Diebold Nixdorf, Incorporated
Q2 2017 Earnings Call Transcript

Published: 19 Jul 2017

[Operator:]

Good day, everyone, and welcome to the Diebold Nixdorf's Q2 2017 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the conference over to today's host, Mr. Steve Virostek, Vice President of Investor Relations. Please go ahead, sir.

[Stephen A. Virostek:]

Thank you, Alan, and welcome to Diebold Nixdorf's second quarter earnings call for 2017. Joining me today are Andy Mattes, President and CEO; and Chris Chapman, Senior Vice President and Chief Financial Officer. Per our custom, today's webcast is being recorded and a replay will be made available later this afternoon. For your benefit, we've posted presentation slides to accompany our discussion on the Investor Relations page of dieboldnixdorf.com. Slide two is a reminder that we'll be referencing certain non-GAAP and pro forma financial information, which we believe are helpful indicators of the company's performance. We've reconciled these metrics to their respective and most directly comparable GAAP metrics in our supplemental schedules of today's earnings release and the slides. On Slide 3, we remind everyone that certain comments may be characterized as forward-looking statements and that there are a number of factors that could cause actual results to differ materially from these statements. You may find additional information on these factors in the company's SEC filings, including our Form 10-Q, which we'll file next week. As usual, this forward-looking information is current as of today, and subsequent events may render this information out of date. And now I'll hand the call over to Andy.

[Andy Mattes:]

Thanks, Steve. Good morning, everyone and thank you for joining us this morning. Two weeks ago we made significant revisions to our 2017 outlook. I'm personally very disappointed and I know the management team feels the same. Given that our books for the quarter were not yet closed, we were very limited in the amount of information we could share with you. Today we will review our second quarter results, walk you through the elements that led to our recent revision, and outline the actions we're taking. Looking at market demand in the second quarter, we delivered 4% sequential order growth. Our book-to-bill ratio was greater than 1 in all three regions. The Americas region provided the strongest order growth and book-to-bill ratio due to large project sales for branch automation. On a global basis, we booked another strong quarter of recycling orders with six large contracts for approximately 6000 recycling units across all regions. Our backlog grew 6% sequentially to approximately $1.2 billion. Now let me take you through the main factors that led to our revised outlook and Chris will provide additional detail by segment. The biggest change is to our top line where we see full-year revenue coming in about $300 million less than previously anticipated. The weakness is predominantly tied to our banking hardware volume which also had a direct negative correlation to our installation services business. And while the recent order activity demonstrates the market acceptance of our new solutions and the competitive advantage we bring to our customers, the pace of orders to date is still short of our expectations. Additional contributing factors are for one prolonged installation schedules causing delayed backlog conversions and secondly, the earlier than expected contract runoffs from legacy Wincor base in the U.S. and at few niche IT service contracts in Europe. We also reduced our profit outlook due to the impact of the lower revenue and higher cost in our service business due to a complex timing challenge. This includes lower utilization of service techs due to the accelerated runoffs in the above mentioned contract. This was coupled with our strategic investments to maintain our competitive advantage in break fix services and grow our market, our managed services and ATM-as-a-service business. Also as the NexGen multifunction Diebold series reached critical mass in the Americas, we applied incremental resources, invested in additional spare parts and technical training to attain high customer satisfaction levels. In addition, like other North American companies in the IT services industry we're experiencing higher wage inflation and attrition rates among service technicians. The shifting to our action plans we've taken aggressive steps to solidify the top line and adjust our cost structure at the near-term revenue realities. We're boosting our sales transformation and sales excellence programs by giving up scaling our teams on the broader portfolio of services and software for banking and retail customers. We are investing in additional sales training and new hires for software and project management. For example, as part of our service growth activities we launched targeted sales initiatives to ramp up service attach rates of the installed base of ATMs. We had some early wins adding about 5000 ATMs under contract to date. We're also gearing up our ATM-as-a-service, our self checkout and our retail store lifecycle management programs in key markets. With respect to software, we're seeing increased opportunities to sell software at our installed base of customers. As an example, we had more than a dozen wins at U.S. regional banks in Q2. We also formed a partnership with Kony, the leader in mobile application software as recognized by Gartner and Forrester. Consequently, we're making a concentrated push to train our sales force to sell cloud-based mobile software platform, to offer toolkits and apps to current customers in every region. We are enhancing our product excellence program which among others consists of a holistic quality initiative across all lines of businesses which will ultimately improve performance for our customers and lower cost of both our systems and services portfolio. With respect to the product portfolio, we will streamline the number of terminals from 96 at the beginning of our combination to less than half by the end of this year. In the same timeframe we will have also renegotiated about 70% of our direct procurement spend and we're beginning to benefit from volume pricing on direct materials as well as optimization of freight costs. These actions have resulted in an improvement in systems gross margin. With respect to our overall integration we have completed or are in the process of completing several actions which should benefit our P&L by the end of the year. For example, we have taken all necessary actions to close our legacy Diebold plant in Hungary and our distribution logistics center in the Netherlands and we expect to complete these closures by year-end. We are well on our way to reducing redundant stocking locations globally. As of today we have closed some 200 locations and expect to close another 100 by the end of the year. We have also made good progress on integrating the field service organization which includes unifying the legacy IT systems and logistics support. With our work nearly complete in about 70% of countries we expect to drive increased operating efficiencies through fewer calls and faster fix rates. We are also making greater use of lower-cost call centers both offshore and near shore to improve both the cost and performance of our global delivery infrastructure. On the organizational front we would continue to remove management layers, reduce headcount and improve our decision making processes. We've reduced our global headcount by more than 600 FTEs and we expect another 300 employees will exit the business by year end. Finally, we continue to review our portfolio of businesses to reduce complexity and emphasize our more profitable entities. During the quarter we completed the sale of our electronic security business in Mexico and reached an agreement to divest our legacy Diebold business in the UK, opening the door for us to pursue major customers in this country with the full breadth of our portfolio. Our DN2020 initiatives continue to point to significant scale benefits for the new company. As a result of the increased visibility on our cost structure we now expect net savings of $240 million by the end of 2020. And now Chris will provide additional details on our financial performance.

