Diebold Nixdorf, Incorporated
Q4 2019 Earnings Call Transcript

Published: 11 Feb 2020

[Operator:]

Good day, and welcome to the Diebold Nixdorf Hosted Fourth Quarter 2019 Earnings Call. At this time, I would like to turn the conference over to Mr. Steve Virostek. Please go ahead, sir.

[Steve Virostek:]

Thank you, Britney, and welcome to all our listeners. This is the Diebold's fourth quarter earnings call for 2019. Joining me today are Gerrard Schmid, President and Chief Executive Officer; and Jeff Rutherford, our Chief Financial Officer.For your benefit, we posted slides which will accompany our discussion today. And our slides are available on investor relations page of dieboldnixdorf.com. Later today, we will post a replay of our webcast to this IR website.On slide 2 of the presentation, we are reminding all listeners 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.Over 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. Please keep in mind that our forward-looking information is current as of today, and subsequent events may render this information out of date.And now, I'll pass the mike to Gerrard.

[Gerrard Schmid:]

Thanks Steve. Good morning and thank you to everyone for joining our fourth quarter earnings call. 2019 was a good year for the company as we executed on our DN Now transformation initiatives and delivered financial results which were in-line or better than our expectations.To set the stage a bit, I want to reflect for a moment on way were one year ago. We were in the early stages of streamlining our operating model and simplifying our portfolio. And we had clear goals for strengthening our balance sheet. Fast forward today, after year one of DN Now and we have met or exceeded on every commitments we made and on track for future targets.As shown on slide 3, we reported total revenue of just over 4.4 billion, which was within our initial range and our results also included substantial currency headwinds of approximately $150 million. We delivered adjusted EBITDA of $401 million which was within our initial outlook from February of 2019 and which represents a 25% increase over 2018, and also included a foreign exchange impact of approximately $7 million. Most importantly, we exceeded our free cash flow target generating $93 million versus our initial expectation of breakeven.In line with our focus, these results demonstrate meaningful improvements in profitability and cash flow. We increased our non-GAAP gross margin by 280 basis points to 25.2% with strong margin expansion in all three segments and business lines. A progress enabled DN to boost its adjusted EBITDA margin by 210 basis points to 9.1%. Free cash flow increased by $256 million, and unlevered free cash flow jumped by $315 million reflecting our company-wide focus on driving both operating and networking capital efficiencies, while delivering these against a backdrop of significantly stronger customer satisfaction levels.Our progress reduced our leverage ratio by more than a full term ending 2019 at 4.4x. With this progress, our core business has a stronger foundation, yielding a more focused and efficient company. I'm extremely pleased with how the entire team at DN focused on our shared goals. It is because of our people that we're executing in line with our plan.On Slide 4, you'll see a list of operating achievements for 2019. Four our Banking customers, we enhanced our differentiation by launching our next generation platform called DN Series, the most the most IoT enabled platform on the market. We also introduced a new card based analytics platform called the AllConnect Data Engine through which we will further differentiate our services capabilities. During the fourth quarter, key wins included a multi-million dollar global agreement for dynamic software and DN series ATMs with Citibank.We're excited to work with Citi across its retail banking channels to help drive connected commerce with our dynamic software suite and DN series ATMs. In Belgium, we want a multi year ATM as a service agreement to update and maintain approximately 1,560 ATMs with a joint venture called JoFiCo. Our end-to-end solution features our DN series units and common DN Dynamic software stack and cloud based analytics from our AllConnect Data Engine. Banking product orders in Q4 declined year-over-year as we're up against a strong results from the fourth quarter of 2018, especially in Latin America. As we enter 2020, we expect some easing of demand from large North American banks as they complete the upgrade efforts.In the Retail segment, we increased our retail self-checkout shipments by more than 50% in 2019. More recently, a leading market research firm in our space, Retail Banking Research recognized Diebold Nixdorf as the largest self-service kiosk provider in the world. In the fourth quarter, we won a new $6 million contract at the US value retailer for kiosks and dynamic software. Continued growth in self checkout orders and the easing of point-of-sale orders were in line with expectations in the quarter. As the market for point-of-sale solutions evolves, DN's responding with introduction of an all-in-one point-of-sale system that brings together the latest technology in a stylish space-saving design.Important wins in the quarter included a $15 million contract with a Swiss Gaming Cooperative for 5,000 point-of-sale terminals and a new three-year $14 million agreement with a European do-it-yourself retailer to refresh the end-to-end customer checkout experience at several hundred stores spanning 12 countries. When I reflect on 2019, the greatest accomplishments are those which require coordination across large sections of company. For example, we're very encouraged by the broad-based success of our services modernization plan which includes proactively upgrading hardware or software on more than 140,000 terminals and implementing standard practices globally.Similarly, we have substantially increased our product gross margins by streamlining our manufacturing footprint, improving product pricing strategies and optimizing the number of ATM models. In addition, we dramatically improve the efficiency of our inventory levels, collections and payables which added $110 million to our cash flow. Allowing improving performance led to a successful extension of nearly $800 million of credit in August. With these accomplishments in the books, we enter the second year of our DN Transformation with momentum across our efforts and confidence in our strategic direction.Slide 5 summarizes our key DN initiatives which are positively impacting both the quality of revenue and the efficiency of our operations. Our execution momentum gives us confidence to increase our targeted growth savings from $400 million to $440 million through 2021. I'll comment briefly on several initiatives that have been in place for several quarters. First the transition to our new operating model is complete and about a $100 million of savings have been realized in 2019. Next, we'll continue to simplify our product portfolio and further optimize our manufacture footprint. Heading into 2020, our focus is squarely on realizing the benefits