Diebold Nixdorf Incorporated Common stock

Good day, and welcome to the Diebold Nixdorf-hosted second quarter 2020 earnings call. At this time, I would like to turn the conference over to Mr. Steve Rostec. Please go ahead.

Thank you, Olivia, and welcome everyone to Diebold Nixdorf's second quarter earnings call for 2020. Joining me today are Gerard Schmidt, President and Chief Executive Officer, and Jeff Rutherford, our Chief Financial Officer. For the benefit of all of our listeners, we've posted slides to the investor relations page of DieboldNixdorf.com, which will accompany our prepared remarks. And later this afternoon, a replay of our webcast will be made available on the same IR website. Slide two of today's presentation contains a reminder that our 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 and the earnings release, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric. On slide three, we remind all participants that certain comments may be characterized as forward-looking statements and that there are a number of factors which could cause actual results to differ materially from these statements. Additional information on these factors can be found in the company's SEC filings. Participants should be mindful that our forward-looking information is current as of today, and subsequent events may render this information to be out of date. And now I'll pass the mic over to Gerard.

Good morning, everyone. To support our recent debt refinancing, we pre-released results for April and May a few weeks back, and today's comments will build on those. Our June results reinforce a solid quarter. despite revenue headwinds primarily from COVID-19. On slide three, I'll make a few comments regarding our mid-year update. Our business showed strong resiliency this quarter, reinforcing the operating rigor and transformational work done to strengthen the company. Second quarter financial results were very good, especially when considering the widespread lockdowns from the COVID-19 pandemic and significant disruptions to economic activity. In this challenging environment, I'm extremely pleased to say that our operations were not impacted in a material way and our profits were materially higher year over year, led by substantial gains in margins. And despite difficult conditions, especially in April and early May, customer orders for our solutions continued with only modest year over year declines. Additionally, our visibility into booking levels for the second half have strengthened over the past several weeks. We are performing well in delivering essential services to our banking and retail customers. And of course, we're continually reviewing and modifying our practices to ensure that we protect the health and well-being of our employees against the backdrop of complex and different government approaches globally. The cadence of business activity improved as the second quarter progressed, and we experienced a steady rebound in self-service transactions. to the point where a number of markets have returned to pre-COVID levels. And we remain focused on executing our DNR transformation initiatives and incremental cost actions. Our results underpinned a successful capital raise and debt refinancing transaction in July. We issued 1.1 billion of secured notes to the US and European investors, and both offerings were oversubscribed. Jeff will take you through the detailed benefits of these transactions. However, the key takeaway is that we've extended our maturities by three years to create greater financial flexibility while reducing our cash interest expense for 2020 and improving our tax efficiency longer term. With the refinancing now complete, our priorities are focused on completing our DNR transformation and concentrating efforts on growth opportunities while sustaining the resiliency of our workforce. At the top of slide four, we reintroduce our framework for discussing the expected impact of the pandemic on our 2020 results. This was shared on our prior earnings call. We set an expectation for mild impacts to services and software revenue with more significant headwinds to product revenue. And we expected Q2 results would bear a disproportionate impact. Additionally, we signaled our confidence that gross margins would be improving as a result of our DNR initiatives and incremental cost actions. Our second quarter results, shown at the bottom of the slide, were squarely aligned with this framework. Excluding the impact of currency and divestiture-related activities, service revenue declined 11.8%, product revenue declined 30.7%, and software revenue grew 2.6%. Our services and product revenue reflect significant installation delays, resulting from the temporary closure of bank branches and retail stores in April and May, noticeable especially in Europe. As we moved through May and into June, installations increased nicely with far fewer delays. Software revenue growth in the quarter reflects solid demand for our software professional services activities. Turning to gross margins, our performance was strong and were modestly better than our expectations. Our gross services margin improved significantly by 470 basis points to 30.7% in the quarter due to our continued services modernization activities, as well as reduced costs from lower spare parts utilization and lower labor costs in some markets. Products gross margin increased in the quarter by 250 basis points versus the prior year, despite the drop in revenue. This highlights the substantial progress we've made in shifting to a more variable cost structure, as well as a beneficial mix of higher margin products. Software margins expanded by 940 basis points versus the prior year, reflecting strong performance from our software excellence program as well as a favorable mixed shift. A non-GAAP operating profit growth and operating margin expansion were both very strong for the second quarter. OP increased by 24 million year-over-year to 98 million, an