[Christopher Chapman:]

Thanks Andy and good morning everyone. My comments today will focus on our non-GAAP results from continuing operations unless otherwise noted. In addition, we are providing select pro forma information for the year ago period to help facilitate more meaningful comparisons. I will first comment on the results for the quarter, then provide additional details on our recent change in the full year outlook. In addition given the accelerated timing of our earnings release this quarter we are changing our practice of filing the 10-Q the day of earnings and expect to file next week. Staring on Slide 6, we compare total revenue for the second quarter of 2017 with pro forma revenue from the year ago period. On a constant currency basis revenue decreased 11% primarily due to our systems and services lines of business for banking solutions. Looking at the mix of revenue on a GAAP basis our mix was largely unchanged from the first quarter. Services and software accounted for 61% of the business while systems accounted for 39%. Our geographic mix of revenue was 52% in EMEA, 34% in the Americas and 14% from Asia Pacific. With respect to our solutions, banking accounted for 74% of total revenue while retail was 26%. Moving to Slide 7, we compare key non-GAAP profit metrics for the quarter with pro forma results from the prior year. The $56 million change in gross profit is primarily due to the systems and services businesses which I will discuss in greater detail later in my comments. Operating expenses down $11 million compared to the pro forma 2016 results showing the benefit of our integration efforts and our overall DN2020 program. Operating profit was down approximately $45 million with operating margin of 3.5% reflecting the impact of the lower year-over-year volume partially offset by the reduction in our operating expense. Our adjusted EBITDA of $74 million was down approximately $47 million from the prior-year pro forma results reflecting the lower operating profit performance. Turning to Slide 8, non-GAAP services revenue decreased 7% in constant currency on a pro forma basis with growth in retail more than offset by decline in banking. The revenue decline is due to lower product related installation activity as well as lower contract services volumes both in the Americas and in EMEA tied to multivendor and IT contracts that were not renewed. The lower volume combined with the previously mentioned service investments resulted in a gross margin decline of approximately 240 basis points year-over-year. Looking at Slide 9, total systems revenue decreased 16% in constant currency compared to the prior year pro forma period. Looking at the performance in more detail, banking systems revenue was down 22% with the declines mainly in EMEA and the Americas largely related to completion of large projects in the prior year period. Partially offsetting the declines in banking, retail systems was up slightly year-over-year coming off of a very strong prior year performance that followed results in EMEA and Asia-Pacific. Systems gross margin decreased 150 basis points to 20.2% compared to previous year pro forma. The change in systems gross margins largely a reflection of the volume decline and customer mix partially offset by the initial benefits of our integration efforts as outlined in our DN2020 program. On a sequential basis, our systems margins increased for the third consecutive quarter as a result of our continued focus on deal quality and procurement initiatives. Turning to Slide 10, our software line of business delivered revenue of $110 million which was a decrease of 8% in constant currency compared to prior year pro forma. The year-over-year change is primarily the result of a tough comparison as we completed a large banking project in the Americas in the prior year period, partially offset by improvements in retail software solutions. Software gross margin increased slightly year-over-year. Moving to Slide 11, non-GAAP EPS was $0.08 for the quarter which is a reduction of $0.35 compared to the previous year reflecting the impact of the lower operating profit and higher year-over-year interest expense. As a reminder, the deal related interest expense was excluded from the non-GAAP results in the prior year pending approval of the combination with Nixdorf. The non-GAAP EPS for the current period excludes restructuring expense of $0.19 and non-routine expense of $0.78. The non-routine expense consists of $0.29 of acquisition integration expense, Nixdorf purchase price accounting adjustments of $0.56 and other net non-routine benefits of $0.07 mainly related to a gain tied to the divestiture in the UK. The impact for restructuring and non-routine items inclusive of allocation of discrete tax impacts was $0.48. During the quarter, the non-GAAP effective tax rate was a benefit of 2.7% with the year-to-date non-GAAP effective tax rate of approximately 20%. The non-GAAP tax rate in the second quarter largely reflects the year-to-date adjustments, but lower forecast performance across several high-tax countries. Items impacting the company's non-GAAP earnings arise from a number of different tax jurisdictions and the final amount incurred can result in variability in the non-GAAP tax rate. As a result we continue to hold a full-year non-GAAP rate at approximately 30%. On Slide 12, free cash use was approximately $134 million in the second quarter, reflecting an increase in use of $37 million. The increase was primarily the result of integration and deal-related expense payouts in the current period which included an obligation of approximately 20 million and stock compensation for employees of legacy Nixdorf. This largely brings the deal-related expense items for the Nixdorf transaction to a close. In addition, interest expense payments were also higher by approximately $20 million versus the prior year. On a year-to-date comparable basis free cash use is essentially flat. On the right side of the slide we provide highlights of our liquidity and net debt position. As of June 30, 2017 we reported cash on hand of $528 million and gross debt of $1.9 billion, resulting in a net debt of approximately $1.4 billion. The previously announced term B re-pricing became effective on May 9, 2017 and will reduce the interest expense by approximately $5 million per quarter with the full benefit starting in Q3. To provide a perspective on our net leverage ratio, if you look at the trailing 12 months pro forma adjusted EBITDA based on publically available information, the net debt to adjusted EBITDA is at approximately four times. Continuing on Slide 13, I will further detail the primary drivers behind our adjusted outlook for 2017. We have included revenue and adjusted EBITDA log to highlight the major movements that Andy previously summarized. Starting with revenue, approximately $225 million of the change in our expectation is systems related revenue which is inclusive of the software license and installation services tied to our hardware sales. From a solutions standpoint this was roughly a 70

