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spk09: Ladies and gentlemen, thank you for standing by and welcome to the Deep Load Next Door 2020 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Steve Vrostic. Thank you. Please go ahead, sir.
spk01: Steve Vrostic Thank you, Ashley, and welcome everyone to Diebold Nixdorf's fourth quarter and year-end 2020 earnings call. Joining me on today's call are Gerard Schmidt, President and Chief Executive Officer and Jeff Rutherford, our Chief Financial Officer. To accompany our prepared remarks today, we have posted slides to the investor relations page of dboldnicksdorf.com. Our remarks are being recorded, and we will post a replay of the webcast on the IR website later today. 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. We have posted reconciliation schedules for each non-GAAP metric. We're reconciling to the most directly comparable GAAP metric in the supplemental schedules of our slides and in the tables of today's earnings release. On slide three, we remind all participants that certain comments may be characterized as forward-looking statements. and that there are a number of risk 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that our forward-looking information is current as of today, and subsequent events may render this information to be outdated. And now I will hand the call to Gerard.
spk06: Thank you, Steve. And good morning, everyone. I'm pleased to join you today to discuss our investment thesis, our solid 2020 results, and our outlook for value creation. I'll begin on slide three with our investment thesis. Since 2018, our focus has been on transforming our business model to generate strong free cash flow. We've been streamlining and simplifying our business through our Dear Now transformation initiatives. We evolved these initiatives and increased our savings target to $500 million through 2021. With two years of solid execution in the books, our path to higher profitability is well underway. As our DNR restructuring spend tapers off in 2021, we expect this to translate into a meaningful increase in free cash flow. The second element of our investment thesis is the ability to leverage digitally enhanced solutions to drive sustainable top line growth and a positive next shift. Slide four highlights how we're transforming our business model. In 2021, we will continue to enhance our productivity and anticipate delivering approximately $160 million of incremental savings. Key initiatives for this year include continued services modernization progress, driving a higher mix of our next-generation self-checkout retail devices and next-generation DN series ATMs, and investing in digital and cloud technologies to enhance efficiencies across IT, finance, and HR enablement functions. And with the DNNOW transformation set to conclude by year-end, Our restructuring payments will also come to an end, with cash restructuring payments expected to be no more than $50 million this year. The net result of our efforts will drive a strong sequential step-up in free cash flow, which is anticipated to be in the range of $140 to $170 million for the year. In addition to enhancing the free cash flow generation from our operating model, we are targeting growth in areas where we have competitive differentiation. Within banking, we're well positioned to support the accelerating digital transformation agenda of our customers across the globe as they enhance their value proposition for their end customers and seek greater operating efficiencies. Our momentum with the in-series ATMs and fourth generation cash recycled technology is promising. we have seen customer enthusiasm for the advanced feature set, increased connectivity through the AllConnect data engine, greater modularity, support for advanced software capabilities, and improved security features in a small footprint. For our services business, we are leveraging the IoT and machine learning capabilities of our AllConnect data engine to enhance availability for customers and improve our own efficiency. Early deployments with legacy ATMs suggest that ACDE can reduce call rates by approximately 20%. In addition, we are supporting our customers' efficiency agendas through offering preconfigured managed services solutions for those customers who want the most comprehensive ATM solutions, performance levels, and capabilities. Beyond self-service channels, We're also investing in software offerings for financial institutions. I will shortly describe our cloud-native dynamic payments offering and the market opportunity on the next slide. Within retail, consumer journeys continue to evolve and shift toward more digital and self-service solutions. We're seeing strong momentum through our differentiated suite of self-checkout solutions, and we further enhanced our position in January when we announced the DN Series Easy, which is a new family of self-checkout products designed to be more modular, more reliable and flexible because of its open architecture. 2020 was a very strong year for Diebold Mixed-Off from a self-checkout shipments perspective, as we delivered growth of approximately 90% in the fourth quarter and just over 200% for the full year. The high service attach rates of approximately 90% is another reason to like this business. We also see opportunity to expand our software reach with retail customers and are investing in our cloud-based dynamic retail offerings. In December, we launched our cloud-based software offering for fuel and convenience customers. As more technologies proliferate within our retail customer environments, They're also turning to default next door to support them with our comprehensive managed services offering to generate greater operating efficiencies and more integrated store operations. On slide six, I'd like to highlight an exciting new software offering which we are bringing to market, the dynamic payments platform. As the payment landscape rapidly evolves, banks are facing a proliferation of new payment types and rapidly growing payment volumes. Their cumbersome legacy payment platforms limit their ability to offer a consistent and optimized consumer experience across multiple channels. Our cloud-native solution