increase of 32%, and the company's OP margin was a best-ever 11% for the quarter, a significant increase of 460 basis points versus the prior year. Our strong performance illustrates how our DNR transformation initiatives are hitting their stride and that both our business and our employees are exemplifying a high degree of resiliency in this challenging environment. As a result, we are reiterating our 2020 outlook for revenue and adjusted EBITDA and increasing our free cash flow outlook to a range of $20 to $30 million. Slide 5 illustrates weekly transaction data from more than 50,000 ATMs located in more than 20 different countries. While there is no doubt that the government quarantines in March and April had a dampening effect on cash transactions, by June we saw transaction levels improve in most countries to pre-COVID levels as these economies reopened for business. Equally important is that third-party research expects cash withdrawals to recover from 2020 levels and grow 2% annually through 2025. The continued growth of cash over the long term is a favorable indicator for our banking solutions. New business in the quarter was resilient as we experienced modest declines in Eurasia banking and retail orders and a much more mild impact in the Americas. Key wins in the quarter included initial orders for our next generation DN series ATMs at a top 10 and a top 25 financial institution in the United States. In Egypt, we sold a bundle of 350 DN series with remote monitoring and cash deposit software. While the sales funnel for DN series is building nicely, COVID-19 has slowed down some of the certification work occurring in customer labs. We are continuing to scale our certification activities and have increased the number of customer projects from 240 at the beginning of the year to 400 by the end of March and 475 as of today. On the retail side of our business, we were pleased to win a three-year contract for managed services and products contract with AS Watson, one of the world's largest health and beauty retailers. in support of the company's digital transformation strategy. We also secured a new $17 million managed services contract to expand self-checkout solutions at one of Europe's largest home finishing retailers. Continued business wins like these provide confidence in the long-term strategic importance of self-service solutions. On slide six, we highlight key components of our value creation journey. Starting on the left side, our initiatives to drive operating margin expansion, as we've articulated in the past, are well underway and include services modernization, software excellence, simplifying the product portfolio and manufacturing footprint, harvesting G&A efficiencies, and transforming and digitizing our back office functions of IT, HR, and finance. Over the past 18 months, We have demonstrated how these initiatives are driving higher profits and cash flow, even as we've experienced challenging business conditions due to COVID. So far, we have realized about 60% of the DNR targeted savings of $470 million. And our team remains keenly focused on realizing the remaining 190 million of savings between now and the end of 2021. Our cash payments for restructuring and DNR transformation actions are tracking to about $100 million for 2020, and we expect total program payments will be substantially complete by year-end, so that we will be realizing a higher conversion rate of adjusted EBITDA to free cash flow starting in 2021. Moving to the middle of the page, we continue to optimize the company's capital structure. Since Q3 of 2018, we have reduced our leverage from 6.5 times to mid-4s, and we remain focused on achieving a long-term target of three times net debt to adjusted EBITDA. As previously mentioned, we've extended over a billion dollars of maturities from 2022 out to 2025. Our recent refinancing included Euro-denominated debt, which improves our tax efficiency through improved deductibility of interest, which lowers our medium-term cash tax payments. Coupled with our cash on hand, we believe the company has sufficient liquidity to complete our DNR transformation and increasingly differentiate our solutions and pursue growth opportunities. Going forward, we will continue to monitor the capital markets for additional opportunities to further optimize our capital structure. Looking forward into 2021, we are very focused on the differentiation and enhancements we are making to our offerings to meet evolving customer demands. Within services, we have largely completed the work to eliminate lower-margin services contracts, and we're focusing on leveraging our market-leading product-related services, our IoT-enabled AllConnect data engine, and our managed services capabilities to grow services revenues. For products, we are well-equipped to gain share at Attractive Economics with our DN series and self-checkout solutions. Industry-wide self-checkout penetration remains in the mid to low single digits in our key markets, and there is significant runway in front of us for growth. To this point, the company shipped more self-checkout units in the first half of 2020 than we did in all of 2019. We're also looking to build on the recent software success as we see opportunities to increase our share of wallet with our dynamic software offering. Key opportunities include our multi-vendor software for ATM, our cloud-native debit platform, marketing, cash management, and forecasting modules. In the near term, we continue to monitor the evolution of COVID-19 across the globe. And while there may be some further country-specific contractions in business activity, our outlook contemplates a gradual recovery of economic activity through the end of the year. We're confident in the resilience of our model and anticipate somewhat stronger top-line momentum in 2021 and remain confident in our ability to create value for investors over the long term. With that, I'll hand the call over to Jeff Rutherford.