[Operator:]

Thank you, sir. [Operator Instructions] And we’ll take our first question from Paul Condra with Credit Suisse.

[Paul Condra:]

Hey, thanks, good morning. You know, I guess just for the first question, I just wondered if you could kind of revisit the DN2020 targets from the Investor Day, the $3.50 in EPS by 2020?

[Andy Mattes:]

Yes, let me first go through the overall change in the DN2020 cost targets, so we had outlined approximately $200 million at that time and we have increased it to $240 million. You can hear from the expectations in 2017 we were looking to run at about additional $10 million through. And if you think about it from a sequential standpoint we are looking at pulling some things and from the 2020 standpoint into 2019 and accelerating some of the activities where we have seen very good progress. If you break it down by the major categories that we have highlighted previously, I’ll just take you through the three main buckets here. We had indicated service, cost of sales, benefits were roughly $50 million. We are increasing that to $65 million. On the systems side we previously had approximately $60 million and we are increasing that to $70 million. And then on the overall OpEx spend side we were at $90 million and we are increasing that to around $105 million. So, that’s the rough breakdown of what we see. With regards to the $3.50 that remains our outlook for the long-term and we are looking at pursuing all appropriate pathways to achieve that over the next several years.

[Paul Condra:]

Okay, thanks, and I just wondered, I mean in terms of the conversion delays, should we think of that more as kind of the new status quo, so you know when you were looking at your pipeline may be six months ago, and now when you are looking at it, you kind of thinking even things of couple of years out, are going to take longer to convert to revenue, and just kind of trying to think about, when we look at 2018 whether we should think of some of that revenue, you know that you were expecting then should also be pushed out as well?

[Andy Mattes:]

Paul, from a market point of view, I will consider this the new normal. The market has completely swung towards a big project market. The market has completely swung from what used to be three or four years ago a market that was aided and driven by break to a market that is predominantly focused on the developed market. Now the good news is these are higher value machines. Those have much higher software attach rates. These markets have much higher service attach rates and at the end of the day they're more margin accretive. The flip side there off is within the developed market the financial institutions that are buying are debating [ph] institutions, basically the top 100 o banks and those turn into bigger projects with longer installation cycles, but also longer decision cycles but inside the bank. As the projects get bigger more levels in the organization have to approve. So we would expect these longer projects related cycles to be the new norm and we're adjusting our thinking and our planning accordingly.

[Paul Condra:]

So just I guess, just lastly, I mean just on the - you know the deal slippage, can you talk about your confidence level then that around those deals closing in the second half and being similar in size and value to what you thought they would be originally?

[Andy Mattes:]

Let me just take you through, there's – we have three elements. Yes, we wanted to sell even more than what we sold in Q2, but that's the smaller of the buckets. The more important one is of the deals that we closed some of the deals were in the works for months and months. By the time we got down to, not just the frame agreement, but to the installation schedules and those came in very late in the quarter, the installation of these deals pushed out. So deals we had in the funnel what we had anticipated to have a rollout in the second half are now beginning to rollout after the blackout time starting February next year. And then the third bucket is that with our existing backlog we had a few projects where for a multitude of reasons the financial institution asked us to push the deployment into the next year and when you bundle all of that up, that's the deviation from the assumption that we had three months ago.

[Paul Condra:]

Okay, so yes, I just wanted to clarify it didn't sound like any deals that had, I mean significant deals that have been lost or that now are in question?

[Andy Mattes:]

We've lost some deals especially in Asia to local competitors, but that's also part of our conscious decision to not chase revenue for revenue sake. We're very much focused on deals that are margin accretive and some of the Asian markets have gotten into questionable territory when you look at the profitability and that's where we didn't go full throttle forward.

[Paul Condra:]

Okay, thanks guys. I'll jump off.

[Operator:]

And we will take our next question from Paul Coster with JPMorgan.

[Paul Coster:]

Yes, thanks for taking my questions, if you could, one so it sounds like you've lost a few service contract that run off. How many in total and is there a common theme to why you lost more, is that already encapsulates the new comment around the APAC move to local competitors?