from our next-generation banking solution, the DN Series.Earlier in the call, I spoke about the actions and significant achievements of our services modernization plan. While we're pleased with our progress, we believe there is further room to improve service delivery and operating efficiency. In addition, we launched a new series of actions called software excellence aimed at improving our software operations and gross margins. We are enhancing professional services delivery by optimizing our resources and improved peace improved pre-sales scoping.Within our software products we're simplifying our offerings and placing a greater emphasis on software development effectiveness. Our efforts to reduce general and administrative expenses picked up steam in Q4 and are expected to deliver meaningful savings in 2020, as we build a fitful purpose support structure for our business. I've already mentioned our 2019 success, our networking capital and we are continuing to pursue efficiencies on this important metric. The final initiative on the slide is divesting non-core assets enabling us to focus on businesses that meet our return hurdles, creating value for shareholders.In 2019, we divested or shut down a half a dozen businesses which generated about 2% of revenue. During Jeff's remarks he will discuss our focus on revenue quality in greater detail, including two additional transactions which further simplify the company's business operations, enhance liquidity and reduce risk.On slide 6, I'll discuss the progress we're making to simplify our product portfolio. We successfully reduced the number of ATM terminals by about 30% in 2019. And we solidify plans to further reduce legacy terminals by about 45% in 2020. When coupled with changes to our manufacturing footprint and better rigor on contract bids, we expanded our non-GAAP product gross margin by 310 basis points in the quarter to 22%, which is a multi-year high for the company. Going forward, we expect to build on our success with the rollout of DN Series. Early field performance results are confirming substantially higher performance levels than our already strong field performance from prior models.Customer reactions have remained very positive and they see a compelling value proposition including a more modular and upgradable design which includes our next-generation cash recycling technology, advanced sensor technology and connectivity to DN AllConnect Data Engine which will increase uptime and offer a better customer experience, greater load capacity, improved reliability and industry-leading security features in a smaller footprint, and increased options for personalization and branding. We have initiated the certification process for DN Series with 240 customers across 35 countries. Our sales pipeline is growing nicely and we fully expect to round production as many certification processes are completed in the next few months.Slide 7 contains key performance metrics for services modernization plan. Our services renewal rate continues to exceed 95% during the fourth quarter, while our contract base of ATMs remains stable at 582,000. This chart shows our revised contract base figures which exclude about 35,000 units in China following our reduction in ownership in a strategic alliance as part of our non-core assets divestiture actions. As minority owners, services revenues from these units will be deconsolidated going forward. The recent trends in contract base units reflect our focus on making the business more profitable. We have completed much of this important work and as a result, we expect the services contract base to expand modestly to 590,000 by year-end 2020. In addition, evolving customer demands have created a growing opportunity for managed services and we're excited about the potential for securing these contracts.Our gross services margin increased 330 basis points versus the prior year to 28.2% in the fourth quarter. Once again, both retail and banking contributed to these gains. This is the sixth quarter since we launched the program and we have consistently delivered strong year-on-year gross margin expansion. Our momentum underpins our confidence in achieving full-year gross margins of 28% to 29% by 2021. Looking forward to 2020, our service priorities include continuing our modernization program across both banking and retail, growing our services contract base of ATMs and self-checkout terminals and leveraging our AllConnect Data Engine across more of our estate.On Slide 8, I'll cover our initiatives to further reduce general and administrative expenses. This is a key opportunity for DN in 2020 to further improve our effectiveness and efficiency. Within the finance organization, we are executing on centralizing our accounting processes, making greater use of shared services and increasing automation. In Q4, we build meaningful momentum and Jeff will provide more details about our plans to realize substantial savings from these actions of the next few quarters. During 2019, we reduced our IT spend by consolidating data centers, clamping down spend on legacy platforms and by proactively improving the resiliency and utility of our systems.In 2020, we are shifting our focus to digitally enabling more capabilities across the company. So while we continue to rationalize our legacy systems, our greater focus will be on implementing new tools to support our digital transformation. We also continue with our procurement rigor and are proactively managing external spent. Looking forward, we see incremental benefits to be realized. With respect to our real estate footprint, we reduced our office square footage by about 10% by closing or right sizing more than 40 locations. For 2020, our goal is to reduce office space by another 10% by also implementing more agile workforce practices.In the fourth quarter, we were pleased to drive non-GAAP SG&A expense to $169 million, a low point for the year. Looking forward, we expect our initiatives will harvest further efficiencies from functional G&A costs in 2020.Before I hand over to Jeff, I want to address what we're seeing with respect to the Coronavirus situation. Our first priority focuses on the safety of our employees, customers and suppliers. And we're closely monitoring all developments. We're also playing close attention to the impact that this developing situation may have on our supply chain production and logistics. As you're aware, many Chinese companies resumed production only yesterday. And with partial capacity and the situation therefore remains fluid. Our current view is that we may incur higher freight costs and could experience potential delays from our suppliers as they work to return to normalcy in a way that ensures worker safety. We're being proactive in developing alternative supplier strategies and have initiated efforts with other technology providers in exploring potential broader solutions to mitigate any supply chain disruptions.At this stage, the situation remains dynamic and any near-term impact should not change our long-term trajectory.Now over to Jeff for discussion of our financial performance before I rejoin with a few concluding remarks.