Thank you, Gerard, and good morning, everyone. During my prepared remarks today, my comments will focus on non-GAAP metrics unless otherwise noted. On slide seven, We provide a table which explains our year-over-year revenue performance for the second quarter. Revenue of $890 million was impacted by the COVID-19 pandemic, foreign currency, and actions we have taken to drive higher quality revenue. Specifically, the company experienced unplanned revenue delays of approximately $108 million during the quarter, which is primarily the result of delays in product installations from the pandemic. We did not experience any material cancellations and fully expect this revenue will be recognized in future periods. The economic disruption of COVID further strengthened the U.S. dollar, which resulted in unplanned foreign currency headwinds of approximately $39 million in the quarter. Other factors were in line with our pre-COVID plan and included approximately $75 million for non-recurring volume in the prior year period, partially offset by incremental business in the current period. Approximately $23 million from non-core divestitures and approximately $15 million from our proactive efforts to reduce low margin business. Our efforts to reduce low margin business have been underway for several quarters and primarily involves our services contracts. We have reached a point where the vast majority of these actions are behind us, and we expect this will be less of a factor during the second half of 2020. On the right of this slide, we show the significant gross margin expansion from our D&L initiatives, 500 basis points more than the prior year period. Our best-ever gross margins of 29.6% were made possible by significant gains across all three business lines, with services increasing by 470 basis points, products 250 basis points, and our software gross margin increased by 940 basis points. As Gerard mentioned, our service gross margin expansion was underpinned by the sustainable benefits of our services modernization actions as well as some interim benefits from lower economic activity. The product and software gross margins in the quarter benefited from D&L actions and a favorable mix. Gross profit in the quarter was $264 million. The year-over-year variance reflects lower revenue contributions, approximately $7 million of currency headwinds, and approximately $3 million from divestitures. On slide 8, the company is showing good progress from our D&L transformation initiatives to harvest operating efficiencies from functional G&A costs. Our non-GAAP operating expense declined by $43 million, or 21%, when compared with the prior year. We have made real progress on our finance transformation to regionalize and centralize work streams while making greater use of automation within our core functions. Other enablement functions of HR, IT, and sales support are also leveraging technology and process improvements to become more efficient. As a result, we have reduced our internal G&A headcount by just over 300 and trimmed our external support headcount by another 100 through the first half of 2020. With respect to real estate, a successful transition of many employees to work from home environments is enabling the company to accelerate our consolidation activities to a more efficient real estate model. During the quarter, Diebold Nixdorf announced an important enhanced partnership with Accenture to accelerate our digital transformation for IT, finance, human resources, and sales support. Over the next three years, we will deploy common cloud solutions across our business that generate savings of approximately $50 million by rationalizing legacy applications, migrating workloads to the cloud, and consolidating data centers. Slide 9 contains a summary of our second quarter results and provides a comparison to the prior year period. Since we have already discussed revenue and gross profits, I will focus my comments on the profitability metrics, which exceeded our internal model. Operating profit of $98 million improved by $24 million, or 32% versus the prior period, driven by higher gross margins and meaningful reductions in operating expense. Operating margin expanded by 460 basis points in the quarter to 11%. This reflects the continued progress of our D&L initiatives approximately $18 million of cost actions, which we do not expect to recur in 2021, as well as some mixed benefits. Our performance over the past 12 months has steadily improved. We have doubled operating profit to $328 million since the end of 2018, even as the top line declined by approximately $500 million. Adjusted EBITDA of $122 million increased $15 million, or 15%, over the prior year period. The company's adjusted EBITDA margin expanded by 440 basis points in the quarter to 13.7%. Second quarter gross margins. Operating profit margins and adjusted EBITDA margins are at record levels for Diebold Nextdoor. demonstrating very strong execution, commitment, and resiliency from our employees. We have also reached an important milestone with respect to value creation in that our return on invested capital has reached the low teens and is greater than our weighted average cost of capital of approximately 10%. The next three slides provide segment level financial information which adjusts prior year metrics to normalize for the effects of foreign currency and divestitures. Moving to the Eurasia banking highlights on slide 10, second quarter revenue of $338 million was significantly impacted by lower activity as our customers took action to protect their employees and slow the spread of the coronavirus. This resulted in unplanned revenue delays of approximately $40 million from products and services during the quarter. Additionally, our divestitures and reduction of low-margin business impacted segment revenue by $23 million and $4 million, respectively, with most of this impact coming through services. Based on a gradual reopening of branches and stores, we expect improving services and product revenue trends for Eurasia Banking in the second half of the year. Non-GAAP gross profit of $102 million in the quarter and a gross margin of 30.3% reflects good progress on our DNR initiatives, as well as an interim benefit from lower service activity during the initial phases of COVID and a favorable product and software mix. On slide 11, America's banking revenue was $331 million for the quarter. When compared with the prior year, segment revenue includes approximately $60 million of planned reductions resulting from strong product revenue performance in the second quarter of 2019 in North America and Brazil. Lower product volume offset professional services software growth in the