow. And we haven't gone through all of the detail, but the bigger portions of it are that we're anticipating lower EBITDA for our guidance and increase in inventory working capital. By the way, that inventory working capital obviously is short term and will reverse in the model in '22. So increase 22. So where we're at right now is that, -- will be slight deterioration in EBITDA and inventory, we stick with the $50 million of restructuring payments and all other contributors, we'll have somewhat unmet positive impact stipulates to the one fit to the guidance we provided today.

Our next question comes from Marla Backer from Sidoti & Co. .

So you talked earlier about one of the characteristics you see on the Banking side in terms of driving some market share gains that you're experiencing, being the cash recycling capability. Can you talk a little bit about what you're seeing in terms of projected consumer -- customer uptake on the video-enabled capability of the ATMs?

Good morning, Marla. So video capability is certainly an attractive feature but it seems to be predominantly focused on the U.S. end consumer, and more notably amongst some of the midsized U.S. banks. We don't see broader adoption, quite frankly, due to different consumer preferences in Europe and other parts of the market. So certainly a less material contributor than we've been, for sure, recycling will be for our business. Yes. We are seeing, however, good demand within the U.S. market for that product.

Okay. And in terms of -- you've -- over this call and I think on the last call, you've talked about seeing service contracts growing in terms of the percentage of new product revenue. Can you give us a sense directionally of what you're seeing in terms of that conversion, like what percent of contracts for products being written today also include the service component versus, let's say, over the past 2 years?

Yes. So let me start the answer then I'm sure Jeff may add too as well. So Marla, within our Banking business, in any market where we have our own direct services organization, yes, the attach rate for services when we deploy hardware is exceptionally high, typically north of 90% with a very, very -- even higher recurring renewal rate for our services contract. So yes, as Jeff was saying early on, product-wise, we're so encouraged by our very high product order growth is that positively fuels the higher services revenues. And we're seeing, yes, the model to be pretty consistent and it's been pretty consistent for the past several quarters, which is what's giving us confidence as we look into future performance that our services revenue will flow once these machines are deployed.

And it's even higher in self-checkout. I mean self-checkout is extremely high. We just reviewed that, in fact, this week. Point-of-sale is smaller. It's a less complicated device. And our attachment rate for services and point of sale is somewhere around 30%.

And would you say that those metrics are higher today than they were, 2 -- let's say, 2, 3 years ago because service -- the service component is just becoming a more important part of the overall business?

Yes. Marla, we've put a lot of focus on making sure that services is one of our differentiated propositions. But as I said earlier, our attach rates in Banking has generally always been in the 90s. We've seen that largely be stable, sometimes a little bit higher. As Jeff said, on the retail front, we've seen a very, very strong uptick in the attach rate on self-checkout. It's a more complicated device of steady around 30%. So I wouldn't say, broadly, there's been a material change in the attach rate over the years. It differs by product, but the trend has been pretty consistent.

Our next question comes from Matt Bryson from Wedbush Securities.

I'll get to 2. The backlog growth number of 20% and the order growth rate of 40%, those are both really impressive metrics. But I mean, obviously, other than retail, it's not flowing through into current revenues. When you're looking for 3% to 5% growth for the year, it's not in 2021. I guess, typically, I would think about that at some point, certainly, your product revenue growth -- your product revenue is growing at something like that rate once you start to convert those orders into revenue. I guess is that the right way to think about things? And what's the timing on that, assuming you see that conversion?

Yes. Let me lead off, first, to a couple of higher-level comments. So as, Matt, some of them pointed out that, that 40% was against the later 2020 comp. What's more important for us is the absolute level of orders, they were strong. We fully expect to show very strong product revenue this year as we fulfill these orders, and you'll see those flow in Q3 and Q4. Obviously, we -- if I can tell you, as Jeff said earlier on, we have a very, very high degree of confidence in our revenue guide for this year, provided we can fulfill on the orders as we work on logistics and supply chain OpEx fees.