[Jeff Rutherford:]

Thank you, Gerrard. And good morning, everyone. 2019 was a very strong year as we took major steps forward in our journey to value creation and are looking forward to building on that success in 2020. As I discussed our financial results for the fourth quarter and 2019, please keep in mind that my comments will focus on non-GAAP metrics unless otherwise noted.Slide 9 contains our fourth-quarter financial highlights, which are squarely in line with the company's outlook. Excluding the impact from foreign currency headwinds and our divestiture, revenue declined 8.1% to $1.15 billion for the quarter. Many of you should recall that we reported exceptional strength in our product revenue in the fourth quarter of 2018, which is approximately $50 million more than we would typically expect resulting in an unfavorable comparison. In the fourth quarter and throughout 2019, we have focused on higher quality revenue and that have been proactively reducing our exposure to load margin business which had a fourth quarter revenue impact of approximately $40 million.As a result the year-over-year comps for the fourth quarter are not indicative of our 2020 revenue expectations. These efforts coupled with our DNR progress are producing tangible and sustainable gains to gross profit, operating margin and adjusted EBITDA margin. We increased gross margins by 300 basis points to 26.3% % which translates to higher gross profit of $3 million. Higher gross profit coupled with lower operating expenses enables the company to boost operating profit by 20% from $83 million to $100 million, correspondingly, our operating margin increased by 230 basis points, 8.7% while the adjusted EBITDA margin improved 180 basis points to 11.4%.Return on invested capital was approximately 10% in 2019 much better than our mid-single digit result in 2018. Going forward, we will continue to be selective about how we go to market and build on this momentum which you will see reflected in our 2020 outlook. We believe this will set us up nicely to execute on our growth initiatives for 2021 and beyond.Slide 10 through 12 contains segment financials for the fourth quarter and full year. On slide 10, we disclose highlights for Eurasia banking, which were in line with our expectations. Excluding currency and divestiture, revenue declined 8.8%. The year-on-year variance was primarily due to our proactive efforts to address low margin business. These actions include our service contract renewal discussions, higher margin thresholds, our new deals as well as decline in certain non core businesses which are in the process of being divested.Operating profit for Eurasia banking was impacted by revenue volume, as well as a higher mix of professional services, which has a lower software gross margin. On the plus side, we continue to drive higher gross service margins for this segment from our DN Now initiatives. For the full year, revenue declined 2.4% adjusted for currency; divestitures and other actions. This decline was primarily due to our actions to harvest low margin business, partially offsetting these trends, we delivered product revenue growth from customers and EMEA.Operating profit increased by $19 million or 13% to $169 million and includes foreign currency headwinds of approximately $10 million. Our operating profit gains reflect DN Now success and driving higher service and product gross margins, as well as lower operating expenses.Slide 11 provides financial highlights for Americas Banking. Fourth quarter revenue declined 1.5% after adjusting for currency headwinds and divestitures. During the quarter, we experienced lower product volume in Latin America, partially offset by product and software growth in North America. Operating profit nearly tripled in the quarter from $14 million to $40 million when compared with the prior year period. Again execution of our DN Now initiatives resolved in a 630 basis point expansion of the profit margin to 9.5%.For the full year, revenue increased 7% excluding the impact of currency divestures and related actions. ATM upgrades, the adoption of cash recyclers and increased software activity fuel these revenue gains. In our Services businesses, we exited certain contracts which did not align with our gross margin hurdle rates. Operating profit increased by more than $100 million to $120 million primarily due to our DN Now initiatives and revenue growth. This is by far the best performance in Americas banking, operating profit and margins since the combination.Moving to slide 12. Retail results were in line with expectations. Revenue decreased 15% after factoring in currency headwinds and divestitures due primarily to a challenging comparison. Our fourth quarter 2018 retail revenue was approximately $50 million or 15% above our quarterly average as we delivered on a number of large POS refresh contracts. Within this segment, we continue to grow self checkout product revenue as we experienced lower POS sales versus the prior year. Another factor is our strategic decision to reduce our exposure to low margin business such as shuttering our consulting business and discontinuing the reselling of certain low margin hardware from third-party suppliers.Higher quality revenue and better cost structure from the DN Now initiatives increased operating profit by 62% to $21 million.For the full year, retail revenue decreased 2.5%, again excluding the impact of currency divestures and related actions. Operating profit increased by 23% to $58 million as we've benefited from a more favorable mix of self-checkout products, higher services gross margins attributable to our services modernization plans and lower operating expenses.Referencing slide 13, I'm pleased with our team's ability to generate $93 million of free cash flow for the full year of 2019. On a year-on-your improvement of $256 million demonstrates