quarter at large US customers. In addition, we experienced approximately $18 million of foreign currency headwinds a $6 million reduction from actions as we are taking to become more profitable, and approximately $5 million of delayed revenue pertaining to the COVID-19 pandemic. Despite the revenue headwinds, segment gross profit increased versus the prior year period to $107 million since we continued to benefit from our D&O initiatives, lower service costs, and a favorable product and software mix. Segment gross margins expanded by more than 900 basis points to 32.4%, with meaningful contributions from all three business lines. Advancing to slide 12, the retail segment revenue of $221 million primarily reflects approximately $63 million of unplanned products and services delays pertaining to COVID-19, which is masking growth in our self-checkout business. Foreign currency headwinds were approximately $9 million in the quarter, while the reduction of low-margin business was approximately $5 million, and non-recurring projects from the prior year was nominal, as expected. Despite lower revenue, our retail team continued to expand gross margins by approximately 270 basis points to 24.7%. This improvement reflects solid progress with our services modernization and software excellence programs, a favorable revenue mix of self-checkout solutions, and interim service cost benefits from lower economic activity. On slide 13, we highlight our continued progress in networking capital efficiency. During the second quarter, Networking capital as a percentage of revenue over the past 12 months declined 230 basis points to 15.54%, down from 17.7% a year ago, due primarily to tighter controls on our accounts payable. Although we are trending towards greater networking capital efficiency, we did see some impact from the pandemic and current economic environment, mainly from the lengthening of inventory turns and an increase in day sales outstanding. From a free cash flow perspective, we exceeded our pre-COVID plan for the first half of 2020, which was a use of $138 million. Versus the prior year, free cash flow benefited from stronger operating profit and mild benefits from lower cash taxes, deferred costs, cash interest, and capital expenditures. We ended the quarter with sufficient liquidity of approximately $457 million, and net debt was approximately $2 billion. On slide 14, I will discuss our debt maturities and leverage ratio within the lens of our refinancing transaction, which closed on July 20th. We raised $1.1 billion from our senior secured notes offering consisting of approximately 700 million of U.S. dollar denominated notes and 350 million of Euro denominated notes. Both offerings were oversubscribed, especially in the U.S., as we received broad interest from current and new investors. Net proceeds were used to pay down our term loan A, term loan A1, and 69 million of the revolving credit facility, which was set to expire in December. Since these tranches were scheduled to mature in 2022, we have significantly extended our debt maturities by three years to 2025. At the same time, we amended and extended approximately $330 million of our revolving credit facility from April of 2022 to July of 2023. This transaction significantly improves our financial flexibility. From a modeling perspective, we are now expecting lower cash interest of approximately $150 million in 2020 due to the timing of interest payments on the new notes. In 2021, interest is expected to be approximately $180 million, which is in line with our 2019 interest results. By raising debt in euros, we also expect greater tax efficiency relating to the deductibility of cash interest. Cash taxes should be approximately $40 million for 2020, down slightly from $42 million in 2019, but note that 2019 included an approximately $8 million tax refund. Most importantly, this transaction coupled with current cash on hand provides sufficient liquidity and time to complete our D&L transformation in 2021. To the right of the slide, we've provided a pro forma maturity schedule. As you can see, the company has no material scheduled maturities until 2023. As Gerard stated, we will continue to monitor the capital markets, and where appropriate, we will take opportunistic steps to further optimize our capital structure and weighted average cost of capital. To the bottom right of this slide, you'll see a leverage ratio of net debt to trailing 12-month adjusted EBITDA was 4.6 times at the end of the second quarter. We have steadily improved this ratio over the past year, and it remains well below our covenant maximum of 6.5 times. Moving to slide 15, I will discuss the outlook for 2020. We expect to generate revenue of $3.7 to $3.9 billion, reflecting a modest impact to product revenue and a mild impact to services and software revenue, excluding the impact of two divestitures in 2020, which create a headwind of approximately $110 million. We are maintaining our updated range for adjusted EBITDA of $400 to $440 million which we believe reflects an appropriate balance of opportunities and some risk of further macroeconomic uncertainty. We will continue to execute our D&L initiatives, which are targeting approximately $130 million of savings, plus our incremental actions, which include reduced bonus expense, deferred merit increases, and a freeze on hiring. Approximately $50 million of the incremental savings are unlikely to recur beyond this year. Offset to these savings include the margin on revenue delays from COVID-19 and inflation. We have improved our free cash flow outlook for 2020 from break-even to a range of $20 to $30 million and includes the following approximate amounts. Net interest payments of $150 million, restructuring and transformation payments of $100 million, $40 million from unfavorable timing of certain balance sheet items such as compensation accruals and other prepaid items, $40 million of cash taxes, $25 million of capital expenditures, $20 million in net working capital cash use, and $20 million for pension contributions. Given our first half results and our outlook, Investors should expect revenue and adjusted EBITDA for the third and fourth quarters to be proportionate to our 2019 results. In conclusion, the company has risen to the challenge of managing our business through a challenging period. Our accomplishments, D&L initiatives, and company values provide us with a high degree of confidence in our value creation journey. Now I will hand the call back to the operator to begin our question and answer session.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. We will now take our first question from Matt Somerville with DA Davidson. Please go ahead.