[Andy Mattes:]

No Paul, no this is Americas and Europe. We're talking a handful and we can be very precise on those. The legacy Wincor installed base that we took over, especially in North America that's the base that ran off and we knew it would run off eventually, but that has accelerated. And then we had done IT outsourcing contracts in Europe basically on the fringe, they weren’t in our core portfolio, that either came to a completion or ran off. So those are the two main issues. To give you a data point, the legacy Diebold installed base in North America has been rock solid around 90,000 units for the last three to four years. And adversely the legacy Wincor installed base in Germany has been rock solid around 40,000 units for the last three years. So the main contributions of our service and our service profitability are very much intact.

[Paul Coster:]

And just for the - in the projects running - in insofar as these service contracts run offs, I anticipated that you'd step up and rebid on them and have a high win rate on the rebids, but have you just chosen to let it go or is it an actual competitive loss?

[Andy Mattes:]

If you look back at what happened in 2016 and we’ve now got enough data we have to concede that we lost a couple of points of flow share in 2016 and when you would say where did that happen, it very clearly points to the weaker of the two parties in the time between deal announcements and deal closure had market share loss, i.e. Wincor in North America and one financial institution and one of our top [indiscernible] has also made this very public that they won that the deal last year and we knew that we had submitted that previous call and vice a versa legacy Diebold in the European Diebold operations, so it’s. We knew it…

[Paul Coster:]

Andy I'm okay with - then that makes quite sense to me. What doesn't make such great sense to me though is that it should therefore be something of a surprise that the service margins would get impacted by the low utilization rate when you knew that was coming or is it a completely unrelated issue?

[Andy Mattes:]

Let me take you through the service margin issue and it's through the U.S. because that's predominantly where this hit us and it's down to three elements that are driving that. Very simple, a tech is not a tech, meaning once when you combine portfolios not every tech is trained on every technology, but if you think back two years ago, our Diebold techs had to know one product which is our Opteva product line. We then took over two products from the Nixdorf side and we rolled out two products in the NexGen Diebold series, which means we went from one to five, which meant we had to cross train, which meant we had people in training which lowered their utilization, but more importantly people are in different local geographies, so let's say we have a run off on a legacy Nixdorf product in California and we had growth with new contracts on the East Coast or in Canada. I still need the guy in California because he had the Wincor Nixdorf the main expertise on the product I cannot let that person go by the same token is underutilized while at the same point I have to dash up in other parts of the country. And that's when the scheduling gets so, important, as long as the schedules are rock solid you can plan for that. The minute that the customer accelerates one and slows down the other, our scheduling gets out of sync and you have underutilization and margin pressure.

[Paul Coster:]

Thank you, that helps. Okay, one last question then please, the new guidance, to what extent would you argue it's the risk of the outlook now perhaps you can give us some sort of sense on the puts and takes in either direction at this point?

[Andy Mattes:]

Yes, I guess I would start just with the learning’s that we've had here in the first six months of 2017 and I think it's very fair to say that we underestimated the amount of distractions tied to the integration. The amount of change that we introduced into the organization and also the size of the hole that we dug ourselves as we exited 2016 and came in to 2017 with the order activity in that second half of 2016. And so, as we looked at that second half of the year and we had to acknowledge some of these distractions. We had to acknowledge our lack of execution frankly that we've had and so we've tried to take a very prudent view of the second half. If I think about this across the two quarters, the third quarter we have roughly on a full revenue basis roughly 10% selling revenue as of July 1 that we did in the overall quarter, so we've taken a very thoughtful view there. And if you think about that also then from a fourth quarter standpoint, it's roughly 25%, 30% of selling revenue for orders that we have to secure here in the quarter. So execution is still key and we have to improve there, but I think we've taken a fairly prudent approach on the second half outlook.

[Paul Coster:]

Thank you.

[Operator:]

And we would take our next question from Matt Summerville with Alembic Global Advisors.

[Matt Summerville:]

Hey Chris, just a follow-up on the last question, typically at this point in the year, how much do you still have to sell for Q3 and how much do you still have to sell for Q4? I guess after this sort of massive reduction you've had in your top line forecast, I guess at the end of the day I'm just trying to figure out why we should believe this latest forecast which still implies yet again a big ramp in fourth quarter revenue if you're going to even come close to the high end of your revenue range?

[Christopher Chapman:]

Yes, I would say for the first part of the question Matt, the selling revenue expectations that we have are very much within our norm of what I'd expect from the combined company right now. The other piece that you have to keep in mind when you think about that fourth quarter ramp as well as we start to get the compounding effect and the benefit of our cost takeout of our synergies, so we're going to see a little bit more of that benefit. And again when you think about the overall range, the banking activity and the overall order intake that we get here in Q3 is going to determine whether or not we're at the upper or lower band of that. And the last piece that I would just highlight, when you think about Q3, we've also tried to factor in the normal European vacation or holiday schedule impact that you typically see a little bit of that lull from the overall August impact. So we tried to factor all of these items and to come up with a prudent set of numbers for the second half.

[Matt Summerville:]

And then if possible, I'd like both of you to address this, when I look at kind of where the stock is and if we think about a company that still has potential to earn $3.50, why have we not seen management step in and buy shares since this thing has been announced? I know there's blackout periods from time to time, but I've still been very surprised in particular that neither one of you have come into the market and can we expect after this big drop in share price that we've seen your behavior to change?