the broad-based commitment to financial discipline across the company. The DN Now initiatives were the key to our success as we increased adjusted EBITDA to $401 million and harvested $110 million of net working capital.To put a finer point on our improvements. The company reduced net working capital as a percentage of revenue by 440 basis points from 18.3% to 13.9%. Our free cash flow progress is even more impressive considering that we offset $60 million of incremental interest payments. Unlevered free cash flow is $275 million, an improvement of $315 million. For the fourth quarter, the company generated free cash flow of $116 million and unlevered free cash flow of $168 million. All these metrics are squarely in line with our expectation; they do represent a quarter-over-quarter decline as we have focused on working capital management throughout the year versus the fourth-quarter push in 2018.A summary of our liquidity, leverage and capital structure can be found on slide 14. The company has sufficient liquidity to meet its seasonal cash flow needs, invest in R&D and fund our DN Now Transformation program. Total liquidity of approximately $770 million includes nearly $388 million of cash plus available credit. Company ended the year with gross debt of $2.1 billion and net debt of $1.76 billion. Our leverage ratio continues to improve, declining to approximately 4.4x at year end. Over the next few weeks for our credit agreements, we'll use approximately $50 million of our free cash flow to pay down secured debt, reducing 2020 interest cost.To the right side of this slide, we provide our debt maturity schedule. While there are no meaningful maturities in 2020 and 2021, we can continue to develop strategies to reduce our weight average cost of capital through the optimization of our capital structure, reduction of interest rates and extension of maturities. Today, we launched the process to obtain an amendment with our secured lenders which will allow us to greater flexibility to issue additional sources of long-term secured or unsecured debt.On slide 15, we outline our finance transformation actions and saving starts. Our Finance & Accounting transformation is a good example of the opportunities to harvest efficiencies from our G&A functions. We are replacing our legacy structure, enforcing standard processes and leveraging new tools to automate tasks. At a high level, DN will follow in the footsteps of many other global companies in centralizing back-office resources and regionalizing compliance activities. Our workforce streamlined finance personnel and processes which should lead to incremental G&A savings of $30 million in 2020 and another $20 million in 2021.Subsequent through the quarter, the company made significant progress in divesting nine core businesses. First, the company finalized a transaction to consolidate its joint venture operations in China with the Inspur Group. As a result, DN will repatriate approximately $25 million of cash and become minority shareholder in the combined operations. Moving from approximately 55% ownership to approximately 48% ownership. Due to our minority ownership status in the consolidated JV, we will report pro rata profit or loss on the P&L as equity and earnings of unconsolidated subsidiaries. Deconsolidating approximately $50 million of future revenue. We believe this transaction is an important step in strengthening our partnership with Inspur while reducing our risk and exposure to challenging ATM market conditions in China.In a separate transaction, the company signed a definitive agreement to sell its 68% ownership stake in Portalis to Data Group. This non core business provides application management and IT infrastructure, outsourcing solutions to certain financial institutions in Germany. The transaction is expected to close by the end of the first quarter of 2020 and is subject to customary closing condition. DN will harvest approximately $10 million in cash for its 68% interest and will receive relief from future liabilities including capital and pension obligations, while maintaining good relationships with common customers.During 2019, this business generated revenue of approximately $60 million. On Slide 16, we discuss our 2020 outlook. We are expecting revenue will be relatively flat excluding approximately $110 million impact from our recent divestures and reflecting expected currency fluctuations. Adjusted EBITDA is expected to be in the range of $430 million to $470 million, reflecting approximately $130 million of DN Now savings plus $25 million for growth initiatives; $10 million of non recurring profit from our divestitures and typical inflation headwinds and other items. When compared with 2019, we expect 2020 results will be slightly more weighted to the second half of the year, specifically we expect to generate approximately 45% of our annual revenue and approximately one third of adjusted EBITDA during the first half of the year.This reflects the timing of our product backlog, our DN Now initiatives and the priorities of our services business. Additionally, Gerrard mentioned, we are working with 240 customers and certifying our DN Series so it follows the production activity or ramp in the second half of the year. From a free cash flow perspective, we expect to generate between $100 million and $130 million for 2020 including the following components. EBITDA midpoint of $450 million and net working capital benefits of approximately $30 million. Net interest payments of approximately $170 million. Restructuring cash outflows of approximately $80 million; capital expenditures approximately $70 million which includes certain investments in our internal system supporting our digital transformation and cash taxes and other payments of approximately $45 million.And now I will hand the call back to Gerrard for closing remarks.