Thanks. Good morning. A couple questions. First, with respect to DM series, can you talk a little bit more granular in terms of where you're at with the certification and sales process? In other words, when do out-the-door volumes really begin to ramp up for that new product line?

Good morning, Max, and thanks for the question. So just as a reminder for the benefit of everyone, what we commented on this quarter has been the really remarkable and steady improvement in the number of certification projects underway, which really reflect longer-term market demand for the product. We also mentioned that some customers have had difficulty accessing their own customer labs, which has slowed down certifications by about three months in some markets. Prior to COVID, our view was that we were going to start to shift more meaningful volumes out the door in Q4. I think in light of COVID, we're now looking at early into 2021 to start seeing those volumes pick up. And that's not to say that volume isn't going out the door, but just given the pacing of certifications, we're more likely to see a much more material uptick in early 2021. Got it.

And then with respect to some of the more temporary changes benefit you're seeing to service gross margin. I think for the quarter it was up 470 basis points, if I'm not mistaken. How much of that improvement would you say is sort of temporary? In other words, what is the kind of the current normalized run rate of services profitability?

Yeah, Matt, this is Jeff. We believe that it's approximately 200 basis points of above what we would consider normal and what we would internally model.

Got it. And then maybe just one final and then I'll get back in queue. You talked about self-checkout shipments being up in the first half of the year more than they were for all of 19. What sort of momentum do you still have in that business in the back half? And are you seeing incremental interest being born out of COVID and as retailers look to move increasingly to more low-touch type of environments. Thank you.