[Andy Mattes:]

Matt, first and foremost we were absolutely in blackout and there's no way that we were allowed to do anything and as you can imagine our lawyers have us on a very short leash when it comes to what is material information, what is insider information. Second, let me just point out the majority of the top management’s personal net worth is tied to the Diebold stock and also let me point out the majority of our long-term compensation, basically 80% of our long-term equity compensation is tied to the stock and the metric here is the TSR or the option price. So we are definitely in this thing and we're hurting just like any other investor personally big time from the drop of the share price and have every motivation in the world to do right for shareholders.

[Matt Summerville:]

And then just lastly, when should we expect service gross margins to trough or should we be thinking about the second quarter as being at that trough rate given cost savings, given utilization rates, all the sort of things that you've touched on throughout the call?

[Andy Mattes:]

Yes, I would say that if you think about it you're hitting some of that trough now. As I just highlighted you get a little bit of that seasonal effect of utilization in Europe typically in Q3 and then you start to get that higher utilization as we start hitting that higher ramp on the overall systems side. So that combination ultimately impacts it and then also as we move forward and we start to realize some more of our integration savings, there should be some step change benefits that we get in future quarters as well.

[Matt Summerville:]

Thank you.

[Operator:]

And we will take our next question from Justin Bergner with Gabelli & Company.

[Justin Bergner:]

Good morning Andy, good morning Chris.

[Andy Mattes:]

Hi Justin.

[Justin Bergner:]

A couple of questions here, I'll try and run through them quickly. On the service contracts not being renewed when you talk about accelerated runoff, could you maybe help me understand what that means, do the contracts actually end prematurely?

[Andy Mattes:]

These were systems that the customer took out of commission and replaced them with a different product that was not under our service agreement. And any service contract that you have, they have a bandwidth in which the customers are allowed to do, are allowed to do that and depending on the age of the system, some of the contracts had shorter duration times, so the customers were very well within their rights to do so. They did present to the bottom end of the commitment that they had towards Diebold and as I said they did that ahead of the schedule they had previously communicated with us.

[Justin Bergner:]

Okay, I mean if we sort of rewind a year or two multi-vendor service agreements were sort of a big revenue push for Diebold and you’re making progress on those. I mean has that momentum stalled or have any of these service issues affected that or has that mainly been on the margin side, do you think you could continue to use multi-vendor service agreements as a source of good revenue growth for the company?

[Andy Mattes:]

We will definitely continue to use multi-vendor services as a growth opportunity for the company. However, what we did notice is the stickiness or you can say the loyalty that these customers have with us is vastly different than the customers who’ve made a long-term commitment into Diebold Nixdorf technology. And hindsight we probably weren't nuanced enough in our anticipation on how you run these numbers because if you look at where the runoff came from, it's all in the multi vendor space because when we started this project Wincor was still the competitor.

[Justin Bergner:]

Okay, I appreciate the honest clarity there. Just finally on cash flow, I think the guide coming out of the end of the year was for $50 million of free cash flow. It seems like EBITDA, taxes if you tax effect that that's down by $60 million, CapEx is down by $10 million, restructurings is up by $50 million, that would sort of take me from positive 50 to negative 50. Is my math off or how do you get sort of closer to breakeven in free cash flow?

[Andy Mattes:]

Well, there are two things there. Number one on the working capital side, we've actually had some very nice progress internally improving the overall metrics looking at working capital as a percent of revenue down another 2% in the quarter. We were also down in Q1, so there's still significant opportunity there and with the down revenue and profit obviously we're going to look to bring out of working capital that's one to get some offsets there. Number two, when you look at the overall restructuring, the timing of the actual expensing that through the income statement versus painting that out of the cash flow, that's a variable. Right now, I see some of that payment coming more in the 2018 timeframe, but it is in our best interest as a company to accelerate and get that out. So, some of that is outside of our control. We've got to work with some other constituents, work councils and other things to get that finalized and so that's I would say the biggest wild card we have that could swing a little bit and I will look to accelerate and it could have a negative impact, but right now I would say it's more some of that's going to show up in 2018 versus 2017.

[Justin Bergner:]

Okay, would it be safe to sort of assume sort of 75%, 80% in 2017 and the rest in 2018 or what's a rough split for the cash?

[Andy Mattes:]

Yes probably closer to 50

[Justin Bergner:]

Okay, thank you for taking my questions.

[Operator:]

And we will take our next question from Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Hey, good morning Andy and Chris. Andy why don’t you go back to your comments on market share and you've acknowledged that there was some market share loss in 2016 and I guess if you look at the numbers for EMEA and the Americas it would indicate on the banking side that you've lost some market share. As we go forward, what has been done to make sure that you don't lose more market share or do you have any evidence to suggest that that trend is reversing?