offers a path for banks to address these pain points. We are currently deploying our dynamic payments platform at our first client, a top 10 global financial institution. The solution will scale to support billions of debit transactions across multiple channels. We also recently announced a win at one of the largest credit unions in the United States. Our solution leverages an API-enabled microservices approach, which provides distinct competitive advantages for our company, including the ability to transform a bank's payment operations, a flexible and future-proof approach to support multiple payment types and channels, giving banks the flexibility to adapt to changing regulations, schemes, payment types, and channels, and the ability to quickly scale to billions of transactions. These characteristics place DeVault NextOff in a position to offer a distinctive solution versus less flexible and more expensive legacy platform providers. Moving to slide seven, I will recap our financial performance in 2020 and growth outlook for 2021. We are experiencing strong demand for our differentiated and digitally enabled solutions. Despite the continued complexities of the COVID-19 pandemic, product orders increased 17% in the fourth quarter, with banking growth of 34%. In fact, order activity across the full year exceeded our performance in 2019. We were also pleased that our customers are further validating our progress, as customer satisfaction further improved as net promoter scores from our banking customers increased substantially for a third consecutive year. At the same time, we enhanced our execution of the DNR transformation initiatives, and delivered approximately $165 million against our savings targets during the year. These achievements were the main driver behind meaningful year-over-year increases to profits and profit margins, even as we experienced revenue impacts from the pandemic. With respect to free cash flow, our fourth quarter result of $186 million was the strongest we've experienced in eight quarters, fueled by solid profitability and strong collections. For the full year, the company generated $57 million in free cash flow, which exceeded our outlook by $27 million. In addition to our strong financial performance, I am gratified by the multiple ways in which our team adapted to the dynamic and highly uncertain macro environment. We are entering 2021 with a strong order book differentiated and well-positioned solutions, and a detailed operating plan for bringing our DNNOW transformation efforts to a successful conclusion. While we have confidence in our outlook for 2021, we also recognize that we must continue to manage a number of pandemic-related uncertainties, including the pace of easing of lockdown restrictions, wide availability and access to vaccines, and the impact on business activity both in customer buying patterns and in our supply chain. Against this backdrop, our 2021 outlook is for revenue of approximately $4 to $4.1 billion, or 3 to 5 percent growth. Adjusted EBITDA of $480 to $500 million, which translates to 6 to 10 percent growth, and significant free cash flow growth to a range of $140 to $170 million. On slide eight, I'll provide some more details underpinning a strong 2020 financial results. Strength in product orders during the quarter drove our product backlog 23% higher versus the prior year. In our retail business, customers are investing in automation and self-service capabilities to improve the in-store experience while lowering operating costs. During the fourth quarter, we received initial orders from our milestone agreement with a pan-European grocer who is refreshing the second largest fleet of self-checkout devices in the world. In Poland, we procured a $7 million contract for self-checkout products and dynamic iSCAN software licenses with another large grocery store. In our banking business, I am pleased to report that for the first time, DN Series ATMs contributed meaningfully to the order book. Success in the Middle East included two sizable deals. In Saudi Arabia, we booked an order with a top three bank to refresh 1,800 ATMs with DN Series. We also booked a new logo in Egypt for 500 DN Series in support of this bank's expansion initiatives. Notably, both agreements included multi-year contracts for security, monitoring, and marketing software. In the Netherlands, we secured two new contracts valued at approximately $11 million to provide DN series ATMs and indoor lobby cash recyclers. In the Americas, we expanded our existing partnership with Citibank for additional DN series ATMs a full, dynamic software suite, and maintenance services across 15 countries, which will help standardize the customer experience while reducing complexity, cost, and security risk. We also want a new contract to install 1,000 new DN-Series cash recycling modules and our IoT-enabled AllConnect data engine with the largest private bank in Brazil. During the first quarter of 2021, we're seeing continued success with an initial order for cash recycling D and series units and maintenance services at a top 10 financial institution in the United States. We consider this win as a new logo because for many years, this bank has purchased ATM solutions from others. Turning to revenue, our trajectory steadily improved as the year played out. reflecting how both the company and our customers adapted to the challenges of the pandemic. We reported sequential growth in the third and fourth quarters of more than 10%. Our fourth quarter revenue was about 5% better than our recent outlook. Full year revenue of $3.9 billion declined by 11%, as reported, and 8% when one removes the effect of divestitures and currency fluctuations. with most of that decline attributed to COVID delays. In the face of revenue headwinds, we continue to execute our DNR initiatives and deliver greater profitability. Adjusted EBITDA increased 13% to $453 million for the full year. Our adjusted EBITDA margin, 11.6%, increased by 250 basis points versus the prior year. And I previously mentioned a strong fourth quarter free cash flow performance, and our total is $57 million for the year. Let me now hand over to Jeff Rutherford, who will discuss our financial performance.