[Gerrard Schmid:]

Thank you, Jeff. In closing, following a successful year of execution in 2019, we enter the New Year in a stronger financial position with solid execution momentum and a more efficient core operation. We will advance our strategy as we expand our differentiation with DN Series, the AllConnect Data Engine, more sophisticated self-checkout solutions and the strength of our services organization. Secondly, by laying the groundwork for future revenue growth opportunities, by making targeted investments in services and software.And thirdly, by continuing to streamline the business, embrace standard processes and operate as efficiently as possible. And fourthly, by continually strengthening our balance sheet. This is our path forward toward long-term, sustainable value creation. To learn more about Diebold Nixdorf and our plans for value creation, I'd like to invite investors to join the management team for a discussion of our strategy, market opportunities and financials on Thursday, May 21st in New York. Please mark your calendars and be on the lookout for registration information from Steve Virostek.This concludes our prepared remarks. And we are ready to begin the Q&A session. Thank you.

[Operator:]

[Operator Instructions]Our first question comes from Paul Coster with JP Morgan.

[PaulCoster:]

Yes. Thanks for taking my question. Gerrard, you mentioned as we roll into the New Year that some of the larger banks of, it sounded like they've kind of concluded their upgrade process. And can you sort of just elaborate a little bit? Can you talk about the smaller and regional banks in North America? And for that matter in Europe and how they may kind of play out over the course of the end, how to reconcile all of the above with this sense that you're conveying that there's a pending kind of backlog associated with the new DN Series equipment that's been certified at the moment.

[GerrardSchmid:]

Yes. Good morning, Paul. Thanks for your question. So let me try and hit the different aspect to your question. As you rightfully put it, we're expecting some of the larger North American banks to wrap up some of their upgrade activity through the back end of 2019. So we don't expect that same level of volume through 2020. That being said, we continue to see very solid buying activity from the regional banks and community banks, as well as the larger banks in Latin America. Don't forget that those banks often operated fleet substantially larger than the large US banks. As relates to Eurasia, as we've discussed in the past Eurasia has been experiencing a slower ramp in the refresh cycle versus North American banks.And we're seeing decent buying activity through 2020 across multiple regions in Eurasia notably Southern Africa, the Middle East, Eastern Europe; parts of Western Europe and those ties to our broader observations that we're seeing a high degree of interest from multiple banks across the world for DN Series. And clearly that's what's causing us to feel fairly bullish about the back half of the year. And once we're through the certification processes that these banks are currently executing against.