Yeah, Matt, we've seen a very, very sustained momentum as we move into H2, and we would be very surprised if the momentum we saw in H1 doesn't carry through to H2. So quite frankly, the overall volume expectations that we're looking at now for this year are are pretty close to pre-COVID levels, which is a reflection of the market really showing strength and interest in our self-checkout devices. As I mentioned when we did our debt roadshow, we're starting to see a material pickup in interest in European markets that were perhaps lagging. Other European markets were self-checkout. In particular, large population markets like Germany that have historically lagged Markets like the UK are showing extremely heightened interest in self-checkout. So we would say that that points to a very, very strong period of momentum for us in self-checkout as we move into 2021 as well. Great. Thank you.

Our next question comes from Paul Koster with JP Morgan. Please go ahead.

Hi, guys. This is Paul Chung on for Koster. Thanks for taking my question. So, first up, just what's been the feedback on demand at, you know, some of the regional banks in the U.S.? Are you seeing any different behavior from the regionals kind of relative to the Tier 1s? And, you know, are they seeking some of these contactless-type functionality as well? And a follow-up.

Good morning, Paul. Yeah, sure. So the regional banks have actually been pretty steady in terms of their behaviors all the way through COVID. You would have heard me talk about order entry being much, much more mild in terms of the declination in the Americas, and that was certainly reinforced by some ongoing solid order activity from the regional banks. So they've been really quite robust. And in terms of their appetite and interest in contactless solutions. I wouldn't describe their behaviors as being profoundly different from what we're seeing from the tier one global banks. We are rolling out antimicrobial solutions to enhance the cleaning of machines. There's enhanced interest in mobile pre-staging and withdrawal of cash from machines. But that's been a pretty consistent trend, and we've just seen heightened interest from, quite frankly, banks of all sizes for solutions like that.

Gotcha. Thank you. And then just on free cash flow, where do you see more opportunities on maybe some working cap conversion? It looks like you have a $20 million drag this year. Your near peer has been pretty aggressive on the AR collections. Can you do the same there or was that more kind of a benefit for you in 2019? Thanks.

Yeah, that's a good question. Let me cover all of free cash flow. I'll start with working capital. We harvested $110 million of cash out of working capital in 2019 and We've hit pretty much a plateau relative to inventory. We take inventory down much further than it currently is at. We could affect service levels, and obviously we want to be sensitive to that. Payables, we always have opportunity, right? And receivables, we always have opportunity. So going forward, we believe we're going to be able to harvest working capital dollars, but it's not going to be anything as significant as what we saw in 2019. Our working capital is too efficient to believe that we're going to harvest anything to that level. When we get back to the growth of the model as we transition in 2021, we're going to see some probably use and then our expectations would be to be flat working capital. The real opportunities in our free cash flow conversion is to get through the restructuring transformation. As we talked about on the call, that'll be approximately $100 million of spend in 2020. We do have some supplemental information in the deck that will explain the reconciliation between the cost of restructuring transformation and the spend, but it'll be $100 million. And then our expectation and our target for 2021, we have to get through our planning process, but we're targeting $25 million. And then the cash will be done for the D&L initiatives that we currently have. Cash taxes is an opportunity. We're inefficient relative to cash taxes. We talked about it on the call. I'll tell you that our tax deductibility efficiency, the ability to utilize interest rates against operating profit in 2019 was less than 50%. You can do the math. If you assume that we can get closer to 100% in interest deductibility efficiency at even a low tax rate of 25%, you can see that we could impact cash taxes $20 million. Now, we're going to be consolidated tax income starting next year, so there will be some increase in cash taxes just because of the continued expansion of the operating profit of the company. And then CapEx is always going to be around on a stable basis around $20 to $25 million, right? And then the last thing, and that would be before any projects relative to our ERP, internal systems expansions and implementations to the cloud and so forth. And then that leaves interest. There's a path with EBITDA growth in our internal models that with the reduction in the payments for transformation and restructuring, eliminate that, get cash taxes where they need to be. There is a path with breakeven working capital to get the model to approaching a 50% EBITDA to free cash flow conversion.

That was very helpful. Thank you. Sure.

We will move to our next question, and that comes from Kartik Mehta with North Coast Research. Please go ahead.

Hey, good morning. George, I'm wondering if you look at the geographies, U.S., Asia, Europe, if you're seeing any difference in demand on the banking side compared And obviously retail, you're more tied to Europe. So maybe if there's any differences in demand in Europe as well for the retail side.