spk05: Thank you, Gerard, and good morning, everyone. As usual, my prepared remarks today will focus on non-GAAP metrics, unless otherwise noted. 2020 was a good year for us, especially when considering the challenges of navigating a global pandemic. The team made tremendous progress with our D&L transformation, delivering for customers, advancing our digital-enabled solutions, refinancing debt, and living our values. Before we review our operating results, I would like to discuss our non-gap adjustments summarized in Note 2 of our insurance release. including our transformation and restructuring activities. During the fourth quarter, we made a concerted effort to accelerate our transformation expenses and cash payments with the explicit goal to complete all expenses and payments for the DNL transformation before the end of 2021. During that process, new projects were identified, including in our software business, which increased our total cost and payments. These incremental projects will yield longer-term benefits, so there is no change to our cumulative D&L savings target of $500 million through 2021. I need to note there will be no additional or incremental D&L projects other than those identified as of today. For the quarter, we've spent $72 million of restructuring and transformation expenditures and paid approximately $60 million in cash. Since we are nearing the end of DNR restructuring, we have scheduled all necessary severance spend. We are targeting a maximum of $50 million for these cash payments for 2021. Other non-routine expenses in the quarter were minor and include balance sheet and contract cleanup of legacy issues and costs associated with divesting non-core businesses. During the fourth quarter, non-routine expenses were approximately $8 million and we expect these adjustments have largely concluded with the exception of divestiture related costs. Slide nine contains our financial highlights for the quarter and the full year. My comments were focused on the quarterly numbers. Before getting into the specifics, I remind everyone that the fourth quarter of 2019 was an exceptionally strong quarter for us. Despite a tough comparison, we performed exceptionally well. Revenue adjusted EBITDA and free cash flow exceeded our prior guidance announced in October. Fourth quarter revenue of $1.1 billion declined 2.5 percent after adjusting for foreign currency and divestitures. Foreign currency was favorable by approximately $18 million, and divestitures were unfavorable by $36 million. Our revenue was primarily due to unplanned delays of approximately 40 million, largely driven by the pandemic. We delivered product revenue growth of 1% versus the prior quarter, showing a strong rebound from COVID-19, and we are encouraged by robust order entry growth during the second half of 2020, supporting a stronger rebound ahead. Continued strong gross margin results in the quarter, were offset by the revenue decline, resulting in a $7 million decline in gross profit versus the prior year period. Progress on our services modernization and software excellence initiatives drove a 50 basis point increase to total gross margin versus the prior quarter. Software margins expanded 850 basis points, services expanded 120 basis points, and products declined 230 basis points due to a less favorable geographic customer mix in our banking segments. Operating profit increased $4 million or 4% versus the prior quarter, while operating margins increased 80 basis points to 9.5% for the quarter. We continue to show progress in reducing SG&A expense during the quarter. However, R&D expense was slightly higher as we continue to invest in future solutions. We delivered adjusted EBITDA of $128 million, which exceeded our prior outlook by $13 million. Adjusted EBITDA margin expanded 20 basis points year-over-year to 11.6 percent. Fourth quarter free cash flow was $186 million. The upside to free cash flow versus our model was higher profitability and significantly stronger cash collections, which dropped our day sales outstanding by eight days sequentially. Our cash performance also included the previously referenced higher restructuring and transformation payments. As Gerard mentioned, we see opportunities for cloud-native software growth. In the interest of greater transparency, we are disclosing capitalized software development in our pre-cash flow recordings. We will include capitalized software development and capital expenditures in our free cash flow definition going forward while continuing to exclude the impact of M&A related activities and cash settlement of non-operating hedging derivatives. The next three slides contain financial highlights for our three segments adjusted for currency and divestitures. My comments will focus on fourth quarter trends. On slide 10, Eurasia banking revenue for the quarter increased 1 percent to $419 million after adjusting for $36 million from divestitures, net of a $20 million benefit from foreign currency. Total gross profit was down $4 million year-over-year, reflecting a stable margin on lower revenue. We realized gross margin improvements to services and software through our transformation initiatives offset by lower product margins due to a less favorable mix. Moving to slide 11, America's banking revenue of $375 million declined 7% versus the prior quarter, excluding a $13 million foreign currency headwind, primarily reflecting non-recurring projects in North America, as well as COVID-19-related project delays. Segment gross profit of $100 million was down $8 million year-over-year due to the revenue decline, partially offset by gross margin expansion of 90 basis points due to our D&L transformation initiatives and a more favorable product mix. On slide 12, retail revenue of $312 million was 1% lower year-over-year after adjusting for a $12 million foreign currency benefit. Gross profit increased to $73 million during the quarter as our mix of products was more favorable due to rising self-checkout shipments and our D&L initiatives positively impacting services and software margins. Retail gross margin expanded