[PaulCoster:]

Okay. One quick follow-up, sort of turning back to growth in 2021 and some of that growth will originate in things that are new to the world. Is it the DN Series product that you think fuel the growth? Is it software? Is it services? Is it stuff yet to be introduced over the course of the year?

[GerrardSchmid:]

Paul, I think it's going to be driven by three different factors. And obviously at 2021 still a ways out and our focus is on 2020, but when we think about medium-term drivers, it really will be from the DN Series program. We think that there's a lot of runway ahead of us for that in part because of just how competitively differentiated is. The second core driver will come from growth in our software business and the third core driver will come from, our comment I touched on briefly where we're seeing more and more banks showing interest in broader managed services, where banks will be looking to outsource broader parts of their value chain to players like Diebold Nixdorf and we think that that is an area and a trend that's going to continue to expand as we look out through 2021.

[PaulCoster:]

Just a quick question there, in which context? Why did you let go of the Portalis operations since it seems like it's contiguous with that managed service business.

[GerrardSchmid:]

No. It's actually not. That particular asset was focused on managing the data centers for certain smaller institutions in Germany. It wasn't a business that was particularly scalable for us. And as we've commented in the past, our broad focus is building replicable, scalable platforms globally. In that particular asset, it didn't meet any of those criteria. So it's not contiguous with the strategy that we're executing against.

[Operator:]

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

[MattSummerville:]

Thanks. Couple questions. First is to follow up on divestitures. Gerrard with these two transactions that you're discussing this morning, will this effectively conclude what you're looking to do divestiture wise? And maybe talk through that in a bit more detail in terms of what we can expect going forward.

[GerrardSchmid:]

Yes. Sure, Matt. So ultimately as Jeff alluded to in his prepared remarks, the divestitures that completed through 2019 in the first quarter accounted for roughly 4% of our revenues. And we continue to look at a couple of other assets, I'm not going to get into any specifics around timing, but they will be of a similar nature to one that you've seen us execute against in 2019 and we'll obviously report on those as and when they get concluded.

[MattSummerville:]

And then just to follow up just to the ATM market, you spoke a bit to North America and with respect to EMEA. What is your market outlook for Latin America for 2020? And what expectation should we be thinking about? Is it pertains to your business in Asia? I guess what I'm trying to get at is there still a drag on the top line in Asia or we effectively anniversaried that and maybe if you can work in some comments on what you're seeing globally with respect to recycling uptake that would be helpful as well.

[GerrardSchmid:]

Sure, Matt. Thanks so three different questions. As you're well aware we have very strong market position in Latin America. We're expecting solid activity in large markets like Brazil and Mexico. I think the one area we're mindful of is where the Mexican economy is headed. So that's an area for watch out for us but that aside we continue to expect decent activity across the big Latin American markets. Asia Pacific, I think you're spot on that we should have anniversary the more challenging quarters that we experienced in the past. And consistent with our strategy last year we continue to be very focused on markets where there is a sustainable profit pool.Part of the action that we undertook to deconsolidate our China joint venture will further allow us to have an easier compare going forward, but from end market demand perspective I think things are settling down somewhat in Asia-Pacific. And on your last comment related to rate cycling. We continue to see an evolving and growing trend as banks increasingly look towards recycling, but this has been a steady and consistent trend for us that we believe continue to work in our favor given our distinctive recycling capability.

[MattSummerville:]

And then one last one for, Jeff, in your prepared remarks towards the end you talk about some things you're potentially looking to do with your debt structure, balance sheet. Can you maybe provide sort of a two-year overview on what the broader balance sheet game plan is for Diebold, Jeff?

[JeffRutherford:]

Yes. What I would say relative to the long term is we are looking at debt markets and opportunities within debt markets continually. So it would be premature for me at this point to say what it's going to look like in two years, but obviously we have the term A and the term A1 maturity is coming in 2022. So that's the top of mind, what we are asking for today from our secured lenders is the ability to use other sources of secured debt other than just term loans. So that the -- we're trying to expand the field relative to opportunities for us in capital structure and at this point in time, I could speculate what it's going to be in two years, but I'm not really prepared to do that as we continue to evaluate the debt markets and what the opportunities are for us.

[Operator:]

Our next question comes from Kartik Mehta with Northcoast Research.

[KartikMehta:]

Jeff, just a little bit more on the balance sheet. You talked about I think you have $388 million of cash on the balance sheet. I'm wondering what's the optimal amount of cash you'd like to have on the balance sheet.