[Andy Mattes:]

Hi Kartik, the first evidence of course is our improved book-to-bill ratio. If you take a look at our second half last year, we were right about 0.7-ish and we're now clearly through the one time marker. So, definitely more sales, meaning we're back from the competitive information that we have on the deals that we see, we basically win the deals that we - that our eye is on and we’ve been very successful especially in the Americas to regain some of the territory that we had lost. Canada was a very successful market for us as of late and the – so that piece I feel really good. The second piece a lot of initiatives around training on the software side. We see software sales go up and the nice thing that we see as a change is in previous years we would basically sell software with hardware shipments and of course we still do that, but we're now able to go to the broader installed base and sell new software, new software functionality, multi vendor software, new monitoring software and we're finding very receptive years in our customer community. So software business is growing very nicely. So, those are the two main elements and then let me reiterate, we will, we have and we will take a conservative stance on margins. We will not go down the rat hole of doing revenue for revenue sake. We're going to be chasing margin accretive deals.

[Kartik Mehta:]

And then Andy, as you look at the Americas and you talked a little bit about that starting to improve, but the market share you've lost or the deals that you lost are there any commonalities? Was it large banks, regional banks, was it a specific type of solution, were there any commonalities in those losses?

[Andy Mattes:]

Well, first of all go back and do what I said previously, regional banks in the developed markets are woefully low in their procurement efforts. So anything we do in this industry is large projects and predominantly it's the Zero or Hero, you either win them or you don't. Now what happens is, as I said the weaker side in each geography lost and if you step back and say what does the customer normally do, well you normally go with the more incumbent brands that you have. So it's no wonder that in Europe Nixdorf was the more reliable side to go with and it was no surprise that in the Americas Diebold was to say for a pair of hands to go with. But in this process, when we had a lot of uncertainty and needless to say our competition helped with that, we lose some deals last year. But as I said, I think we're on a very good recovery rate. Let me add another element to it. The fact that we were allowed to combine our business in the UK for over 12 months was A, unanticipated and B, created a very awkward absence of our company in what's the third largest developed market in the world. So with the opportunity that we now have, we literally just had our day one with our teams in the UK. My calendar is filling up with invites from large British banks who want to talk to us. We were completely absent. We were not allowed to talk to these people and with us being back in the market I would also expect us to have a better opportunity to participate in that huge opportunity that the British banks still are amongst some of the most active when it comes to technology refresh.

[Kartik Mehta:]

Then Chris, I wanted, when you in your prepared remarks, I just want to make sure I understood something, I think when you gave the new guidance you said the shortfall from a system standpoint you thought 70% was banking 30% was retail and I just wanted to, was this retailer that you anticipating on winning in the Americas and it's just taking longer or are these deals you were anticipating winning and they just went to a competitor?

[Christopher Chapman:]

It's a lot more of the former with regards to the deals taking a bit longer. We also had a couple of things in that legacy Brazil other business that rolled up into retail, but also given the environment in Brazil have pushed out. So, it's a bit of what you would call traditional retail and a bit of what you would call that legacy other than our roles in there from a consolidation standpoint.

[Kartik Mehta:]

And then just last question Chris, your net debt I think on a trailing basis you're at like four maybe on a forward basis you're like 3.5. Any issues with covenants or any other issues because the net debt ratio is maybe a little bit higher than you had anticipated?

[Andy Mattes:]

No, from a debt covenant standpoint looking at leverage we're at roughly 3x when you look at the overall agreement, but that's all public information as well. So, when you look at that and where we're at from a forward looking standpoint, we have no issues with bumping up against our leverage covenants or the other key items.

[Kartik Mehta:]

Thank you very much, I appreciate it.

[Operator:]

And we will take our next question from Joan Tong with Sidoti & Company.

[Joan Tong:]

Good morning. I would like to ask you about that $240 million in cost savings for that or synergy for that, that the Plan B in 2020 seems like you have accelerated or expanded it obviously the Diebold amount and how should we think about the trajectory now compared to like you know couple quarters ago you talked about the trajectory how we should be able to benefit or realize those cost saving. Is it accelerating, I'm just more interested in 2018 how much like cost saving synergy you can realize in that period of time?

[Andy Mattes:]

Joan, Chris is going to give you a little bit more of a breakdown in a second. Let me just give you one of the main levers and it shows you where our teamwork is really starting to pay off. We had said that we would take the number of terminals in our systems business from 96 down to the mid 30s by the end of 2020. Given the work that has been done we are able to accelerate this by a complete year which will not only benefit our hardware business, it also has a very positive flow-through to our service business because you have the flip effect that I've tried to describe earlier, less systems out there, less systems to train people, less parts, et cetera, et cetera. So, if you're looking for drivers over and above aggressive cost management that's one of the very big levers that we're able to pull and Chris can give you a little bit more breakdown on how it manifests itself in the P&L.

[Christopher Chapman:]

Yes. And I would add one additional example as well. If you think about it on our service side is and looking at the opportunities, we clearly see some major opportunities for cost out in Europe. Some of these areas we are exploring and we have or are in the process of getting the appropriate agreements to do more near shoring, especially given where we've seen the overall profit out and that's going to take some time and there are also some systems related efficiencies that we’re looking to get and these also take some time to implement. So some of this is, you have to invest a little bit and you've got to work through some of these agreements before you get it. That's why you see some of this layer in more in that 19-20 timeframe from an overall ramp and so, if you think about it, year one we're looking at roughly $50 million and around 20%. Year two, that's going to ramp and be somewhere, roughly 40%, 45% and then as we get some of the full benefits of the systems initiatives and finalize on the headcount out unfortunately certain markets are not like the U.S. where you can take a decision and effect it in months. It takes quarters at times to get some of the people out and that's where we see it then ramping more so in the 2019, 2020 standpoint to get to the full 240.