by 80 basis points during the quarter. On slide 13, we provide information about leverage and debt maturity. At the end of 2020, the company's net leverage ratio of 4.4 times was unchanged from the end of 2019, as the increase in EBITDA and our positive free cash flow was offset by payments associated with our debt refinancing, M&A activities, and an unfavorable exchange rate on foreign net debt balances. Over the next three years, we will generate stronger free cash flow due to the elimination of restructuring payments, continued strong management of networking capital investments, and incremental profitability. We expect to use free cash flow to pay down debt, and we are targeting a reduction in leverage ratio to less than three times net debt to adjusted EBITDA by 2023. On the right side of the slide, we provide details for our outstanding debt. You can see that the next material debt maturity date is November of 2023, which provides the company with ample time to complete our transformation, strengthen our credit profile, and execute on our growth initiative. In response to investor questions, I will discuss our income tax structure, key consideration, and cash tax payments as disclosed on slide 14. Our company's tax structure consists of two tax principles, the United States and Germany. The tax principles provide products and related support to distribution subsidiaries in approximately 60 countries. Due to high restructuring, transformation, and interest payments, The combined tax principles reported a pre-tax loss that paid approximately $7 million in income taxes due primarily to tax loss pertaining to the U.S. foreign source income alignment, or in tax jargon, if you prefer that, the global intangible low-tax income, GILTI, provisions and subpart F provisions of the U.S. tax code. And also due to U.S. limitations on the deductibility of interest payments. The distribution subsidiaries pay the principles for products and related services, and as appropriate, these entities generate taxable income. On a collective basis, the distribution subsidiaries paid approximately $30 million in cash income taxes during 2020, bringing total company cash income taxes to approximately $37 million. Looking to 2021, we expect to report pre-tax income on a consolidated basis due to continued operating profit growth and a significant reduction of transformation and restructuring expenses. Taking into account all the factors listed on this slide, we expect cash tax payments in 2021 will be approximately $35 million, while targeting an effective tax rate of 25 to 30 percent. We have implemented tax planning initiatives designed to benefit our tax efficiency going forward. For the two principles, we seek to better align foreign sources of taxable income with appropriate market consideration while improving the deductibility of interest payments with principal taxable income. For our distribution subsidiaries, the main opportunity is to rebalance the distribution of income based on true transaction economics. On slide 15, I will discuss our 2021 outlook. We are expecting revenue in the range of $4 to $4.1 billion, which translates to 3% to 5% growth. Based on our order book, as well as the challenges of 2020, we're expecting product revenue growth to lead the way and for banking growth to modestly exceed retail growth. Investors, which have already been completed, are expected to result in a headwind of approximately $50 million to services revenue, with the majority impacting our first half results. Our adjusted EBITDA range is $480 to $500 million, or 6% to 10% growth, Key contributions are expected from top-line growth and $160 million of DNL savings, primarily from higher mix of DN series, software excellence, and greater efficiencies from our service organization and AllConnect data engine. Offsetting these benefits are approximately $40 million of incremental growth investments in growth areas which Gerard discussed today. a $40 million reversal of one-time savings and services gross margin benefits, which occurred in 2020, and investments we are making in people, which primarily relate to the timing and magnitude of merit increases and also inflation. The net effect of revenue growth, D&L savings, and offsetting expenses generates the EBITDA growth previously referenced. For operating expenses, the net effect will be approximately $20 million of higher expenses in 2021 versus 2020. In terms of seasonality, we expect our first half will account for approximately 45% of annual revenue and approximately 40% of annual adjusted EBITDA. Moving on to our free cash flow outlook, we expect to generate $140 to $170 million in 2021, representing an EBITDA to free cash flow conversion rate of approximately 30%, up from 12% in 2020. We expect net working capital to be a $50 million source of funds in 2021 as accounts receivable DSOs and inventory investments normalized from COVID-19 impacts. Uses of cash include the following approximate amounts, $170 million in interest payments, $50 million in restructuring payments, $85 million of CapEx and software development payments, and $75 million from cash taxes, pension, and other items. The sequential increase in our capital expenditures is driven primarily by payments associated with accelerating our digital capabilities and moving work streams to the Oracle Cloud for IT, HR, finance, and sales support. Modernizing our enablement functions and tools will facilitate future efficiency gains and provide better analytics, enabling the company to leverage growth and run a more efficient and agile business. Additionally, our investments in capitalized software are supporting development of our cloud-native software offerings, dynamic payments, and next-generation dynamic retail. We believe our 2021 outlook reflects the proper balance of top line and profitability growth, higher free cash flow conversion, and investments for the future as we continue to generate long-term value for our stakeholders. And now I will hand the call back to Gerard for comments on our 2023 financial targets and our ESG initiatives.