Good morning, Karthik. Q2 was interesting for us because from a revenue perspective, Eurasia banking was much, much more impacted by COVID than America's banking. And from an order entry perspective, we saw more modest declines in Eurasia and much more mild declines in America. So for that particular quarter, slightly lower demand in Eurasia. However, I don't think that's indicative of what we're seeing more structurally. If you go back to Q1, we saw extremely high demand in Eurasia banking. And as we look at our sales pipelines in the back half of the year, Both America's banking and Eurasia banking is showing some nice improvements, and we'll start to see some sequential improvements in revenue growth. On the retail side, as you rightly put it, we've got more exposure to Europe than anywhere else in the world. And as we've commented in the past, we're seeing very, very strong demand for self-checkout with moderating demand on the point-of-sale side of things.

And then, Jeff, I guess what's the next step on your debt side? Obviously, extending the maturities really is helpful, kind of gives you some room to breathe. I'm wondering maybe the next steps on the debt.

You know, Cardiff, the next step on capital structure, right, and by the way, all options are on the table, right? But we really need to continue to to perform relative to operations. And then our opportunities will expand. We already talked about the continued expansion in operating profit and the continuing expansion of cash flow and the free cash flow conversion from EBITDA. But we will monitor all capital structures or markets And we are not committed to anything right now relative to capital structure. What I will say is where we're at right now isn't our optimal capital structure, right? Based on our current EBITDA, debt is high. We're probably, I think everyone would admit that we are a turn high relative to debt, to EBITDA. We need to address that either through operations or some other means. So we'll continue to monitor capital structure and markets, but obviously we're not going to commit to anything today. But you can be assured that we're continually monitoring that. What we have done, and we said this during our non-deal roadshow and deal roadshow on refinancing, what we have done is give ourselves the flexibility to get through the D&L transformation in 2021. We now have the space that we aren't worried about debt maturities in 2022 become current in 2021. So it gives us all kinds of options. But the real focus of the company is to continue to operate and then all the opportunities to address what we would all admit is a deficient capital structure will open up to us.

Hey, thank you, Jeff. Thank you both.

Thank you. Our next question comes from Jeff Harlib with Barclays. Please go ahead.

Hi, good morning. So for the COVID delays and the deferrals, as you look across the company, do you see any visibility on those being implemented in the next quarter or two quarters from now, or is it still unclear? How does that factor into your revenue expectations?

Yeah, good morning, Jeff. As Jeff commented, we haven't seen any cancellations of orders. So what we're starting to see is an uptick in installation activity. Obviously, that's counterbalanced by some ongoing conservatism from some of our other customers that might have been placing orders in Q3. So our expectation is that under the assumption that the world continues to steadily improve, we'll start to see a steady sequential increase in revenues. But we're not expecting a rapid snapback or a sudden surge of incremental revenues, but more of a steady improvement of the next few quarters.

Okay. And, you know, sort of independent of COVID or, you know, once we get through COVID, how do you see the upgrade cycle as you look at banking, America's banking Europe with respect to win 10 upgrades and also on the retail side where I know There have been some upgrades over the last couple of years.

Yeah, so if you go back and look at the commentary from Q1, we saw a very, very strong order activity in Eurasia, which was reflective of what we saw as strengthening end market demand on the banking side of things, given that Eurasia was lagging the Americas from a win-ten perspective. However, we're still seeing decent order activity from the regional banks and banks in Latin America, as evidenced by the order activity we saw in Q2. So, as I've said on multiple occasions, we're not of the view that Win10 by itself causes a material surge or a material drop in demand. It'll ebb and flow somewhat, but there's much more fundamental reasons for upgrade cycles in the banking segment driven by Increasing shifts towards cash recycling capability, driven by increasing shifts towards software upgrades in the contactless space. So Win10 is a much more modest factor. On the retail side, there have been a number of upgrades, but quite frankly, we think that that is an opportunity for us, not a threat. As more upgrades come due, In Europe, we think that there will be a fairly material upgrade cycle in front of us in self-checkout in particular, plus growth in increased penetration. So we think that those industry dynamics are attractive over the next several quarters.

Okay. And last for me, just on the DNL initiatives, what are the initiatives that are still sort of ahead of you, you know, looking into the second half and into 2021? I know you talked about Accenture is one. What else are you looking to do to complete the initiative?