[Joan Tong:]

Okay, okay. Got it, thank you. And then we just stick to the market share and then on the sales side of things, so obviously you lost some share in late 2016, but then in the past couple of years we also have seen like, some of those Asian vendors have come to America and take some like business away from of you guys and also what your competitors like, on the western world. So, I'm just wondering with the winning of the patent litigations from Pousung, [ph] I'm just wondering like, how fast are we would see some positive impact there, may be winning some market share back on that front?

[Andy Mattes:]

But the biggest, the biggest market what we were not actors and because one competitor gained a lot of share was in the ISO market in the U.S. We have had our first wins into that market late last year, early this year. We are definitely gearing up our product portfolio for this market segment and you should see more of Diebold Nixdorf also in the ISO space going forward. Now having said that, those are also longer sales cycles to get these partnership agreements in place, but that's definitely the area where we are going to fight back and are looking for additional markets that were not on our radar screen in the past.

[Joan Tong:]

And okay, any you know, sort of potential opportunity in the larger bank customers and we know like some of them actually have used like Pousung [ph] products in the past couple of years, any potential to get back some of those business from them?

[Andy Mattes:]

We're very aggressively pursuing all the large banks Joan and why you never know in which one you will have a breakthrough just given the level of interaction, the level of interest in our portfolio. I would expect us to also break into accounts where we work at successful in the past, but I cannot give you a breakdown at this point in time in earnest to say where that would materialize first. But in general, let me give you another data point, because the question behind your question is, why do you think you're winning? And one of the biggest things that we've done is we've truly refocused our company in the last month on customer engagement and customer interaction. And yes, you can blame us for having been too inwardly focused especially in the second half of last year. We've taken very aggressive actions to change that. We've also taken very aggressive actions to invest into innovation. If I take a look just at our deep budget today, we will break through the 50% barrier on the downward slope of how much of our money goes into maintaining existing systems. And by the way in the past by the legacy company these numbers were probably pushing closer to 70. So as we reduce terminals, the amount of money that we spent on legacy, maintenance and all that stuff goes down rapidly and the amount of money that we can invest into go forward topics, into recycling, into software, into cardless ATMs, into connectivity, into cloud based solutions is going up dramatically and that's one of the main drivers for our future growth opportunities as we sit today.

[Joan Tong:]

Right and then finally like, you're 2020, the end of 2020 you mention that 2% to 4% like top line growth and knowing that you have a near normal right now and things seem to be, projects seems to be more complicated, but like that secular driver there is should be still there and so we shouldn’t change, think of that any change to that like sort of like, your target at 2% to 4% top line growth a year?

[Andy Mattes:]

Yes, I guess a couple comments here. First of all we're getting a little more detail on this. Whenever we started talking about 2018 when we look at the $3.50 as I mentioned earlier, we're looking at a balanced path to get there and obviously some level of low single digit growth is helpful to drive it overall. And we just need to see where some of the things are out in the market here and we'll update accordingly, but again we see great opportunities. There's some very interesting step change, type of projects that are out there and it's too early to I think get into the long term details about 2020 on the top line, but we've got a lot of opportunities on the bottom line to drive the overall earnings accretion.

[Joan Tong:]

Okay, all right guys, best of luck for the rest of the year. Thank you.

[Andy Mattes:]

Thank you.

[Operator:]

And we will take our next question from Jeff Kessler with Imperial Capital.

[Jeffrey Kessler:]

Thank you. I know you've talked a bit about customer service and the loss of customer service agreements, the margin effect and what I'm getting to is, it seems clear at this point in time that overall solutions that you're providing require the customer to love you and to love you for more than one or two or three years and to create a long term trusted partnership. What are you doing specifically? And you've laid out a couple things that you, a couple of points, but what have you done in the last two or three months to create an infrastructure that will reinforce and in the long, the whole customer service process, how much more training people do you bring out, how much more service people do you bring out to teach the younger folks how to do things and vice versa for those employees you are not IT who are not up to IT snuff? What are the things that you were doing specifically and where that spend is going to come from to make sure that your customers stay with you for a longer period of time on that services software side as it becomes a bigger and bigger part of your company?

[Andy Mattes:]

Yes, yes all great questions. This is exactly the reason why our service margins are where they are today versus where we probably would have wanted them to be in the near term. So let me go through give you a few data points. Today versus this time last year we've added approximately a 150 service techs in the U.S. alone. If you talk about support and customers loving us, when there's - if there's ever a time to over invest on techs and onsite support it's when you rollout new products which is exactly what we did. You then take into account that the labor market for IT service techs is super tight, there basically is no unemployment, we are looking at attrition rates that are probably pushing 10%. So we actually in totality hired and replaced people, so we probably brought some 500 folks back on the payroll to also replace attrition we put all of those through training. We trained them not on one machine, but on five machines to make sure we do not have the utilization issue that we showed earlier and by the same token we've invested heavily on the tools side. So, all our new products have diagnostic tools on them. We're going down the whole route of pre-emptive maintenance, predictive maintenance; we're putting a lot of software out. We’re piloting various innovators, data, warehousing, Big Data software analytics with some of our top customers to not only make sure that we do a great, great a break fix service, but to make sure that we truly can provide 99.9% availability for our customers. We talked about that earlier that shift from break fix to always on is both a huge opportunity, but it's also a big investment. If I take a look at all the service data that I see from where we used to be last year to where we are today, our first time fixed rate is up dramatically. Our call rates per machines are down. Our customer stack rates are up and we always were the leader in this market, so we're up from a very high springboard. So all the parameters are pointing into the very right direction, but you're absolutely right Jeff. The best way to counterbalance volatility in our business is with more long-term service contracts which is why it was so important that we renewed our two largest outsourcing contracts earlier this year and the more we have three or five-year service contracts under our belt, the higher the predictability of the revenue stream in that area.