spk06: Thank you, Jeff. Before we conclude our prepared remarks, I'd like to comment briefly on our longer term outlook and financial targets on slide 16. Starting with revenue, we are targeting annual organic revenue growth of 2 to 4% through 2023. supported by the areas which I discussed earlier. We are focused on high-quality revenue growth, which will be accretive to the company. We also expect to deliver ongoing operational efficiencies and gross margin expansion in our services business through widespread deployment of our AllConnect data engine, which underpins our gross service margin target range of 32% to 33%. In addition, we will be driving continuous improvements through the use of digital tools and standard processes. Collectively, these factors contribute to an adjusted EBITDA target for 2023 in excess of 13%. Stronger profitability, substantially lower restructuring costs, and more efficient networking capital management are key levers toward our goal of improving the conversion of adjusted EBITDA to levered free cash flow. Our plans call for increasing this ratio from 12% in 2020 to approximately 30% in 2021 and approximately 50% in 2023. We expect cumulative three-year levered free cash flow to exceed $600 million. Furthermore, we believe the company can generate a return on investment capital of greater than 20%. As we increase our profitability and use excess cash to pay down debt, we expect to reduce our leverage ratio to less than three times net debt to trailing 12 months adjusted EBITDA. As part of our commitments to sustainable growth, we're also affirming our commitments to be a leader in our sector in environmental, social, and governance, or ESG matters. Our key initiatives are summarized on slide 17. First, sustainable supply chain and operations is vital to our customers and suppliers. Our focus is on reducing our carbon footprint, promoting recycling, and using environmentally sustainable materials. And we are applying all these principles in the design and production of our new product lines, such as DN series ATMs, the N Series EZ and Beetle point of sale. Since 2015, we have systematically reduced our carbon emissions by 16,500 metric tons, and we report our results in the Carbon Disclosure Project. And as we have discussed on prior calls, we continue to prioritize the health and safety of our employees through the pandemic, through educational, personal protection equipment, and specific initiatives supporting employees in the hardest-hit countries. As a global company operating with customers in over 100 countries and employees in more than 60 countries, we also take our role as a global citizen seriously. With respect to diversity and inclusion, we have formed a Care Council to promote inclusive values where we are considerate, aware, responsible, and empathetic toward one another. And we are holding one another accountable to create a great working environment for our diverse and global workforce. Our impact on local communities is also important to us. As part of our global citizenship actions, the Depot Next Door Foundation has committed to half a million dollars to expand financial literacy in underserved populations through an organization called Operation Hope, We invite you to learn more about our overall efforts by reviewing our recently released Corporate Sustainability Report, a link of which is available through our slide deck or on our website. This now concludes our prepared remarks. I'll hand the call back to our operator, Ashley, to begin our question and answer session.
spk09: At this time, if you would like to ask a question, please press star to the number one on your telephone keypad. And your first question comes from Paul Chung with J.B. Morgan.
spk05: Hi. Thanks for taking my questions. So just on your guidance for 21 and specifically on the DN series, how good is your visibility for the year? You know, and what can kind of drive some additional upside in the second half? Does your guidance kind of assume the pandemic continues for most of the year, or are you baking in possible acceleration in the second half?
spk06: Good morning, Paul. So let me answer that second question first. We are not baking in any material acceleration of economic improvements through the back half of the year. Equally, we're not baking in any major deceleration if things happen to get worse. So we're effectively assuming a steady-as-she-go scenario. It's quite similar to what we saw through the fourth quarter. As it relates to DM series, as we mentioned in our prepared remarks, we had very solid order activity through the third and fourth quarters and are entering 2021 with a very strong backlog of specifically related to DM series. So our visibility to revenues through the first half of the year are very, very strong. And obviously given the sales cycles around ATMs, somewhat less visibility as you look to the back half of the year. So clearly the back half of the year will be more influenced by sales momentum through the next quarter or so. But at this stage, based on everything we're seeing in the first several weeks of 2021, we're feeling confident about the revenue guidance range that we have around products in particular.
spk05: Okay, great. Thanks for that. And then on your free cash flow, nice guide for 21, a bit more than we expected. It's largely driven by your EBITDA conversion. How do we think about the working cap benefit of $50 million, the kind of puts and takes there? I assume you'll be you know, investing a bit in inventory for the end series. What can flex that up and down as you move throughout the year? And any other metrics that you want to call out that are big kind of swing factors if, you know, the economy improves in the second half? Thank you. Yeah, Paul, thanks. This is Jeff. And relative to working capital, I will say this, that if you look at our working capital performance in 2020, It was impacted by COVID-19, and in particular in cash collections and customer behaviors. And we saw a significant release of that pent-up payments in the fourth quarter, and that's why we beat our model in the fourth quarter is that we had very, very good cash collections. We are seeing that continue, but our DSOs are still higher than they were at the end of 19 by approximately five days. So we expect through the year that that'll continue to come down and we're targeting that five day reduction. We also carry a higher inventory level than we normally would. In particular, we didn't have a big push for revenue at the end of the quarter. In fact, we were carrying specific inventory investments for certain customers higher than we normally would carry. We don't expect that to repeat it at the end of 2021. And we also know that we have ample opportunity relative to accounts payable and terms. So in all the three major areas of working capital, we see opportunity. to harvest cash in 2021. But you're right, that $50 million is key to our free cash flow conversion in 2021. And also, I'll say it again, both Gerard said it and I said it in our prepared remarks, that $50 million of restructuring payments in 2021 is a hard number. It's all scheduled out. It's dependent upon certain issues relative to works council negotiations and so forth. But we feel very, very confident that we will not exceed that $50 million restructuring payment number for 2021.
spk06: Okay, great. Thank you.
spk09: Your next question comes from Kartik Mehta with North Coast Research.