[JeffRutherford:]

Yes. Hopefully our treasurer you guys are listening, optimal number is zero right but we do have certain places where we have cash locked up because of currency restrictions and so forth. And we do have some operating cash. As we move forward in improving our financial performance and liquidity and so forth, it opens up some opportunities for us to continue to harvest cash. I would say a good target for us and there's some year end flow. Year end for us is a pretty significant collection period. So there's a level of float. I would say a very good target for us is in the mid 200s. Short term, I am telling, our treasury guys, it's much lower than mid 200. So if they are -- what -- since I know they are listening.

[KartikMehta:]

And then, Gerrard, maybe you alluded to this there a little bit in some of the comments you were making for 2021, but I was wondering almost every bank talks about branch collapse and consolidation or reducing the footprint as branch traffic kind of slows. I am wondering what the opportunities or risk are for Diebold as that takes shape over the next few years?

[GerrardSchmid:]

Yes. Kartik. I know that's been a theme that some folks are focused on and well what we see globally is very different postures across very different banks. And when we take a look at the absolute number of machines that are required, it's pretty darn stable. And as we see it growing shift towards banks replacing existing machines with recyclers that naturally dries a higher revenue point for us and a higher margin for us as well. So notwithstanding some of the things you might hear from one or two banks, we just don't see that unfolding in any material way to the downside.

[KartikMehta:]

And then just one last question, Jeff. Well, I know you've done a fantastic job on networking capital and as you move forward what do you think is a good percentage of revenue for networking capital?

[JeffRutherford:]

Yes. And by the way it's the total company did it an outstanding on networking capital. And we can't be broader or the organization to work together in operations and treasury and procurement and throughout the company. I would say we are --we have additional opportunity. It's not a 100 basis points, but it's somewhere between 50 and 100 basis points.

[KartikMehta:]

Over the next couple years obviously, Jeff.

[JeffRutherford:]

Yes. I am sorry.

[JeffRutherford:]

No. That's correct. Over the next few years.

[Operator:]

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

[JustinBergner:]

Good morning. Yes. Thank you for taking my questions. I guess for starters you had a very strong service gross margin in 4Q, I guess, over 28%. Is there a seasonal aspect to that or are you actually sort of based on the fourth quarter tracking ahead of your goals for 28% -29% service gross margin?

[GerrardSchmid:]

Yes. Justin, if you go back and take a look at our historical financials, you'll see that Q4 always generate stronger services margin than the other quarters primarily because of the loading utilization of our service technicians. So it always generally is a high point for us in the quarter. That being said consistent with my earlier comments, we couldn't be more pleased with the momentum we're building in our service of modernization program and at 28.2% gross margin in 2020, you focus that great jump off point as we enter 2020.

[JustinBergner:]

Okay. Thank you. That's helpful and then on the service base, the growth in 2020, is that primarily a function of the strong upgrade activity that you saw in 2019 in North America or is it broader than that?

[GerrardSchmid:]

No. It's definitely a broader than that, Justin. There is a specific initiative that we have underway in each of our various markets related to our overall services contract base. What the Americas activity adds a little bit to that, but it's actually related to broader initiatives.

[JeffRutherford:]

As well as we're coming to the end of some of that meaningful work to harvest the low margin contract.

[JustinBergner:]

Okay. Great. That's helpful. Maybe just on the cost and margin side and cash flow. The $45 million in cash taxes are you seeing -- it seems like you're seeing some reduction there as more of the earnings base shifts to the Americas versus the rest of the world? Is that accurate?

[GerrardSchmid:]

How much time we have. I'll try to -- I'll go in this --

[JeffRutherford:]

Gerrard signal to me to give you previous version of this.

[GerrardSchmid:]

Thank you, Jeff. By the way $8 million of that reduction is a refund a non-recurring refund. So we have seen a reduction in cash taxes, but what we need to do and I've said this before is that we need to -- we are paying taxes in two places. We're paying it in distribution subsidiaries so non-US and German countries where we sell product from Germany in the US to those countries, they resell it. So they're effectively owned distributors, although they do service on the ground there. So we need to optimize that relationship and like a distributor would do and maximize our profitability in Germany and the United States. The other issue we have and I've talked about this before is our capital structures not aligned with our tax structure. And we have all of our deductible third-party interest in the United States which drives the United States into a taxable law under current US taxable rules by tax laws that's not a good place to be.It's not a good place to be in a loss in your principal and profitable in the other countries and paying taxes because it limits what you can do relative to foreign tax credits. So we end up paying taxes in the US on a loss. So those things in combination, it's a combination of our relationship and with our distribution subs and their level of profitability and our capital structure relative to optimization where we should have the deductible third-party interest. Those things in concert can get us to a point where we could have a normal both book provision and cash tax.