Yes, I agree. And as I said earlier, don't forget, we've had strong -- especially fourth quarter last year, we've had strong product. And because of the lead times and the relationship, to your question relative to order entry and delivery, we track that by customer, by product. So we have high visibility in all those orders as to when they're going to be delivered. We get to a certain point and the segments will remind us that, basically, we've got all the orders we're going to have for the year. And so when we look at our order entry, we can directly relate that to revenue recognition. So we track that. We track it monthly. They track it daily. There's a high level of confidence, to Gerrard's point. That's why we can call out $30 million for the second quarter because we had that for revenue recognition in the second quarter. When it didn't happen, it adjusted out of our forecast. So we track that conversion of order to revenue recognition very closely as we track the conversion of installed ATMs and self-checkout in the contract base. This is a -- the base of this model is very unit economics-oriented.

And then for a different question, Jeff, I think you mentioned on the call that you shifted over to DN Series, you see some benefit on the product gross margin side, logistics and component costs notwithstanding for -- I guess, my question there is you talked about 70% of -- I think you mentioned on the call, 70% of orders are for the DN Series products. I guess can you give us some color on what the percentage is in terms of shipments and when, timing-wise, we might expect shipment percentages to reflect that 70% order percentage? And then, lastly, just in terms of the magnitude of benefit or how we should be modeling the benefit, any color at all in terms of how that flows into the gross margin line when you're getting closer to fully transition to the DN Series parts?

Yes. Well, we're in the middle of a very high turnover from legacy ATMs to DN Series. And the reason being, as Gerrard discussed earlier, it's a better equipment, right? It's a better ATM. It's more efficient. It's very self-diagnostic, all the reasons it's connected to AllConnect on that end. It's very efficient, and it's more efficient to manufacture. That's what we'll say. I mean, we have competitive issues here, and we're not going to give all of our information. But let's just say that it's a better ATM that is more economical to --

Yes. And I would say, just to give a little bit more color on that, Jeff mentioned that the conversion rate is in slight -- as you start to look through H2, you'll start to see it unfold in our product gross margins as DN Series becomes a bigger and bigger percent of what we're shipping. So that certainly forms part of our view around our confidence on our EBITDA range and our gross profit range as well.

And Matt, we've made the statement that DN Series is going to be in excess of 50% of shipments this year. And you can imagine, with the 20% of the order book in the first half, that is going to flow through product revenue and product gross margin in the second half and then have an incremental benefit as it reaches a higher level in 2020.

Our next question comes from Rob Jost from Invesco.

Wanted to follow up on that last question. Have you quantified the margin uplift on the DN versus the legacy ATM?

For competitive reasons, we have not done so, Rob.

Obviously, for internal modeling purposes, we have all that information, we're just -- it's just not something we want to discuss. We don't want to discuss the unit cost of our ATMs

Sure. Okay. I wanted to make sure I didn't miss it. When you talked about self-checkout, the comment on the slide was that this was driving higher software and services. But in the follow-up, it sounded like services was fairly constant. I guess I just wanted to if I could dig in a little bit here and understand, with the self-checkout, is there something unique about what you're selling now that is driving, I guess, higher software? It sounds like service levels are very high.

Rob, you broke up there a little bit. So I'll take a crack at answering. If we didn't answer it, just come back on it. So historically, if you go back a couple of years, self-checkout was a much smaller part of our Retail portfolio. We've seen exceptionally strong tailwinds on that front. And also historically, services attach rates in point of sale were low in the 30% range. Self-checkout is a substantially more complex device, which is what's driving a much higher service attach rate in our favor, the attach rate that's typically north of 95%. So every incremental self-checkout machine we sell increasingly drives up our recurring services revenue. So we really expect to see ongoing strong growth in our self-checkout services revenue lane. Software also gets dragged along. As our customers look to deploy both point of sale and self-checkout technologies, they rely on us for software to power those devices. So again, this is a model where strong activity on the hardware front pulls through activity on services and software.