Yeah, I mean, if you look at the sequencing of how we executed our DNR program from 2018 through to now, the early wins came to us through material improvements in that network and capital. We then spent a lot of time focusing on gross profits and gross margin initiatives, for example, services modernization work and our manufacturing footprint. And 2020 is primarily a year that's been heavily focused but not exclusively focused on G&A efficiencies. So we're right in the midst of some fairly profound improvements in our G&A cost base led by our finance transformation. So those are in flight and will largely be complete through the back end of 2020. As we look into 2021, there is a fairly substantial transformation in flight regarding our HR function, as well as our IT systems with Accenture.

Great. Thanks very much.

Our next question comes from Rob Yost with Invesco. Please go ahead.

All right. Thanks. Good morning. I wanted, you've talked a bit about self-checkout strength, but thinking about the point of sale as well, some of the retail, and I think you're exposed more to the bigger retail customers. You know, I've seen a lot of strength in this COVID era. Are you seeing any strength in point of sale at this point, or is it still that kind of declining environment that you talked about in the past?

So, Rob, point of sale over the past several years has shown modest top-line strength. We saw a little bit of a weakening in Q1, and that certainly played itself out in Q2. So I think we're still in the COVID-induced weakness period for point of sale. I think it's too soon to say how we feel about point of sale. As we look into 2021, there may still be a little bit of softness there. But as I said, that's been nicely offset by what we're seeing in self-checkout. And I think that's, quite frankly, driven more by strong consumer preferences for contactless, touchless solutions, where they'd far rather interact with a self-checkout device than a tele-assisted point of sale.

Okay, great. And my follow-up is on the software margins. You called out a few reasons why they were up. They were up very substantially. kind of similar to the question you got on services, where, you know, how much of this should we think about as a more normalized gross margin, given all the improvements you've done with the DNL?

Yeah, the gross margin improvement in software is not tied so much to COVID. It's actually through... We had some change in management, and we... We are doing a much better job in particular relative to professional services and utilization of technicians. We still think that we are a little above what we would internally model, and we've talked about 100 to 150 basis points above our current modeling level for software. Got it. Perfect. Thanks.

Our final question comes from Barry Hines with Sage Asset Management. Please go ahead.

Thanks so much for taking the question. I have one question on the DNNOW savings. You talked about the run right now and the remainder over the next 18 months. But if we look on a year-over-year basis, 21 versus 20, how much incremental savings will there be in 21? And then at the end of 21, while you'll be essentially complete, you'll have carryover 22. So same question, incremental save 22 versus 21. That would be very helpful to get a flavor for that. Thanks.

Yeah. And what we've said is we've targeted $470 million of savings. And we realized $175 million in 2019, and we've talked about $130 million in 2020, which leaves $165 million for 2021. But we've also talked about publicly, when we came out with the April and May results, that we talked about $100 million of incremental benefits, and we talked about $50 million of those being non-recurring. So essentially we've added $50 million into 2020. We haven't called it that, but what it would do is take 2020 to $180 million. We are working internally on our 2021 modeling. And the question is, When are we going to, not if, when we're going to take up our targeted savings for D&L. And so essentially we're sticking with 2021 of 165 million. And so we're still calling that incremental 50 million in 2020. incremental savings. We haven't attributed it to DNL, but we'll have a further update on the full range of the DNL savings. I'll just say it now. It's not if we take it up. It's when we take it up officially. I guess I just did that by $50 million. We're looking at something over $500 million in total savings for D&L.

Okay, and just to clarify to make sure I understand, the 175 for 19, 130, 20, and 160... 130 plus 50 of incremental. Right, but those are end-of-year run rates as opposed to actual... No, no, that's... That's savings in those years.

Those are actual savings. Perfect. Those are actual savings in those years. Got it.

Thank you so much for the clarification. Appreciate it. Sure.

Thank you. That concludes today's question and answer session. Mr. Vrostek, at this time, I will turn the conference back to you for any closing remarks.

Yeah, I just want to thank everyone for participating in today's call. If you do have follow-up questions, please feel free to reach out to me via phone or email. Thanks so much and have a great day.

Thank you all for your attention. This concludes today's conference. You may now disconnect.