[Jeffrey Kessler:]

Is that going to be found in your gross - in your cost of sales or is that going to be found in G&A?

[Andy Mattes:]

No that's - the majority of what we do on the service side, all actions, but the majority you'll find in our SG&A, in our service margins.

[Jeffrey Kessler:]

Great, thank you.

[Operator:]

And we will take our final question from Josh Elving with Lake Street Capital.

[Josh Elving:]

Hi good morning. So, most of my questions have been answered. I guess I just had a question about software. I was hoping you could maybe break out the mix between license and professional services within software and then maybe talk a little bit about how you see recurring revenue in that line?

[Andy Mattes:]

Always very rough numbers. We've always said that license is around about 30% of our software business. We do see license revenue going up which is the good news, but we also see professional service revenue too go up, especially when you integrate software into the environment. So I would say the ratio probably will stay disdained for quite awhile, while the overall software business in general is growing. So no major shifts between the elements and that's also what you see in the margin profile. Keep in mind our software margin is a blended rate between the software license margins that are normal in any software business and the PS margins that are also normal in that type of business, so moving up similar ratios. Q - Josh Elving Sure and how do you think about the recurring nature? Are these all new - go ahead?

[Andy Mattes:]

These are recurring and the other thing is and that's what I said earlier, we're investing very heavily into SaaS and Cloud models and our Kony partnership is a very big enabler for us to do so, because that will all be SaaS revenue going forward. So, working very hard in increasing the recurring nature, not only on the service side, but also on the software side of our revenue stream.

[Josh Elving:]

Great thank you.

[Operator:]

And we will take our next question from Arun Seshadri with Credit Suisse.

[Arun Seshadri:]

Hi, thanks for squeezing me in here, just a couple of questions from me. I just wanted to understand in terms of legacy service contracts, Wincor in North America, is there any way you could quantify how much is left in the revenue base today and how we should think about that rate of attrition and expect this year and maybe you can give any color on the numbers you are talking about?

[Andy Mattes:]

Yes I mean, a lot of pieces there. I think the easiest way to look at it if you break down and you look at the roughly $2.4 billion of service, $2.4 billion, $2.5 billion of service revenue roughly 70% of that comes from annual contract base, and that's largely been stable across our major markets. I would say one of the big areas where you're seeing a little bit of a change is the Legacy China because of the new model there. But I don't think we've typically provided the overall units across that global universe that are out there under contract right now. But I would say roughly 70% of the overall contract or revenue excuse me, would be contract related. The rest would be your installation, your other managed and outsourced services that come through as well. So, very large stable base of annual contract revenue that exists out there still, and it's been stable.

[Arun Seshadri:]

Got it. So is there any way - there is no way you can sort of give us some sense for that legacy service contracts, Wincor in North America how much is left in that revenue base today?

[Christopher Chapman:]

Yes, I mean it's, it's fairly small there's maybe 5000 units or so, I mean it’s relatively minimal at this point.

[Arun Seshadri:]

Got it, okay, very helpful. And then at the other thing I wanted to understand if software went from plus 6% ex-foreign currency in Q1 revenue down 10% is that just natural lumpiness in some respects or just wanted to understand what percentage of the software revenues will be recurring and how we should think about normalized redemption there?

[Andy Mattes:]

Yes, I mean the big driver of that net change over the year was a software project actually delivered in the U.S. in North America and in the prior year that did not repeat. And so, you get some of that large project lumpiness and so when you have this 70

[Arun Seshadri:]

Got it. Thank you. Last thing for me is cash taxes for this year is there any way you could quantify your expected cash taxes? Thank you very much.

[Andy Mattes:]

I'm going to hold off on giving a definitive answer on the cash tax and this is largely because we are in the middle of a very detailed large project around our legal entity consolidation. And as we go through that, that's going to actually drive certain tax obligations. We're looking to do things in a tax efficient manner, but there are still a lot of moving pieces there. So, I'm going to hold off on that one and I'll provide a little more clarity as we get further in the year on the final outcome of that cash tax payout, thanks.

[Arun Seshadri:]

That's good. Thank you.

[Operator:]

And it appears there are no further questions at this time. I’d like to turn the conference back to our presenters for any additional or closing remarks.

[Stephen A. Virostek:]

I'd just like to thank everyone for participating in today's call. If you have additional follow ups please give us a call at Investor Relations.

[Andy Mattes:]

Thank you.

[Operator:]

And ladies and gentlemen, that does conclude today's conference. I’d like to thank everyone for their participation. You may now disconnect.