spk07: Hey, good morning, Jordan and Jeff. Sure. Can you maybe give a little bit more detail on the revenue growth targets you've established through 2023? Maybe just a mix of how you get to that 2% to 4%?
spk06: Yeah, good morning, Karthik, and happy to. Let me start with 2021 and use that to bridge to the after years. As Jeff said, as we look at 2021, we think that product activity, both in retail and in banking will fuel most of the top-line growth, fueled by strong backlog and sales momentum that we're seeing in the first half of this year. As we start to transition into 22 and 23, the mix starts to shift more in favor of software and services-related growth, areas like managed services and dynamic payments that I made reference to, So that's the combination of what fuels the 2% to 4% organic growth rate that we're anticipating.
spk07: And then maybe, Jeff, you could talk about the leverage you're getting this year from revenue to adjusted EBITDA. Would you expect the same type of leverage as we move forward, or do you think that leverage increases after 2021?
spk05: Yeah, we certainly believe that it will increase. We have given that longer-term guidance for EBITDA percentage. So what the key for us is, and when we built the model, right, is to leverage the enablement functions. What we don't want to get into is as we grow the business that we grow enablement functions. So the key to what we've done with finance and IT and HR is make those functions leverageable to absorb growth without increasing costs. And, in fact, I'll even go as far to say is with the systems, the digital systems implementations that we're going through now, our expectation would be that we would see a decline in the percentage of enablement costs to revenue as we move forward through 2023. That would be our goal.
spk07: And then just one last question, Gerard. You know, there seems to be a pretty good demand for self-checkout, and I'm wondering what you're witnessing, what kind of growth you had in 2020 on that and what you're witnessing and what you'd anticipate in 2021, and if that solution is able to be brought over to the U.S.
spk06: Yeah, Karthik, yeah. So in my prepared remarks, I mentioned that from a shipment perspective, 2020 was a very, very good year. We grew self-checkout shipments by 200% year on year. As we take a look at 2021, we're expecting very solid, very strong growth in the first half of the year, with perhaps a little bit of a moderation in the back half of the year, but still very strong growth. So Net-net, we think we're in an interesting period of self-checkout expansion across multiple customer bases. As you're well aware, our customer base more heavily skews towards Europe and Asia at the moment. But we're optimistic that with the launch of our new easy range of D&C self-checkout that that will position us well in other markets, including North America.
spk04: Thank you very much. Appreciate it.
spk09: Your next question comes from Matt Somerville with DA Davidson.
spk03: Thanks. Good morning. A couple questions. First, maybe, Gerard, can you address how you guys are framing up the TAM for dynamic payments? And you mentioned a couple of customer wins, top 10 bank globally, and I think a credit union here in the U.S. Can you talk about what the go-forward funnel in that product line looks like for you guys?
spk06: Yeah, sure. So, Let me answer it a few different ways, Matt. Payments, as I'm sure you're well aware, sits at the heart of any large financial institutions' operations, and therefore technology investments in those areas tend to have a relatively long sales cycle to it. So these are big bets by financial institutions, not rapid sales cycle events. So I'm starting with that comment just to manage everyone's expectations around the pace of customer wins. The second thing I'd say is when we think about the spend by bank for these opportunities, they run in the tens of millions of dollars from a software perspective. So this is not inconsequential software. This is very, very robust, sophisticated technologies. So when we think about the TAM, we think about it in three broad groupings. Our initial core target market would be the largest banks on the planet with very, very sophisticated needs to meet the needs of multiple payment types, whether it's credit, debit, Alipay, Venmo, Zelle, across multiple channels. And then in due course, we expect to be able to offer a similar offer to the large processors that serve the needs of smaller banks. And then in due course to smaller institutions. So I think that's how we anticipate the TAM evolving. And as we get into the year, we'll gladly share more details as we experience growth in that area.
spk03: And then as a follow-up, Gerard, in the past you've commented kind of where you're at with the DN series certifications on the ATM side of the business. Maybe can you give an update there and when you expect actual out-the-door volumes to really reach critical mass for you guys?
spk06: Sure, Matt. So, We exited 2020 with north of 150 banks having completed certifications. As I mentioned in our prepared remarks, from an order perspective, DN series are now a very material part of our order activity. And as we move through 2021, we would expect DN series to be the majority of banks ship and pet levels from an ATM perspective. So 2021 is the tipping point for us as relates to DN series volumes.
spk01: And then we just need projects as well. So previously we had communicated 550 projects. We're well north of 600 projects right now. So I think that speaks to the attractiveness of the offering.
spk03: Perfect. And then if I can just sneak one in real quick for Jeff. You talked about kind of the first half, second half revenue, EBITDA cadence for D-Bold in 21. Can you also talk about how we should be thinking about free cash flow linearity given the timing of cash severance payments, working capital that you're looking to harvest? Can you kind of flush all that out?