Okay. No, that obviously answer that question Okay. And then my last question is just around some of the pressures you're facing both on the logistics as well as the material. I heard you say that you expect this to last, to persist through the New Year, Chinese New Year, I think, is around where you think it might mitigate a little bit. But which way are things trending at this point? Are they still going up? Are you in a stable environment? I'm just trying to get a feel for how to think about the next quarter.

Yes. So let me break it into 2 different pieces. On the freight side, the inflationary pressures are high. Yes. We're modeling a modest uptick above what we saw in Q2 through the balance of the year on freight costs, which are quite high and then are anticipating for them to abate, hopefully, around the Chinese New Year. So that's one factor. The other factor, which I commented on in my prepared remarks is semiconductor demand is exceptionally high right now. I anticipate that, that may tighten further through the year rather than abate. And that one may tighten somewhat further into 2022. It's a much smaller inflationary pressure on us. That's one of an availability question for us, that inflationary pressure question for us. So while a lot of this call is focused on the logistics side, I would just broadly say that the overall supply chain environment is probably -- not probably, defensively, more complex than we've seen it in the years

Our final question today comes from Barry Haimes from Sage Asset Management.

Great. So first one, just it's not clear to me on these additional freight and other costs as to whether and how aggressively you're trying to raise price or put in surcharges to offset. So could you comment on that? And to the extent you are trying to do that, is there a point in time where you think a little catch-up on a dollars basis on price costs? That's the first question.

Yes, Barry, obviously, for competitive reasons, I would be a little bit circumspect on that particular question, but I can tell you that, across the board, across hardware, services and software, we have implemented various measures to offset a bunch of this pressure that we're seeing. The flow-through effect of those measures starts to be felt more notably in 2022, just timing of orders when they were priced, when things have been built and when revenue is being recognized. So I'd say, more broadly, we're bearing some of the inflationary brunt to the second half of the year. We're continuing to take incremental cost measures to offset that. But on the pricing front, that has to flow through into the following year.

Got it. Second question is just getting to some of the free cash flow pieces for next year. And so without forecasting and getting into any kind of an earnings forecast, but just in terms of other changes, so the $50 million on the restructuring costs, as I recall, doesn't repeat next year, so that would be a 50 benefit. And the $25 million reduction we've seen in EBITDA, given that you think things might normalize earlier in the year, so again, everything else equal, would that come back next year? And then are there any other free cash flow pieces that we should be thinking about?

Yes. Yes, and that's a good question. We are not only assuming that in '22, at some point in time, the availability of cargo capacity will improve but that the cost will adjust also. So based on that, yes, it would come back, right? And then from a cash flow forecast perspective, we talked about we'll be a little heavy in inventory than we originally modeled. That should come back, right? And also with what Gerrard said relative to DN Series final assembly capabilities closer in the U.S., that would help relieve some of the pressure on inventory. So we would assume that EBITDA would benefit, that we would see a reduction. And the long position we're taking in certain inventory categories, we will get that back. You're right, the restructuring goes to zero. And then, ultimately, and this is the question I received earlier, is we would anticipate if the debt markets hold that we'll be able to do something to reduce our interest payments going forward sometime in '22. But that's yet to be determined and is dependent upon market conditions and availability within the markets.

Got it. That's very helpful. And last sort of 2 questions. One is you've alluded a couple of times to the extra inventory this year that you had to put on, could you quantify what that number is? And then, lastly, if not for the supply chain issues, based on the strong order book, would your sales guide have actually gone up instead of staying flat on the reforecast? Or is a lot of the order strength more for delivery in '22 and it's really more of a '22 impact?

Yes. So the amount of inventory -- and I can give it to you as our second quarter was in the $20 million range, right, $20 million to $25 million of higher inventory. And we would anticipate that, that level may continue through the end of the year. Yes. The other question is a very interesting question. And I'm not going to answer it the way you asked it. Here's the way I'm going to answer it. If we didn't have any supply chain issues, we would anticipate in having a very good 2020, far better than what we expect.

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