[JustinBergner:]

Okay. Thank you. And then lastly the $25 million in growth investments against the DN Now savings, is there anything in particular that's targeted towards or is that just using some free cash flow flexibility to put much needed investment to the overall business?

[GerrardSchmid:]

So, Justin, this is very, very concrete actions that are underpinning those and as I said in my remarks, the specific initiatives in both our software and services areas.

[Operator:]

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

[IshfaqueFaruk:]

Hi, guys. Gerrard, you briefly touched on this in the last question. And that's the components of the DN Now targets; it's increased from your prior goal post of $400 million. Other than software and services, is there anything else to read into in terms of the -- where are the source of savings is coming from on the DN Now initiatives?

[GerrardSchmid:]

Yes. Just to be clear, Ishfaque, the prior question related to $25 million of incremental investments in future growth initiatives. Those do not factor into the $440 million of DN Now savings. The underpinnings behind why we increased the range was primarily driven by our execution confidence in a number of initiatives that are shaping up very nicely, areas like our services modernization program plus the finance transformation that Jeff referred to and a couple of others. So that's really the primary driver behind why we feel confident upping our targets. Things that we talked about in the past, it's really just execution confidence at the stage.

[IshfaqueFaruk:]

Got it. Okay. And in terms of -- you commented about it briefly in your prepared remarks. And that is the sales pipeline of the DN Series. It looks like there's a lot more customers than previous, it's like 240 customers. Do you have a sense for like what some of the order trends might be after the certification process is completed?

[JeffRutherford:]

Yes. We don't at this stage yet, Ishfaque, primarily because the certification processes are customer specific and country specific. And therefore have a range of duration patents related to them. So once we get further through the certification process, we'll be able to provide more commentary around it. What I would say though is, yes, there remains very strong interest, so that gives us the confidence to frame the remarks that we have.

[IshfaqueFaruk:]

Great. And Gerrard, any -- do you have any specific remarks regarding Brexit on your retail segment? I mean, like it was a little late, the retail revenues coming out of Europe?

[GerrardSchmid:]

Yes. We're not seeing any meaningful impact from Brexit, Ishfaque. The retail revenues that we talked about directly relates to a very difficult comparing Q4 of 2018 where there were some substantial point-of-sale deliveries in a couple of markets in Europe. When we take a look at the underlying forms of retail, we're very, very encouraged by the momentum we're seeing in our self-checkout business. Last year we grew self-checkout the units by 50% and we actually have to do substantially better than that in 2020. And that's offset by some moderation in-point-of-sale demand in Europe, but at this stage we don't see Brexit having a meaningful impact on our European patents.

[Operator:]

Our final question comes from Todd Morgan from Jefferies.

[ToddMorgan:]

Thank you and glad I could slip in. You guys have spoken about the managed services opportunity. I wanted to ask you to drill down a little bit more. I would assume for example that it's a long sales cycle and a fairly long implementation cycle. Can you give us any sense of where you are in the various sales cycles that I'm sure you're engaged in? And then if you win business, the kind of timeline it would take to really ramp that and for example do you have existing resources you can leverage or how many new staff would you need to hire and train?And lastly, is the margin profile that's similar to what you have currently in the services business or is there kind of a ramp as a new business comes on to get to that? Thanks.

[GerrardSchmid:]

Thanks Todd. There is a lot of granularity in your questions. Let me try and give you some high-level comments around those. This is --the good news is that managed services are not a new capability for the company. We are enhancing it, but it's not brand new and in fact when you take a look at some of our prepared remarks and we want to recently size the deal in Belgium for ATM as a service, managed services business. So the sales cycle it is somewhat longer than typical sales cycle. We're looking at depending on the size of the institution and a complexity of the transaction in the 6 to 12- month timeframe. Implementation is not materially more difficult than some of our existing services businesses and different aspects of the managed services proposition will have different implementation timelines.So we are adding some additional resources, part of the $25 million that I alluded to as incremental investments gets directed towards capabilities of that very nature that you just made reference to. And your last comment related to margins. From the transactions that we've secured to date, we're seeing higher margins coming out of our managed services business than we would see out of our broad services business, which points to an attractive profile for us, if we can build more momentum around that business.End of Q&A

[Steve Virostek:]

Good. I would just want to thank everybody for joining us for today's fourth quarter earnings call. If you have follow-up questions, please contact me at Investor Relations. Thank you.

[Operator:]

Thank you, everyone. This concludes today's call. Thank you for your participation. You may now disconnect.