spk05: Yeah. And that's an area of continued focus for us. We will have As you know, in the first quarter with incentive comp payments and so forth, that will be our expected to be our lowest free cash flow, which would be a slight spend, right, in the first quarter. We want to even out then. The other thing to take into consideration when I say that, Matt, is that our interest payment cadence has changed considerably. It used to be that we paid the bond interest in second quarter and fourth quarter. Now we're paying it in the first and third quarter. So that's going to have an effect on us. So the first quarter is going to be a use of cash. We're working hard to get the second and third quarters to at least flat. We'll be positive on the operating side and being able to leverage the cash payments, interest payments we have in the second and third. And then the fourth quarter it all releases, especially now that we don't have a big bond payment in the fourth quarter. So it'll be similar cases. We are trying to level that out. It really swings on working capital, so we have a focus on working capital. But it'll be a use in the first half and then generation of cash in the second half.
spk03: Got it. Thank you, guys.
spk09: Your next question comes from Jeff Harlip with Barclays.
spk04: Hi, good morning. Just with the significant growth in product orders in 4Q and DN series, can you just maybe talk about some of the dynamics there in terms of, do you see this as, you know, with DN series, you know, sort of an acceleration of the refresh that will level out over time? Is it sort of catch up from weakness during the early parts of COVID? And then on self-checkout, are you seeing significant growth you're seeing? Is it more market growth or is the company gaining share?
spk06: Good morning, Jeff. It's Gerard. So let me talk about the DN series, ATMs first. I think we're seeing a few phenomena. So in multiple markets that would generally be characterized as developing markets markets in the middle east etc we're seeing market expansion by those financial institutions as they look to drive up financial inclusion so we're seeing an expansion of the number of atms per institution in those markets you know second of all i think we are seeing some catch-up from the weakness of q2 of 2020, as we're starting to see spend accelerate from several institutions. And thirdly, from a cash recycling perspective, we're seeing much more heightened interest from banks in the Americas in particular for our fourth generation cash recycling technology. And I commented earlier on some of the new logo wins that we secured on that end. And as it relates to self-checkout, I know both ourselves and others have talked about the strength of the self-checkout market, so there's no doubt that we're benefiting from strong market expansion for that collective opportunity set as consumers look for more self-serve options. In addition, we are seeing some competitive takeaways in our favor, and we've commented on those in the past.
spk04: Okay, great. And Jeff, just in terms of the balance sheet, you've talked about wanting to simplify the capital structure over time. You have a good amount of time for the term loans at pretty attractive rates, but then you have high coupon callable bonds in 22. Are you looking at doing, as you look at things now, are you looking at wholesale refinancing sometime in 22, or could you look at you know, parts of the structure before that?
spk05: Oh, well, we always monitor the market, right? But based on where the model is, we're looking more toward 22. And, you know, we'll have the B will become current at the end of 22, mature in 23. So that would be a catalyst for us looking at, at the markets very intently in 22, but that doesn't rule out that we'll continue to monitor the marketplace. As we all know, it's much stronger now than any of us anticipated. When we did the refinancing, obviously, we were right on the issues relative to the pandemic and the election disruptions. Where we missed it was on just the amount of capital that would be available in the marketplace and the markets function as well as they did. So we'll, you know, we did that specifically. We did the refinancing in 2020 specifically to give us the time to mature the model, to show growth in the model, to get some movement out of the rating agencies to make refinancing more attractive. So certainly that should happen. by the end of 21 into early 22, but we'll monitor it all the way through. And the catalyst, as I said before, is the term bees, which are very attractive from a rate perspective, going current in the back half of 22 and then maturing in 23. Got it. Thanks very much.
spk09: Your next question comes from Justin Bergner with G Research.
spk08: Good morning.
spk06: Good morning, Justin.
spk08: Thanks, Gerard, and thanks, Jeff. I guess, first off, I just want to delve into a win that you spoke to at the tail end of your prepared remarks, Gerard. You mentioned, I think, a top 10 U.S. financial institution that had been ordering from a competitor for the last couple of years. Is that win – selling DN series equipment or other equipment in your portfolio?
spk06: Justin, it was DN series cash recycling.
spk08: Okay. Got it. So it's not sort of at this point a replacement of their existing ATMs. It's sort of a product offering.
spk06: Well, as I've mentioned in the past, Justin, cash recycling has certainly been growing in popularity across the world. And when we take a look at our mix between cash dispensing and cash recycling machines, we're seeing a greater and greater shift towards cash recycling. And as we've also commented in the past, the U.S. has lagged the rest of the world around the adoption of cash recycling. And And we were quite encouraged by this most recent move by a top 10 U.S. bank as they're signaling a strong appetite to consider cash recycling.
spk08: Got it. Shifting gears, in regards to the tax discussion, that was very helpful. You know, the 25% to 30% estimated effective tax rate in $35 million in cash tax payments against higher you know, income seem quite manageable. Are those, you know, numbers representative of normal conditions under your current capital structure going forward? And are there changes when you are able to, you know, change your balance sheet that will lower those numbers further?
spk05: Yeah, I would say, Justin, that those are normal rates based on our statutory rates of the jurisdictions we're in. Here's what I'd say on taxes, and I'm going to be a bit, it's a bit of a sensitive topic, right, when you're talking about 62 plus jurisdictions around the world and as they fight for the income of the organization and for the ability to tax and collect tax payments. And you probably picked up from my prepared remarks the imbalance between our distribution subsidiaries and our principals, right? And that's why we reference market dynamics of the transactions. It makes little sense that the principals would be in a consolidated loss position mainly due to the capital structure of the company while the distribution subsidiaries make money and pay taxes. So, we need to work on that balance. between distribution subsidiaries and principals. And then you're right, we need to align our deductible interest payments with the principal profitability, the adjusted principal profitability. So we need to align our capital structure between the two principals, the U.S. and Germany, and now it's heavily centered in the U.S., which drive the U.S. in the loss, which the combination of foreign source income and a And a loss generated by interest payments is the definition, right, that the tax code is looking for for charging, you know, an excise tax relative to profit shifting. So that's what we're working on, rebalancing the income levels between distribution subs and the principals. That will help on the tax side, on the payment side. But we're sticking with that provision side of 25% to 30%. We think that's a reasonable number.
spk08: Okay, thank you. That's very helpful. I appreciate the question.
spk09: Your next question comes from Ana Gosko with Bank of America.
spk10: Hi, thanks very much. It was great to see the guidance, in particular the free cash flow confidence, both for 21 and into 23. So I have two questions. So one, just to put a finer point on the discussion on the on the debt pieces. The company does have an 8.5% bond that becomes callable next month, which I believe could be refinanced at a much lower rate. So is that something you are considering refinancing? based on your comments, is that something that you would prefer just to kind of call out and pay down with free cash flow? So that was the first question. And then secondly, with the strong free cash flow outlook, to what extent does that open you to think about things like tuck-in acquisitions that might supplement the growth areas, which I think you've been constrained from in the recent past because of the free cash flow performance?
spk05: Yeah, those are great questions. Obviously, we have been monitoring the unsecured market, right, and looking at what potential opportunities will be and fitting that into our priorities right now. And as I said earlier, we don't have anything that we absolutely need to do until probably the back half of 22, but we'll continue to monitor opportunities between then and then. And the unsecured market is something that we have discussed. And I think maybe even your bank gave us some calls about that and have advised us on that. So, it's something on the table that we'll continue to look at and determine what's in the best interest. We have, we do have a high interest in, our weight average across capital is high. Let's admit that. You know our capital structure. It's on the high end of the range. Um, fortunately we have the return on investment capital that's greater than that. So we are creating value, but we are always going to be looking at opportunities to lower our way to average cost capital. So we are monitoring that situation and, and, and we, you know, we don't want to lock ourselves into something today because we can, it could be much better, uh, nine months from now. So that's, that's what we're looking at. And then as far as, uh, investments, uh, You know, that's not built into that pre-cash flow forecast that we provided. But certainly, you know, relative to value creation, it's not off the table, but, you know, we're not announcing anything today. And, you know, like capital structure, our strategy group's very good, and they are continually monitoring what's available for us that could help us in our strategy relative to value creation.
spk09: Okay, great. Thank you very much. Your last question comes from Marla Backer with Sidoti.
spk02: Thank you. Switching topics here, can you talk a little bit about your product backlog? You certainly have some growth there at the end of 2020. Can you remind us what the average time is in revenue?
spk06: Marla, good day. It's Gerard Schmidt. I didn't quite hear you. You might have broken up a little bit. Do you mind repeating that?
spk02: Sure. I said, could you please remind us what the average deadline is for converting backlog, product backlog, to shipments and revenue?
spk01: Yeah, I can take that, Marla. Thanks for your question. So, typically, we look at a product backlog as that would generate revenue in the next 12 to 18 months time period.
spk02: So given the strong growth of the backlog, I'm wondering, you know, in terms of the conversion in your guidance, your revenue guidance, there seems to be a connect there between the backlog growth and the revenue guidance. And I'm wondering if you could help me understand that better.
spk06: yeah marla you know as i said in my prepared remarks we have very good visibility for the first half of the year and some of that revenue in the first half will be as a result of the backlog converting others will be related to selling activity and quite frankly we think it's very very prudent for us to be somewhat conservative as we think about the back half of the year and we're anticipating that uh we continue to manage through this pandemic but we also want to leave ourselves a little bit of room if there's any surprises on that end so yeah i think we're being a little bit circumspect with regards to our outlook through h2 until we see and get more visibility around how lockdowns unfold and how accessibility to a broad vaccine plays itself out because you know we have to keep reminding ourselves that this pandemic continues to be a very very complex situation that can change outcomes fairly quickly.
spk02: Okay. Thanks so much.
spk01: So I'd just like to thank everybody for your participation on today's earnings call. And, of course, if you have follow-up questions, please give us a shout-out over at Investor Relations. Everybody have a great day.
spk09: That concludes today's conference. Thank you for your participation. You may now disconnect.
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